明晟 (MSCI) 2009 Q2 法說會逐字稿

Good day and welcome to the MSCI second-quarter 2009 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr.

Michael Neborak.

Please go ahead, sir.

Thank you, operator.

Good day everyone and thank you for joining our second-quarter earnings call.

Please note that earlier this morning we issued a press release describing our results for the second 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 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 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 forward-looking fees for subscriptions and product licenses that we will record over the next 12 months assuming no cancellations, new sales or changes in the asset and ETF licensed to our indices.

Please refer to table 2 in our press release for a detailed explanation.

Henry will begin the discussion with an overview of the second quarter and then I will follow with a review of our financial results.

Following the formal remarks, we will open up the line for questions.

In order to leave plenty of time for the Q&A, our prepared remarks focus primarily on information that is incremental to what was provided in the earnings release.

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

Thank you, Mike, and good morning to everyone.

Earlier today, we reported second-quarter revenues of $109.4 million, a record adjusted EBITDA of $53.4 million and a record adjusted EBITDA margin of 48.8%.

We are very pleased with this result particularly in light of a very difficult operating environment.

Our run rate for both the subscription and asset-based fee businesses were higher at the end of Q2 than they were at the end of Q1.

The growth in the subscription business speaks to the critical nature of our risk and performance tools for our clients.

The equity index asset-based fee business benefited from the strong rally and many equity markets around the world and even more importantly from the strong inflows into a changed credit fund linked to our indices.

This inflow highlights the continued secular growth of a changed credit fund around the world as investment vehicles.

In our subscription business, new sales increased in Q2 compared to Q1.

In Q2, we generated new recurring sales of $14 million which while down from Q2 2008, they were up from the $11 million we generated in Q1.

This was a break from the normal seasonal trend whereby Q2 sales are typically lower then Q1 in our subscription business.

Our three largest growth categories of equity indices, equity analytics and multi-asset class analytics all reported growth in new sales reflecting our desire and an ability on the part of many new and existing clients to enhance their investment processes by subscribing to our products.

We have also experienced success by exploring new sales channels to reach new clients who have money to spend and by expanding existing sales channels by developing closer working relationships with vendors.

We have continued to further monetize our equity indices with broker-dealers by licensing our data to launch the structured products based on our indices.

We recently announced a new license agreement with NYSE Life to enable them to create futures contracts based on a range of MSCI equity indices with market coverage of the US, Europe and the emerging markets.

The rate of decline in our retention rate on a year-over-year basis moderated during the quarter.

In Q2, our aggregate retention rate declined approximately 300 basis points to 88% from 91% in Q2 2008.

In Q1 of this year, the retention rate declined nearly 600 basis points year over year.

As you note again that the recovery of our business typically lags the recovery in the equity markets.

And those are retention rates may remain under pressure in the coming quarters.

Our new sales pipeline is solid and continues to build although the sales cycle for many of our products remain elongated and subject to the budgetary pressures of our clients around the world.

Let me comment briefly on our margin performance for Q2.

As I said earlier, our adjusted EBITDA margin for the quarter reached a record 48.8%.

This is clearly higher than our long-term target of low 40s for several reasons including, our disciplined approach to expense management; our increased focus on growing the absolute level of adjusted EBITDA in a period when revenues are increasing at a rate lower than our long-term growth target of mid-teens; a moderation of our investment spending during the quarter; a favorable benefit from foreign exchange rate changes compared to Q2 2008; and the rapid and unexpected growth in EPS fees during the second quarter.

Because of the potential quarter-to-quarter variability in our margin from ETF fees which can be up or down, and because of our commitment for significant investment to grow our business, we are leaving unchanged our long-term target of low 40s for our adjusted EBITDA margin despite the increasing levels of margin in this past quarter.

We also recently accelerated our investment spending plan by approximately -- by hiring approximately or looking to hire approximately 100 people largely in our sales organization and in our data factory with approximately three-quarters of these hires expected to be in our emerging market centers around the world.

These hires are likely to take place over the next several months and it may take a couple of quarters for us to realize the full expense impact.

These additional employees will help us capitalize on the growth opportunities across our product categories and across our client base by enabling us to launch new products faster and to expand our reach to new clients and upsell and cross sell to existing clients.

Another significant development for MSCI during the quarter was the completion of the separation from Morgan Stanley.

As most of you are aware, Morgan Stanley sold its remaining ownership stake in MSCI in May thereby making MSCI a fully independent holding company.

In addition, we recently completed our replacement of Morgan Stanley's services.

Both of these developments are very exciting for us and are a significant milestone and we can now completely focus on further developing and growing our market-leading businesses.

Before I provide more color on our Q2 performance, I would like to highlight that our balance sheet remains very strong with cash and short-term investments of $318 million, representing a $41 million increase from this balance at the end of Q1.

Our strong cash flow generation reflects our high level of profitability as well as our continued focus on expense management and account receivable collections.

Our net debt position at the end of Q2 was $73 million, down from $119 million at the end of Q1.

I will now provide further details of our Q2 performance by major product category.

I will be referring only to run rate whereby Mike will focus on accounting numbers in his presentation.

I will be speaking to comparisons to Q1 of this year unless otherwise noted.

Run rates are only a snapshot of our business at a point in time and only serve as an indicator for future revenues.

In equity indices, the run rate in the quarter increased 10.1% compared to Q1.

Equity index data subscriptions reported a 2.5% sequential increase in their run rate.

Our core index modules of developed, emerging, and the small cap markets reported a 1.5% increase led by a 3% increase for small caps.

We saw gains in custom indices, the value and growth index module and user fees which were up 5%, 3% and 1% respectively.

We also saw increases in derivative product license fees and also in client reporting fees.

Price increases contributed about 1% to the sequential run rate growth.

Sequential growth in the run rate were seen across all regions of the world and was led by the asset manager and broker-dealer client segments.

We were able to remove several large contracts with clients during the quarter at higher run rates.

The aggregate retention rate for equity index data products declined to 93% from 94% in Q2 2008 largely reflecting the impact from mergers, office closures, firm closures and budget related cost reductions by our clients.

Later Mike will discuss the performance of our asset-based fee business within the equity index category.

In equity portfolio analytics, the run rate declined 0.4% sequentially.

The run rate for Barra Aegis declined 0.1% from Q1 to $81.7 million and the run rate for equity risk data sold directly and through vendors declined 0.7% to $42.1 million from Q1.

Excluding the positive impact of foreign exchange rate changes during the quarter, the run rate decline for equity analytics was closer to 1.6% which is on par with the sequential decline reported in Q1.

Our new sales were higher in Q2 than Q1 with growth across all regions of the world and across all client types reflecting demand from investors globally for quantitative tools to enable them to better understand their portfolios and their risk exposures.

We are seeing a strong demand for new subscriptions for GEM2, our new global equity risk model launched at the end of last year particularly among asset owners as well as we are seeing demand for short horizon models particularly from US hedge funds.

New client additions in equity analytics contributed to the increase in new sales.

We added 18 clients on a gross basis in this [growth] category during the quarter which is the most clients that we have gained since Q3 2007.

We experienced increased sales from asset owners and from US hedge funds and broker-dealers subscribing to our US trading and short horizon models.

Lower retention rates for our equity analytics products are more than offsetting the new sales activities that I just mentioned.

The weakness is more evident in the asset manager category where spending cuts have continued and in the broker-dealer category where a number of firms have scaled back their proprietary trading activities.

The [product] cancellations were concentrated with about one-third coming from five clients.

The overall aggregate retention rate in equity analytics declined to 82% in Q2 from 86% in Q2 2008.

Approximately 85% of the product cancellations in equity analytics reported during the quarter were a function of the cost pressure faced by our clients which have led to office closures, employee departures, firm closures, mergers, strategy changes or fee changes.

The remaining 15% was split evenly between clients switching from Aegis to BarraOne and client seeking other alternative product solutions either from our competitors or through internal solutions.

As we have discussed before to soften the weakness in this product category of equity analytics and to return to a run rate growth, we continue to develop new and enhanced products and we expect to release GEM2 history data to accompany the GEM2 model and to release a new European equity risk model in the third quarter.

In multi-asset class analytics, the run rate increased 5.3% sequentially.

Excluding the positive impact of foreign exchange rate changes, the increase was 1.6%.

The run rate for BarraOne increased 8.7% sequentially to $29.3 million with strong growth in EMEA offset by a modest decline in the Americas.

We continue to see growth in new sales of our core BarraOne risk product as well as our value at risk and other simulation products in BarraOne.

In terms of client segment, asset managers were BarraOne's best performing category reflecting in part the migration of two asset managers to BarraOne from total risk.

We expect several total risk to BarraOne migrations to take place over the next few quarters.

Planned engagement with our multi-asset class products remains high based on usage figures and our new sales pipeline for BarraOne continues to be solid and to build although the time required to close deals remains longer than it was before the market downturn obviously reflecting client budgetary constraints.

The migration of the two clients that I mentioned before from total risk to BarraOne negatively impacted our aggregate retention rate because we report cancels on the total risk line and a new sale in the BarraOne line.

So in Q2, we think it is especially important to focus on the core retention rate which was 94%.

I will now turn it over to Mike for a detailed review of our second-quarter financial performance.

Thank you, Henry.

I'm going to focus my comments on a few key areas starting with our asset-based fee business.

The AUMs and ETFs linked to our indices at quarter end increased $68 billion or 63% from the end of Q1.

We estimate $42 billion of that increase came from asset depreciation and $26 billion from inflows.

Approximately $9 billion of the inflow went into our emerging market Index ETFs with the balance spread across a variety of ETFs.

Our global market share of equity ETFs increased to 27% on June 1 from 23% on March 1 reflecting the move by investors into cross quarter ETF.

Our market share of US-listed ETFs increased to 32% from 27% and to 25% from 23% in the European listed market.

We ended the quarter with 222 ETFs linked to MSCI indices.

That figure represents an increase of 22 ETFs during the quarter with most of the new listings occurring in Europe and a few funds launched in Asia.

33 ETFs had AUM balances greater than $1 billion.

Compared to May 2008, the number of shares outstanding in ETFs linked to our indices increased 49%.

BGI accounted for approximately 62% of the AUM linked to our indices at the end of May which was down from 69% a year ago.

BGI accounted for less than 10% of our revenues in the quarter reflecting the increased diversity of our ETFs business.

The AUM balance for ETFs linked to our indices on June 30 was $171 billion.

That figure is down nearly $5 billion from the end of May.

Of the $5 billion decline, nearly $3 billion came from outflows and $2 billion was due to market depreciation.

The average AUM for June was approximately $174 billion.

We post month end and average balances for the last six months on our website.

You should note that our ETF run rate includes minimum fees received from ETF providers until the AUM reaches a specified level.

These minimum fees affect the calculation of average fees.

During the quarter, the average fee received excluding minimum fees was approximately 3.2 basis points.

At the end of the second quarter, our ETF run rate was $56 million and our weighted average fee was close again to 3.2 basis points excluding minimum fees.

In Q2, approximately $13.2 million or 12% of our accounting revenues were denominated in non-US dollars.

A majority of these revenues were denominated in euros, Japanese yen and British pounds.

We also had indirect non-dollar revenue exposure of approximately $11 million from the non-dollar assets and ETFs linked to our indices.

When the US dollar strengthens, these revenues decline and vice versa.

The fees associated with these non-dollar assets are billed in US dollars and are shown as US dollar revenues on our income statement.

Approximately $22 million or 30% of our second-quarter total operating expenses were denominated in non-US dollars.

In the second quarter of 2008, 24% of our expenses were non-dollar.

The increase in non-dollar expenses reflects Morgan Stanley allocations paid in US dollars being replaced by non-dollar expenses.

Our non-dollar expenses were concentrated in the British pound and Swiss franc.

Including the indirect non-dollar exposure from ETF asset-based revenues we were fairly well matched during the second quarter with $24 million of non-dollar revenues versus $22 million of non-dollar expenses.

The largest year-over-year change in FX rates were the major non-dollar currencies we transact in occurred in the British pound.

In the second quarter 2008, the average US dollar/British pound rate was $1.97 for a British pound.

In the second quarter of 2009, the average rate was $1.48 to one British pound.

Therefore the US dollar strengthens in the second quarter of 2009 versus the second quarter of 2008 by 25%.

Total operating expenses were down 3.4% to $72.7 million in the second quarter 2009 compared to comparable quarter in 2008.

If we exclude founders grant, depreciation and amortization expenses, our adjusted EBITDA expenses were down 7.9% to $56 million.

This 7.9% decline is comprised of a 6% increase in compensation expense more than offset by a 29.6% decrease in non-compensation expense.

The 6% increase in compensation expense reflects higher headcount offset by a lower bonus accrual and a higher percentage of employees located in emerging markets centers.

The non-compensation expense decline of nearly 30% on a year-over-year basis reflects the $4.7 million decline in Morgan Stanley allocation expenses as well as significantly lower consulting and travel expenses.

For Q3 and Q4, we expect the year-over-year decline in non-compensation expense to be sizable but more modest as we begin to cycle through the allocation expense from Morgan Stanley which began to decrease meaningfully in the third quarter of 2008.

In May, we finished the physical separation from Morgan Stanley by completing the last of the data factory migration.

That means the allocation expense from Morgan Stanley in Q3 should be close to zero.

You should note that in conjunction with the sale by Morgan Stanley of its remaining ownership, we entered into an agreement to settle all intercompany amounts owed between us within 90 days of the offering.

At the end of May, our payable due to Morgan Stanley was approximately $38 million.

Depreciation expense increased by $2.5 million to $3 million largely reflecting the depreciation of capitalized IT expenditures associated with our separation from Morgan Stanley.

Our cash earnings for 2009 second quarter were $28.1 million or $0.28 on a diluted per share basis compared to $27.2 million or $0.27 per diluted share for second quarter 2008.

We calculate cash earnings of $28.1 million by taking net income of $19.6 million and adding back the after-tax impact of the founders grant.

That amount is equal to $3.9 million and then also adding back the after-tax impact of amortization of intangibles.

That figure is a $4.5 million.

Net income in the second quarter of 2009 increased 5.3% to $19.6 million from the second quarter of 2008.

The increase in net income primarily reflects revenues and lower operating expenses.

Our diluted EPS for the second quarter of 2009 was $0.19, an increase from the second quarter of 2008 reflecting higher net income.

Now a little bit about our balance sheet.

As of May 31, we had cash and short-term investments of approximately $318 million which includes $245 million of US Treasury securities with maturity dates ranging between four and 12 months.

$318 million is approximately $41 million higher than our cash balance at the end of February 2009 and that figure is after $3.5 million of CapEx in the quarter and $5.6 million in debt repayments.

For all of 2009, we expect capital expenditures as shown on our cash flow statement to be approximately $16 million.

Other cash commitments for the year include scheduled debt repayment under our credit facility which are approximately $5.5 million per quarter and then the settlement of the intercompany balance with Morgan Stanley I mentioned earlier.

Our debt balance at the end of the second quarter was $391 million and our credit ratios remained significantly better than required under our credit agreements.

In terms of leverage, as defined by total debt divided by latest 12-month adjusted EBITDA, we are at 1.86 times which is well below the 3.75 time requirement.

Our coverage ratio as defined by latest 12-month adjusted EBITDA divided by interest expense, is at 10.18 times well above the required 3 times.

For Q2 2009, our effective all-in interest rate including the swap was approximately 4.4%.

For Q3 2009, we expect our effective all-in interest rate to be approximately 4.15% based on LIBOR rates as of the end of May.

Our operating metrics are provided in tables 2, 3 and 4 of our earnings release.

However, let me spend just a few minutes on our retention rate.

Our aggregate retention rate declined to 88% for the second quarter 2009 from 91% in the second quarter of 2008 and 91% in the first quarter of 2009.

Product swaps had a greater impact in the second quarter here in 2009 than they did in our first quarter.

Excluding product swaps, the core retention rate was 90% which compares to 92% in the second quarter of 2008 and 91% in the first quarter of 2009.

In the second quarter here in 2009, cancellations totaled approximately $11 million.

This $11 million breaks down largely as follows.

Approximately 70% reflected some type of budget constraint in the firm's strategy change and consolidation resulting in office closures, employee departures or fund closure.

Approximately 15% was from product swaps and the remaining -- largely the remaining part 8% reflected fee changes.

That completes the formal part of our comments.

The operator will now open the line for questions.

Thank you.

(Operator Instructions) James Kissane, Bank of America, Merrill Lynch.

Yes, thanks.

Hi, Mike and Henry.

Just asking about the pipeline.

I guess relative to last quarter in the two different businesses, Barra and the index business?

Yes, all across the pipeline is stronger in Q2 than it was in Q1.

It is particularly strong in the BarraOne product category.

But again as I said before, the variability of closure of that pipeline or the way we look at it ourselves internally, the variability weighted pipeline has a lot of variability because of the uncertainty in client budgets and the time for individuals with our client organization to get approval for new spending.

If I can get one last question.

Any thoughts on the BlackRock BGI deal, Henry?

Well, we continue to feel that the deal is positive from our perspective.

We have quite a strong relationship with BlackRock at all levels including BlackRock Solutions.

And therefore, we are very excited about that combination and what they can do to their product line including the exchange credit fund to grow them faster and therefore we can benefit from it.

Great, thank you.

Andrew Fones, UBS.

Thank you.

First, could I ask about the expense impact, the potential expense impact of the hiring and how that might roll out over the next few quarters, please?

As I said, we are looking to hire about 100 people in the next couple of quarters.

The majority of these hires, about three quarters of them, are in emerging market centers, many are of them are in Mumbai, many of them are in our new office in Monterrey, Mexico.

Some of them in Budapest and a few in Hong Kong.

The hires that we are going to do in the developed market centers are mostly associate i.e., non-officer hires and therefore will have a less of an expense impact in our business.

So we feel pretty good that we can add these resources to continue to grow our business and still not have a major impact in our expense base.

Okay, one other expense question.

I was wondering as obviously you do most of the IT in-house, now having Morgan Stanley do that, how we should think about depreciation expense going forward?

I think, Andrew, depreciation expense is going to be pretty consistent, somewhere between $10 million and $12 million on an annual basis going forward.

In terms of our capital expenditures, most of those capital expenditures really are going to be a replacement of what we have on a fairly consistent basis.

So that is how I would look at depreciation expense.

Okay, thanks.

And then just one final one.

Obviously you have been seeing a greater demand for the data than for the Aegis platform.

Any thoughts on further development there in terms of the Aegis platform or how are you thinking about the declining retention rates there?

Thanks.

Andrew, as we have indicated before, we are working pretty hard in the development of the next generation of Aegis software that we are hoping to launch sometime in 2010.

This Aegis software will be different from what we currently have because it will be an ASP solution built on the infrastructure of BarraOne.

So we are hoping that that will -- there will be a lot of take for that by existing and new clients.

So that will provide a seamless solution with BarraOne at that point?

Well I think there will be certain clients that would prefer to use BarraOne for both multi-asset class analytics and some level of equity portfolio analytics.

I think over time the new Aegis which is this ASP solution built on a common set of platform with BarraOne will focus much more on just the equity portfolio capabilities.

And over time, the idea will be to migrate or add, I should say, a lot of the very rich features and functionality that have been built in the current Aegis over the last couple of decades to build all of that into the new Aegis.

Got it, thank you.

Murali Gopal, KBW.

Good morning, Henry.

Good morning, Mike.

A couple of very quick questions.

When I look at the EBITDA margin, the adjusted margin, I do understand that the ETF assets were significantly higher and that was part of the reasons why part of the reason why the margins were up.

But when I look at the equity and the asset-based fees that really is sequentially improvement growth was about 2 million.

When I look at the EBITDA in dollar terms, that grew about $5 million.

So there is a lot more to the EBITDA margin expansion than just the EPS assets growth.

I just might get a better handle on what may be some of the other things that happen sequentially that led to this improvement?

So you are talking about sequentially versus year over year?

I'm talking about sequentially the asset-based fee has improved $2 million and sequentially the adjusted EBITDA in dollar terms improved $5 million.

Right, so I think really the remainder there relates to the reduction in our adjusted EBITDA expenses or our cash expenses, which as we have mentioned, are going to come down as a result of the elimination of costs that we have been spending on consultants, costs I would characterize as not being recurring.

So I think if you look at the combination of slightly higher revenues but a much or a significantly more reduced cash expense, you get the margin difference that you are talking about between Q2 and Q1.

Right.

So the reduction in the consulting expenses is probably something that is at least part of that is sustainable?

Definitely.

And they were significantly reduced in the second quarter.

Okay, okay.

We are also (multiple speakers) just in general other expenses are running lower as well but that is the one that stands out most significantly.

Right, okay.

One other question.

Henry, you have talked about potential M&A opportunities in the past but when I look at the cash on your balance sheet, can you update us in terms of what kind of opportunities that you are seeing out there?

I know in the past you said that the valuation that you see for assets is not as attractive as you would like it to be.

Are you seeing any change in the last several months in terms -- is it getting better in terms of more attractive in terms of pricing?

And also in terms of the cash that you have on your balance sheet, if the acquisition opportunities don't improve significantly, how long do you think you don't mind holding on to that cash before you feel that you have to deploy in some form or shape?

So first of all we -- we did sign a low-cap agreement with the underwriters in which restrict our ability to look or discuss any acquisitions.

Beyond that time horizon, we clearly will continue to -- we will continue to look for businesses that we can acquire of all sizes from the small size or midsize or large size company.

And I think there will be two alternatives at that point either stock transactions depending on the nature of those discussions or potentially cash acquisitions or a combination of both.

And therefore for at least the next six to 12 months, and I say at least because it will go longer, we have been of the view that it is better to conserve our cash, keep our cash in our balance sheet even though invest in a relatively low yield and with a negative carry to the debt that we have in order to have the flexibility in this operating environment to try to add value to some acquisitions.

Beyond that period, we clearly will need to start focus -- if we don't do any of that with our cash, then we will need to start focusing on what is the most optimal use of that cash.

Will it be to repay debt, to buy back shares or pay dividends or whatever?

But all of that is speculative because for now we have decided that for the foreseeable future and because of the difficulty in the credit markets, that it is best to conserve our cash.

Okay, thank you.

John Neff, William Blair.

Thank you.

A couple of points, a couple of questions here.

I was interested to see that your US broad market index indices now represent the third largest ETF in terms of assets.

I think historically, I don't think of you guys as having most of your ETFs and your index brand and reputation being outside the US.

So is that a sign of increasing penetration here domestically?

Yes, it is, John.

And it is something that strategically we are very focused on to try to expand our equity index business from a cross border business to be much more relevant in the domestic markets for domestic assets.

The only region of the world in which we have a major presence for domestic indices and domestic assets is the Euro zone.

And then everywhere else a lots of our business is built on the cross border part.

So we are very focused on trying to grow that by expanding the ETF licenses in the US.

If we can by continuing to expand them in Continental Europe.

And a part of the motivation for us to work closely with NYSE Life, new US futures have changed has been their desire to build a lot of equity index futures contracts around our indices particularly launching our US domestic equity in the form of futures contracts.

So there is a big initiative on our part to try to do that but it is also that clearly it will take a while.

It will take a long time and I am not clear what the end results will be and the revenues will be -- may not be meaningful in the short term.

Actually my next question was the index derivatives side.

Can you give us maybe a sense for how big that derivatives business is for you currently and maybe how big you could see that opportunity being again long term?

Yes, longer-term what we are really strategically trying to do is that we have two major legs of revenues in our equity indices business in what we call the benchmark data business and obviously most of that or all of that is a subscription-based.

And then the second leg is investment products in the form of exchange credit funds and other asset-based fee investment products.

And the third leg that we are trying to build over time is license fees from all sorts of derivative products from listed derivatives like futures and options listed around the world to structure products in which people pay us license fees as well.

So that is an initiative that we have put in place about a year or so ago.

David Brierwood, our Chief Operating Officer, and Ted Niggli, the head of our Equity Index business, are driving that and the NYSE Life contract is part of that.

And then maybe two quick ones.

You mentioned -- how close to ETF commercialization are the new Barra risk factor indices, number one?

And number two, Henry, you had mentioned some new sales channels you were exploring.

Can you give us a little more color on that?

Thank you.

Yes.

The factor indices that we launched recently, some of them have already been licensed for the creation of investment products both over-the-counter products and exchange credit funds.

This is a fairly new area for us and for the fellow creators and is a new use of data of our factory indices by client.

Many clients have been using them in different formats but not in the form of a swap or an exchange credit fund.

So therefore, it is hard to say how that is going to evolve.

We clearly are excited about taking a shot at it and think we can develop that market.

But a lot of the revenue that may come from that is not factored in at this point in many of our projections longer-term projections because we have to wait and see how that part of our business develops.

So with respect to new sales channels, I am working more closely with vendors.

What we have done during this crisis is really analyze the various ways that we work in cooperation with other entities.

We obviously realize that everyone isn't in the same spot as we are which is looking for those clients and prospects that have demand for our mutual products and have money to spend, have budgets to spend.

And that is not a small piece given the large client base that we have and the large prospect base that we have.

So what we have done is work more closely with a number of providers like Bloomberg, like FactSet, like Thompson, Clarify and the like and another company called [Rangs].

We work very closely with them in developing joint sales campaign, in cooperating in products that can be bundled together and things like that.

So that is one area that we have seen at the margin some incremental sales.

Another area is that we are working on is working more closely with other forms of intermediaries like custodians for example and have the custodians carry in their sales approaches to their own clients many of our risk systems to see if we can generate additional sales particularly in BarraOne through that sales channel.

What we have done also in addition to all of that is we have increased substantially the pace of publishing research papers by our research department, holding Webinars with a lot of different prospects and clients on these papers.

And that has driven interest and demand from existing and new clients that we have followed up.

Recently we made a sale of BarraOne to a client that had heard about our fixed income modeling and coverage capabilities in BarraOne through one of these Webinars so that is very direct tangible example of the results of that campaign.

Thank you.

Andrey Glukhov, Brean Murray.

Yes, thanks for taking the question.

Henry, to follow up on the licensing business, as you guys look to work with NYSE Life and presumably -- I mean you can approach some other exchanges.

Can you talk about the underlying business model in this licensing?

Is there an opportunity to invest volume relating -- related component into the pricing?

Yes, that is the business model.

I mean the licensing fee is typically composed of an upfront fee that is payable by the counterparty here.

And then secondly, then there are fees based on volume of futures contracts or options contracts that traded based on our indices.

The latter part is something that we have established for a long time with many of the exchanges, many of our indices, MSCI Taiwan, MSCI Singapore, our Euro and our Pan-Euro indices that have futures contracts in London.

They are all based on the same model and, therefore, the potential here is for incremental revenue to come from those volumes.

Now typically, unless the contract is exceptionally successful, these fees are meaningful but not very large.

Where ultimately you make more revenues is the ability of structured product creators to use these futures contracts to hedge their risk and, therefore, you get additional fees from the structured products.

Again, we are very excited about this because it's a new area that we have been looking to penetrate for quite some time.

But it is too early to tell how much of a revenue impact that we will have in the short term.

If anything, it's probably not going to be very material to our revenue base in the early part of the process.

That helps.

And as far as the cancellation rate, particularly in the portfolio analytics as it was concentrated, if you look at the large customers in that business, what is your sense on sort of in what inning are we of going through some of the carnage in the customer base and going through some of the reductions in the budgets?

That is a good question.

I think the thing to keep in mind is that this is a part of our business that we have started investing a couple years ago heavily, in both the creation of new risk models, the enhancement of existing models, the data factory that produces the data coming out of those models and the software updating -- investments in the software such as Aegis, as I mentioned before.

So they started about two, two and half years ago and therefore the initial fruits of that investment just began at the end of last year in terms of the GEM2 model.

We have another one coming up with the new European model and a variety of different models that are going to be coming in the next few quarters.

And as I said, the fruits of the investment on the revamping of the software would only begin to come in 2010.

So therefore -- therefore, even though there is quite a significant amount of demand for a lot of these newer things that we are working on, we don't have them already in the marketplace yet and therefore are not capturing those additional revenues.

And therefore, the gross sales of this product even though continued at a fairly good pace, they are not being supplemented by gross sales for these new products that will happen in due course and the cancellations are higher than the sales.

Many of the -- a lot of the cancels sometimes come from, have come from some large asset management companies with centralized budgetary processes that have a middle office with a lot of different tools, quantitative tools to support their fundamental managers.

And there have been quite a scale back of those activities by those firms.

We are pretty confident that a year or two from now as the markets recover many of these clients will rebuild their middle quantitative offices.

But for now, they have had either partial or total cancellation of services.

This is likely to continue in the next few quarters but also we feel that the sales will continue, our pipeline of sales will continue to materialize.

So the overall run rate will clearly be under pressure but what we are trying to do is figure out -- continue to figure out ways in which eventually our sales begin to offset the levels of cancellations.

David Scharf, JMP Securities.

Good morning.

I will try to be brief here.

First, Henry, on the ETF side, there has been in lot of new fund formation announced over the last nine, 12 months, ETFs linked to your indices.

When you look at the substantial inflows this past quarter, are most of those dollars flowing pretty much into EAFE in some of your all your established big funds out there?

Are we actually seeing some traction of the funds that have been launched over the last 12 months gathering assets?

Yes, David, a lot of the revenue, the additional revenue, came from both an appreciation market appreciation of the various country, regional and global emerging market indices and flows that went into them as well.

As we know, the performance of many emerging markets around the world in the past three or four months was quite significant compared to many of the more developed markets.

So that we benefited from that.

We clearly benefited from a little bit from additional product introductions in the marketplace.

But I think overall the thing to keep in mind on what is happening to this product is there are three things that are -- there are four things that are important in the drive of the growth of ETFs.

The first one is the transparency that these products create because you know exactly what the index is, what the index is invested in and all of that and therefore in a market like this, people have gravitated toward much more transparency than that.

Secondly, is the high levels of liquidity this product you can come in and out all the time.

Even if you don't have a strong convictions, you can reverse your trade very easily.

And then thirdly, there has been quite a move toward passive investing in the last six to nine months after the crisis relative to active investing, active investing significantly underperformed in this crisis.

And therefore, there are a lot of entities that have referred passive rather than active.

So some of that will continue in quarters and future years.

The passive trend is a trend that has been going on.

Transparency will probably be more rather than less and people will be looking for liquidity as well.

So all of those things bode well for the ETF business and in addition to that, there are many regions of the world in which ETFs are not yet fully pledged particularly in Asia and we are focused on expanding that market for this product.

And then David, I might just add in terms of that $26 billion inflow in the second quarter, $9 billion of that inflow went into ETFs linked to our emerging market composite index.

And then the rest of it was pretty well spread across a whole variety of other ETFs.

And then during the quarter, about a very small part of the inflow about between $1 billion and $1.5 billion of the inflow came from -- into ETFs that had been launched over the last 12 months.

So a majority of it went into ETFs that had existed for a while.

Okay, that's $1.5 billion was really the figure I was looking for.

So we are still in the very, very early stages of adoption in asset attraction for some of the newer funds that have been launched.

Okay.

Next and last question and then I will get back in queue if there are any more.

Just revisiting the margin, margin outlook and I know there has been a lot of questions focused on this.

If I just look at 100 new bodies and three-quarters of them are in emerging market centers supposedly lower labor costs.

And here I can take a number -- maybe it is 100,000 annually fully burdened expense with payroll tax, healthcare, everything, times 100 people.

I look at the quarterly expense rate and divide that by this quarter's revenue.

It comes out to about maybe 200 basis points of expense margin.

It is still a pretty long drop from 48.8 down to the low 40s.

There would clearly have to be something more than just annualizing the incremental fully burdened labor costs of 100 people.

And I know it has been asked before, but is there anything else that would take me from the mid-40s after those 100 bodies are added down to the low 40s?

Yes, a number of things.

First, I think your estimates are on the high side.

The run rate of a lot of these people is probably closer to 150 basis points or lower than what you are estimating.

Secondly, is we have -- we continue to have major opportunities for investment in our business which we have been a bit hesitant to push hard in the last nine to 12 months given the environment and the uncertainty in the environment and not knowing where the environment was taking us.

We have felt like most people that the global equity markets have stabilized at these levels for now.

They may turn higher but they have stabilized and therefore we are beginning to take steps to make the investment that we have wanted to make in the last nine to 12 months.

There is more investment to make after this as well.

We feel that we are in a number of categories we feel we continue to be under penetrated in a lot of client segments and regions of the world.

So we need to add more salespeople.

We feel that we can accelerate even further the launch of new products particularly in equity analytics, new risk models and more software if we had more resources applied to that.

We feel that we could continue to develop particularly the fixed income asset coverage and modeling of our BarraOne offering.

We also feel that there is a lot of demand for fixed income analytics for fixed income portfolio managers not only for multi-asset class portfolio managers.

So we could be making good investments in expanding that category and build it as another major leg of our business.

So all of that is on the horizon and therefore that is what allows to ask you to temper a little bit the continued drive higher of our EBITDA margins.

Like you, we are not completely sure we are going to be successful in holding it down, to be honest.

But we would rather tell you that those are our intentions in order to try to continue to grow at the top line aggressively when the markets turn.

Great, thank you very much.

And with no further questions in the queue, I would like to turn the conference back over to your presenters for any additional or closing remarks.

Well, we thank everyone particularly in this day before the long weekend to attend the call.

And as we said, we are very pleased with our performance so far given the environment and we thank you again for your attendance and support.

Have a good long weekend.

This concludes today's conference.

We thank you for your participation.