明晟 (MSCI) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MSCI fourth quarter and full-year 2014 earnings conference 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 is being recorded. I would like to turn the call over to Mr. Stephen Davidson, Head of Investor Relations. You may begin.

Thank you, Kate. Good morning and welcome to the MSCI fourth quarter and full-year 2014 earnings conference call. Earlier this morning we issued a press release announcing our results for the fourth quarter and full year 2014. A copy of that release may be viewed at MSCI.com under the investor relations tab. You will also find on our website slide presentations that we have prepared for you for this call.

Let me remind you that 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 on which they are made. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements in our most recent Form 10-K and our other filings with the SEC.

For today's call, in addition to GAAP results, we also refer to non-GAAP measures including adjusted EBITDA, adjusted EBITDA expenses, and adjusted EPS. We believe our non-GAAP measures are more reflective of our core performance. You'll find a reconciliation to the equivalent GAAP term in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on pages 30 to 32 of the investor presentation.

On the call today with us are Henry Fernandez, Chief Executive Officer, and Bob Qutub, Chief Financial Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry.

Thank you, Steve. Good morning, everyone. I am pleased to share our fourth quarter and full-year 2014 results. Before I begin my prepared remarks, let me provide some comments about our new format.

For the better part of last year, we have been listening intently to feedback and comments from many of you about what interests you and what concerns you about our Company. Since our last earnings release, we have been hard at work in designing new slides, providing additional detailed information, and a new script. I hope you like it, and please give us further feedback and comments to improve even more. Now, let me move on to my script.

I will begin with a strategic update, review the financial highlights and milestones for the year, and provide you with a recap on the investment program. I will conclude by providing some additional context around the drivers of our margins over the past eight quarters and our new guidance calling for margin expansion beginning in the second half of 2015. After Bob reviews the financial results, I will wrap up and we'll take your questions.

Let me step back a bit and provide you with a strategic update that begins on Slide 3. In 2014, we delivered strong financial performance and significantly enhanced our business through the investments that we initiated in 2013 to drive our future growth.

We are pleased with the progress of our enhanced investment program which is now largely complete. The investments we made in products, sales, and technology have driven near-term returns principally in the form of much higher retention rates. We expect that these investments that we have made in product development and technology will deliver returns over the medium term as well in the form of higher sales, higher run rate, and higher revenues.

We're now able to wind down our spending growth to more normalized levels, assess how things are working, and focus on ensuring that our investors are rewarded for the patience they have shown as we have executed this program. Towards this end, we're working to ensure that the investments we made in each initiative achieve the expected return, and any initiative that does not achieve expected ROI will be modified or stopped.

We also announce today internally at MSCI that we have reorganized the firm to put Baer Pettit in charge of all MSCI products; Laurent Seyer, who joined us in December, continues to head all client coverage. And Chris Corrado continues to head all technology and data services, and all three will continue to report to me.

As part of this reorganization, we have combined PMA and RMA into one analytics [produce line] under Peter Zangari who has successfully re-established the growth engine for PMA over the last couple of years. Peter and his team will be focusing on generating more revenue and increase operating efficiencies from our combined analytics product line.

Based on the encouraging early returns in our investment and our continued focus on ensuring their benefits, we now expect margin expansion to begin in the second half of 2015 and continue thereafter. This is earlier than our previous guidance of margin expansion beginning in 2016 and it's predicated on a stable operating environment going forward, especially in asset-based fees.

Moving on to capital allocation. In the third quarter of 2013 we announced an enhanced capitol return policy with a commitment to return $1 billion in capital to investors by the end of 2016. Over the past year, we have been very disciplined in our approach to MNA. And given that our focus is basically on organic growth and the return of capital to our investors, we are well positioned to continue to do so.

I am pleased to refer, therefore, that we returned $420 million to investors in 2014 through buybacks and dividends. And our Board just declared our first quarter 2015 dividend.

Finally, as part of our continued commitment to ensure that investors can accurately value our franchise, we are in the process of evaluating new ways to increase transparency in our financial reporting. We expect to introduce new reporting segments in the second half of 2015, and we will work to make sure that this process is as smooth as possible to the investment community.

Let's turn to Slide 4 for a review of full-year 2014 results. We reported strong results across all metrics. MSCI's run rate grew 8% and adjusting for the impact of foreign exchange, our subscription run rate grew 9%.

Revenues grew 9% driven by strong increases in both recurrent subscription and asset-based fees. Adjusted EBITDA was up only 1%, which reflects the affect of $37 million in investments and cost from GMI that flow through our P&L in 2014. Finally, our adjusted EPS grew by 6%, principally due to lower income tax expense and a lower share count.

We also took a number of operational actions in 2014 to enhance our competitive position in the near and medium term. We completed the bolt-on acquisition of GMI, a complementary provider of ESG ratings and data and research. We significantly enhanced our internal capabilities by bringing in new market-leading talent in key functions, including a new chief human resource officer to help us foster and attract great talent and a new head of client coverage to deepen our client relationships. A

s you know well, we divested ISS to focus our attention, resources, and capital on our core capability. We made a commitment to do so in 2013 and we deliver on that commitment in 2014.

In summary, 2014 was a very strong year for us. We significantly expanded our capabilities, and we're now in a very strong position to take full advantage of the many growth opportunities that we believe lie before us. Let me now provide you with more details around our investment program.

For Slide 5, our the benefits that we are seeing from our 2014 investment spend related to sales, client service, and marketing. To drive sales and deepen our relationship with clients, we hire 109 net new sales and client service people in 2013, and an additional 44 people in 2014.

The training cycle of our salespeople varies by [product] area. Training a salesperson in our equity index product line takes about six months whereas a salesperson in risk management and analytics might require one year or more.

The hires that we made in 2013, therefore, had a negligible impact on our sales in 2013, but we are beginning to see their impact in the last year of 2014 with total sales of $37 million in the fourth quarter, the highest level since the first quarter of 2011 or almost four years ago.

Subscription sales of $32 million in the quarter were the highest since the third quarter of 2010. Higher sales combined with the lowest level of cancel of any fourth quarter ever resulted in our highest fourth quarter net new sales since the fourth quarter of 2008, or at the start of the financial crisis. This has therefore translated into an aggregate retention rate of 93% in 2014, an increase of 150 basis points over the previous year.

So, we're already seeing significant returns primarily in the form of higher retention, and we're beginning to see the benefits of our sales hires with stronger sales which we expect to translate into run rate and revenue growth over time.

On Slide 6 is the adjusted EBITDA expense development from 2012 to 2014 or the two-year period of enhanced investments. We are providing you with the details on this slide in the response to the desire for more transparency around development in our expense base and detail around our enhanced investment program. Over this two-year period, we recorded expense growth of $151 million beginning with a baseline in 2012 of $437 million.

Let me break this down for you in the key components that make up this $151 million increase. First, moving from left to right we have incremental organic growth in expenses of $36 million. This includes investments in our technology platform, in client service, retention, inflationary spend, and one-time costs. This is normally what you would call business as usual incremental cost. This dollars helps us acquire resources and capability directed at near-term returns to retention, sales, and product enhancement.

In the middle, you see the impact that acquisitions have had on our expense base, recently from IPD, what we call real estate now days, the GMI acquisition, and InvestorForce. In total, these acquisitions reflect in the first 12 months of expenses after closing were $71 million. These acquisitions, as we have reported in the past, were to fill gaps in our portfolio, expand our exposure to new asset classes, and accelerate capabilities all within a three- to five-year window that would set for acquisitions to be accretive in our financial results.

On the right side you see the enhanced investment of $44 million in 2013 and 2014. These investments were directed at new indexes, new factor morals, geographic expansion, data center expansion, and to bring in our critical executive leadership to our firm.

In summary, with our enhanced investments we have acquired the resources to develop, build, and sustain MSCI for growth. And to complete the bridge, we ended 2014 with adjusted EBITDA tax expenses of $588 million.

Let us now turn to Slide 7 which shows the incremental growth in our revenues from this two-year period of enhanced investments. We've generated incremental revenue growth of $170 million. Again, moving from left to right, we generated at $75 million in incremental organic revenue from the build out of our existing asset-based fee products and subscription product offering.

Incremental revenues from our acquisitions of IPD, GMI, and InvestorForce were approximately $59 million. This is initial revenue from these acquisitions, and we're surely focused on their growth and their return to profitability.

We expect this acquisition to be accretive in the to three- to five-year timeframe that we discussed before, and we are well on our way to achieve that. For example, IPD which represents a considerable part of the $71 million in incremental adjusted EBITDA expenses, recorded 9% year-over-year revenue growth and run rate growth of 12%, excluding the impact of foreign exchange while a lot of the revenues and the run rate of IPD is in pounds and in euros.

We earned $24 million in incremental revenue from the investments that we have made in the asset-based fee product line, principally the EPS product line. From the end of 2012 to the beginning of 2014, our asset-based fee revenue grew from $140 million to $177 million, a $37 million increase.

This is about the $22 million negative impact from the net loss revenue on EBITDA from the transition of Vanguard. So, our total growth in ABF was, in effect, $58 million in this two-year period, reflecting our tremendous performance on winning back significantly more than the revenue we lost at the time of the Vanguard transition. This $58 million in growth was split between $24 million from our recent investment and $34 million from what we call organic asset-based fee growth which is a combination of in flows and market appreciation of existing older products.

Let me touch on a few statistics that reflect the very strong results on our ETF franchise; 43% of the inflows into our ETF were in products that we have developed over the past two years. We saw a surge in demand from ETF provider or MSCI-factor indexes with almost half of new MSCI-based ETF launched in 2014 link to this MSCI factor indexes that we have been hard at work.

Lastly, we have the incremental revenue $34 million from the investment that we made in our subscription business. That is towards the right of the chart. The incremental revenue was driven by increased retention rates the 24 new index families will launch in 2014, enhanced capability in Barra portfolio manager, and the new slew of risk morals that we have launched in the past year or two.

Turning over to Slide 8. We show our [KPI] that we believe are leading indicators of growth for the investments that we have made in product development and technology. As you can see, our investments have enabled us to increase our production of new indices, specially factor indices, and custom indices.

We have deepened our relationship with ETF providers and developed relationships with new ones. We have produced quite a number of new risk models, and we have built out data center capabilities to process more portfolios and provide better service in our multi-asset class platform.

In the equity investment process as a whole, [policy] benchmark wins in 2014 were 182, up 8% from the prior year. New index families have seen a 243% increase in the past year compared to 2013. The number of new ETF linked to MSCI indices grew 20% year-over-year and represented approximately 22% of the total number of ETFs launched globally by all index providers and ETF managers in 2014.

Active and passive assets tied to our factor indices continue to increase more than 60%-plus to $122 billion in 2014, our key metric, given our leading position in factor indices. Given market volatility at the end of the fourth quarter, I want to provide you with more detail on ETF linked to MCSI indices.

First, US listed ETF. In Q4, US equity ETF in general, all together for all index providers, captured 76% of cash flows which reduced MSCI's market share of cash flows during the quarter. Despite that trend, we continue to see successful ETF launches based on our indices in Q4. Two of the largest launches in 2014 were based on the MSCI ACWI Low Carbon Target Index.

We also continue to see growth in our client base and fidelity ETF based on MSCI indices exceeding $2 billion in AUM and Deutsche Bank ETFs based on MSCI indices exceeding $3 billion in AUM.

Turning to Europe, while the focus on US equities reduced MSCI's market share of cash flow for the quarter, Europe had a record-breaking inflows of $44 million into European domicile equity ETF of which MSCI took $17 billion or 39%. MSCI increases its AUM market share to 35% of inflows in Europe from 33% the prior year.

Stepping back and looking at full-year 2014 in a global basis, we saw a surge in demand from ETF providers for MSCI factor emphasis with almost half of new MSCI-based ETF launch in 2014 link to MSCI factor indices. 42 of MSCI factor index ETFs were launched in 2014 compared to six only the prior year. 95 ETFs based on MSCI indices were launching not 2014, almost twice as many as the next index provider.

And among all index providers, MSCI has the highest market share of AUM from new ETF launch during the year. MSCI's idea of market share increased in 2014 with our share of cash flows from 2014 being higher than our market share of AUM the year prior to that.

Quite a great deal of the leading franchise that we have in MSCI factor indices is as the result of the combination of capabilities and the skill set from our Barra product line and our MSCI index product line. In our equity [analytics] product line we have been very pleased not only with the pace of new model generation, but also with the way MSCI's research capabilities produced [models] that are strongly differentiated from what our competitors are offering. We launched 25 new risk models in the two-year period of 2013 and 2014. Now that we have essentially caught up with the launch of new risk models, we expect to launch about 12 of these models in 2015. We are tracking the revenue that we generate from these new models, and I am pleased to say that we had $20 million in 2014 from these new models that we created and 57% increase over 2013.

Finally, in the multi-asset class investment process, we processed a total of 31 billion securities in 2014, most of which was in risk management and analytics. Just a couple years ago the technology and processing capability of the RMA product line has reached its limit and was in need of significant upgrade. As a result, over the last two years our investment in RMA product line has been focused on upgrading our processing on our technology capability.

If we had not focused this spend on our technology platform, we would not have maintained relatively stable growth that we have seen in the run rate for this business and the high retention rate that we have achieved. We have the confidence that our platform and processing capabilities are robust, our new client numbers are growing, and we're well-positioned to reap the rewards of our investment in this area.

Let me conclude my section on Slide 9. We showed the trend in our adjusted EBITDA margin beginning in the first quarter of 2013, again the two-year time period that we have been engaged in an enhanced investment program. The decline in our EBITDA margin from 45% in the first quarter of 2013 to the low of 40% in the first quarter of 2014 was driven by two factors that we undertook to create value for our shareholders over the near medium term.

The first is the impact of acquisitions. In November of 2012 we had [acquired] IPD. The real estate performance measurement and performance attribution service grew. In January 2013 we acquired InvestorForce, our performance reporting for consultants.

Finally, in August 2014, we acquired GMI ratings to pioneer in the application of nontraditional risk factors to investment analysis and risk modeling. We are on track with each of these acquisitions to achieve or stated goal of delivering returns above our cost of capital within the first three to five years, but until we achieve those returns, they are a drag on our margin. If you aggregate them (inaudible) when you look at the slide, you'll see that we're offering them at a slight loss.

Real estate, for example, as you can see in our supplemental disclosures in the appendix generated $50 million in revenue from the real estate (inaudible) carrier. So, as this acquisition moves to increase profitability, we expect each to generate a more meaningful contribution to EBITDA and to earnings.

The second factor in the decline of our margin is the investment program which we began 18 months ago. Our margin decline includes a loss of $19 million in revenue and adjusted EBITDA in the first half of 2013 from the Vanguard matter. We have since regained more revenue than we lost, higher levels of profitability as I noted before. Based on the near-term returns and the emerging medium-term returns that we are looking for, we're now expecting to achieve margin expansion in the second half of 2015 and we expect progressively higher margin to follow thereafter as we achieve the payback on this investment. Again, all of this is predicated on a stable operating environment, especially an asset-based fee.

We will not be able to achieve this without developing broader [public] relationship with our clients. Roughly 65% of our top 100 clients use products from the entire MSCI product line. This is not a small slice of our business.

These clients represent 43% of our subscription run rate. Since we began our investment program, the revenues from this client is growing at a rate of about 9%, well above our growth in revenues of 7%.

This is why we're building a model that enables us to deliver our full suite of products and services to our entire client base. Doing business with our client this way results in significantly higher revenues, and we're only at the start of capitalizing on that cross-selling opportunity. Let me now turn it over to Bob for the financial results.

Thanks, Henry. Good morning to all of you on the phone this morning. Let's get right into the numbers on Slide 10.

Our performance across our key metrics in the fourth quarter was strong. Run rate and revenues were up 8% and 6% respectively versus the prior year with subscription run rate of 9% year-over-year, excluding the impact of FX.

Adjusted EBITDA was up 4% to $104 million. Adjusted EPS was up 23% to $0.49, benefiting from a lower tax rate in the current quarter and a 5.5% decline in the weighted average shares outstanding year-over-year.

On Slide 11, we provide you with a bridge for the year-over-year change in our revenues. Total revenues rose $14 million or 6% to $251 million. The growth was driven by an increase of $8 million or 4% in subscription revenues and an increase of $6 million or 16% in asset-based fees.

Over the past several quarters we have seen significant fluctuations in the currency markets. The FX impact manifests itself in several ways into our financial statement, but overall the net effect to our income statement has not been significant. Approximately 15% of our revenues are building currencies other than the US dollar. A much larger percentage of our operating expenses, approximately 45%, are incurred in foreign currency because of the large global footprint of our firm.

Turning to Slide 12, we provide the adjusted EBITDA expenses trend. While our fourth quarter adjusted EBITDA expense rose 8% to $147 million, this is the second consecutive quarter in which the year-over-year growth has declined from the 21% we recorded in the second quarter of 2014. It should be noted that the quarter also includes $2 million in professional fees related to our recent shareholder matters. Adjusted EBITDA expenses increased $80 million or 16% full-year 2014 compared to the prior year.

Consistent with our guidance on investor day in March last year, let me highlight some of the major drivers of the increase; $46 million of the increase, or 58%, has gone towards product development and technology, and this also includes our investment in GMI. Sales, client service, and marketing accounted for $22 million or 27% of the new spend.

These investments have had a more immediate impact helping us lift our overall level of sales to the highest level since the first quarter of 2011, and these investments are contributing to the increase in maintenance of our very strong retention rates. At $588 million in adjusted EBITDA expense, we came in below our adjusted full-year guidance of $595 million to $605 million.

Now, turning to Slide 13, we provide you with the adjusted EBITDA expense bridge to show you the drivers of the year-over-year increase. We ended 2013 with $500 million of adjusted EBITDA expense. The increase of $80 million, or 16%, can be broken down as follows: $43 million spent on our enhanced investment program, including $6 million related to GMI. The remainder reflects increases associated with running our business as well as higher advisory and other fees. Excluding the $43 million spent on investments and GMI, adjusted EBITDA expenses were up just over 7% in 2014.

Turning to Slide 14, we provide you with more detail regarding the $43 million in investments we made in 2014. As you can see, the investments made have been broad-based across all of MSCI directed at developing new products, expanding capabilities, and improving client service. We estimate these investments have resulted directly or indirectly in additional revenues of approximately $57 million in 2014 and will be the basis for driving long-term shareholder value creation.

Turning to Slide 15, we have a summary of the fourth quarter operating metrics. Total run rate grew by $72 million or 8% to just over $1 billion, driven by a $55 million increase or 7% increase and a subscription run rate and a $17 million or 10% increase in asset-based fee run rate. The 7% increase in our subscription run rate to $832 million, which includes the impact of FX rates, was driven by a 12% increase in index, real estate and ESG subscriptions, and a 3% and 4% growth in run rate for RMA and PMA respectively.

Turning to our sales metrics, total sales rose by 5% to $37 million, the highest quarterly sales number we have recorded since the first quarter of 2011, as Henry pointed out. In Q4, we had $17 million in annualized cancellations, the lowest Q-4 level for cancellations since 2008, reflecting the continued benefit we are seeing from our investments in client service and our consultants.

The combination of higher sales and lower cancellations resulted in net new recurring subscription sales of $15 million, the highest Q-4 level since 2008. This resulted in MSCI's aggregate retention rates increasing across all products both year-over-year and the full-year 2014 with aggregate retention rates of 91% for the fourth quarter and 93% for the full-year 2014, the highest fourth quarter retention rate since our IPO.

On Slide 16, we'll drill into our run rate to show the impact of FX and acquisitions. Given the strengthening of the US dollar, FX had a significant negative impact on our subscription run rate in the fourth quarter, especially on our analytics product lines.

Total changes in FX lowered our subscription run rate by $15 million year-over-year. Excluding the impact in FX and the acquisition of GMI which contributed $7.4 million to our run rate, total subscription run rate grew by 8%. Since the first quarter of 2013, our organic subscription run rate, SFX, excluding foreign exchange has increased from growth rates at 4% in the first quarter of 2013 to 8% in the current fourth quarter.

Now, let's turn to Slide 17 where I'll begin my review of the performance of our three major product lines. Index, real estate, and ESG subscription revenues grew 7% to $100 million. On an organic basis, subscription revenues grew by 5% excluding GMI.

Drilling into the components. The index revenues increased 8% to $84 million, real estate subscription revenues declined $2 million or 24% to $8 million from the prior year due in part to the timing of product deliveries and revenue recognition. Total ESG revenues increased 50% to $9 million, or 16% excluding the impact of GMI.

Total index real estate and ESG subscription run rate grew by 12% to $414 million. The index run rate grew 10% to $335 million with negligible FX impact. Real estate subscription run rate increased 3% to $45 million, but adjusting to the impact of FX, the run rate increased 12%.

The run rate for the Americas show particular strength in real estate increasing to $5 million or 25%. The EFG run rate of $34 million represented an increase at 51%, but on an organic basis, excluding the impact of FX and ESG run rate, grew 22%. The retention rate for index, real estate and ESG increased to 93% and was 94% for the full year of 2014.

Now, please turn to the index asset-based product discussion on Slide 18. ABF revenues grew 16% to $45 million in the quarter driven by strong inflows by ETF and non-ETF passive funds. The run rate grew by $16 million or 10% driven by a 12% increase in assets under management linked to MSCI indices which was $373 billion as of December 31.

Looking at the fourth quarter 2014 in isolation, we entered the period with AUMs of $377 billion. There were $4 billion of cash inflows and market depreciation of $8 billion for a net decline of $4 billion. This was driven by a spike in volatility at the end of the year resulting in period ending AUMs at $373 billion. On a full-year basis, we saw $49 billion of net inflows offset by lower market performance of $9 billion and excluding the effect of Vanguard in 2013, this is approximately 7% higher it was in the prior year.

On Slide 19 we have the key indicators of our risk management analytics product (inaudible). Revenues grew by just over 1% year-over-year and run rate rose by 3% to $310 million. Excluding the impact of FX, run rate rose by 5%. Aggregate retention rate rose to 89% for the quarter verses 86% in the prior year and was 91% year-to-date. Sales rose 9% versus fourth quarter 2013. And as Henry mentioned earlier, we have invested in building and expanding our capacity which has created a better environment to meet the needs of our clients, and this has resulted in improved retention.

On Slide 20, we have the key indicators of the portfolio management analytics area. Revenues were relatively flat to the prior quarter. Run rate increased 4% and by 6% excluding the impact of FX.

The growth of run rate continues to be driven by both stronger sales which rose 63% and by much stronger aggregate retention which increased to 93% from 89% a year ago. On a year-to-date basis, aggregate retention rates rose significantly to 93% from 87%. The growth rate in sales of portfolio management analytics was driven by higher sales of equity models and better portfolio manager. Return to growth is directly attributable to the investments we have made in this product area.

Now, turning to Slide 21, let me give you a quick snapshot of our profitability metrics. We reported EBITDA of $104 million for the quarter which represented on increase of 4% year-over-year, adjusted EBITDA margin of 41.5% declined from 42.4% in the prior year quarter but increased sequentially from 40.5% in the third quarter of 2014.

The fourth quarter of 2014 effective tax rate of 38.8% was higher relative to the full-year 2014 guidance of approximately 36%, reflecting the negative impact of certain discrete items in the quarter partially offset by the reenactment of the research development credits.

On Slide 22, we are incorporating more metrics for our fixed income investors. We ended 2014 with cash and cash equivalence of $509 million, which includes cash held outside the United States of $102 million. And as a general policy, we prefer to maintain US cash buffer of approximately $100 million to $125 million for operational purposes. Our gross leverage was two times based on our total debt of $800 million to our 2014 adjusted EBITDA, well within our stated policy of maintaining leverage of 1.5 to 2.5 times.

We generated strong operated cash flows to $305.7 million for the full year within the guidance and right about the mid point of the range we provided for the year. We spent $51 million in CapEx for the full year of 2014, ending the year at the low end of our guidance range we provided for the year.

In 2014, we repurchased 6.9 million shares as part of the two ASRs, bringing the weighted average diluted shares outstanding to 113 million shares for the quarter and shares outstanding at the end of the period were 112.1 million. As a reminder, our current ASR is scheduled to mature between early March and mid May.

Lastly, as a quick refresher on our commitment to return $1 billion to shareholders by the end of 2016, we executed the most recent $300 million ASR in September under the plan, and we paid our first quarterly dividend in October. Further, our Board approved our first quarter 2015 dividend to be payable on March 13, 2015.

We currently have $550 million remaining on the outstanding share repurchase authorization from our Board, and as we move forward we'll continue to be opportunistic in terms of executing repurchases to ensure that we optimize the method by which we return capital to our shareholders.

And before turning the call back over to Henry for his closing comments, we provided you with a full-year 2015 guidance on Slide 23. We expect adjusted EBITDA expense to be in the range of $620 million to $640 million. Incremental is driven by several components. First, the full-year effect of the investments that we have made in 2014 will be the principle driver of the increase at approximately $15 million to $20 billion when you analyze them into 2015. Next, we'll have moderate inflationary costs for compensation and non-compensation, and this will include incremental technology costs related to continued capacity though in a small magnitude.

We are expecting margin expansion to begin in the second half of 2015 and continue thereafter. Due to the seasonal first quarter affect on compensation increases, payroll taxes and benefits, we expect that our margins will be impacted slightly from the Q4 levels and then by the second half of 2015 return to the approximate Q4 2014 exit rate of 41.35, and from there we expect margin expansion to begin and continue in the subsequent quarters.

We expect our cash flow from operations to be in the range of $275 million to $325 million, and capital expenditures are projected to be $55 million to $65 million, and finally we anticipate that our full-year tax rate will be approximately 35% to 36% and, lastly, our indicative pay-out ratio remains at 30% to 40% of adjusted EPS. With that, let me turn it over to Henry for some closing comments.

Before I open the line to questions, I would like to welcome our three new prospective Board members, Wayne Edmunds, Rob Hale, and Wendy Lane. We very much look forward to benefiting from their experience and perspective when they join our Board in March.

I realize we gave you quite a great deal of information and detail. It has compressed a bit the Q&A period. We'll take some questions now, but in the event we run out of time, we'll be more than happy to take your questions after the call and the next day or two as well. Operator?

Thank you.

(Operator Instructions)

In the interest of time, we ask that you limit yourself to one question and one follow-up question. Our first question comes from the line of Georgios Mihalos with Credit Suisse. Your line is open.

Thanks for taking my question.

Henry and Bob, just sort of two quick things here. One, just maybe talk a little bit what will drive the 620 or 640, the $20 million of delta in your expense looking out into 2015? And then somewhat related to that on the prior quarters, Henry, you spoke about revenue growth in 2016 correlating with EBITDA growth in the double-digit range. Is the new formula for MSCI, are you more comfortable looking at the business as a sustainable high single-digit top line grower with double digit EBITDA growth for margin expansion, and then adding on to that incremental points from buy back and dividends? Thank you.

Let me address the second question, George, and then Bob will take on the first one. So this -- we have been in the last quarter or so -- we always do this at the end of the year when we are preparing our budgetary process. We're going through our budgetary process for the following couple of years. We really took stock on where we were with all of our capabilities, all the investments that we have made, all of the opportunities that we see in the marketplace. We discussed it with our Board, and clearly one of the key functions of a Board and a management team is to size up the Company to the appropriate opportunity, so we felt that we had already completed a big part, or the major part of what we set out to achieve a couple of years ago, and it was earlier than expected, when we took this deep dive.

So that now changes the guidance that we gave you with respect to EBITDA -- adjusted EBITDA expense growth and revenue growth in terms of the link between the two of them that you mentioned. We are still very much of the view that our Business will achieve sort of double digit growth as we discussed before. The only change we made is clearly the greater growth of our expenses and the timing being reduced -- the greater growth of expenses being reduced sooner rather than later at this point.

And, George, on your second question. It's really two parts. One is the annualization of the hires. We hired people mid year obviously in the second and third quarter, part of these initiatives is just the continuation of the annualization of the compensation. Another piece of the annualization is the cost-related GMI.

Okay. And just last question. The retention rates look great. They continue to improve well ahead of what we're looking for. You commented on the new sales improving as well, but if we sort of look at them, at least the recurring sales, over the back half of 2014 versus the back half of 2013, they're sort of flattish there. Can you talk a little bit about what you're seeing in the environment and your thoughts on driving those higher?

Yes, so the area, we clearly -- in terms of our investment plan, two to three areas that we're clearly the most proud of is the enormous increase in retention rates, right, way and above our highest expectations. We set out to put out an enormous amount of servicing around our existing clients, so that has paid in spades, and clearly also our EPF business, EPF has paid in spades, and the BMA business and others, right.

The one area across the Company that is lagging naturally is the sales in terms of payback from the investment. That is normal, because we added a lot of sales people, obviously, and those take time, as I mentioned in my script.

Secondly, the new product developments that we're doing take time and running through the system and being launched, and then when you launch them it takes time to obviously accumulate sales. And then, three, we're not completely in a normal operating environment, by normal I mean pre-2008. There's a little bit of an impact there, but we're still hopeful that we'll see a continued grinding upward of the pace of sales as we get the payback from all the things that I mentioned.

Our next question comes from the line of Chris Shutler with William Blair. Your line is open.

Good morning. I really like the new format. I appreciate it. First question just on the RMA and BMA and just want to get a little bit more detail on the rationale for combining those from a client's perfective what that will look like. And then in relation to that one of your shareholders had made a comment about the one MSCI strategy and criticizing that, and maybe you could talk about what has worked and what changes you've been making in you're thinking there? Thanks.

I am glad you liked the new format. So clearly, we want to do even more in the coming quarters, Chris. So, I think there are a couple ways to address that question, Chris.

The first one is that there is a significant amount of convergence going on between our equity index product line and our equity analytics product line because the vast majority of the new product development effort and the new activity in this business is factored indices. So, the equity analytics business is about building factor models, right, that discern the factors that affected return and risk of portfolios. And, therefore, we're taking all of that know-how experience of people and combining it with our equity index capability to arrive at a leadership position and factor indices and factor investing that I mentioned before.

The second convergence that is happening, which is the one that you're eluding to, is the convergence between front office analytical capabilities such as equity portfolio management capabilities, and that's part and partial of the equity analytics product line, and risk management central office, risk management analytics capabilities. So, what we're trying to do is, we really are announcing the combination of what we used to call BMA and RMA in order to capture that convergence and generate higher revenues, higher sales and all of that, but also better efficiencies in how they work together.

What we didn't combine, because it's already working really well, is the equity analytics research team working very closely with the equity index research team in building all this great factor indices that we're doing. So that's what we're trying to achieve there and that's what our clients want us to do.

We constantly get our clients saying can I have one person that can help me look at the entire product line that you have and bring all of that capability to better my initiatives, my objectives or what I am trying to drive in my firm. So we're clearly pushing that very strongly on the client end with the senior relationship managers and the like.

With respect to comments about the one MSCI, I think there is a little bit of a misinterpretation. This approach of trying to put all of our capabilities in front of our clients is not at all in order to subsidize one product against the other one or to reduce the prices of any one single product. If you check around, MSCI is definitely not well known for giving too many breaks, right, including some of your organizations.

This is an attempt to service our client better. It creates better -- it can create better impact on them and therefore generate incremental revenues from them because we're better solving problems better for them.

Thanks a lot, Henry.

Our next question comes from the line of Al Kramm with UBS.

Hey, good morning.

Maybe to follow up on some of the questions that you just heard in terms of some of the public investor commentary you received so far this year. Just obviously you reacted and we saw some of the Board changes here, but just curious to what degree increased discussions and public commentary has impacted some of the views here on expenses going forward, some of the investment spend.

Clearly, there's been a little bit of a change here. So, curious how that's been impacted. Bigger picture wise, if it's also impacting the way you think about acquisition strategy, divestitures, capital return, anything you want to share? Thank you.

So in terms of the dialogue with those shareholders starting August of last year and running through January, first a private phase, and then obviously a public phase, or semi-public phase in the last five weeks. A lot of the down look has been more of strengthening the Board and adding people to the Board and who the right people should be.

There's clearly been a dialogue with them and every other shareholder that has been in response of that. Where is the investment growing? How do we provide better clarity of that? Better metrics? Better representation and the like? We have been hearing that from quite a lot of our shareholders and many of you in the analyst community. So we have been working on that for quite some time in terms of trying to provide that additional disclosure and additional clarity in the Company.

In terms of operating differently, not yet so to speak. These people are going to come into our Board. We're going to have an expanded Board now of 12 directors. The discussions are going to be robust as they always have been in terms of how do we do differently and the like. So we welcome that, but a lot of what we're doing right now, a lot of this fine-tuning of our investments and our plans and all of that has been ongoing for some time now.

Okay. That's helpful. Thank you.

And then just coming back on the cost side of the business. Two comments here, or questions. One, you made a quick comment about your guidance for this year is recognizing stable asset-based fees. So, if we do have a great year in terms of in flows -- what does stable asset-based fees mean, and if there's up side to that, would that just flow through to the bottom line.

And, secondly, just going back to one of your earlier slides around where the expense growth has come from over the last couple of years in terms of organic investments. It looks like the organic growth has been 4% per year. Is that a good number to use for out years now?

And that as a number which is also contemplated every two, three, four years you have to go through another cycle of incremental investment spend. So, again, how are you thinking about the cost growth longer term if there is any more color you can give? Thank you very much.

Yes. So on the first question, you notice that a few times I mentioned predicated or not in a stable environment, especially asset-based fees. What I really mean there is that if there is a burn market in equities around the world, that's going to put some pressure on the margin, right, because that declines revenues immediately and our cost structure will have to gradually adjust to that.

So imbedded in our expansion of margin is a continuation of some meaningful level of return in the equity markets in terms of appreciation, in terms of new product development, new product launches, new in flows, and EPS and the like. If that were to be -- if that equity environment, new product launches and equity values were to accelerate further from what we had when we see here, that will expand the margin factor and we will not be expanding that incremental.

Bob, do you want to address the second part?

The expense growth. If you look at the chart that Henry used, it shows in terms of organic, I think it was $75 million. Driven by the tremendous inflows that we talked about from ABF. A lot of that piece will be the volatility on that, but we're continuing to generate the new products that we talk about directly and indirectly. We're receiving benefits on it. So, the investment returns that you see in here become organic, and as you continue to use the investments to leverage your organic, that's where you're getting your growth.

Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open.

Thanks for taking my question, and also I appreciated the break-out of the investments on Slide 14.

Just looking ahead to the next year, where will your investments be focused? Would you expect that like it should be similarly proportional or are there certain areas or segments that have more opportunities and others that you are looking to invest in?

Thanks.

I am glad you like it and please continue to give us feedback, all of you, for all the things that you like to see. At this point, we are really, really focused, Toni, on what we've done so far and how do we capitalize on it and pay back and obviously creating efficiencies from that and all of that. We haven't yet started any kind of planning process as to what are the areas enhanced investment would occur because it's premature.

In general, we are very happy with the progress we're making. In fact, there's going to be more of that, clearly. We're really, really focused on this expansion of the BMA business and trying to broaden it to fundamental managers, not only to quantitative managers.

Clearly, a lot of fundamental managers are looking at this onslaught of factor indices and passive management against the factor indices and a lot of what they do is one way or another is factor investing either qualitatively or quantitatively sometimes, right. We need to provide tools for them to do that and to get the business models continuing to grow.

We're very focused on the -- we're very much focused on the return of the RMA business to significant growth. The last two years have been a bit more of trying to ensure that the technology platform that has served us well but reached the limit, was invested in and with the complete overhaul of that, and so on and so forth, we now need to put forth more time and effort into launching new products and new services on that business in order to increase sales. I think we're happy with the retention rate.

So, those are areas. Obviously you have the real estate and the ESG par, which are really performing very well. So, I think we're very focused on what we have today and making sure that it pays, as opposed to expanding into new areas.

Okay. Thanks. And just one followup.

On the index subscription revenue, I know Bob mentioned that there was some product timing in terms of why it was organically only about 5% this quarter. Was there anything else that we should be thinking about?

That was really driven by -- there's a page in the supplemental disclosures back there, Toni, that shows the revenues, which in the real estate business you recognize it when the products deliver. We had slow down in the fourth quarter. It's not affecting the pipeline. It was really more of timing, Toni, and that's why it dropped. You can see it decline 24%. That's sort of the small piece of it that brought it down to 5%.

Thanks a lot.

Our next question comes from the line of Bill Warmington with Wells Fargo. Your line is open.

My turn to ask a question already. I want to say I like the format very much, and also welcome to Steve. So, first question on margin.

Thanks.

The first question on margins. I just want to understand the trajectory of the margin expansion, and just to be clear when we're talking about margin expansion you're talking year-over-year change and the adjusted EBITDA margin, just to be very clear, so I don't misinterpret it. So, are we talking those margins are likely to continue to be down on a year-over-year basis for the first and second quarters and then starting in the third quarter they start to move up, and then finally in the fourth quarter of 2015 you're going to show improvement. Is that the right interpretation of that?

Well, Bob is going to give you the answer, but before that we do also welcome Steve. And he's been hard at work to create all of this. We wanted to get him baptism by fire, so a lot of this is a lot of his efforts, as well. Bob.

Yes, Bill, we're looking at --.we're going to have seasonality issues which is why we provided the data table back on these supplemental disclosure, see some of the fluctuations that happen with the real estate business that are out there. But first, we're going to hit the first quarter like I talked about with some seasonal increases mainly related around compensation.

As we move through second into third ward quarter, definitely year-over-year progression of margin without a doubt. That's what we're moving towards and successively we'll be working to progressively expand the margin each quarter. Again, we'll get some volatility with ABF, but if the influence continues and the markets go the way we're looking at, we should like to see it progress for a while.

Is there anything that has changed in the business that would keep you from getting back up to the high levels of 46% that you had previously?

Yes, I think we don't see it that much, but obviously levels of competition will be something that we need to monitor closely that has been stable in the last year or two. That is something we need to continue to look at, right, to make sure we don't lose market position.

I think all of you in our discussions, both shareholders and analysts, have always recognized that there is an inherent expansion of margins in a business like ours because you have a relatively fixed cost structure that grows a certain level and then the incremental revenues -- the growth of incremental revenues is at a higher pace than the growth of incremental growth.

And on top of that a lot of new development that we do is enhancement of existing products and built off the existing cost infrastructure, right. So there is an inherent pressure there for the margin to rise.

What we're trying to do, and this is always a debate, what we're trying to do strongly is to not look at the next few quarters in terms of the health and the progress and the success of the business, but to look at it on the medium term for three, four, five years to ensure that we're not sorry three, four years from now that we haven't captured market positions and we're not in a position well in the areas that we want to be and get hurt.

That was a little bit of the problem with the BMA business, which we were harvesting the Company or the business at the product line and not looking across the three-, five-year horizon. That should never happen to us again. There will be a level of investment that we need to keep in order to ensure that doesn't happen to us, but for sure the embedded machine of MSCI has a grinding of gradual increasing profit margin.

Our next question comes from the line of Kevin McVeigh with Macquarie. Your line is open.

Henry, you mentioned if the investments don't meet certain ROI thresholds you would reconsider. How should we think of those thresholds in terms of ultimate returns relative to the business?

We look at -- first when we're acquisition-related, we look at our acquisitions to be value accretive three to five years that Henry pointed out in his comments. Organic investments, Kevin, you're leveraging an existing infrastructure so the value accretion should be significantly higher, and we look for that, but always the bottom of the that would be the weighted of average cost of capital.

The timing as we've talked about before tends to be a little bit longer than acquisitions sometimes, but we're looking at pretty significantly having ROIs much higher. If they fall below these high levels, they're competing for other investments around there.

And, Kevin, what we're telling you is that we are very dogmatic. We're very disciplined. We're very focused in how we look at everything we do, and our comment is attributed -- the large majority of what we've done the last two years is paying back in a major way and will continue to pay back.

There are a couple of pockets that we're evaluating of things that we have done that are not performing at the level we wanted to see and are evaluating whether we continue with them or not. Those are that is what we normally say the tail of the dog. The dog is really the majority of the investment plan that is working well. But we want to be truthful and tell you that we're looking at those things, as well.

And then just Henry, as you're working your way through the budgeting process, any sense -- obviously the fundamentals look pretty good, but people feeling better just relative to how budgets are coming together this year?

Yes, it's -- that's a question we all times ask ourself because a year ago or so people were feeling fairly good. The end of last year with some of the news from Europe and geopolitical news and slow down in China and things like that. We monitored that like a hawk to try to see how the budget and spending patterns of our clients around the world are coming together.

And we have not seen major change yesterday, right, so that's the good news. But we are monitoring that intensely because there are pockets -- big areas of the world with the exception of the US are slowing down and we want to make sure that we're getting our fair share of the budget or even a higher share of the budgets going forward. So we're monitoring that, but so far we're fine, but that's an area -- meaning the pipelines are fine, the time of products in the pipeline, and all of that. So all of us keep looking at it.

I'm not showing any further questions at this time. I would like to turn the call back to management for closing remarks.

Thanks, everyone, for joining us today. We took up a little bit more of your time than expected. We appreciate all of your interest in MSCI. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a good day.