明晟 (MSCI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Stephen Davidson, Head of Investor Relations.

You may begin.

Thank you, Andrew.

Good day, and welcome to the MSCI First Quarter 2017 Earnings Conference Call.

Earlier this morning, we issued a press release announcing our results for the first quarter 2017.

A copy of the release and the slide presentation that we have 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 and are governed by the language on the second slide of today's presentation.

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 other SEC filings.

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 facilitate meaningful period-to-period comparisons and provide a baseline for the evolution of results.

You'll find a reconciliation to the equivalent GAAP measures 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 26 to 30 of the earnings presentation.

On the call today are Henry Fernandez, our Chief Executive Officer; and Kathleen Winters, our Chief Financial Officer.

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

Henry?

Thanks, Steve, and good day to everyone on the phone.

Apologies for my scratchy voice as I suffer from pollen allergies at this time of the year.

We reported another strong quarter, driven by the continued execution of our strategy, our focus on innovation and our drive to higher levels of integration within client activities, our content, our content-enabling applications and our services.

Our results included the positive impact of a 27% increase year-over-year in quarter-end AUM in ETFs linked to our indices to a record $555 billion, driving strong double-digit growth in Index revenues.

On our call today, I will review the financial highlights for the quarter.

And then, I will discuss how our financial performance is increasingly benefiting from more innovation and better integration of content within each product line as well as across product lines in the enterprise.

Please turn to Slide 4 for a review of our financial results for first quarter 2017.

A 29% increase in adjusted EPS was driven by an 8% increase in operating revenue, a 3% increase in adjusted EBITDA expenses, a 13% increase in adjusted EBITDA, a lower effective tax rate and an 8% decrease in diluted share count.

Furthermore, we delivered a strong overall aggregate retention rate of 95%, with Index at an impressive aggregate retention rate of 97%.

We have achieved these strong results because the management team is focused on 3 areas, as we have reported to you each quarter.

We are focused on investing in new products, enhancing existing products and ramping up our go-to-market strategy with clients to drive revenue growth, striving for further operating efficiency and productivity gains to free up resources for both to invest in our business and further improve our profitability, and ensuring that capital is optimally deployed to enhance shareholder returns.

First, in terms of revenue growth.

We recorded an 8% increase in revenue, driven principally by a 13% growth in Index revenue.

Excluding the foreign exchange impact on subscription revenues, overall operating revenues would have increased 9%.

This was the 13th consecutive quarter of year-over-year double-digit growth in Index subscription run rate, which is a testament to the strength of our equity index franchise, the contribution from many new products as well as our go-to-market strategies.

The strong increase in AUM in ETFs linked to MSCI indices this quarter helped drive an 18% increase in asset-based fees.

Analytics revenue grew 2% on a reported basis or 3% on a foreign-exchange adjusted basis.

We are clearly aiming for higher growth in this product line through our investments, and are taking steps to accelerate the next stage of the evolution of the Analytics product line.

These steps that we're taking will help further drive the transformation of Analytics into a more client-centric and solutions-based product line.

I will discuss this important evolution later.

All Other revenue grew 6% on a reported basis and 12% on an organic basis and excluding the impact of foreign exchange.

ESG continues to register strong top line growth or about 17% year-over-year this quarter.

The success in this product line is being driven by the increasing integration of ESG factors into the mainstream global investment process.

In Real Estate, reported revenues decreased 3%, but on an organic basis and excluding the impact of foreign exchange, revenues increased 8%.

The restructuring of the Real Estate product line is still in progress and has resulted in a significant improvement in profitability, but we have more work to do.

Turning to operational efficiency.

Our adjusted EBITDA expenses increased only 3%, and 5% excluding the impact of foreign exchange, driven by our continued and relentless effort on efficiency and productivity gains, while at the same time investing in our business to drive further growth.

Finally, in terms of capital allocation and capital optimization, we continue to be good stewards of capital and have been very opportunistic in repurchasing our stock to ensure that we're maximizing value for shareholders, and we will continue to follow this strategy, as we have indicated many times before.

In summary, to us, first quarter 2017 was another very good quarter, especially in the very large part of our business that drives growth, profitability and valuation of the firm.

Please turn to Slide 5, where we highlight the power of the integrated franchise that MSCI brings to clients to help them make better and more efficient investment decisions.

This integration is evidenced within 3 distinct areas: our approach to client relationships, especially the C-Suite in our largest accounts; the development of our content across all product lines; and then thirdly, our applications and services that enable the use of that content by our client.

Please turn to Slide 6, where we highlight the strength of our client base, which we believe is benefiting from the better integration of client initiatives like our strategic account management program.

As shown on the left side of this slide, a growing percentage of our overall run rate is attributable to clients who are buying from all product lines in the company, increasing from 38% of total run rate in the first quarter of 2015 to 47% of total run rate in the first quarter of 2017.

This growth in clients buying all of our products is being driven by our go-to-market strategies and our ability to better cross-sell our products.

On the right side of the slide, we highlight the run rate from clients that have more than $1 million of run rate, which are growing faster than the overall growth of the company and have higher levels of retention.

There have been several recent deals which reflect the increasing integration of our go-to-market strategy.

Let me illustrate this with 3 examples.

First, a very large employee retirement system in the U.S. selected MSCI for a full set of solutions across index, multi-asset class risk, real estate and ESG as a result of our integrated client-facing and integrated product approach, resulting in over $1 million in run rate from this client in this combined sale.

Second example, a large global asset manager in Europe selected RiskManager not only because of the strength of this product, but also because we leveraged our C-suite and existing Index and ESG product relationships, all coordinated by our Senior Account Manager on that specific client.

This resulted also in over $1 million of additional run rate from this account.

A third example, we leveraged our deep analytics relationship with a very large public employee pension fund in America to win a real estate index benchmark mandate, expanding the relationship beyond risk to Index, Real Estate and ESG with this particular account.

So we're very pleased with these significant wins, which reflect an increasingly integrated approach within and across our product and sales activities.

Turning to Slide 7. We illustrate the current state of integration of our content by asset classes.

MSCI is largely a content company.

And we're known mostly for our equity index content, but also increasingly for our factor, ESG and other analytical content, and also the analytical content-enabling applications that we provide.

On this slide, which is obviously related to content, we highlight the select content that we generate within each asset class, as indicated in the top half of the chart, as well as select content that is common across all asset classes, as indicated on the bottom half of the chart.

An example of content integration across asset classes would be factor investing content.

When you look at our total run rate related to equity factors across all product lines in the company, it is over $180 million, and it's growing at a rate of approximately 13% this past quarter compared to last year.

ESG content would be another example where we're levering ESG content to create indices.

The run rate of ESG indices embedded in the Index segment, not in the ESG segment, is approximately $13 million and grew by over 55% compared to prior year.

One underlying theme in these examples is how our non-Index product line content benefits our Index segment, which is, of course, our most valuable and profitable franchise at MSCI.

On Slide 8, 9 and 10, we highlight the integration of our Index, ESG and Analytics content as well as the client demand trend that we're driving to generate growth.

First, let us begin with Index on Slide 8. We are focused on tighter integration of our content within this segment, as well, of course, as across segment.

So for example, we're looking at new ways to monetize our Index content using new business models and integrating it within our Analytics application for delivery to our clients.

For example, we are looking to deliver our Index metrics reports through our Analytics applications.

Index metrics is our analytical tool to sell factor indices to both passive managers and active managers.

The client demand for our content, as shown on the right side of the slide, is being driven by the globalization of the equity investing process, which continues unabated; the trend towards lower-cost index-based equity investment products, which is obviously accelerating; and the demand for factors, which is on [a tier].

Next slide highlights the ESG content on Slide 9. Client demand for our ESG content is being driven by investors' focus on ESG criteria to evaluate the risk and the alpha in their portfolios.

As a result, therefore, ESG is being integrated into the mainstream investment process across the world.

For example, our ESG ratings content is now available not only in content format but also through third-party applications and through our own applications like RiskManager, and some of our clients are accessing the ESG content through BarraOne.

As I mentioned before, ESG reserves have been integrated within the Index segment in the creation of ESG equity indices, which are, therefore, reported in that segment.

Lastly, we're integrating ESG research and ratings with factor exposure to provide our clients with an integrated -- thoroughly integrated perspective of the equity market, which would include not only the market caps but the factors and ESG, and you can build, therefore, the entire equity universe according to those factors and areas.

Lastly, we highlight Analytics content, and in this case, also applications on Slide 10.

As we all know, investment institutions around the world are under significant pressure, which is causing them to focus on their investment processes more keenly.

They're becoming much more -- or trying to become much more efficient and more integrated, and they're looking for a more client-centric solutions-based approach from their partners such as MSCI.

To meet the demands of the changing market, we are quickly evolving our Analytics product area and we're doing this in 3 ways.

First, we're helping clients address this [large] complexity in their investment processes that, obviously, is driving a lot of the cost and inefficiencies in their organization.

Secondly, we're helping clients achieve a high level of integration in all of those investment processes so that they can achieve efficiencies and cost savings.

And lastly, we are meeting our clients' needs for increased and deeper services and solutions to make more effective use of our analytical tools.

Some of these clients, for example, say, "Not only give me the tools so I can do things myself, but can you do the work for me and I'll pay you more for it?"

Please turn to Slide 11, where we highlight the next phase in the evolution of the Analytics product line.

In just the last 2 years, we have made significant progress in this transformation in moving to a more integrated, more client-centric and more profitable organization.

And while we have been doing this, we have also been self-funding this great new initiative that are positioned in the product line for further growth and will enhance our transformation.

And this will include a great deal of fixed income analytics, not only for fixed income portfolio managers, but strengthening fixed income analytics for the multi-asset class process; the new Analytics platform that will integrate all of our content through 1 delivery mechanism; and then, thirdly, managed services and solutions to help clients enable those analytical tools, and in some cases, do the work for them.

In 2017 and beyond, our keen focus is on driving top line growth in this product line.

We expect to achieve higher growth rates by evolving our Analytics product line in 3 primary ways, as I mentioned before.

First, we are increasing the delivery of all content at MSCI through integrated Analytics applications.

Next, we're focused on creating an integrated processing environment, internal processing, computer processing environment and superior content-enabling applications that are interfacing with the client.

And then lastly, we are increasing our focus on client-centric services and solutions to enable our clients to better use our tools.

By evolving to this model and this transformation, we'll be able to provide our clients with a more efficient performance and risk environment, where they have the tools to make better investment decisions and reduce their cost and build competitive advantage.

In the coming quarters, we will continue to provide you with updates on this progress in integrating these multiple facets of our powerful franchise at MSCI, including our client activities, content, content-enabling applications and services, which represent significant opportunities for growth.

I believe that we're only getting started in what is possible to achieve with this franchise.

Kathleen?

Thank you, Henry, and hello to everyone on the call.

I'll start on Slide 12, where I'll take you through our first quarter results.

As you can see, we clearly continued the momentum we had coming out of 2016.

While Q4 had strong revenue growth of 7%, 8% adjusting for FX, and adjusted EPS growth of 23% year-over-year, Q1 is even stronger.

Let me take you through the numbers.

In Q1, we delivered an 8% increase in revenue, driven primarily by a 6% increase in recurring subscription revenue and an 18% increase in asset-based fee revenue.

Excluding the impact of foreign currency exchange rate fluctuations, total operating revenues increased 9%.

As a reminder, we do not provide the impact of foreign currency fluctuations on our asset-based fees tied to average AUM.

This is substantially billed and booked in U.S. dollars.

However, approximately 2/3 of the underlying assets are invested in securities denominated in currencies other than the U.S. dollar.

On a reported basis, operating expenses and adjusted EBITDA expenses increased by 3% each.

Excluding the impact of foreign currency exchange rate fluctuations, first quarter operating expenses and adjusted EBITDA expenses increased 4.8% and 5.3%, respectively.

The primary currency move that drove this benefit was the British pound, which was substantially weaker year-over-year.

We delivered a 15% increase in operating income and a 13% increase in adjusted EBITDA, resulting in a 280 basis point increase in our operating margin and a 220 basis point increase in our adjusted EBITDA margin to 50%.

Our effective tax rate was 28.2%, below the 33.5% effective tax rate in the prior year Q1.

Diluted EPS and adjusted EPS increased 33% and 29%, respectively.

Q1 free cash flow was $27.4 million, a decrease of $4 million.

This was driven by higher cash operating expenses, higher interest payments of $11.5 million associated with higher debt levels and higher CapEx of $4.2 million, primarily related to our data centers.

These factors were partially offset by higher cash collections of $37 million.

As we mentioned in our Q4 earnings call, we saw very strong customer collections in Q4 '16, with some clients paying early, which resulted in (inaudible) forward of about $20 million in collections into 2016, which would have normally been collected in Q1, thus dampening free cash flow in this quarter.

In summary, this was another very good quarter coming off 2016, which was a banner year for the company.

We're continuing to execute our strategy, which is resulting in strong top line growth.

We have very high levels of client retention, 95% across the company, and we're focused on continuing to deliver productivity and efficiency gains to free up more capital to invest, and we're exercising very strong discipline in the deployment of that capital.

On Slide 13, you can see the different drivers of EPS growth in Q1.

Adjusted EPS increased $0.20 or 29% from $0.68 per share to $0.88 per share.

Strong revenue growth contributed $0.17 per share.

Investments, net of efficiencies, in our product segments and operations reduced earnings by $0.06.

And capital optimization, specifically share repurchases, also benefited EPS.

We reduced our average weighted diluted share count by 8%, which benefited adjusted EPS by $0.07, partially offset by higher net interest expense resulting in a net $0.03 per share benefit.

The positive impact of share-based compensation excess tax benefits and the ongoing progress in better aligning our tax profile with our operating footprint as well as additional discrete tax items resulted in a lower effective tax rate in the quarter, which benefited earnings by $0.06 per share.

The positive impact of stock-based compensation excess tax benefits totaled $3.1 million in the quarter or $0.03, and reflects the required accounting change effective Q1 2017 on a prospective basis.

Now let's turn to the segment results.

We'll begin with the Index segment on Slides 14 through 16.

Revenues for Index increased 13%, driven primarily by an 18% increase in asset-based fee revenue and a 9% increase in recurring subscriptions.

We saw growth in core products as well as our newer products, including factor, thematic and custom index products and usage fees.

Quarterly sales of $19 million increased 11% and were driven by recurring subscription sales of $14 million.

The increase reflects our ongoing success in capturing the waves of innovation in the market such as strong demand for factor modules as well as increasing demand for ESG.

Aggregate retention rate remained high at approximately 97% in the quarter compared to 96% in the prior year.

Index run rate grew by $81 million or 14% compared to March 31, 2016.

This was driven by a $42 million or 21% increase in asset-based fee run rate and a $39 million or a 10% increase in subscription run rate.

We're continuing our track record of growth.

This was the 13th consecutive quarter of year-over-year double-digit growth in our Index subscription run rate.

The adjusted EBITDA margin for Index was 70.8% this quarter versus 69.2% in Q1 '16.

The impact of FX on Index results was not significant.

In summary, this was a very strong performance for the Index product line, driven by strength in core product areas as well as a strong contribution from our newer index product areas, reflecting the benefit of the investments that we have made and continue to make.

This was a great start to the year.

Turning to Slide 15, you have detail on our asset-based fees.

Starting with the upper-left chart, overall asset-based fees increased $9 million or 18% over Q1 '16, driven by a $7 million or 21% increase in revenue from ETFs linked to MSCI indexes on a 28% increase in average AUM, and a $2 million or 13% increase in revenue from non-ETF passive funds.

The decline in our non-ETF passive product compared to the fourth quarter was principally due to higher revenue accrual true-ups and initial fund fees in Q4 of $1.1 million, so it can be lumpy from quarter-to-quarter.

Also unlike ETFs, where the latest AUM is available daily through public market data sources, non-ETF passive assets are not public and are reported by our clients to us generally on a 1-quarter lag.

As a result, the first quarter market appreciation which we saw for ETFs is not yet reflected in the non-ETF passive product results.

Turning to the upper-right chart.

We ended the first quarter with approximately $556 billion in period-end ETF AUM linked to MSCI indexes, driven by both cash inflows of $38.5 billion and market appreciation of $36 billion for the quarter.

Cash inflows of $38.5 billion into ETFs linked to MSCI indexes represented 26% of the cash inflows into the equity ETF market for the quarter.

Since the end of the quarter and through May 2, ETF AUM linked to MSCI indexes has further increased to $581 billion, driven by $11 billion in inflows and $14 billion in market appreciation.

Another all-time high.

As shown in the lower-left chart, quarter-end AUM by market exposure of ETFs linked to MSCI indexes reflected our strength in developed markets ex U.S., where we captured 30% of the equity ETF inflows, and in emerging markets, where ETFs linked to our indexes captured 84% of the equity ETF inflows, further solidifying our position as the leading provider of indexes to ETF providers.

Lastly, on the lower-right chart, you can see the average run rate basis point fee of 3.08, which has basically leveled off over the last 4 quarters.

I'll explain year-over-year decline in basis point fee in more detail on the next slides.

On Slide 16, we provide you with the asset-based fee run rate related to ETFs as well as the AUM of ETFs linked to our indexes classified in 3 distinct categories, illustrating our differentiated index licensing strategy.

In the upper-half of the chart, we highlight the growth of our asset-based fee run rate specifically related to ETFs linked to MSCI indexes.

Year-over-year, our run rate increased 21%, driven by strong inflows as well as market appreciation, which drove a 28% increase in average ETF AUM linked to our indexes.

The difference between the 21% growth in run rate compared to the 28% increase in average AUM was driven principally by the product mix, as shown in the lower half of the chart.

Turning now to the lower half of the chart.

You can see how we think about our ETF licensing strategy.

This strategy is designed to further expand our index licensing franchise for the ETF market beyond our flagship indexes, increasing the adoption of new index families and U.S. segment index families.

Year-over-year, the flagship index families total AUM decreased to 71% of total AUM linked to MSCI indexes from 75% in the prior year first quarter.

The new index families continue to grow at a faster pace, specifically driven by flows into core and U.S. factor products.

For new index families, AUM increased to 14% of total AUM from 10% in the prior year first quarter.

The faster growth in the lower-fee ETFs linked to our indexes was a primary driver of the year-over-year decline in the average basis point fee from 3.24 to 3.08.

While we expect to have periods where product mix will impact the average fee we earn through our differentiated licensing strategy, we're seeking to maximize revenue and optimize the price/volume trade-off over the long term.

On Slide 17, we highlight the financials for the Analytics segment.

Revenues for Analytics increased 2% to $112 million.

Excluding the impact of FX, Analytics revenue increased 3.3%.

The increase in revenue was primarily driven by higher equity model revenue.

Analytics run rate at March 31 grew by $10 million or 2% to $457 million, and increased 3% excluding the impact of FX.

The year-over-year revenue comparison reflects the negative impact of the challenging back half of 2016, specifically the elevated level of cancels in those last 3 quarters of the prior year, which impacted our run rate immediately.

We believe, therefore, that the lower level of revenue growth in the quarter is more of a lagging indicator.

Adjusted EBITDA margin was 26.3%, down from 27.5% in the prior year.

The lower adjusted EBITDA margin rate was driven by the investments in strategic products and services.

While quarterly margin rates can be somewhat lumpy, we continue to expect the full year 2017 adjusted EBITDA margin rate in Analytics to be flat or slightly better than the Q4 2016 exit margin rate for the product line, which was 28.7%.

Slide 18 provides you with the sales and cancels for the Analytics product segment for the last 5 quarters.

Our Analytics offering continues to be viewed as mission-critical by our clients, as evidenced by our very strong client retention.

However, challenging market conditions continue to impact select client segments.

The market is evolving and changing, and this is putting tremendous pressure on clients.

This changing market is driving clients to focus on becoming more efficient, better integrating technology and data and also to look for more services and solutions from their partners.

We're evolving our Analytics product area to meet these new demands.

Q1 2017 recurring sales of $12 million were down slightly compared to Q1 prior year.

We saw strength in some client segments and continued weakness in others.

Specifically, the year-over-year decline in sales was driven by lower sales to wealth managers due to the lumpy nature of sales into this segment, combined with continued weakness in multi-strategy and macro hedge funds.

This was partially offset by strong growth in the asset management segment and the banking segment.

As a reminder, we had very low cancels in Q1 last year, but saw an increased level of cancels in Q2 through Q4 last year, which was largely driven by 4 clients.

Q1 2017 cancels are at recent historic levels and aggregate retention rate has rebounded to over 93% in the quarter, up significantly from 87% in Q4.

The year-over-year increase in cancels was driven by multi-strategy macro hedge funds, and is the result of the challenging market condition for this client segment.

While we're pleased that the level of cancels is more in line with recent historic levels and retention has improved relative to the last 3 quarters, we remain focused on increasing the level of sales in the Analytics product line.

Importantly, the Q1 level of sales and cancels are in line with the planning assumptions we made for 2017, and the pipeline for the remainder of 2017 is strong.

However, until we see less cost pressure on clients and see a decline in closures of hedge funds, we expect to continue to see challenging conditions, and this is in line with our planning for 2017.

Turning to Slide 19, we show results for the All Other segment.

Revenues for All Other increased 6% to $25 million on a reported basis and grew 12% after adjusting for the disposal of the occupiers benchmarking business and the impact of FX.

First, in terms of ESG, a $2 million or 17% increase in ESG revenue to $13 million was due to strong ESG ratings revenue.

Growth in ESG continues to be driven by the increasing integration of ESG into the mainstream of the investment process.

Real Estate revenues decreased slightly to $13 million on a reported basis.

Excluding the impact of foreign currency and the sale of the Real Estate occupiers business, Real Estate revenues increased 8%.

Aggregate retention rate for the All Other segment remains high at 92%.

The All Other adjusted EBITDA margin was 21.8%, up from 11.4% in the prior year.

The increase in the adjusted EBITDA margin rate was driven by continued strong growth in ESG revenue as well as lower Real Estate costs, primarily due to a reduction in headcount and strong cost management as we made continued progress towards improving profitability in our Real Estate product line.

Turning to Slide 20, you have an update on our capital return activity.

In Q1 and through April 28, we repurchased and settled a total of 1.1 million shares.

Since 2012, we returned almost $2.4 billion through share repurchases and dividends and we repurchased 36 million shares of the company.

There's $0.8 billion remaining on our outstanding share repurchase authorization as of April 28.

On Slide 21, we provide our key balance sheet indicators.

We ended the quarter with cash and cash equivalents of $697 million.

This includes $250 million of cash held outside the U.S. and a domestic cash cushion of approximately $125 million to $150 million, which, as a general policy, we maintain for operational purposes.

Our gross leverage was 3.6x at the end of the quarter, down from 3.7x at the end of the fourth quarter.

Over time, we expect that we will return to our stated range of 3 to 3.5x as our adjusted EBITDA grows.

Lastly, before we open the line for Q&A, on Slide 22, we are reaffirming our full year 2017 guidance.

Furthermore, we're also reaffirming our long-term targets.

In summary, we continued to execute against the MSCI algorithm this quarter, delivering strong upper-single-digit revenue growth.

We're investing for growth and creating a more efficient infrastructure, while, at the same time, achieving productivity and efficiency gains, driving a modest 3% growth in expenses.

These strong operating results drove double-digit growth in adjusted EBITDA, which when combined with a 530 basis point decline in our tax rate and an 8% decline in our share count, drove a 29% increase in adjusted EPS.

We're well positioned given the macro tailwinds, and we're executing well against our strategy, and we're optimistic about our prospects for continued growth.

With that, we'll open the line to take your questions.

(Operator Instructions) Our first question comes from the line of Bill Warmington with Wells Fargo.

So I noticed the improvement in the index retention rate there, looking on a year-over-year basis.

So I -- it's already at a pretty high level, and to be able to bump it up another 60 bps, what has been driving that?

And is that a reflection of some of the cross-selling?

I think it's, Bill, a variety of factors.

But very importantly, at the core, this is a very critical -- mission-critical [role] that clients need to have, in this case, active managers.

And with the continued pressure on active managers by passive products, many of them, obviously, benchmark to or index to MSCI indices, then the client needs to be a lot more focused on the performance against the index because the index is the competition to passive, right?

So therefore, the essential and criticality of this product line has increased, and that has allowed us to sell more into them, to sell more modules of all types and the likes of those.

So that's one area.

And the second area, just referring to the module selling, factoring [those] module, small-cap modules.

I mean, small-cap is poised to do well in kind of an [inflation rate] in -- domestically in many countries.

So that's another aspect of it.

And then I also wanted, as my follow-up, ask about the Analytics business.

That's one where you talked about the challenges in the retention in the second, third and fourth quarter, so last year, on -- if you look at the -- you showed improvement on the quarter-to-quarter basis for the retention rate, but if you look at it year-over-year, which is probably more meaningful, that was still down.

What does it take to get that revenue growth back to the mid-single digits?

Or up to the mid-single digits?

Yes, so just to -- first of all, address the retention, right?

The first thing to understand, and when you compare it to other people in this space, is that our Analytics product line is -- it is a lot of products to a very diversified client base.

So we sell a lot to hedge funds, multi-strategy hedge funds, for example.

We sell a lot to European -- Continental European asset managers, right?

We sell a lot to asset owners and to global asset managers and to wealth managers, some of them owned by banks and the like.

So therefore, in order to really understand the retention, it's always important to go underneath the hood, not just the aggregate retention, and say where are the areas of strength and the areas of weakness of that retention?

And clearly, the areas of weakness in the last 12 months or so have been in the multi-strategy hedge funds that haven't done that well and have been cutting cost; the wealth managers that are owned by European banks that -- and so the American banks that even though their wealth management business has done well, they just give orders to cut across -- cost-savings across the whole divisions and the like.

Now in order to get to the second half of the question, is how do we get these sales up, right?

Largely, the way to think about it that there are largely 2 -- and very generically, 2 segments of this market.

One is the people that are self-help.

They want the tools for them to do the work and they want some of them tools in the -- that are applied to fixed income only or equity only or the central office of risk only on that.

And that market is still vibrant and is still there, and that's where we're highly well positioned.

And the other part of the market is a market that is saying, "Look, I don't -- I no longer want all of that.

I don't want the tools.

I want people to do it for me.

I fire all those people and I'm closing down those areas and can you do it for me.

And therefore, can you give me an integrated data platform and integrated application and integrated processing and solutions and services and just do it for me." So that's the area that we are doing some work.

We clearly are -- we're trying to get a lot of that revenue, but that's the area that, in addition to the tool side, self-help tools, that's the area where we can see -- we are positioning ourselves to see significant growth there.

Bill, it's Kathleen.

Let me just add a couple of more comments to what Henry said.

Just to give you a little more specificity around the retention rate.

Sure, we're up versus Q4, as you'd expect to see that seasonality impact, right?

But important to note that we're up versus each of the last 3 quarters from a retention rate perspective.

Now obviously, not back up to where we were Q1 2016, so we've got more work to do there.

But the way we're doing that is focusing on where we see pockets of strength, right?

In particular, sales for Analytics in the quarter, we saw a strength in multi-asset class asset managers.

In fact, net new sales were up over 40% for that client segment in Q1.

So focusing there as well as demand in the banking segment for risk solutions.

And our next question comes from the line of Chris Shutler with William Blair.

Question on the EBITDA expense, just the cadence as we think about it over the course of the year.

I think you said in the past that Q1 is a seasonally high quarter for EBITDA expense.

So maybe just help us with how much of the expense in Q1 falls out of the P&L in Q2?

And just given that seasonality, I'm just curious on the maintenance of the expense guide and if it's conservatism or if you're expecting expense levels to ramp over the course of the year.

Yes, you'll see it ramp maybe slightly, but nothing very substantial here.

And I think the commentary with regard to Q1 was more around it being a heavily cash quarter, if you were referring to the comments from the last earnings release.

Heavy cash usage.

Okay.

Q1 is not necessarily seasonally strong in terms of expense?

Well, look, as we continue to invest, you'll see it ramp up slightly as we go through the year.

Okay.

And then, I guess, a little different question on the -- I just wanted to get an update on the Analytics platform, the integrated platform, just what the timing is there.

Yes, so we are a -- Chris, the new Analytics platform is ready to be rolled out for the equity investing process.

So we're positioning this in the first phase for equity and factor investing and all of that and that -- we are very excited about that, because then we can sell equity factor models, equity indices to that and all sorts of analysis, et cetera, et cetera.

And that's -- we're within a few days or weeks of launching it to the marketplace.

The next phase of this will be to then -- which we already started, doing work on expanding that Analytics platform to the multi-asset class risk side, and particularly to put in a lot of the fixed income analytics that we have been building.

That's probably going to take us a year or so before we can release that to the marketplace.

So that's where we are on that.

And our next question comes from the line of Joseph Foresi with Cantor Fitzgerald.

I was wondering if you could frame for us the size and the impact of the new products.

I think you said factor investing was $116 million, maybe growing 13%, and I didn't really catch ESG, maybe at $13 million?

But what's the size of the full suite there?

And maybe some growth rates and what else could be considered one of the new products?

Yes, so the -- and these are examples, I mean, we don't plan to be providing this level of granularity in our quarterly reports.

But if you look at the totality of the run rate of the company, $1.2 billion.

And instead of looking at it from the prism of the product operating segments like Index and ESG and Real Estate, Analytics and all of that, you look at it across from equity factors only.

Equity factors, not all factors.

Because we have stuff that is fixed income factors.

We know a lot of the BarraOne revenues are about our multifactor models, that it's called the MSCI multifactor model and the like.

So -- but if you look at equity factors only, that revenue across all product lines is more than $180 million and grew, I said 13%, right, in the last 12 months.

And that is composed of equity factor indices, equity factor models and all the ancillary services and permutations to all of that.

So that was that example that I used.

Now the -- and that -- and we are very focused on equity factor investing, because that's a big wave that is going on in the world.

And we will like to see that sort of -- that across the product line revenue or run rate continue to grow at a double-digit rate.

And that's 1 metric that we use to analyze how well we're doing on equity factors.

Now when you look at ESG, it's a different example that I was giving, but what I was saying is that, again, going back to the cross innovation between product lines is the equity index team has taken all the IP associated with the ESG research, the rating, the company information and everything, and we've created ESG indices that are coming out of that entire cost structure that is embedded into ESG.

And that revenue of ESG indices, which is embedded in Index, even though the cost structure is embedded in ESG, but it's embedded in Index, is now at a 13% run rate.

And that is --

$13 million.

I'm sorry, $13 million, and that is actively managed subscription fees and passively managed [ABF], not the base fees in that, and growing over 50% a year.

So it's -- that's another example of all of this.

In the past -- just to clarify, in the past, we decided that in the operating segments, we were going to lift the costs in the product lines in the operating segments and that any part of the company could take the opportunity from other product lines and create products and the revenues of those product lines are in the segment where -- if it's Index or Analytics.

In this case, it happens that a lot of what we're trying to do is continue to fortify and enhance and strengthen the already powerful Index franchise.

And a lot of what is happening is that the factor model work that we're doing in Analytics is benefiting immensely the factor indices in Index, the ESG work is benefiting that.

We're actually even beginning to look at -- we have released a whole new family of factor indices in fixed income.

And we're looking into can we make fixed income factor indices out of that.

Okay.

And then my second question is just on Analytics.

Is it fair to think of that as a 2018 story?

Or is it going to take maybe a little bit longer than that?

And any rough long-term targets for revenue growth and margins as -- in the upcoming years?

Yes, so on the latter, we continue to stick to our guns, which is we would like this product line to have EBITDA margins in the 30% to 35%, and revenue growth in the...

Mid- to high single digits.

Mid- to high single digits.

And we continue to be focused on that.

And we clearly have done very, very well in getting us to those targets of profitability.

And we have more work to do, and stronger work to do to get to the high single digits, mid- to high single digits in revenue growth.

I -- we all believe that it is feasible to achieve that, because there is an inherent amount of demand for this, the complexity of portfolios, the efficiencies of investment processes, all these things that I've mentioned in the prepared remarks.

We just got to position the product line to ride that wave in addition to the current wave that we're doing.

And I don't know whether it would take a year or 2, hard to say.

But we clearly -- as we develop more confidence as to the timeline, we'll be talking to all of you about it.

And our next question comes from the line of Toni Kaplan with Morgan Stanley.

This is Patrick in for Tony.

BlackRock's Aladdin platform seems to be gaining share in the Analytics space, and the management team of that firm has talked about aggressively growing the product suite.

I'm wondering if you would attribute any of the deceleration you've seen in Analytics or the uptick in cancellations to an increase in the competitive intensity in that industry.

Not much, to be honest.

When you look at the cancels that we have had, they have been -- a lot of them have been cancels that a hedge fund shut down, and they've canceled the service.

So the wealth management cancels have been partial cancels in which the cost-cutting pressure was such that even though there's part of what these tools do that is mission-critical, they just scaled back the ancillary services that we provided, for example, and the like.

So we haven't seen that level of keen competition in all of this.

I think that, clearly, we are in a much more position into the area whereas tools adaptable -- the tools are adaptable to the client investment processes, a little bit of self-help, meaning they do a lot of things themselves.

And what we're trying to do is capture the opportunity that they are capturing, which is the one that "I don't want the tools, I want somebody to do it for us".

And that's where solutions and services come in, a more integrated platform of data, analytics and models and all of that.

Yes, Patrick, we track the reasons for cancels very closely.

And as Henry said, we're seeing the reasons particularly attributed to cost pressure, reductions of cost by our clients, hedge fund shutdowns.

So that's what we're seeing when we take a look at that.

And then can you remind us what you typically see when 2 clients merge, I guess, particularly on the index side?

It seems like consolidation is coming up more often as a way for the industry to manage some top line pressures.

So I'm wondering what you typically see when 2 customers come together?

Well, first of all, we've been waiting for this consolidation for 20 years, right?

So I think that it looks like it will accelerate.

But trust me, I've been saying that for 20 years, and it hasn't happened, right?

So we'll have to see if this time is different, right?

Secondly, is that the -- when there is consolidation, there are times in which you do lose a little bit of the index subscription because 1 plus 1 is not 2 in that merger, it's 1.5.

But what happens is that these firms become bigger and more sophisticated.

And therefore, they need more information in more places in order to manage the business.

So it tends to be a wash, to be honest.

In many instances, you may lose a little bit of -- you lose a -- you have a cancel, and then the -- in a year or 2 later, the client sort of begins to subscribe to more things.

So we're not as worried about that at this point with respect to Index.

If there is more consolidation in Analytics, I mean, in active managers, we will get more impacted in Analytics, maybe a bit more, but again, they become -- they have more complex processes, they want to have a better platform, sophisticated, to cut cost and all of that, and that's where we come in.

So again, it's a little bit of half of 1 -- 6 of 1, half a dozen of the other.

And our next question comes from the line of Anjaneya Singh with Crédit Suisse.

Henry, I wanted some of your thoughts on the integrated effort.

What do you think are some of the bigger hurdles to growth once you do get to, say, end of phase 2?

Is it going to be the incumbency of competitor solutions?

Is it the missionary sale to new clients?

Clearly, you folks have a lot of tailwinds that should grease the wheels.

But just wanted to think about the puts and takes looking a bit further out.

Yes, so are you asking about the totality of the company or just 1 product line?

Totality.

Yes, look, in the totality of the company, I just want to reiterate, we're largely a content company.

And when you look at the vast majority of our revenues and our valuation and our -- all of that is about -- it's about selling content.

And the content is about investment problems and challenges and putting a model or a methodology and then turning that into data and into analytical algorithm for calculations and things like that.

Now so there's a lot of technology in producing that content, but we master that very well.

Now all of that content needs to be enabled by very sophisticated content-enabling applications, workflow applications, if you want to call it that.

And that has traditionally been the clients build their own or they use third-party services.

And increasingly, the clients don't want to build that because they're under a lot of cost pressure.

They don't want to build that, so they're either relying on third-party applications or they want us to build those applications.

So when you look at our [niching] of our growth is the smaller bet that we're placing in the company of [pooling] those applications to enable that content and drive much higher levels of growth.

Even in the Index product line, which is a product line that is largely sold as content, as data to be enabled by client applications or third-party applications, with factor indices, the clients are asking us -- we got to have the analytical tools for them to understand what factors are driving those indices, and that's what we call index metrics.

And we started with reports, they get sent to paper, then we automated a little bit, and now we need to put that into BarraOne because the client cannot understand what's going on, on those factor indices with those analytical tools.

So I think that is an area -- we'll continue to do very well in content and the production of that content and that will be -- continue to be a big part of the growth of the company.

But I think we're looking for that incremental growth to be -- to how we do put our content through all -- every single type of application, whether it's client or third party or our own.

Okay.

That's really helpful.

And as a follow-up, I was wondering if you can share some thoughts around the chatter amongst your customers about a push to self-indexing.

Any updated thoughts on how you're viewing that as an opportunity versus risk?

Yes, look, that's what has been, it's a chatter.

It's -- look, we're always obsessed and paranoid about everything, that's how we built the company and continue to stay well, but it's not something we're losing sleep on.

These are the -- MSCI, in this position, is very entrenched, it's part of our language.

We're innovating all the time.

There's an ecosystem built around our indices from active to passive to derivatives to over-the-counter products and all of that.

Very, very hard to make a dent on that.

And our next question comes from the line of Warren Gardiner with Evercore.

I was wondering if you guys could just dig in a bit more around the point you made about being able to reduce cost for the asset manager.

I mean, have you guys executed on any examples in that yet?

Or is this really more just the sort of the crux of the solutions initiative you were talking about?

No, no, no.

The -- we have a number of initiatives with clients that are looking to get out of building data sets, get out of building models and get out of building technology, and actually not to have all those people that are doing all of that.

In some cases, the client has already fired those people and they're looking for us to help them.

This is most prevalent right now in Europe, particularly in Continental Europe.

That's an area that we're spending a great deal of time with those clients, and they are really at the leading-edge of doing that.

But it's definitely beginning to creep into the U.S. as well.

Great.

And then I guess just a quick one.

You mentioned 13% growth in factor-based run rate, I think, for the quarter.

Did that include ETFs?

Or is it just the subscription side?

No, it includes everything.

Subscription -- remember, this is not just indices, also includes factor models, equity factor models.

Equity factor models did very well, what we call equity analytics.

It did very well in the Analytics segment this past quarter.

So it's across every tool that is used to invest along equity factor basis.

And our next question comes from the line of Keith Housum with Northcoast Research.

Can you guys just revisit your -- the thought process regarding share repurchases?

Obviously, the share repurchases in the quarter were made at probably the lowest point in the quarter, and the shares appreciated quite a bit there.

But in terms of the overall free cash flow and at what price point you guys buy the shares, can you guys just discuss what your thought process is for that?

Yes, so look, I think it's highly predicated on volatility of the stock.

The more volatility of the stock, the more we buy shares.

And -- so it's not -- there is clearly an overlay of valuation and levels and all of that, but we believe that there has been volatility in the stock in prior quarters, and we want to park up the truck and load it up when there is that.

Unfortunately, this past quarter, there was not a lot of volatility.

Obviously, look, we're a risk company, we look at volatility all over the world and that's what we sell in our risk models.

And volatility in all equity markets around the world has been extremely muted, right, as we know.

So that has been the case with our stock also, and that has prevented us from buying.

To the extent that there will be volatility in the future, we'll continue that strategy.

If it happens a lot, we'll have to change and modify the strategy.

But right now, we continue to believe that that's what we want to do.

And therefore, we will buy a lot more when prices are low and a lot less when prices are high.

It's not a -- totally a fundamental view on the valuation of the company is that we like to take advantage of volatility.

It is based on the amount of free cash flow you have in any given period as kind of the baseline of where you go from there?

Is that where you start?

Yes, well, we start there, being if you have no cash, then it's academic, right?

And -- but look, we didn't have the huge amount of cash that we used to have.

We have still a meaningful amount of excess cash, somewhere -- I don't know, $350 million, $400 million would be the -- might -- when you exclude the international cash and cash for operation and working capital and all of that.

So look, if there were a lot of volatility, would've blown out through all that cash.

So that's -- our goal is to carry as little excess cash as possible, but to ensure that we do it in the proper way, right?

And our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Just 1 quick question from me.

So as we think about your ESG business, obviously, that's an area that it seems like a lot of companies and competitors are trying to get into.

So as you think about yours, certainly the growth rate is really nice, but how do you defend that growth?

How do you defend that market share?

What sort of structural advantages do you guys have that are sustainable?

Well, you've got to first understand that a lot of people are getting into this thing into the data side, just producing data and giving data to customers.

And some of the big players, big financial information companies, that's what they do.

That's not where we are.

I mean, where we are is in the ESG business to enable investment decisions by clients.

So at the front end, a portfolio manager making a decision, an equity analyst making a decision, a fixed income manager making a decision as to -- think about if somebody wanted to buy $100 million worth of MSCI shares, and they look at all the financials, and they look at the ESG and they say, "I like the rating.

I'll put 150 million." or "I don't like the rating.

I'll put 50 million." That's overweighting or underweighting, whatever they will do.

That's exactly where we are.

And to do that, we do ESG ratings, for sure, and we, obviously, will increasingly do ESG indices so that their -- underlying basis for portfolios and things like that.

That is in the sweet spot of what we do.

So we have all these relationships with all these asset managers.

We have great trust by them and we -- they consult with us as to which is the best way to integrate this.

And as a result, they buy the service.

And then they say, well, I want to launch -- I need to have a benchmark to benchmark my portfolio that is actively managed or I need a passive management approach.

It's a sweet spot.

So that has a huge [bulk] and big competitive advantage for us.

And I'm showing no further questions at this time.

So with that, I'd like to turn the call back over to Stephen Davidson for closing remarks.

Thank you all for your time, and have a great afternoon.

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

This does conclude the program.

You may all disconnect.

Everyone, have a good day.