明晟 (MSCI) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the MSCI second quarter 2010 earnings call. at this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Edings Thibault, Head of Investor Relations.

Thank you, Operator. Good morning, everybody, and thank you for joining our second quarter 2010 earnings call. With me in the room I'm joined by Mr. Henry Fernandez, our Chairman and Chief Executive Officer; Mr. David Obstler, our Chief Financial Officer; and Mr. Michael Neborak, MSCI's outgoing Chief Financial Officer. Please note that earlier this morning we issued a press release describing our results for the second quarter 2010. A copy of that release can be viewed on the Company's website at www.msci.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're made, which reflects 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 most recent Form 10-K, subsequent 10-Q reports and the amended registration statement on Form S-4 filed with the Securities and Exchange Commission on April 27, 2010.

Today's earning call may also include discussion certain non-GAAP financial measures including adjusted EBITDA and adjusted EPS. Please refer to today's earning 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 is an approximation at a given point in time of the 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 assets and ETF license store entities. Please refer to table five in our press release for a detailed explanation.

This morning Henry Fernandez will begin the discussion with an overview of the second quarter and then David Obstler will provide some details on our financial results. In their prepared remarks both Henry and David will focus on commentary that will supplement the information that can be found in the earnings release. Following our formal remarks we'll open up the line for questions.

I'll now turn the call over to Mr. Henry Fernandez. Henry?

Thank you, Edings, and good morning to everyone. Thank you for joining us. I am delighted to welcome you to the first earnings call that we're hosting following the completion on June 1st of our acquisition of RiskMetrics. For the most part, the numbers we'll be discussing today will be those of legacy MSCI. But we'll also give you some commentary regarding the performance of RiskMetrics in the two months leading up to the close of the deal, as well as a report on our activities in the early stages of integrating these two great companies.

So onto MSCI's second quarter results. This morning we reported record second quarter revenues of $125 million, record adjusted EBITDA of $62 million, and record adjusted EPS of $0.35. The revenues grew by 14% year over year. Our adjusted EBITDA grew by 16%. Our adjusted EBITDA margin increased to 49.4%. And our adjusted EPS rose by 30%. For the first half of 2010, our revenues grew by 15%, to $247 million. Our adjusted EBITDA grew 19% to $121 million. And our adjusted EPS grew by 29%, to $0.66. Please note that both our adjusted EBITDA and our adjusted EPS figures exclude third party transaction expenses resulting from our acquisition of RiskMetrics, and they also include founders grant expenses. And our adjusted EPS also excludes a amortization of intangibles and debt repayment expenses.

I'm very pleased with our strong performance in Q2 and in the first half of 2010. Demand for our products strengthened, and we're encouraged to see more signs that business conditions have improved from the depressed levels of 2009. Our new recurring subscription sales rose to a record $22 million, a significant increase from a year ago, and from Q1. Our retention rates improved year over year but remained lower than in year's past, which is evidence of continued post crisis caution in our client base. Our asset based revenues continue to rise as global equity markets were generally higher during the second quarter than in the first and our ETFs linked to our indices attracted healthy levels of inflows.

As I mentioned earlier we had strong sales in the quarter. Our ability to achieve these sales despite the continuing tightness in client budget is the result of extremely hard work by our salespeople, which is evidence that there continues to be caution in our client's spending patterns. In Q2, new recurrent subscription sales rose by $4.2 million sequentially, and by $7.7 million year over year to set a new single quarter record. Quarterly subscription sales rose year over year in all three of our major product categories. With equity index new subscription sales rising 82%, and multi-asset class analytic sales rising 62%. The search in new sales was the key driver behind the acceleration of our subscription run rate.

The equity retention rate increased to 89% from 88% in Q2 '09 but fell from 92% at the end of Q1. As you may remember, our retention rate normally falls from Q1 to Q2, due to the timing of our renewal cycle. In dollar terms, cancellations fell by 9% from year ago levels, indicating continued recovery from recession lows. The retention rate improved from 89% for the first six months of '09 to 91% for the same period this year. Our asset based business also continues to drive our growth. Our revenues in the quarter benefited from an increase in average assets under management in in ETFs linked to our indices to $250 billion, up from $240 billion in the first quarter. Asset inflows were positive in each of the first and second quarters of 2010. And they are positive again quarter to date. Total assets under management in MSCI linked ETFs closed last night at $235 billion, and the third quarter to date average AUM is $242 billion, down 4% from the average AUM in Q2 but up 2% from the end of the second quarter.

We continue to invest in our business. During the second quarter we added a net of 24 new employees, bringing the total number of employees in the MSCI legacy business to 942, up 15% from a year ago. As has been the case for the last several quarters, the bulk of these new additions are coming in our emerging market centers in Monterey, Mexico, Budapest, Shanghai and Mumbai.

I would now like to provide some additional information regarding the performance of our major product lines before closing with a few comments about RiskMetrics. In my prepared remarks, I will be referring only to run rate figures. And David's comments later on in the call will focus on financial accounting numbers. I will be speaking to comparisons to Q1 2010, unless otherwise noted.

Our total run rate grew by 2% to $474 million compared to Q1, an increased 10% compared to a year ago. Our subscription run rate grew by 3% to $382 million, but was partially offset by a 2% decline in run rate from our asset based fee business. The run rate in our overall equity index business increased 3% compared to Q1. The equity index subscription run rate rose 5%, driven by strong demand across all our major index product lines. Run rate for our four index modules for developed, emerging and small cap markets rose by 5% and our other index products such a value and growth index modules rose 7%. Finally, user fees rose by 5%. Equity index subscription run rate grew across all client types, and we recorded robust growth across all regions in the world. Retention rate in equity index subscriptions remained flat versus the second quarter of 2009, at 93%. As in the past, structural changes in a few clients, such as mergers and acquisitions, and firm and fund closures, continued to account for about half of the equity index cancels in the second quarter. Later in this call, David will provide more color about the other part of our equity index business, the asset based fee areas.

Our equity portfolio analytics business remains stable but is not yet growing. The run rate shrank by 1% in Q2, compared to Q1, but is essentially flat from the beginning of the year. The strengthening of the US dollar also had a modestly negative impact of $1 million on sequential run rate growth. Recurring subscription sales of equity portfolio analytics were $4.5 million, were up 15% year over year and 7% sequentially. Which is an encouraging sign. Sales remain below levels of '07 and early '08. We are seeing solid demand for our products at non-US broker dealers and from the smaller clients. The retention rate for equity portfolio analytics increased to 85%, from 82% in Q2 '09. By client type, run rates increased at asset owners, they were flat at asset managers, and declined at broker dealers, hedge funds and others. On a regional basis, we experienced continued growth in the Asia Pacific region.

The investments we have made to improve our product portfolio in equity portfolio analytics over the past several years have been critical to the stabilization of this business. Our refresh product portfolio has enabled us to selectively raise prices and to roll back discounts that were given in '09, which were important drivers of new sales growth in this quarter. We're also encouraged by the positive response to the new products launched in the quarter, including our first Asia Pacific equity risk model, and our new Barra extreme risk products. We expect to begin booking revenues from those products in the third quarter.

Finally, development of Barra Portfolio Manager, our new proprietary ASP software system, remains on track for release at the end of 2010, and the early feedback from clients has been positive. We believe this investment in our data and operations, as well as the launch of new models and a new software system, will help our equity analytics business begin to grow again. The multi-asset class portfolio analytics run rate increased 2% compared to Q1. Driven by 4% growth to $38 million, for BarraOne. Offset by a 10% decline to $4 million for TotalRisk. The strengthening of the US dollar during the quarter reduced our run rate by $1.2 million, or 3%. It is important to note that we saw no impact whatsoever from the announcement of our planned acquisition of RiskMetrics on sales of our BarraOne products, which speaks very well to both the demand for our products, as well as our own efforts to reassure clients that we'll continue to support the BarraOne products following the completion of the deal.

The equity retention rate for multi-asset class portfolio analytics rebounded to 89% from 83% in Q2 '09 and Q1 of this year. The overall retention rate was only modestly impacted by expected cancellations of TotalRisk, which, as you know, is a product that we're in the final stages of decommissioning this year. For BarraOne specifically the retention rate increased to 93% from 92% a year ago, and from 88% in Q1. By client types, multi-asset class portfolio analytics run rate increased at asset managers and at broker dealers but declined modestly at hedge funds. By region, the product run rate rose in the Americas, in Japan and in Asia Pacific. The run rate declined slightly in EMEA as a result of the stronger dollar versus the euro.

Finally, I would like to provide you with a brief commentary on RiskMetrics' recent performance and an update regarding the integration of the two companies. RiskMetrics ended May with an aggregate contract value or ACV of $284 million, an increase of 1% from the ACV at the end of March of this year. The increase in ACV is a result of both stronger new sales, particularly in the risk business, and an increase in the Company's renewal rate into the over 80 percentage range. RiskMetrics risk segment, which comprises the company's multi-asset class risk business, is experiencing a strong rebound in new sales, and higher renewal rates. We have seen a rebound in new sales from the Q1 slowdown related to the sale of RiskMetrics, and no significant deals from the strong pipeline have been lost. We continue to have a strong and growing pipeline in the risk manager products, particularly in the US, and at both asset managers and hedge funds in the US.

RiskMetrics ISS segment appears to have stabilized in April and May. This segment contains RiskMetrics ISS proxy governance service business, the environmental social and governance business, the CFRA for intricate accounting products and services, and the corporate advisory business. The improvement in the renewal rate, which is up on both on an annual basis as well as sequentially, helped drive a modest increase in ACV as of May 31st versus March 31st, while new sales remain solid in the ISS segment. We will provide much more detail on the performance of RiskMetrics businesses at our next quarterly call. As I noted at the beginning of my remarks we closed the acquisition of RiskMetrics on June 1st, the first date of our fiscal third quarter. The integration process is clearly in the early stages, but is going very well. Prior to the deal, we formed more than 30 joint committees involvement, more than 150 people worldwide, who conducted more than 200 in-person meetings, to develop detailed plans for the integration. So in the time of the closing of the transaction, we hit the ground running. That planning has started to payoff.

One example of the progress that we're making is that we have internally announced and distributed very detailed organizational structures for each unit of the Company from sales to finance to IT and other areas. We have also started to execute on our signature targets and we have achieved already approximately $12 million in annualized compensation savings. We have also realigned and are about to merge our joint sales force in the wake of the closing. The addition of the RiskMetrics sales team with its deep relationships with hedge funds, banks and other clients, has given us more resources to focus on our key client categories. As a result, we now have dedicated sales managers and sales teams for asset owners, for asset managers, for banks, for broker dealers and for hedge funds worldwide. That should position us well to achieve additional cross selling opportunities in the combined Company.

It is still early in the integration process, and there remains an incredible amount of work to be done to meld our two companies into a single organization. What I have seen over the past month has increased my confidence that we'll be able to complete this task in the 12 to 18 month time frame that we laid out for you in March. I would also like to take this opportunity to confirm one more time our previously announced target of $50 million of cost synergies and the timing of those cost synergies. Many of these synergies will come from outright cost cuts in areas such as administrative overhead, where clearly there are duplicative functions. But the combination of the two companies will also enable us to forego additional investment that each company would have had to make on a standalone basis. An example of this would be our efforts to build out additional capabilities in fixed income analytics, an area that both companies have targeted for further investment. We will need to make additional hires in this area, so we have not eliminated the need for investment, but purely it is now one set of investments rather than two in the combined companies.

Let me now turn it over to David for a review of our other financial highlights.

Thank you, Henry. As Henry mentioned, MSCI revenues increased 14% for the three months, and 15% for the six-month period. Revenues were also up 3% in the second quarter, from the first quarter. The Q2 growth was driven by a 28% decrease in equity index revenues comprised of a 15% growth of subscription revenues and 69% growth in asset based fees. Revenues in our multi-asset class product line also grew by 16%.

I first want to spend time on some of the drivers of the asset based fee revenue increase. Revenues from that category were up 10.5%, to $25.7 million versus Q2, 2009. Similar to the prior periods, the substantial majority of that revenue was related to equity ETF businesses. We saw asset inflows into all the major ETFs linked to our indices with the exception of those linked to the Europe and Brazil indices. Inflows for the quarter totaled $7.9 million, offsetting asset depreciation of $7.9 billion. ETFs linked to our emerging market index were the biggest beneficiary with $4.5 billion of inflows. Over the course of the second quarter, we estimate that more than a quarter of all inflows into equity ETFs went into those links to MSCI indices. Our overall market share of equity ETFs was down slightly to 29% at the end of May, versus 30% at the end of 2009 but was up from 27% at the end of the Q2 '09. The number of ETFs linked to MSCI indices rose to 309, a net decrease of 18 during the quarter, with most of that growth coming from Europe.

As of May 31st, iShares accounted for approximately 55% of the AUMs linked to our indices. That is down from 62% a year ago. And 64% of our ETFs run rate. Lastly, the AUM in ETFs linked to our indices at the end of the quarter was $237.6 billion. And our run rate was $74 million. The weighted average basis points fee excluding minimum fees was approximately 3.0 basis points.

Next, revenues from our subscription businesses grew 6% versus Q2 '09, and acceleration reflected the modest increase in our subscription rate during the last 12 months. If new recurring subscription sales increase, and retention rates improve as they have been, revenue growth from our subscription business should increase but on a lag basis versus run rate growth. Non-recurring subscription revenues, which consists of sales of custom indices, and historical index information, rose $1.6 million year over year, and $1.7 million sequentially to $4.2 million, the result of a single large $2.5 million deal involving historical use of our indices. The improvement in non-recurring revenues had a positive impact on our adjusted EBITDA in the quarter.

In the second quarter, we generated $61.8 million of adjusted EBITDA. Up 4% from $59.2 million in Q1, and up 16% from $53.4 million a year ago. Please note that our adjusted EBITDA calculation excluded $5.3 million in transaction expenses, consisting of third party financial advisory, legal and accounting fees, relating to our acquisition of RiskMetrics, and $2 million of founders grant expense. For the six months, adjusted EBITDA increased 19%, to $121.1 million. Overall, total cash operating expenses, which exclude depreciation and amortization, founders grant costs and transaction expenses, rose 13% to $63.3 million in Q2. Compensation expenses excluding founders grant expenses rose 9%, while non-compensation expenses increased 23% versus the second quarter of '09. The increase in compensation expense was driven by increased investment in our product development and research capabilities, as well as more investment in or sales and sales support functions. The increase in non-compensation expenses, which exclude the impact of third party transaction expenses, was driven by higher investment in IT infrastructure, third party professional expenses and higher occupancy to support our growing footprint.

For the six months comparison, cash operating expenses increased 11%, with compensation expenses increasing 11% and non-comp increasing 12%. Since revenue grew at a faster rate than cash operating expenses for both the three and six months periods, adjusted EBITDA margins increased to 49.4% for Q2 versus 48.8% in the comparable period last year, and to 49.1% for the six months from 47.3%, again in the comparable period.

Our effective tax rate in Q2 was 36.6%, down from 37.2% in the first quarter of this year, and 38.6% a year ago. For the six months, our effective tax rate was 36.9%, versus 37.7% last year. Our blended tax rate was impacted by two major factors in the quarter and year to date. The first was the impact of transaction charges, which are not considered to be tax deductible. The second was the impact from $2.6 million of discrete tax benefits resulting from an over accrual of tax charges in previous periods. If we excluded these factors from the calculation, our effective tax rate would have been 35% in Q2 of this year, and 36.6% in the first six months.

Turning to earnings. GAAP earnings per share for the second quarter were $0.22 per share. Our adjusted EPS, which is a non-GAAP measure, and which is derived from adding back after tax costs of founder grant expense, the amortization of intangibles, third party transaction expenses relating to the RiskMetrics acquisition and certain debt repayment costs which totaled $6.3 million associated with the retirement of our $297 million of term loans in the quarter, was $0.35 per share, up 30% from the second quarter of 2009, stated on a comparable basis.

Our operating cash flow for the first six months of 2010 was $55.1 million, down from $69.2 million in the same period a year ago. Our operating cash flow in Q2 was particularly strong at $69.9 million versus $46.7 million in Q2 of last year, driven by strong collections of receivables. Relative to 2009, our first cap cash flows were impacted by $10 million of higher tax payments, approximately $5 million of cash third party transaction costs, and $6 million of higher payroll tax payments in our international operations. Changes in FX also had a modestly negative impact.

As Henry noted, we closed the acquisition of RiskMetrics on June 1st, the first day of our fiscal third quarter. Clearly the shape of the Company has changed dramatically. In order to help with your understanding of what the combined company will look like, I'd like to provide some information on a few of our lines in our financial statements. First, total debt and interest costs. In connection with the acquisition, MSCI entered into a senior secured credit agreement, which is comprised of a $1.275 billion six-year term loan facility and an undrawn $100 million five-year revolving credit facility. The interest costs of the term loan is set at LIBOR plus 3.25%, with a LIBOR floor of 150 basis points. We will be completing a swap agreement shortly that will effectively convert a portion of this term loan interest expense into a fixed rate liability, but we expect our near term interest expense to be in the 5.5% to 6% range, including the impact of the amortization of debt financing expense.

On cash balance at the end of the first week of June, the combined Company had cash balances of roughly $195 million. In addition, in the past months, largely after that, we've made approximately $28 million in payments to third party advisors in connection with the acquisition of RiskMetrics, which will impact our cash flow from operations in the third quarter. With the current low rate remaining available on our cash balances, we do not anticipate significant interest income from these balances.

Turning to our shares outstanding. At May 31st, MSCI had 105.7 million shares outstanding. Fully diluted shares outstanding for the EPS calculation were 106 million. As part of the acquisition, MSCI expects to issue approximately $12.6 million shares and has reserved approximately 4.3 million common shares for outstanding vested and unvested stock options and restricted stock awards assumed as part of the acquisition. We would anticipate our diluted share count for the fiscal third quarter be in the 121 million to 122 million shares outstanding.

On depreciation and amortization we do not expect to make any significant changes between the two companies' individual depreciation schedules as a result of the combination. Based on our current mix of business, we would anticipate our quarterly depreciation and amortization on TP&E to be in the $5 million to $6 million range. Also, as a result of the intangibles created in the RiskMetrics deal, we anticipate additional annual amortization of intangible expenses of roughly $50 million. That would imply a quarterly rate for Q3 of $17 million including our pre-existing amortization expense. Total depreciation and amortization expense, therefore, should be in the $22 million to $23 million range for the third quarter.

On transaction expenses, as I noted, we reported $5.3 million of transaction expenses in the second quarter. During the third quarter we anticipate third party transaction costs to be in the neighborhood of $13 million to $14 million. In addition, we expect to record a $2 million expense charge related to the last repayment of our prior term loan. Please note that the cash figures I cited above will differ from these transaction costs because RiskMetrics legal and investment banking fees were recorded prior to the close of the deal but were actually paid in June. Finally, we expect to record additional GAAP expenses during the third quarter related to the acceleration of stock based compensation, severance and other expenses related to the integration.

On ACV versus run rate metrics for RiskMetrics, as Henry mentioned, RiskMetrics ACV at the end of May was $284.3 million. Going forward, we will be reporting run rate numbers for the combined Company using the legacy MSCI methodology. The biggest difference between ACV and run rate is the treatment of changes in foreign currency. These changes are reflected monthly in the run rate but at RiskMetrics were reflected only at the renewal of the contract and its consequent impact on revenues. The strengthening of the dollar since the beginning of 2009 would have had a negative impact of $7 million to $9 million based on current currency rates if ACV had been calculated in the same manner as run rate for RiskMetrics.

Lastly, on our ticker symbol. I want to mention this before moving to the Q and A portion of the call and remind everybody that we'll be changing our ticker symbol for our common shares on the NYSE to MSCI from MXB effective at the start of trading on Tuesday, July 6th.

With that, we'd be happy to open up the line for questions that you might have.

Thank you. (Operator Instructions). Our first question comes from Suzi Stein from Morgan Stanley.

Hi, my questions are mainly around the ETF business. Last week, Vanguard announced that it's introducing some new ETFs based on S&P and Russell indices. Can you just talk about your current relationship with Vanguard and why you think they chose to benchmark against your competitors' indices instead of yours since they've tended to use MSCI in the past?

Yes. Vanguard is a large and important client of MSCI. There really is no change in the relationship between us and them. In the past, Vanguard had been precluded from offering ETFs linked to those indices at S&P and Russell because of exclusive arrangements that those index providers had signed. It now appears that those arrangements have expired. So I think importantly, the announcement that they made, broadly represents quite a strong symbiotic relationship between the benchmark business and the brand of those indices and the ETF business. With respect to S&P and Russell, clearly they have a larger market share in the domestic US market than we do, and Vanguard is trying to capitalize on that, for domestic investors. Our core forte continues to be the international portfolio arena. We continue to be very comfortable that those indices will attract healthy inflows from both institutional and retail investors and the like.

So I think Vanguard is clearly positioning itself as a provider of ETF from various index suppliers, a little bit of a supermarket context, and I think that inflows of funds are going to go into various providers depending on the brands and the competitive positions that they have in each one of the markets. But as I said, in summary, there's no change in the relationship. If anything, however, our relationship with Vanguard has strengthened in the last few years.

Okay. Can you just talk generally, with the -- as ETF providers are cutting fees, are you getting any pressure from any of your relationships to lower your fees in that business?

None whatsoever. If anything, at the renewal of some of our ETF contracts, we have been able to, in some cases, that we didn't have, we've been able to put minimum floors, we've been able to establish minimum basis point floors, we've been able to establish upfront fees in terms of licensing our indices to people and the like. So we see no competitive pressure and no pricing pressure in any of our ETF licenses.

Okay. Thank you.

Our next question comes from Andrey Glukhov with Brean Murray.

Yes, thanks for taking the question. I have two things. First on, as far as the integration is concerned with RiskMetrics, can you talk a little bit more as to how you're thinking about some of the overlap in multi-asset class products? And Henry you said that you guys are going to support BarraOne but a certain functionally is overlapping, so as we think about the modeling what should we assume for maybe the aggregate ACV haircut?

That's a good question. I think one of the positive surprises, as we closed on the acquisition of RiskMetrics and therefore were able to go deeper into the client profile and the pipeline and the use cases of the various products which we were prevented from doing that prior to closing given the anti-competitive reasons, one of the positive surprises is how little overlap exists. So the first thing to begin with, which we were pretty relieved, is that there was no overlap in the pipeline, so there was no cannibalization of sales from one entity to another. So that is very positive. The second thing is that the people who use RiskManager versus people who use BarraOne, again very little overlap. The two software systems have fairly different use cases in some instances and the way that they're being applied internally are also different, so it makes it highly, highly complementary to what we do, and that's been a very good thing since we closed on the deal. So that's one thing.

The second thing is that ultimately our plan, our extensive plan, is to figure out over the course of a few years how we end up merging the two software platforms and the two software applications into a combined set of products that end up being good in both aspects, in both use cases. The one of our use cases for RiskManager and the use cases for BarraOne. It's likely to take at least a year internally to figure out how that will happen, and what work needs to happen to do that. It will probably take another year plus, maybe two years, to do the work, and two or three more years to do the migration of clients from one entity, from one product line to the other. So, so that is clearly a multi-year strategy to do that. And therefore during that period of time, we will be heavily investing in both product lines, the RiskManager product line and the BarraOne product line, and the way we're going to be selling both and selling both highly, is on a suitability point of view. Which is, we want to end up offering the product that is best for the use case of the client to ensure that they're satisfied with the purchase that they make.

Okay. That helps. And then David, a technical question, if I may. The weighted average fee on the AUMs seems to be drifting down here from 3.1 to 3.0 bips. So basically how do you think about that metric over the next few quarters? Is it pretty stable at this level or should it continue to drift down?

This is Henry answering the question. I think what happens is that, bear in mind that embedded in the AUM there are two businesses with different fees. There is the cross border equity indices, the MSCI International Equity Indices that are listed all over the word and the US and in Europe and the like. That is the large bulk of the AUM, and those have fees between 3 and 4 basis points, and in some cases higher than that, in some selective cases higher than that. Now, there is a smaller component which is the AUM that is related to Vanguard's US equity ETFs, the US telemarket index, the large cap index, the mid cap, the small cap, and all of that within the US market. Those fees are considerably lower than the international cross border fees, and therefore the aggregate basis point that you mentioned is typically a reflection of the mix between how much the market in the US versus the markets around the world have been, the relative performance of those markets and the relative performance of inflows of funds into those ETFs. So the trending down a bit has been caused by the relative out-performance of the US market versus other markets around the world, including obviously the strengthening of the dollar versus the US market and the relative performance of inflows of money into US equity products rather than international equity products. What is likely to happen in the next few months is anybody's guess. You've got to have a view on the relative performance of foreign markets versus the US and on the inflows of the foreign market versus the US and on the dollar, so it's hard to say what will happen.

Okay. That helps. Thank you very much.

Our next question comes from Drew Gaputis from Davenport.

Yes, my question is around equity portfolio analytics. I was hoping to get a little bit more color on, we're witnessing retention in that segment, especially among broker dealers and hedge funds. I was wondering if this is a reflection more of just general budget reduction (inaudible) from a competitive standpoint or the competitive landscape you're seeing in the marketplace?

It's a good question. I think, to begin with, just to set the framework of the question, the answer is that the equity portfolio analytics business is a business that when we bought Barra had not been invested in. We obviously took a year, a year and a half, to figure out what needed to be done and instead of investing on that for the ensuing two to three years, and therefore the new products on that business did not start coming until about a year and a half ago with the launch of GEM2 and then obviously last summer the launch of the European risk model, all the models in the fall and the Asia Pacific model and now clearly hopefully the launch of the new Barra portfolio manager software at the end of this year. So what happens is that clearly no business continues to grow without adding features and functionality and new products and new clients and things like that. So it hasn't been until the last couple of years that a lot of that activity that we were doing internally has begun to be seen and clients benefiting, seen by clients and obviously clients benefiting from that. So obviously during the crisis, this business had a lot more cancellations than sales. And mind you, the equity index business also has high levels of cancellations but we had a lot of new products to sell to a lot of different people, so that's why the equity index business held up better than this.

So we're pretty optimistic that, given the investments that we have made in revamping the data factory, and putting in a lot of new products, that this business will continue to grow. In terms of the attribution, you can see that the attribution of the business, you can see that sales have picked up in the quarter compared to prior quarters. The retention rates, or I should say cancels, have moderated quite significantly. I think cancels are down 21% year over year, as an example, compared to Q2 '09. So I think we're seeing a transformation of it from low sales and high cancels to lower cancels and higher sales but not enough to start growing. I think we did a little bit last quarter, but not this quarter, but the expectations are that we're in that inflection point of beginning to grow and the common question is when and how fast, given the new products that we're launching.

Our next question comes from Aaron Teitelbaum from Keefe, Bruyette & Woods.

Great, thanks for taking my question, guys. I really just wanted to ask, could you give us a sense for business activity in June and across the combined franchise, how the more challenging recent market environment may be impacting your client sales and retention?

Very little impact, if at all, so far, given June. If anything, this may be a lag effect, but if anything the pipeline of the combined Company during June has strengthened. Look, that's not to say that we don't have to work really hard in every sale, harder than we've worked in a long time. And that's not to say that if clients are cautious with their budgets, but a lot of that has been more or less a result of the post crisis environment that is a result of the recent volatility in the world's financial market. Which is to be expected. We typically lag by a lot in all of this, and if volatility does not stick, it typically doesn't affect us. It affects us when there's a sustained period of volatility or down draft in the market. And all of my comments also include our client base in Europe, which is obviously the center of a lot of the attention. We haven't seen any evidence, meaningfully, of anybody postponing a purchase or canceling a demo or canceling meetings or whatever on the basis of the volatility. But again, it's probably too early to tell.

In the RiskMetrics business the trends that Henry mentioned on the call which are recovery renewal rates and strong renewed sales were continuing throughout the quarter and into June. So it's a continuation of the recovery that we talked about in the call.

I just want to take this opportunity, having said that, you have seen in the legacy MSCI business a recovery quarter by quarter. We're clearly seeing in the legacy RiskMetrics business a recovery quarter by quarter. But I think we've got to be conscious that this is not a straight line. Clearly, the markets are volatile, people are cautious. We haven't seen any evidence, any tangible evidence, of anybody pulling anything. But as I said we work very hard for every sale and to ensure that it happens in a timely fashion and people make decisions and the like, it hasn't been a slam dunk.

Our next question comes from James Kissane from Banc of America.

Hi, guys, it's actually George for Jim. Just a couple of questions. I know it's early days now with the acquisition, but have you guys thought about perhaps framing a target EBITDA margin or EBITDA range, adjusted EBITDA range, for the combined entity? And maybe you guys can speak to some of the potential longer term revenue synergies that could come out of the combination?

With respect to targets, we're really looking at all of that. And probably we'll have more to say in the next quarterly call. But I think it is fair to say that on the revenue side, as a combined Company, we continue to believe that we can be at or around the mid teens revenue growth across cycles. In the higher end of the cycles it will be higher, in the lower end of business cycles it will be lower. So we continue to be comfortable with those numbers. We're obviously really looking at everything just to make sure on that.

On the EBITDA margin, we continue to be comfortable on a combined EBITDA margin at or above the combined EBITDA margin of the two companies. And clearly a lot of it is because our incremental margin is high, a lot of it is because we have some cost synergies that we'll be realizing over the next few quarters. But also we continue to believe that these are very high growth businesses, and it's important to invest, and it's time to invest heavily in the businesses in order to accelerate at some point the revenue growth rate. So therefore the real crux of all of it will ultimately be what is our investment plan and how can we really make it all happen at the same time that we're integrating these two businesses. That's going to be the determinant ultimately of the EBITDA margin.

Okay. Now on those investment plan targets, I know in the past you said, Henry, you guys were looking to bring on an additional 105 associates over the first half of the year. How far along are you with that and is that proceeding according to plan?

It's lagging plan. And it has nothing to do with the integration or acquisition of RiskMetrics. It's got a lot to do with the fact that we're looking to hire a lot of people around the world. In the past, our hiring model has been recruiting people with graduate degrees with three to five, three to seven years of experience in the quote/unquote secondary market. That has become harder to do as we increase the number of people that we're looking to hire globally. So we're looking at our plan to see if we should put a percentage of our hiring directly out of graduate degrees in universities rather than relying so much on the secondary market, therefore go to the primary market, so to speak. So we're looking at those plans. But it's been hard, and a lot of it is clearly because on a growth basis, including attrition, the numbers are getting bigger and bigger globally. So we worked pretty hard on hiring what we got, but that slows down on the hiring of the targets.

We are releasing additional open head count for some of the managers in the second half of this year. We're in those plans right now and we'll be able to report more on that on the next quarterly call. But, importantly, my message to you is not only that we've done a lot of it but we're still lagging, we want to do more of that. We've got to change or refine the recruiting process, but also importantly we want to continue with our foot on the accelerator on the investment, even with the combined acquisition, particularly in those areas that don't get affected by the joint risk business, multi-asset class analytics business in areas like in equity indices, particularly in ECS, particularly in Asia, as an example in our equity portfolio analytics business, and other areas of the Company.

Okay. Last question for me, can you comment a little bit on if you're seeing any sort of opportunities, threats, emerging from financial services formed here in the US? And also how you would frame, again, threats, opportunities in Europe from the proposed alternative investment fund managers directive?

I think, George, a lot of that is net positive to us. We don't like regulation for ourselves but regulations for other people creates opportunities for us. It is something that both businesses have always benefited from regulation. So we believe that the onset of a lot of this regulatory regime post crisis in the US and Europe will benefit us to the extent that the proprietary training that are disaggregated from large banks and broker dealers, and many of those people end up setting up hedge funds, those are new clients that we can gain in the business. To the extent that other people in Europe, particularly mutual fund complexes can invest in derivative, or hedge funds can offer (inaudible) 3 and (inaudible) 4 investment products in the retail market in Europe, that again benefits our tools because people will need more risk management system, more index systems, more everything.

Now, the only small effect that we have had negatively in the context of the regulation in the US, has been on FEA, our energy and commodity analytics business. That's a business that in the past really has benefited from the buyers and traders of natural gas and electricity, hedging their positions with over-the-counter commodity and energy swaps and options and the like. And clearly some of the uncertainty that took place in the last few months has moderated our rate of growth in that business. But a pretty small part of our business and we're beginning to see a little bit of recovery, but the regulatory regime clearly, and the uncertainty associated with that, clearly motivated our sales there.

Great. Thanks, guys.

And I'm showing no further questions. I'd like to turn it back over to our speakers for any closing comments.

I'd like to take this opportunity before we all go to offer a very special thanks to our outgoing Chief Financial Officer, Mike Neborak, which we talked today on this call. Mike played a pivotal role in preparing the Company for the IPO, and the significant number of secondary offerings that we made and number of financings that we made, and particularly on the acquisition of RiskMetrics, and the exit from Morgan Stanley completely. So we want to thank Mike profusely for all of that. We'd also like to congratulate him on his new role as Chief Financial Officer of the Willis Group. I know he will be a valuable addition to that team. So thank you, and good luck.

Thank you, Henry.

Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the program. You may all disconnect. Have a great day.