明晟 (MSCI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MSCI first quarter 2014 earnings call.

At this time, all participant lines are in a listen-only mode.

Later we will be conducting a question and answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Mr. Edings Thibault.

Mr. Thibault you may begin.

Thank you very much.

Good day, everyone.

And thank you for joining our first quarter 2014 earnings call.

Please note that earlier this morning we issued a press release announcing our results for the first quarter 2014.

A copy of that release may be viewed at MSCI.com under the investor relations tab.

You will also find on our website a slide presentation that we have prepared to accompany this call.

This call may contain forward-looking statements.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date in which they were 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 uncertainty that may affect MSCI's future results, please see the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ending December 31, 2013, today's earnings release, and our other filings with the SEC.

Today's earnings call may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EPS.

Adjusted EBITDA and adjusted EPS exclude the following: after-tax income from discontinued operations, and the amortization of intangible assets.

Adjusted EBITDA also excludes depreciation and amortization of property, equipment, and leasehold improvements, while adjusted EPS also excludes the income tax effect of the excluded items.

Please refer to today's earnings release and pages 20 through 22 of the investor presentation for the required reconciliation of non-GAAP financial measures to our numbers.

With that, I would like to turn it over to our Chairman and CEO, Mr. Henry Fernandez.

Henry?

Thank you, Edings.

Good morning, everyone.

I am pleased to report our strong first-quarter results.

Our revenues of $240 million are up 9% versus the prior year and our run rate grew organically by 10% to $955 million.

Our EBITDA slipped a bit by 2% to $97 million as we made important strides in executing on our investment plan.

Our diluted earnings per share rose 42% as a result of a non-cash tax benefit associated with the sale of ISS.

Bob will review these numbers later on in the call.

Let me take this opportunity to share with you, from my perspective, what I think are the three biggest headlines from this quarter.

First, the investments we made in 2013 and earlier are continuing to pay dividends.

Our subscription run rate accelerated to 8% versus 6% in the fourth quarter, [before] example of [those dividends].

Importantly, the improvement in the first quarter was driven by both stronger sales and an improved retention rate environment for us, which have been two key investment areas for us over the past year.

Secondly, we continue to make important strides in our investment program, which we outlined at investor day.

And, therefore, we added a total of 43 employees for the quarter and nearly 400 over these last 12 months.

And, third, I am pleased to report that this morning we closed on the sale of ISS.

The last two points, the investment program that we have set for ourselves and the close of ISS, are critical because they reflect our determination to make MSCI a more focused and faster-growing Company, one that is well positioned to take advantage of the big changes that we see in the investment industry worldwide.

By investing in our products that create real solutions to our clients' investment programs and distribution, so that we are very close to those clients and in servicing them, and by shedding non-core units we believe we can accelerate MSCI's revenue growth into the double digits over the next few years.

Our first quarter results represent one important step in that direction.

As I noted, our run rate grew by 10% in the first quarter of 2014, fueled by a 14% growth in our overall sales and a continued improvement in our retention rates.

Our sales growth was driven by a combination of the investments we have made to add to our sales force and an increase in our product development initiatives.

We have grown our sales force by almost 20% over the past year.

We have increased our sales focus on ETF providers, a decision that is paying off.

In the past, we have talked about our investments in countries like Korea and Canada on how those investments have generated new sales.

This quarter, we opened a new sales office in Santiago, Chile, to cover clients in the countries of Chile and Peru and Colombia, which have fast-developing pension fund markets for us.

Another contributor to our growth was the continuous trends in our retention rates.

Over the past year, we have made significant investments to strengthen our client service teams.

Our key focus has also been on adding to the number of client consultants that support our analytics products.

These client consultants are typically located in our major sales office around the world, and have the day-to-day responsibility for ensuring that our clients get the maximum benefit from our tools.

Increasing the quality and the quantity of our interaction with clients increases our retention rates, enables us to meet our clients' needs faster, and serves as a valuable pipeline of ideas for new products.

As we noted during investor day, adding to our new product development capability has been and will continue to be the single biggest part of our investment plan.

We want to be relentless in our focus on adding value to our clients, and accelerating new product development is critical to that goal.

It is very gratifying to see some signs that our focus in these areas are starting to pay dividends in the form of improved operating results for us.

One big example of where innovation is driving results is in the equity investment process.

Equity investments worldwide are increasingly using quantitative tools to help them drive a desired investment outcome, such as lower volatility or higher dividend income without giving up the benefits of broad market diversification.

MSCI's factor indices are used by our clients to help them achieve these goals.

Assets under management linked to our factor indices have grown rapidly, expanding from $50 billion a year ago to approximately $95 billion at the end of the first quarter.

New mandates won in the quarter added almost $10 billion in new assets, demonstrating the increasing assistance of MSCI factor indices on our increasing leadership in this market.

One of our key advantages in building factor indices is the credibility that we bring to the market via our Barra factor modeling expertise.

We are focusing on extending that leadership in factor investing.

In the first quarter, we launched a series of 10 sector factor models for the US market.

These models enable investors to take a factor-based approach to market sectors in the United States for the first time.

We also launched an emerging market model -- a risk model or factor model to help emerging market investors.

All these 11 new models incorporate our new and innovative methodology, which we call systematic equity strategies.

Looking ahead, we anticipate a new release shortly of Barra portfolio manager that will significantly expand our ability to process large equity portfolios and extend the fact-testing capability of some of our key risk models.

In the multi-asset class investment process, we continued to benefit from the growing demand for a greater exposure to alternative asset classes among our asset owner clients.

During the first quarter, two large US state pension plans turned to MSCI to provide risk management and reporting systems because of our market leadership and our progress of both liquid asset classes and alternative asset classes.

We also made progress in deepening our relationship with pension fund consultants by leveraging the InvestorForce platform that we acquired a year ago.

One of our key growth strategies is to reinforce that network effect or ecosystem effect that can -- that we can derive from the widespread use of our tools and methodologies by both asset owners and asset managers.

So it is gratifying to see our continued progress on this front.

Many of our large multi-asset class investment clients are placing increasing demand on our portfolio processing capabilities as they seek to bring more positions and more portfolios into our risk management and reporting technology platform.

One of the largest deals for the first quarter was to a global asset manager who needed to upgrade their current usage to incorporate many more portfolios and cover a much wider set of securities in a much faster environment.

Therefore, increasing the capabilities of our technology platforms is a key investment objective of ours, including expanding our data centers, expanding our use of virtualization technology, and storage capability.

During the second quarter, we will be releasing an upgrade to Barra One, which will provide enhanced visualization capabilities in that software system, and improve asset liability management capabilities among other changes.

We are also targeting a significant upgrade in our ability process data around complex security with lower latency in the second half of this year.

We continued to make progress on our targeted investing plan during the first quarter.

As all of you know, investment for us is really adding skilled people that develop and enhance our intellectual property.

Our net headcount increased by 43 versus -- in the quarter, the fourth quarter of last year, and by almost 400 people versus the first quarter of 2013, which is an evidence of the investment program that we have set for ourselves.

And approximately 50% of the first quarter additions of personnel were in our product development efforts, one-third came in client service, and the remaining 15% were additions to our corporate infrastructure.

Most of the new additions of personnel that we made over the last year have been in our emerging market centers, reflecting our focus on maximizing the efficiency of our investment dollars.

Finally, as I said earlier, we closed the sale of ISS this morning.

With the sale, MSCI is now even more focused on its primary goal of offering a full range of tools that offer insight to our clients on their risks and the performance of their portfolios in the major single-asset classes of the world, and the combination of all of them for our multi-asset class investment clients.

So let me sum up my remarks.

First, we had a very solid start to 2014.

The investments that we have made in sales, client service, and product development, including our technology platform, have contributed to an increase in our overall sales and continue to drive higher and higher retention rates.

Secondly, we are on track to continue that investment plan.

We continue to push forward in our hiring plans and I am pleased with the pace of our product development efforts.

It is early, but we believe that we are also on track to increase our revenue growth to the double-digit goal that we have set for ourselves over the next few years.

Third, and finally, with the sale of ISS, MSCI is a much more focused Company with additional flexibility to accelerate our organic growth and/or return capital to shareholders.

Bob?

Thank you, Henry.

Before I get into the details of our results, let me point out some important changes that we have made in our financial reporting.

The biggest change is that the results of our governance business have been reclassified as discontinued operations in all periods.

Our numbers reflect operating segment previously reported as performance in risk, plus some shared overhead expenses that have been reported as part of the government segment.

Most of my commentary, unless otherwise noted, is going to be directed at the results of our continuing operations.

I would also encourage you to look at slides 16 through 19 of our presentation, where we have made available our 2013 full year and quarterly results in the new reporting format.

We also consolidated reporting revenue and operating metrics of our Energy & Commodity Analytics product lines with that of our risk management analytics product line.

RMA results have been restated for all periods to reflect this change.

With that clear, let's go into the financial headlines from the first quarter 2014.

Revenues grew 9% to $240 million.

Net income from continuing operations declined 11% to [$45.7 million].

And diluted EPS from continuing operations fell by 7% with adjusted EBITDA falling 2% and adjusted EPS falling 8% to $0.46 per share.

We had a strong first quarter on an operating basis.

Run rate grew by 9.5% to $955 million.

This was driven by a growth in asset-based fee run rate of (technical difficulty) [7.5%] organic growth and subscription run rate.

Retention rates remained strong.

We continued to make progress in executing our investment plan.

Our adjusted EBITDA expense rose by 18% to $143 million, in line with our investment plan and the expectations we laid out last month in our investor day.

We closed the sale of ISS this morning for $367 million, plus or minus some customary working capital adjustments.

As part of the February 2014 [ASR], we acquired 1.7 million shares of MSCI's stock.

Now let's dig into the numbers.

Revenues grew, as I said, by 9% to $240 million.

The biggest driver of revenue growth was our subscription revenues, which grew by 8.5%.

Asset-based fees rose 12% and nonrecurring revenues rose by $500,000.

By product, index and ESG product revenues rose 14%.

Risk management analytics revenues rose by 7% and portfolio management analytics revenues declined by 6%.

On a run rate basis, our total subscription business grew by 7.5% to $793 million.

Subscription run rate growth was comprised of an 11% increase in index and ESG subscription and 7% growth in RMA, partially offset by a 2% decline in PMA.

Subscription sales rose 18% to $30 million.

MSCI's retention rates edged up [40] basis points to nearly 93%, with all products showing retention rates greater than 90%.

Changes in foreign currency rates have a positive impact on run rate of $5.5 million year-over-year.

The sequential impact was only a positive $600,000.

Now let's turn to the performance of each of our three major product groups, starting with our index and ESG products, where revenues grew by $17 million or 14%.

Index and ESG revenue growth was aided by the timing of revenue recognition related to IPD products, which contributed $5.2 million to our growth.

Index and ESG subscription run rate grew by 11% to $382 million, led by equity index and data products, but with strong growth in ESG and IPD products, which, on a combined basis, grew nearly 19% as we saw strong demand for ESG products and IPD real estate data.

Index and ESG sales rose 14% and retention rates remained strong at 95%.

Changes in foreign-currency lifted our run rate by $3 million year-over-year and had only a modest positive impact sequentially.

Asset-based fee revenues rose by 12% to $41 million.

Asset-based fee run rate rose 21% to $162 million, with assets under management in ETF-linked MSCI indices at the end of the first quarter declining 5% to $341 billion.

First quarter 2014, though, was the quarter in which Vanguard began its transition of the ETFs that switched indices, so that we should start to see increasing convergence between the annual growth of asset-based fees -- asset-based revenue, run rate, and the changes in assets under management over the next two quarters.

Excluding the impact of the Vanguard transition, asset-based fees grew 20% and assets under management grew by $55 billion or 19%.

Of that increase, inflows into MSCI-linked ETFs accounted for $37 billion or two-thirds of the change.

Market appreciation accounted for only $18 billion.

That pattern continued during the first quarter of 2014 as assets under management increased by $8 billion during the quarter, with $7 billion of that coming from inflows.

It is also worth highlighting the diversity of AUM linked to our indices.

Less than a quarter of the AUM in those ETFs are linked to our emerging market indices.

More than 50% are tied to our non-US developed market indices and our results are driven by a wide range of ETFs.

Of the 667 ETFs linked to our indices, 62 have AUMs north of $1 billion.

As I noted in the beginning of my remarks, RMA now includes results from our Energy & Commodity Analytics products.

Risk management analytics revenue rose by 7% year-over-year and run rate also rose 7% to $307 million.

Growth in the Americas and in Asia more than offset continued weakness in Europe.

Retention rates in the quarter dipped, but remained strong, above 90%.

FX changes lifted our run rate by $3.5 million over last year, and had very little impact sequentially.

Moving on to PMA, revenues fell 6% to $26 million, and run rate fell 2% to $104 million.

The big story in PMA is a very modest sequential increase in run rate versus the fourth quarter of 2013.

And, as Henry noted, we launched 11 new models in the first quarter.

New products have yet to have a major impact on our overall sales figure, but they are playing a part in our stronger retention rates, with retention rates rebounding sharply to 91% from 82% in the same period last year.

FX and other changes contributed very modestly to the sequential growth of but remained at $1 million headwind on a year-over-year basis.

Now let's turn to expenses.

Our adjusted EBITDA expense rose by 18% to $143 million.

As we expected, the biggest increase in our expense resulted from our investments in product development, followed by sales and marketing.

Total compensation expense rose 14% to $102 million.

The growth in compensation expense was driven by the 17% increase in our headcount to 2623.

While we worked hard to mitigate the impact of these additions by making most of the additions in the lower cost centers, some of that benefit was muted by the senior additions we have made to build out our leadership team.

[Total] compensation expense, which excludes depreciation and amortization, rose 31% versus first quarter 2013 as we strengthened our technology infrastructure and added to our overall footprint.

Increases in other items such as professional services, market data, and marketing expenses also contributed to the increase.

Much of these expenses came online over the course of 2013 and our noncompensation expenses were more stable versus the fourth quarter of last year.

As a result of higher costs, adjusted EBITDA declined by 2% to $97 million, and income from continuing operations fell 11% as our tax rate was more normalized at 36% in the first quarter of 2014 versus 29% a year ago.

And before we turn to our balance sheet and cash flow, let me touch very quickly on our income from discontinued operations.

We reported income from discontinued operations of $33 million versus $6 million a year ago.

First quarter 2014 results include a $31 million non-cash tax benefit associated with our decision to sell ISS, which we completed this morning.

The tax benefit will reverse in the second quarter and we estimate a [set positive] gain of approximately $75 million to be recorded from the sale.

Now, I want to emphasize that we expect to incur no cash tax liability on the sale of ISS.

Now let's turn to our balance sheet and cash flow.

We finished the first quarter 2014 with total debt of $803 million with a total cash position of $260 million, of which [$61 million] is held offshore.

During the quarter, MSCI generated operating cash flow of $25 million.

We spent $10 million in capital expenditures, repaid $5 million of debt, and spent $100 million in February for the accelerated share repurchase program.

As part of the February ASR, we repurchased a total of 1.7 million shares.

That brings the total number of shares we have purchased at part of our December 2012 $300 million repurchase authorization to 7.1 million shares.

We expect to receive additional shares in May at the conclusion of the February ASR.

Share repurchase activity contributed to a 2.6% decline in the number of diluted weighted average shares outstanding in the quarter.

Now, before I conclude, let me review our current financial guidance for 2014.

We expect our adjusted EBITDA expenses to be in the range of $569 million to $582 million.

We also expect our cash flow from operations to remain in the range of $275 million to $325 million.

Capital expenditures continue to be projected at $45 million to $55 million, with capital spending picking up in the second and third quarters as we make additional investments in our technology infrastructure and server capacity.

And, finally, our full-year tax rate is now expected to be approximately 36%, which excludes the impact of the R&D tax credit that has not been renewed.

And, with that, I think we are ready to take your questions.

Operator?

(Operator Instructions) Alex Kramm, UBS.

Just maybe starting on the RMA business, the risk management business, I think the one thing, Bob, you weren't talking about is the retention rate coming down year-over-year.

I think you mentioned it, but I think you didn't give an explanation, so maybe you can just flesh it out a little bit.

Is this coming from a competitive front?

Are you seeing any changes there, or what is driving that lower?

Nothing significant to point out.

We had a couple cancellations.

But I still want to emphasize that a 91% retention rate at RMA is a very strong retention rate for that business.

Yes.

That's fair enough.

And then maybe just secondly on the expenses, if you look at that new chart that you gave us here and the employee growth, it looks like the first quarter slowed down a little bit the pace of 2013.

So, maybe just talk a little bit terms of where you are in your spending and hiring plans as we think about the remainder of the year.

I think if I look at your total expense guidance, I think you are kind of tracking at the lower end.

So maybe just flesh it out a little bit, where the incremental additions are coming in and where you are today.

As Henry outlined, we had a net increase of 43 coming in, of which half of them were for our product development, which is very consistent with our investment spend, and a third coming in coverage and 15% in infrastructure.

We still feel on pace.

As you know, January and February tend to be a little bit slower in terms of getting people in seats, but our online offer acceptance rates are coming in strong.

We feel good and we still have very focused view on where our investment dollars are being spent.

Okay, fair enough.

Thank you.

Toni Kaplan, Morgan Stanley.

Just another question on the comp.

You mentioned hiring some senior people this quarter.

That led to offset in the comp line for moving employees to emerging markets.

A couple questions -- one, is there going to be a mixed change going forward with hiring more in developed markets than emerging, but based on your investment plan?

And then, two, any additional senior people, you are expecting any vacancies that you are expecting in the senior levels.

Yes, we continue to be very focused on the growth of our employee, i.e., our investment plan in lower-cost centers.

So that is -- continues and it is relentless.

What we have found essentially in technology or our technology group is that we have struggled to find very senior, highly skilled global operators in technology in some of the lower-cost centers that we operate in.

So we have shifted a bit the focus on hiring those people in developed markets.

And so in the last -- couple -- the last few -- couple weeks, couple months I should say -- we have hired four manager directors in our technology group.

Three have been managing directors here in New York and one managing director in Mumbai.

Okay great.

And then, just on ISS and the proceeds that you are going to be getting from the closing of the sale today, you have talked little bit about what you are expecting in terms of deploying the proceeds, in terms of investing in the business and potential acquisitions or returning through buybacks.

How quickly do you think that you would be able to deploy the proceeds?

Or is this more of a very long-term process?

We remain, as Henry said and I said, very, very focused (inaudible) on our organic investments and that is where our eyes are.

We are still in the ASR right now.

We are evaluating our options with the proceeds as they have just cleared the bank account.

So I would say more to follow on that.

Georgios Mihalos, Credit Suisse.

Henry, maybe sort of a high-level question; I'm just wondering how much of your success in accelerating sales you attribute to better execution at MSCI versus what, up until recently, was an improving environment in the financial services space.

And just curious if you are seeing any sort of change in client total tone over the past month or so as we have had a bit more of a choppier market.

Thank you.

Just elaborating a little bit on the dialogue that we have had with all of you, with respect to the operating environment, I think the change that you have seen over the last now, say, three quarters or so -- two or three quarters, is an environment in which the clients are more receptive to dialogue to ideas, to concepts, to discussions, and the like.

But they are not in an environment which they are afraid to spend on what they want.

So therefore, the strategy that we have been following is to see how we can capitalize on that receptivity by being a catalyst for fulfilling some of their needs.

And the catalyst typically in the form of a new product or an enhanced product, in the form of a consultant navigating inside the organization and identifying new leads.

And then we come back with a solution to those needs.

And the catalyst is also the ability of us to cover more clients or go deeper into the current client organizations that we follow, and therefore the addition of sales and the like.

So receptivity but is not proactively on the part of clients.

We need to go out and get it.

We need to be a catalyst for that.

So I would attribute a large part of our success in the last couple quarters in increasing the sales tempo, and now for a good number of quarters in very high retention rates, are attributable much more to what we have done.

Much more to our ability to navigate those client organizations and be catalysts, as opposed to the operating environment just coming at all, so just giving those to sales.

And your last core comment is, we don't have an indicator that is kind of week to week or month to month with respect to our clients.

So we really haven't seen much change on the choppy markets over the last few weeks, or there has been [more exchange] in Europe, for example, in the geopolitical situation there.

So there haven't been any items that have been taken out of the pipeline because of that, or a slowdown in the pipeline because of that.

So we have not seeing any effect of any of that.

Okay.

Thank you for the color.

And then maybe, Bob, maybe just digging in a little bit on the RMA, I am just curious if the lower retention -- isn't that predominantly just sourced from the hedge fund side of the business?

And then maybe talk a little bit about the rationale of combining the RMA in the energy business.

Thank you.

I will start with the second one.

It just made logical sense to combine that within the RMA given the multi-asset class nature of that business -- or that product line.

So that was intuitive, something we talked about a while ago and we felt the first quarter was the time to roll that out.

I cannot say that there is anything unusual in the retention rate in terms of that, other than the fact that we feel very good.

It's at 91% in our client service.

I would say we are not losing clients, though, Georgios.

I just want to make sure that these are some modest potential down sales that occur.

We have seen a net growth in our net client base over the quarter year-over-year and linked quarter.

So there is nothing really -- no headlines to attach to it.

With that, Georgios, on Energy & Commodity Analytics, this has been a business that is a small line item, but has been impacted for a couple of years now, because a lot of what we did there was the creation of option models that were coupled with software to help people in energy and commodity markets hedge their exposure to electricity or natural gas or things like that.

And that was highly dependent on the OTC market for companies -- corporate, and dealing with obviously broker-dealers and the like.

And, given the high levels of uncertainty that have existed in that market by the regulators to move it to a centrally clear market and changed credit market, that has been a painful process for that business.

So what we are now trying to do is reposition that business into more of the mainstream of risk management for our clients, which would include commodities and energy markets.

So we are a project internally which is called FEA 2.0, which is a little bit of taking a lot of the capabilities of FEA and putting them in risk manager, the respective product line, and having a wider use case for that in all those capabilities in that business.

Kevin McVeigh, Macquarie Research.

I wonder if you could give us a sense of just as clients are working their way through their budgets, Henry, are they looking to firm them up midyear or kind of keep them more static.

Or just notes on the budget process given that we are kind of a quarter of the way through the year at this point.

Kevin, I mean, we were coming off last year and into this year like -- in answer of your question, we were kind of wondering how clients were going to budget for their needs in 2014.

And given the tough environment in the last few years, we were fearful that on a straight budgetary process, that clients were going to keep a tight lid into their formal budgets going into 2014.

That hasn't happened.

We are not on a spending spree kind of an environment at all.

I think a lot of clients have built flexible budgetary processes in which whatever their basic and most important needs are, are being a drag a bit versus let's say year ago, in which even their basic needs were being postponed.

But what I said before is the absolute key to this process for us is be a catalyst in that process, so that the catalyst that -- there is a need (inaudible).

We present with a product, a new product or enhanced product, and it forces them to go out through the chain of approval to get that done and then we get the sale done.

Being a catalyst in that process is usually important.

And that is why we formed, clearly, this investment program, because we felt that probably in 2014 and maybe even 2015, your success in driving sales and higher retention rates will be dependent upon being that catalyst.

And that typically is a new product, an enhanced product, a new functionality, something new to talk about and so on and so forth, right.

The other part of this is that regulations are tightening, and a lot of the regulatory environment that has been discussed extensively over the last three or four years, is now -- a little bit in 2013 and clearly in 2014 is now coming into -- coming online for a lot of clients.

Before, it was a question of consultations and debate and discussion.

Well, the reality of that regulatory environment is now coming online, and therefore you have deadlines of fulfillment of those regulatory requirements by a lot of financially institutions.

We are capitalizing on that trend as well.

Understood.

And then is there any sense, Henry, is making the investment in the sales force, would you expect some type of kind of -- I know there is going to be a transition.

And then as they scale part of that to drive a continued accelerating into kind of 2015, so you hire them today.

Maybe they take -- is it a 6 to 12-month window before they scale and then they ultimately execute that much better?

Or am I thinking about that right?

Yes.

I think there are two drivers, if I get the nature of your question, Kevin.

There are two drivers that we are looking to benefit from.

One is clearly it takes time, some products more than others, for those salespeople to become completely functional and producing at maximum levels.

In the equity index business is a shorter fuse, say three months or so.

A little longer in -- at the other end, risk management analytics, it probably takes 6 to 12 months for salespeople to get more up to speed.

So that 20% addition of personnel in the sales force is still going through those step functions of improving efficiency and productivity.

So we should get the benefit of that as they become more up to speed with the product line.

So that is one benefit that we hope to reap.

The second benefit is that we are still in an environment which the ticket items are on the lower end of what we are used to.

So therefore, our PMA sales may be $50,000 to $100,000 when they used to be maybe $200,000; an RMA sale maybe $300,000 to $500,000 when they used to be over [$1 million].

So the ticket size has decreased because people are being extremely more focused on reducing the function -- just buying the functionality that they need.

So therefore, our productivity per salesperson over the last few years has been in the low-end of what is possible.

So what we are also counting on, as the recovery unfolds and gets better and better in the next one to three years, is that that size of a sales force that we have could have higher levels productivity per salesperson because the ticket items are bigger.

The sales cycle gets shorter and things improve and, therefore, you get a lot of benefit from that.

But we are not there yet.

We are gradually seeing it, but we are not there yet.

But that could be a significant dividend in one or two years from now depending on, obviously, how fast the recovery in the budget of our clients takes place the next couple of years.

Joel Jeffery, KBW.

This is Mike Needham sitting in for Joel.

I am just curious, thanks for giving detail on some of the factor models that you guys put out this year.

But is there really a clear second group of products where you are seeing the most demand for -- increasing demand for clients outside of factor indices?

Or is most of the new product development specifically in that area?

Look, I think there continues to be a lot of demand -- and I don't want to minimize this, because the bulk of our sales are coming from our existing product line and enhanced product line of market data images.

So there continues to be a lot of demand from that and the bulk of our sales are in that category.

So the developing market modules, the emerging market module, the frontier markets added into the emerging market module.

So, for example, 2013 was a real banner year for the performance of frontier markets, much better than emerging markets.

So that frontier market data set and indices are embedded in the emerging market modules, so we did well in the emerging market data module sales because of the frontier markets, for example, right.

So that continues.

Clearly, with the continued changes that we made in our (inaudible) methodology to adjust to the changes in the marketplace, such as the addition of Qatar and UAE, and things like that, the consultation we are doing to China now currently, and the like, that creates also demand for the market (inaudible) business.

The majority of our licensing activity for ETFs, another form of index funds and the like, continues to be the market capitalization indices.

So that is important to note.

Now, a lot of the new product development, but not a lot yet of the bulk of the new sales, are coming from factor investing in the like.

And, therefore, we end up talking a lot more about it, because that is the thing we are focusing on to generate our new generation of products and build on the sales of the market cap indices.

And there, we started with income-producing indices some time ago.

Then we went to volatility indices.

Now we are talking about quality indices and multi-factor emphasis of one form or another, quality mix and things like that.

And, therefore, there is a lot of demand that is going in that direction, and a lot of activity in our growth and development team.

But again, the major focus of our activities on our sales force has been the market cap indices in the majority of our sales.

So, all we are trying to do is respond to the market needs for a lot of factor investing and create an even more diversified index business on analytics business than we have had before.

Got it.

Thanks for the color on that.

And just on ETF inflows, they came in a little bit lighter in the first quarter.

But it looks like, overall, international fund flows continue to be pretty good.

Do you think that is just some noise in the first quarter or should we read more into that?

No, it's just noise.

We have been extremely pleased with the performance of the ETFs that are linked to MSCI indices in the first quarter.

If you look at the global equity index fund, equity ETFs, if you look at the data inflows, we capture something like 40% of the inflows of the total market.

So, a couple of things are happening.

One, we are launching a lot of new products every quarter all over the world.

Secondly, we are capturing a higher market share of the inflows of money going into the ETFs than our on average market share, so that puts us in a position to increase market share.

And we are thoroughly diversified.

So when the emerging markets -- which is about a quarter, little less than a quarter of our total AUM in ETFs -- when emerging markets are struggling, the money flows to the better markets of Europe and Asia, and (technical difficulty) Singapore and the like, and into the US which, where we have a smaller presence in the US, on US equity ETFs, but an important one, nonetheless.

So I think it is noise.

But this franchise is incredible and it is just the normal.

And we are growing in every day.

We are launching a lot of new products.

The outlook with our ETFs by manager clients is incredible all over the world.

We -- I cannot say better things about the ETF franchise that we have built.

Bill Warmington, Wells Fargo.

A question for you on free cash flow conversion.

Without ISS in the picture anymore, what do we expect the free cash flow from EBITDA to be?

Back in 2013 it was running about 62%.

I think when we provide you our operating cash flow, we look at it -- we are gauging it between $275 million this year and $325 million.

So that gives you the volume that we are looking at from operating cash flow before capital expenditures and any other equity distributions.

Our EBITDA margin is around 40% that we convert from revenues.

You can look at it from that perspective, Bill.

Those are the data points that we put out there for you.

But we still -- high cash flow environment, high cash flow generation.

We are very much out in front, a little bit lower in the first quarter.

Higher compensation expenses, a few things come through.

Our outlook, again, we still remain confident in $275 million to $325 million for the full year.

Okay.

Then I wanted to ask whether you are seeing a pickup in new cross-border institutional mandates, and if so, from where?

No, that is definitely the wave -- the current and the middle -- the midterm in the future, is one world.

And I think a lot of institutionals, especially in the US, that used to segregate their equity investment and into domestic equities on one hand, on the other hand developed market equities, and thirdly on emerging market equities.

And the ones that were investing in small cap had a fourth leg, many of those institutions are looking at the equity world as one world, and then they overlay a domestic biased to that.

So, our ACWI strategy as we call it -- all-country world index strategy, continues unabated.

So we didn't mention too much in this earnings call about that, but that rate of conversion of institutional investors in the US, especially, but also in other places to that ACWI world and ACWI format continues at the same pace as what was happening in the last quarter.

So we are very pleased with that.

And, if anything, we are planning to add more resources -- a handful of salespeople and research people that meet with clients to accelerate that conversion process.

Okay, a couple of housekeeping items.

If I wanted to do an apples-to-apples EPS number that includes ISS, was the contribution of ISS about $0.02 or $0.03?

Is that what I'm getting from the footnotes, the sort of $0.48 to $0.49 number?

That is kind of a difficult question to answer given what we are showing on a discontinued operations.

Right.

Well, that is why -- I am just trying to see if -- I am trying to do a calculation of sale, right.

If it hadn't been reclassified, apples-to-apples what would it have been?

I know it is a --

I am not sure the relevance of that calculation, Bill, to be honest.

I mean, ISS is out of our numbers and will be restated and is being restated from a retrospective basis.

To continue the full operation EPS, $0.68 -- $30 million of that was a gain (multiple speakers).

Yes.

Right.

(multiple speakers) tax gains.

So I would encourage you to really focus on continuing operations, the EPS and as we show it in our format there.

Okay.

And just confirming -- the net proceeds on the sale were -- was it -- it didn't sound like there were a lot of deductions to it.

Around [360]?

(technical difficulty)

Chris Shutler, William Blair.

I know that, Henry, I know you talked about in your prepared remarks if you are going to release a new version of BPM soon.

So -- which will, I think you said, enhance your ability to process large equity portfolios and help with that [kind of] thing.

Is that something that I should view as a potential sales driver?

Or is it more just kind of normal course of business improvement of the platform and, therefore, maybe more retention mechanism?

I think it is both -- it is both, but with a much higher emphasis on a sales driver.

So let me take a step back here to explain.

Clearly, a lot of our -- our level of innovation over the years on the risk modeling side have been okay.

And clearly in the last two years we have stepped it up dramatically, and that is why you see the release of so many risk models.

Our innovation on the technology front for a number of years, going back to the mid 2000s, was low.

And therefore clients were relying mostly on Aegis, which is a client employee solution, to look at this model.

Or we were selling data directly and they will look at their model.

So we started -- they would build their own software, but with our data.

So we started a third front, which was can we offer a lot of it in (inaudible) and that has been a good driver of growth as well.

So -- but, what we have done the last two or three years is really accelerate the investment in the new software, Barra portfolio manager, which eventually becomes a substitute for Aegis, but is much more than that.

It is not just for the clients that use Aegis, but is a lot easier to use.

It has a lot of uses in the fundamental portfolio management process in addition to the quantitative portfolio management process.

So we are definitely selling at a good clip, BPM subscriptions.

And we are hoping to accelerate that in the next one or two years as we are completing the investment plan on BPM.

We are probably are about a year away from having a complete investment plan and after that it is enhancements more regularly.

But we are very close to the end of that process, and therefore the functionality that is there is going to help drive sales at a higher clip.

All right.

Great.

And then just one other one unrelated; the $15 million to $18 million of stranded costs which you outlined at the investor day, how should we think about that playing into your thought process when it comes to acquisitions?

Thanks.

What the $15 million to $18 million gives us, and it is a little bit tighter than that now, but what that gives us is, for example, we have space here in New York.

We vacated, say, 15,000 square feet that we do not need to acquire new space; similar situation that we have in London as well, and as in other offices where we shared space with the ISS team.

So that tells us marginal increase, we have that capacity to expand.

Our data centers, that capacity will be removed out of the data centers that we used with ISS.

That will give us grow room into as part of our investment process.

So those stranded costs will be absorbed over time.

And all the while, while they are still being utilized to a certain extent by ISS, we have TSA agreements that compensate us for that utilization.

So it gives us capacity to grow.

It gives us capacity to expand.

But nevertheless they don't go away, but it just slows down the rate of investment as we absorb.

And to the extent we do smaller acquisitions, the space gets filled out faster and then we relinquish the space where the acquired companies were located.

But we have to do more acquisitions to do that.

Joe Foresi, Janney Capital Markets.

We talked a little bit at the analyst day about the products and customization of the ETFs as being potential drivers of growth going forward.

I wonder if we can get an update on just sort of how you view those as you try to accelerate revenues.

Are you saying product customization?

Well, the products are one piece of it, the new products that you been rolling out, and then customization of ETFs.

How do they fit into your growth plans?

Yes.

I mean, the majority -- I won't even say -- the vast majority of our efforts in new product development is to create products that are off the shelf, so to speak, and can be used by a wide variety of clients.

Only on a very selective basis do we try to go into the business of customizing a product for a particular client.

And the reason is that you put a lot of effort into the product, there is only one client or two, as opposed to you put a lot of the same effort in another product and you have 100 clients.

So we like leverage in building revenues.

And that is why we have -- we founded that philosophy.

Or there is much more on customer retention business, but it is very hard to scale the company on the basis of that.

Now, we have made exceptions.

I mean, there was a client of ours who came last year on this sector, risk models, and we worked with them.

And we created some sector models for them.

And then we took that work and made it more general, and that was the genesis of these 10 sector models that we launched in the US.

So we want to do a lot more of that.

Now, with respect to ETF, again, it is not an issue of customizing an index for a particular ETF.

What we do is try to create an index that can be -- that is an investment thesis that transcends cycles and markets.

And, therefore, it could be the basis of an ETF, but the same index can be the basis of institutionally [passive] product or a retail index mutual fund, or an actively managed mandate or whatever.

So, occasionally we may customize, but it is the high exception -- a particular index or a particular ETF that is very customized.

But that is not the vast majority of the business we want to do.

Ladies and gentlemen, we have reached the end of the question and answer session.

I will now turn the call back over to the speakers for closing remarks.

Well, thank you, operator, and to all of our fellow shareholders, we thank you for your ownership and support.

And to all others, thanks for your interest in MSCI.

Have a great afternoon.

Ladies and gentlemen, thank you for participating in today's conference.

This now concludes the program and you may all disconnect.

Everyone, have a great day.