明晟 (MSCI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MSCI Second Quarter 2015 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 be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Stephen Davidson, Head of Investor Relations. Mr. Davidson, please go ahead.

Thank you, Sabrina. Good day and welcome to the MSCI Second Quarter 2015 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for second quarter 2015. A copy of the release and the slide presentation that we've prepared for this call may be viewed at msci.com under the Investor Relations tab.

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 on forward-looking statements in our most recent Form 10-K and our other filings with the SEC.

During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures are more reflective of our core performance. You'll find a reconciliation of the equivalent GAAP term in earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on pages 28 to 32 of the earnings presentation.

On the call today 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'm very pleased to share with you our second quarter 2015 results. Please turn to slide 3 in the presentation for an update on the quarter.

We delivered solid financial performance with higher levels of profitability driven by solid revenue generation and a strong cost discipline resulting in double-digit growth in adjusted EBITDA and continued margin expansion. Despite some heavy currency headwinds, adjusted EBITDA margin was 43.7%, an increase of over 200 basis points from the second quarter of 2014. This is the highest margin recorded by MSCI since the third quarter of 2013.

We are on course with the execution of our growth strategy and we are seeing the returns from our investments. In Index, we continue to extend our product set to equity investors across segments and markets. We are selling more to our existing customers and we are building on our momentum in the factor or smart beta space with new factor index introductions.

In our asset-based fee products, we are focused on extending our research innovations and capabilities and new product development and we are seeing positive results with the leadership position that we have recorded in the first half of the year. More equity ETFs are linked to MSCI indices worldwide than any other index provider.

Our investment in client surveys and consultants continues to pay us back with very strong client loyalty. Our aggregate retention rate in the quarter was 94.2%. Higher retention rates have bolstered our total net new sales offsetting a range-bound gross recurring sales of approximately $30 million per quarter.

On analytics, we are continuing to take actions aimed at driving this product line to higher levels of performance. I will provide more detail about our plans later in my presentation, but for now, I would like to reiterate what I've said in prior calls. We are not satisfied with our performance in this area and we are taking aggressive steps to improve.

We continue to deliver on our commitment to return capital to our shareholders. Since we launched the enhanced capital return program in September of 2014, we have reacquired a total of almost 8 million shares. 2.2 million shares were reacquired in the second quarter, comprising of a million shares in open market repurchases and 1.2 million shares from the completion of the ASR which brought the total shares for that ASR program to 5.7 million shares. Subsequent to the close of the quarter and through Friday, July 24, last Friday, we repurchased another 1.2 million shares at an average price of $63.24. I'm also pleased to report that our Board of Directors has approved a 22% increase in our regular quarterly cash dividend to $0.22 per share.

Please turn to slide 4, where we show a set of KPIs that we believe are leading indicator of growth in the future. The first section of this slide highlight the drivers of higher performance subscription revenue growth over time despite the quarter-to-quarter variances that we saw in the quarter. Policy benchmark mandate for asset owners were down 10% year-over-year but are running around 2% [at] year-to-date. New index families launched during the quarter were at 14% and our ESG client base increased 34% to over 800 new clients, primarily as a result of the GMI acquisition.

In the next section, we highlight the sources of increased assets flows that lead to higher asset base fees. In the second quarter, the total cumulative number of MSCI-linked equity ETFs increased 15% and the number of new MSCI-linked equity ETF licenses decreased about 29% year-over-year but are running 34% higher year-to-date compared to 2014.

Active and passive assets tied to MSCI factor indexes increased 22% but remained relatively flat when compared to the first quarter. Quarter-end AUM linked to MSCI indexes amounted to $435 billion, up 15%. Finally, listed futures and options trading volumes based on MSCI indexes increased 11% to almost $10 million contracts. You saw that we're breaking out our asset-based fees between the ETFs and the institutional passive and now the listed futures and options because this is an area of increased focus for us to drive further growth in our indexes.

At the bottom of the slide, you also see the highlight that we provide on the drivers of higher portfolio management analytics growth. Run rate from the new equity risk models that we have introduced over the past several quarters stands at $24 million, up 41% from $17 million in the second quarter of last year and up slightly from the first quarter of this year.

On the next page, slide 5, I would like to make a few comments about our performance products of index, real estate and ESG. Global investing trends and MSCI's leading global equity index family continue to drive demand for our MSCI indices, our existing indices and also our new indices. In the quarter, we expanded nine existing index family with (technical difficulty) one new data module and we made an important enhancement to our core modules. Our investment in asset-based fee products especially ETFs linked to MSCI indexes continue to pay dividend in terms of strong inflows. I will touch up on this trend in more detail on the next slide.

Our focus continues on a smart beta or factory investing to leverage our leadership in this space and secure a strong position in a market that is relatively fragmented now and with no clear leader. We're laser focused on leveraging our deep research capabilities in our equity analytics part and our equity index part to continue to develop factor indexes and win market share. And on the new factor indexes we released for our ETF clients during the quarter were prime value indexes, total shareholder yield indexes and buyback yield indexes.

Our thematic and custom indexes are also seeing a strong year-over-year growth as clients seek new ways to differentiate their offerings in the marketplace. In our real estate products, after a period of significant investment in infrastructure, we are turning our attention to launching new products and re-aligning our client coverage themes for maximum sales and efficiencies.

This week, we introduced a new real state analytics portal that gives our clients on demand access to data analytical content from us. Furthermore, we are continuing to leverage our real estate data with the launch of our new real estate modules which includes a full suite of real estate indexes. For the first time ever, investors around the world in private real estate will have a global market data set and a family of indexes that all produce use the same methodology, providing us with a very strong competitive advantage in the real estate marketplace.

We are very pleased with the growth we're seeing in ESG as the product line continues to move into the mainstream of the investment process. We launched ESG ratings during the quarter, which is a major milestone after the acquisition of GMI. We are seeing more demand for our ESG data to create indexes such as low carbon, governance indexes and impact investing indexes.

In the lower right of this slide, we highlighted run rate by region of all the performance products and we show that the growth in Asia has been meaningful and this is an area that we're keenly focused on for both performance and analytics products.

On slide 6, we highlight the strength of our competitive position as a leading index provider to the ETF marketplace. The global equity ETF industry stood at $2.3 trillion in AUM at the end of the quarter, of which a record $435 billion was linked to MSCI indexes, representing about 19% of the market. There were over 750 equity ETFs based on MSCI indexes as of the end of the second quarter, more than any other index provider in the world.

Globally and year-to-date, MSCI ranked Number 1 in net new asset flows into equity ETFs. A total of $44 billion of net new assets flow into equity ETFs globally in the second quarter, of which $24 billion went to ETFs based on MSCI indexes. Year-to-date, about $97 billion has flown into equity ETFs and $56 billion has gone through ETFs based on MSCI indexes or representing around 58% of the net new flows.

Currency hedge ETFs have experienced significant growth over the last few quarters. In this past quarter, they experienced about $18 billion in net new assets, down from $28 billion recorded in the first quarter of 2015. Of that $18 billion in net new flows, over $10 billion or about 56% went into currency hedge ETFs linked to MSCI indexes.

In just six months, global ETF assets linked to MSCI currency hedge indexes have increased by 156% compared to the fourth quarter of last year, going from about $16 billion to about $41 billion. Additionally, there are now 69 currency hedged ETFs globally linked to MSCI indexes, more than the next three highest index providers combined.

Turning to page 7, I would like to provide an update on the key (technical difficulty) for analytics products. Favorable industry trends are serving as a solid foundation for us to improve the performance of this product line.

Asset management firms are increasingly offering specialized investment products to differentiate themselves from the competition as evidenced by the growth in factors, multi-asset class solutions and levels of quantitative investing. The rising complexity of the global investment process for many of these asset management firms is requiring significant operational and risk management enhancement in their internal processes.

An increase in regulatory requirement are necessitating a strong analytics, flexible reporting infrastructure and timely and high quality data generation. So, we're seeing increasing levels of interest by our asset manager clients in deeper relationships with MSCI to provide them with operational and risk solutions and we are engaging all these clients in a way that we can provide those solutions to them.

The second quarter saw strong record for product enhancement and developments in analytics. We delivered [Barra Portfolio Manager 3.11 and BarraOne 3.11]. We have made important strides with the creation of an analytic content growth management team in quarter so we can deliver that content not only through the MSCI applications but also directly to clients and through third party applications.

During the quarter, we delivered the medium Horizon US Dollar market model, our revised or renewed Taiwan equity model and we also delivered a new revised Barra Open Optimizer 8.2. We created (inaudible) that we call factor analytics which is basically bringing together the two analytics platform that are based on Barra factors and that is BarraOne and Barra Portfolio Manager to deliver higher value to our clients and to try to create efficiencies by merging these two applications of BarraOne and Barra Portfolio Manager.

Lastly, we are continuing to focus on managed services for our clients which extends and strengthens our [current] offering to help them become more operationally efficient. In the lower right of the chart, we also highlight the growth that we're seeing in analytics products in Asia as I mentioned before.

On slide 8, we provide more details about the actions that we are taking going forward to drive analytics to higher levels of performance. Our plan to improve analytics is focused on four areas; revenue growth, increased product development, cost efficiencies and a laser focus on clients.

So, revenue growth will come from better serving client use cases, monetizing our analytic content as I mentioned before and creating a new architecture, a new client interface that will provide our clients access to all of our existing applications. We would also place a new focus on managed services which I mentioned earlier. As I said, our clients continue to be under intense budgetary pressure which is forcing them to continue to be more efficient and we can provide solutions to them to achieve that. We're looking to extend our capabilities for clients who are interested in outsourcing non-core operational risk and portfolio management capability.

We are aiming towards a unified and coherent product development effort that will be focused on client use cases as well as the delivery and accessibility of our content. The new architecture, a new client interface that I mentioned that we're developing will help to consolidate this parent applications that we have and focus on use cases of our clients. The third area is cost efficiency. This will be implemented through a rigorous expense reduction and a unified product development effort as I mentioned earlier.

Lastly, we have a blue chip client base. We have been leveraging our senior account managers to grow our largest and more important client relationships to provide them with the set of content and applications that are going to help them solve their operational efficiency issues and help them differentiate their investment offerings. We are confident that by focusing on these four areas we will be well positioned to return analytics to a stronger revenue growth and much higher levels of profitability.

On slide 9, we highlight the first half trend for Company-wide sales for 2013, 2014 and 2015 and the positive impact that our investment in client service has had on reducing cancels and driving higher retention rate. Total net new sales were up 24% when you compare the first half of 2015 to the first half of 2013 but were relatively flat when compared to the first half of 2014 or last year. This growth compared to the first half of 2013 was driven by an 8% increase in sales combined with a 15% decline in cancels allowing more of our sales to convert into run rate and into revenue. While we're very pleased with this development, sales have been range-bound over the past few quarters and therefore there are limits to the levels of retention that we can achieve to be able to add to the run rate. Given this, we're taking significant steps to try to re-accelerate this gross sales effort.

First, our senior account managers are critical to the success of this effort and we're really relying on them and pushing on them to be able to establish C-level relationships that are going to help us make this sales more easily. Our client relationship model in the past has been based on especially catering to a user in the organization and not as much in developing those C-level relationships. So, we're trying to -- in addition to that relationship that we have at the user level move back to the C-level and make our enterprise-wide risk management sales more effective.

The next step is obviously the consolidation of the analytics sales and coverage team that we believe that by doing that we're going to be able to have efficiencies and hopefully also increase the level of sales. Again, all of this in an effort to try to break out of this range-bound levels of sales or gross sales in the $30 million range so far in the past few quarters.

Slide 10, we highlight the levers that we believe will drive revenue growth, higher levels of profitability and margin expansion in the quarters to come. Higher levels of revenue growth will come from continued double-digit growth in index and step up in analytics to high-single digit revenue growth, continue the strong double-digit growth in ESG and a pickup in growth in real estate. While we grow our revenues, we will also continue to remain laser-focused and disciplined on cost management with an operating target of 5% to 7% annual growth in adjusted EBITDA expenses on a constant dollar basis.

The other lever that we're focused on to drive higher levels of revenue growth and profitability and margin expansion is a stronger contribution from our recent acquisitions. As we have stated, since our acquisition of real estate, we have been investing in the platform to upgrade the overall infrastructure, centralize the support functions, to set the foundation to really globalize this business. We are largely finished with the investment phase and now we're looking to consolidate all that investment and begin to launch new products and hopefully move to a break from slight loss and to breakeven and then better profitability on real estate in the quarters to come.

The last two levers are related to our effective tax rate to returning capital to shareholders. We are in the process of doing long-term tax planning and are reviewing our global footprint and how best to realign it to become much more tax efficient. As we have shown this quarter, we continue to be highly committed to returning capital to shareholders and over time we will ensure that we're returning capital in the most effective and efficient way possible. Given this, we expect to continue to repurchase shares in the open market, buying more shares at lower prices and buying fewer shares as the stock moves up.

Let me now turn over to Bob for a review of our financial profile.

Thanks, Henry and good morning to all of you on the phone call. Please turn to slide 11 for an overview of our financial results. We are including additional disclosures on the impact of currency fluctuations on our results to provide you with a more complete view of our operational performance.

Our results this quarter were solid, with 12% adjusted EBITDA growth driven by solid revenue generation and strong cost discipline, with adjusted EBITDA expenses growing just 3% also benefiting from the strong currency tailwind. Our adjusted EBITDA margin increased 200 basis points from the prior quarter to 47.3% (sic - see press release, "43.7%") and as Henry pointed out, the highest margin since third quarter 2013.

Income from continuing operations before taxes was up 4% and included the impact of higher interest costs from the issuance of our 5.25% coupon bond in the fourth quarter of 2014. The prior year's second quarter tax rate was low due to several one-time benefits. Excluding those one times, the effective tax rate in the quarter of the prior year would have been 35.6% compared to the 35.9% recorded in the current quarter.

As Henry mentioned earlier, we are in the process of looking at opportunities to become more tax efficient by optimizing our operational and legal footprint. This work is underway, but we're not in a position at this time to provide any sense of magnitude or timing. We will update you more on our progress in the coming quarters. Adjusted EPS was up 2% to $0.56 per share, benefiting from a 4% decline in the weighted average shares outstanding year-over-year and stronger operating results.

Before moving to the next slide, I want to comment on the impact of foreign exchange on our results. As we have previously indicated, foreign currency fluctuations have been a headwind for our subscription revenues and run rate. This headwind has been mitigated by a significant portion of our expense base that is denominated in foreign currency. Overall, approximately [15%] of our subscription revenues are billable in non-US dollars and nearly all of our ABF revenues are in US dollars. Offsetting this is the fact that 40% of our EBITDA expenses are incurred in non-US dollars.

Throughout this presentation, we are providing the impacts of foreign currency fluctuations to our subscription revenues and run rate as well as to our expenses. However, we are not providing the impact of foreign currency fluctuations on our asset-based fees tied to average assets under management because while our fees for index-linked investment products are substantially invoiced in US dollars, the fees are based on the investment product assets of which two-thirds are invested in securities denominated in currencies other than the US dollar.

On slide 12, we provide you with a bridge for the year-over-year change in our revenues including the impact of foreign exchange on our subscription revenues. Total revenues increased $16 million or 6% to $271 million. The growth was driven by an increase of $9 million or 4% in subscription revenues which includes non-recurring revenues of $4 million and an increase of $7 million or 16% in asset-based fees.

From a product perspective, the increase in subscription revenue year-over-year was principally driven by $11 million or 12% combined increase in Index and ESG revenue as well as $4 million or 3% increase in analytics revenues, partially offset by a decline in real estate revenue. Adjusting for $2 million negative impact from foreign exchange, analytics revenues would have increased by 5.4%. Real estate has also been particularly impacted by foreign currency fluctuations. Revenue decreased 26% on a reported basis but adjusted for $2 million negative impact from currency fluctuations and timing of report deliveries, the year-over-year change would have been positive.

As you will recall from our first quarter call, real estate revenue in that quarter included the benefit of some early deliveries of Client Portfolio Analysis Service reports, which historically have been delivered in the second quarter. The investments that we've made in the platform are allowing us to deliver reports with more regularity throughout the year which will smooth out the traditional second quarter seasonality of this product.

Adjusting for the impact of foreign currency fluctuations, recurring subscription revenues would have increased $14 million or 7%. The $7 million or 16% increase in asset-based fee revenue to $51 million was driven primarily by $82 billion increase in average AUMs and ETFs linked to MSCI indexes to $441 billion, as well as a modest increase in revenues from institutional passive AUM.

Reported average basis point fee for ETF AUMs linked to MSCI indexes was 3.43 basis points at the end of the second quarter, down from 3.53 basis points reported at the end of the second quarter 2014 but up from 3.38 basis points at the end of the first quarter this year. The decline year-over-year was driven principally by fee structure which were impacting tiers as well as negative mix shift. The increase compared to the first quarter was driven by a positive mix shift.

Let's turn to slide 13 and we'll provide you with year-over-year adjusted EBITDA expense bridge. The second quarter adjusted EBITDA expense increased $4 million or 3% to $152 million but declined 2% when compared to the first quarter of 2015. Year-over-year increase was driven by higher compensation costs driven mainly from the impact of 2014 hires and same store inflationary compensation which is noted here on the chart as the net carryover inflationary increase. This increase was partially offset by a positive benefit of foreign exchange currency fluctuations.

Excluding the impact of foreign currency fluctuations, our adjusted EBITDA expenses would have increased $11 million or nearly 8%. It is important to note that while severance is going to be ongoing as we continue to strive for efficiencies, our underlying core expenses included here as net carryover and inflationary costs were only up 5%. Employees in emerging market centers increased to 51% in the second quarter of 2015 from 49% in the second quarter of 2014 and in line with 51% reported in the first quarter of 2015.

And while the second quarter expense exit rate would indicate full year expense levels well below our 2015 adjusted EBITDA expense guidance range, for the remainder of the year, we are expecting incremental costs for new hires, technology infrastructure, professional fees and severance. And in terms of phasing this in for your models, for the remainder of 2015, we expect incremental cost to be more heavily weighted towards the fourth quarter. So with this in mind, we now expect our full year 2015 adjusted EBITDA expenses to come in at the low end of the previously stated range of $620 million to $640 million and that would be on a constant currency basis going forward.

Now turning to slide 14, let's take a look at the run rate bridge for the quarter. Our reported run rate increased 8%, consisting of 6% increase in subscription run rate to $862 million and 14% increase in ABF run rate to $201 million. Adjusting for foreign currency fluctuation, subscription run rate grew 9% year-over-year.

First, in terms of subscription run rate, recurring sales in the second quarter of 2015 amounted to a total of $29.6 million compared to $29.1 million in the prior year quarter. Higher Index and ESG sales growth in performance and 6% growth in Risk Manager sales in analytics were offset by declines in sales in real estate in performance and portfolio management analytics. The decline in real estate recurring sales year-over-year was driven by timing and to a certain extent FX fluctuations and the decline in analytics was driven by lower equity model sales through Barra Portfolio Manager.

Cancels amounted to a total of $12 million for the quarter, a decrease of 8% from the prior year quarter, resulting in net new recurring sales of $17 million or an increase of 9% year-over-year. The lower level of cancels drove year-over-year increases in retention across both performance and analytics products areas, resulting in an aggregate retention rate of 94.2% for the quarter and 94.3% year to date.

Foreign currency fluctuations had a $22 million rolling [fourth] quarter negative impact on our subscription run rate. Also GMI acquired in August 2014 contributed $7 million to our run rate build year-over-year and we'll reach our one-year anniversary of that acquisition in August. So our third quarter results will reflect this change as GMI will then be considered part of our organic revenue and run rate.

Now turning to ABF run rate, the $25 million increase was primarily driven by $57 billion period increase in ETF AUM linked to MSCI indexes on net inflows of $76 billion partially offset by net market depreciation of $19 billion. Growth in institutional passive AUM as well as higher futures and options trading volumes in contracts based on MSCI indexes also contributed to the year-over-year increase.

On slide 15, let's take a look at our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $455 million, which includes cash held outside of the United States of $97 million. We've been active in the markets repurchasing our shares after the end of the quarter for a total of approximately $75 million through the July 24. As general policy, we prefer to maintain US cash buffer of approx $100 million to $125 million for operational purposes.

Our gross leverage was 1.9 times based on our total debt of $800 million to our trailing 12 month adjusted EBITDA. And one comment on leverage. On July 28, the Board of Directors had authorized the Company to explore financing alternatives that could increase interest expense and the target leverage to 3.0 to 3.5. The timing success of any potential financing will be subject to, among other things, market conditions and the Company's ability to obtain terms and conditions authorized by the Board. We will keep you updated.

Capital return continues to be a strong point for MSCI with a total of 2.2 million shares repurchased in the second quarter through open market transactions and the maturity of the $300 million ASR. The average price for the repurchase of the 1 million shares was $61.90 in the second quarter of 2015. Subsequent to the closing of the quarter and through July 24, 2015, an additional 1.2 million shares were repurchased at an average price of $63.24. A total of $413 million remained open on the outstanding Board repurchase authorization and a total of approximately $500 million of the $1 billion capital return commitment has been realized as of July 24, 2015.

Free cash flow year-to-date was $72 million, in line with the prior year. In the second quarter, free cash flow was lower than the prior year due to timing of expense disbursements. We spent $12 million in CapEx in the quarter, in line with the prior year, and we are lowering our CapEx guidance, which I will discuss in the next slide. And finally, our Board approved a 22% increase, as Henry mentioned, in our regular quarterly cash dividend to $0.22 per share from $0.18 per share, which is payable on August 31 to holders as of August 17.

Let's turn to Slide 16 and I'll give you some update on our guidance for the full year 2015. As I stated earlier, we expect adjusted EBITDA expenses to come in around the low point of the range of $620 million to $640 million, assuming at constant currency going forward. There is no change to our interest expense guidance, which we expect to be approximately $45 million, unless, as previously noted, we increase our leverage this year.

We have recently adopted free cash flow to replace cash from operating activity as a metric for cash generation. We expect that we will generate between $245 million and $275 million in free cash flow for 2015. Part of the refinement of our free cash flow guidance was our change in CapEx, which we'll now expect to be in the range of $45 million to $55 million compared to the previous range of $55 million to $65 million, reflecting lower technology infrastructure spending. And finally, the effective tax rate is still expected to come in between 35% and 36% despite being at the high-end of the range in the current quarter and for the year-to-date period.

Now turning to page 17 and in summary before we open up the line for questions, I'll wrap up the call by providing a summary of key takeaways. In the second quarter, we continue to execute our growth strategy and we delivered strong financial performance. We have developed a strong track record for returning capital to investors, as evidenced by $500 million that we have returned of our $1 billion commitment by the end of 2016.

We have several levers that will drive our future growth including, continued strength in our core products, incremental revenue from the investments that we've made with our enhanced investment program, improved performance from our recent acquisitions and we are actively exploring opportunities to bring our tax rate more in line with peers and we are committed to returning capital to our shareholders.

With that, I'll now like to open up the lines for your questions.

(Operator Instructions) Toni Kaplan, Morgan Stanley.

You mentioned just now that the Board gave you authorization to explore options to increase leverage to 3.0 times to 3.5 times. Just want to clarify if that's gross leverage or net leverage and what the plan is for the capital? Is it basically just buybacks or something more?

It's based on gross leverage. And like I said, we're exploring the opportunities but we've consistently been returning capital. We'll make those decisions when and if we increase the leverage to 3.0 times to 3.5 times.

And just as a follow-up, I wanted to reconcile really great expense management this quarter. It looks like you reduced headcount by about 100 people. So just wanted to reconcile cutting costs and managing expenses with the growth goals that you have increasing the sort of gross sales. So just wanted to find out, I guess, where the headcount reductions are that you're lowering your headcount and where you're planning to increase your headcount because you mentioned hiring plans?

We've been making headcount reductions in areas where we've been finding efficiencies that we referred to in the comments on the call here and your numbers are right, we did reduce and you've seen that evidenced by the severance. And so we're capturing those efficiencies, but we're actually using those efficiencies to ensure that we can maintain, whether its infrastructure, whether its stability or whether its growth in our products. So as we said that we will have some step up and redeployment over the course of the year, but it really has given us over the past year, the investment program, the opportunity to really capture some of the inefficiencies and turn them into productive growth.

Chris Shutler, William Blair.

The sequential improvement in the constant currency run rate, growth rate, I think it was about 8% for last couple of quarters. It was 9.1% this quarter. Given sales activity and retention rates were basically flat sequentially, should we view that as the vast majority of that was price. And then secondly, if you look at the total run rate, how much incremental benefit do you think, let's say over the next one to two years, that you will realize from price? Is it more like a 100 basis points, 200 basis points, 300 basis points? How should we think about that, at least directionally?

I think going back to on a constant currency basis, you can see that our run rate has grown basically from 4% back in 2013 to now 8%. So, we've seen that from an improvement in our product suite. Go back earlier in that period, it was PMA along with the models and then we came out within 2013 and 2014. Price has always been a factor on our index side and as we get more and more confidence in the analytics products, we'll see pricing come into play. I wouldn't see it 50% or [300 basis points] that you were talking about. But I would see us over time [lighting] into a higher percentage of our increase coming in from pricing but that would be gained by client confidence, that would be gained by new product innovation and as Henry talked about, the senior account manager program that we have in place.

On that last point, the senior account manager (inaudible) talked about in the prepared remarks. Any changes that you guys have made to the incentive structure to make to -- to try to really push the accelerator on the growth?

We have been for some time now reviewing the most appropriate way to incentivize our client coverage organization and we have a salary and bonus structure that is highly correlated always into sales performance. But we have that under review to see if there are more direct levers that we can put in place to provide even more alignment to that and we're still kind of in the middle of that process. We won't be able to really report back on that until sometime next year.

Alex Kramm, UBS.

Just wanted to come back to the comments you made early and get the question on the, I guess, the levering up the balance sheet more and I think, Bob, you then mentioned capital returns as probably one of the avenues. But can you maybe remind us a little bit like what the specific return are that you're looking at when you do that, so when you say evaluate buybacks versus dividend or maybe even do something on the M&A front again, what are the metrics we should be looking for and I guess I'm asking because you're stock is trading at a all-time high relative to the S&P and obviously the return at this valuation is getting limited and limited on buying back stock. So any additional color would be helpful.

Sure. I think in the past, Alex -- great question, we benchmark all of our investments on our weighted average cost of capital and the accretive value to that, whether it would be a buyback, whether it would be a total shareholder return through a dividend or whether it would be acquisitions externally or investments we make organically but the watermark would be our weighted average cost of capital and sure we have accretion to that for our shareholders.

Yes, the other thing that I will say, Alex, is that -- we can't comment ourself on the valuation of our shares by the market. What we can comment though is that we see a significant amount of opportunities in our client base to continue to drive revenue growth even in the context of a mixed operating environment and then when you look at the mix of our products as I indicated, we think we're hitting in a lot of cylinders on the index product line, we have meaningful opportunities for expansion in revenue growth in analytics and in real estate and if you can continue the pace of growth in ESG, that should provide meaningful amount of revenue growth.

Secondly, we went through that period of investments for about a year and a half, half of 2013 and 2014. We now feel we have the right sort of footprint and infrastructure and are now concentrating on that and really focusing on creating efficiencies out of that. So we believe that there is continue meaningful amount of margin expansion in our shares, in our business. So I don't know what the right price for that is but we're feeling pretty good about the Company.

Maybe just then secondly and I guess picking up on the last comment and you mentioned also the sales you're not really satisfied with -- can you talk maybe about the competitive environment a little bit too, in particular, in analytics and maybe risks, specifically. Anything you're seeing there that makes it harder on the sales side, you think there's some competitors you would highlight that are being stronger than they were in the past or is it more the selling environment or your own doing that is lacking right now?

I think it's the latter. Honestly, it’s -- we clearly are -- our company and our space or our industry is clearly in an area which is, we are creating a new market, we are creating a lot of new use cases. We are going into our client organizations and providing them with things that they weren't really doing before like as I said index in factor investing or a new sort of sophisticated risk management system or new ESG datasets or in the US, we're creating a new industry for real estate indexes and benchmarking and so on and so forth. So, a lot of our growth therefore is predicated on being able to provide -- understand the right use case, provide the right product and obviously convince the client at the right price to embrace a lot of these new offerings. Much less, much, much less driven by competitive dynamics in the marketplace, so we can go into more detail as to some level clearly a competition that exist in various product lines, but I think that the -- my overall message to you is that this range bound has to do with -- clearly its a mix environment, a lot of active managers around the world are not feeling that great, given that they're being squeezed on one hand by passive managers and on the other hand by real big large alpha highly concentrated portfolio managers, and that type of investing. So, therefore, we are -- our job is to try to really galvanize the client base to help them achieve their investment differentiation, their operating efficiencies, their reporting requirements and all that, and that's where we need to work harder at it in order to get out of this range that we've been at for a few quarters now that has us all rallied up.

(Operator Instructions) Vincent Hung, Autonomous.

You've talked a lot about your disappointment with the range-bound sales. What is like an aspirational level of sales for you guys?

I'm not sure we have yet one. Our first step is break out of that range and we're not there yet and the pipeline is always good, it healthy. We had great engagement with clients and everything but we're not yet seeing that breakout and that's what we're trying to do, breakout of that recurring sales of roughly around $30 million or so but clearly we want to break out of that and we want to achieve sort of double-digit gross recurring sales growth, right. So gross recurring sales growth, that will make us a little more comfortable but again, historically, in the last few quarters, we have been trading around this range. We continue to be in that space right now. So, I don't want to raise any expectations, but we clearly wanted to highlight to all of you that we're not happy with that and we're really focused on trying to break out of it.

And what's the main pushback you're getting from clients?

Clearly, clients are not extremely liberal with their budgets around the world. We are living in a highly cost conscious environment anywhere you go in the investment industry, but for the right things and the right use cases and the right solutions, clients will spend money and we've demonstrated that with our -- I think a lot really depends on -- its not just us pushing our sales to clients.

We need to have the right level of engagement, especially on the enterprise-wide deals for risk management and performance and that's why we have formed this group of senior sales people to be focused at that C-level, the CEO, CIO, CRO level to try to help that sales process. We need in our applications. We have all the content. A lot of our content is great, especially in analytics. What we need to do is do a better delivery of that content through more fungible applications that can be accessed by the client through that content or throw the content delivered directly to the client for their own applications. So that it that effort that I mentioned about this new architecture and this new interface, this new platform that we'll be able to have the client access all of our other applications through that one in order to make it more fungible.

So, we're taking a lot of steps. We're clearly pushing the salespeople, we're clearing pushing our senior account managers, we clearly are pushing our content, but I think a meaningful part of it is also breakthroughs that we have achieved in consolidating a disparate set of applications that we have from [users] to Barra Portfolio Manager to BarraOne to Risk Manager to Hedge Platform, we need to be able to put that in a more holistic fungible way to achieve the efficiencies that the clients is looking to achieve through the various use cases.

And just on your decision to increase the target leverage, just curious to get details around that. So, firstly, what kind of term structure would you look for in incremental debt and then, also would you look to get to the 3.0 times to 3.5 times sooner rather than later?

We've had a lot of deliberations with our Board over the last few years as to what the leverage is in a company like us that has a book of long-term assets that are producing great growth and profitability that are highly reliable and subscription based and so and so forth in order to balance out the leverage amount in the Company and risk associated with that with the levering up your equity returns in a company like us. So we had a lot of those debates and discussion. (inaudible) were concluded in the Board meeting this week in which the Board approved the increase in the gross leverage to somewhere between 3.0 and 3.5 and we're now -- that what's just happened right. So we're now exploring based on that mandate what are the types of offerings that we can provide on the debt side to match those goals but it's early. We're still exploring all of that and we have to see what happens in the marketplace and what is convenient for us to achieve.

Can we expect that you do it all by fourth quarter?

It depends on market conditions, it depends on market environment, it depends on a lot of things. We clearly are really focused on it now, given all the work that we've done for the last couple years and given the approval by the Board. We can't really tell you until we see (technical difficulty).

We remain very disciplined in terms of -- as my comments indicated that it's terms, conditions, it's all those factors that come into play.

Joe Foresi, Janney.

This is actually Robert Simmons on for Joe. So, talk a little bit about where you think we are in the ETF growth cycle and also about the movement towards custom products?

I think that in the US, we have filled out quite a lot of the matrix so to speak on market datas on ETFs. So, a lot of our effort and our client’s efforts are in more raising more assets based on a lot of those products and therefore the second major emphasis is in creating more specialized investment vehicles such as factors, such as currency hedge, ETF and so on and so forth. In Europe, there is -- is in an earlier stage of development in the market data and we're also clearly pushing this [beta]. In Asia, the market is totally virgin. There's not a lot at this moment. We are extremely focused on developing that market in two ways. We are supporting our clients with our indexes and then explaining how those client can invest in ETFs in the US and in Europe from Asia and secondly we're working with those ETF clients to be able to develop and launch local product in the region to also for the clients for investors in Asia to invest locally. So, it's a two prone approach.

Can you talk a little bit about your margin expansion trajectory? Going forward (technical difficulty) percentage level?

Can you say the question again? I didn't quite catch it.

Sure. Can you talk a little bit about the margin expansion trajectory going forward? After this year, like when do you think you might get to 46%?

We continue marching deliberately towards margin expansion. We haven't given a cap or we haven't given a timeline but we did say margin expansion through 2015 and we gave our expense guidance that we would stay true to 5% to 7% and obviously this quarter we carved out the normalization of it. FX has had some help in that journey and some headwinds that we talked about earlier. So I can't really tell you a 46%, but I can tell you that we're 43.7% and that we're not retreating from continued margin expansion.

Keith Housum, Northcoast Research.

Question for you about the non-recurring revenue. If I looked at this quarter, I think, it was $5.7 million in non-recurring sales you have but in terms of what you recognize that this quarter's income statement was about $3.9 million. What's the trajectory of when that $5.7 million is recognized? [Is it partly] this quarter and perhaps the rest the following quarter?

It has a whole host of constraints to go with it. That really depends upon when we actually deliver the product to our client. Now, sometimes, we can do data sales, history sales and that can be recognized within the quarter. Sometimes when we have long-term implementations where we have to really get a client hooked up and connected to Risk Manager that could take 12 -- part of the fees could be deferred until we're actually delivering the full product suite. So, it's hard to give you a good line of sight on that, because it really depends on the underlying sale and the product being delivered. It tends to be mainly driven though by the implementation deals or again volatility go back to second quarter of last year, we had a really high revenue recognition and a big chunk of we talked about was a lot of deals were completed for clients fully implemented, we are able to take the revenues. A more elongated sales plan, revenue recognition could be on the real estate side.

(inaudible) next quarter or anything like that?

No, it's tough to give you guidance on that, because we do keep a pipeline, but some of these deals are contingent upon the client being able to deliver certain things to us as well as us delivering to them. So, it's a small amount.

If I can cycle back to an earlier question regarding the reduction in the headcount and the efficiencies, I guess, is your thought process that the reduction in headcount has probably has hit its highest point (inaudible) be adding personnel going forward?

We don't target a headcount. We're looking at the positions. The positions that we took out, we took out. Those are efficiencies that we gain. Now, there is some turnover. There was a part of it, but you can see, the severance was $4 million for the quarter, we eliminated those positions. We do have other positions that are different, that are open that we will be selling through the course of the year that I talked about.

Would we expect severance to be declining then for the rest of the year?

Severance is tough for us to give you a number on that, but we expect to have it as a part of our continuing DNA as we continue to find efficiencies that are out there.

Thank you. I would now like to turn the call back over to MSCI. Please go ahead.

Thank you all very much for your interest in MSCI and we will talk to you soon. Thank you.

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