明晟 (MSCI) 2017 Q2 法說會逐字稿

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

(Operator Instructions) As a reminder, this conference call 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, Charlotte.

Good today, and welcome to the MSCI Second Quarter 2017 Earnings Conference Call.

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

A copy of the release and a 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 reconciliation to the equivalent GAAP measure 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 24 to 29 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.

We reported another strong quarter driven by the continued execution of our growth strategy, our focus on innovation and our continuing efforts to drive a higher level of integration of our content, analytical applications and services.

We believe that this integration will help our clients make better investment decisions and create long-term value for our shareholders.

Please turn to Slide 4 for second quarter 2017 highlights.

First, in terms of revenue growth.

We delivered strong upper single-digit growth in revenue once again this quarter.

Our growth is being driven by a combination of solid growth in our core products and a strong growth in newer areas in which we have been investing like factors and ESG.

Increasingly, our ability to generate a strong revenue growth has been aided by the integration of our content, our analytical software applications and our services.

We are particularly pleased with the very strong growth in asset-based fees where we saw strong growth across all products, particularly revenues from ETFs linked to MSCI indices, both in the quarter and year-to-date.

We continue to believe that growth in the ETF market is in the early innings, and the record cash inflows into MSCI linked ETFs year-to-date is a testament to the growth potential of this market for us.

Year-to-date until August 1, 2017, cash inflows of $92 billion are already over 2x full year 2016 levels and higher than full year 2015 inflows.

Lastly, I would also like to highlight that our long-term goal of achieving upper single-digit revenue growth on Analytics has not changed.

The lower growth this quarter was driven by several factors, which Kathleen will cover later.

We expect the performance of this product line to improve in the second half of 2017.

Turning to operational efficiency.

On the expense front, we continue to strive for higher levels of efficiency, continue reprioritization of projects and initiatives and gains in productivity to free up resources, to invest more in innovation and to further improve our levels of profitability.

Our new lower fiscal year of 2017 effective tax rate guidance reflects an acceleration of the benefits from the closer alignment of our tax profile with our global operating footprint, and Kathleen will provide you with more details on this area.

Finally, in terms of capital optimization.

There has been no change to our approach to returning capital to investors.

We are particularly pleased that our Board of Directors has approved a sizable increase in our dividend to $0.38 per share this quarter.

As discussed before, we continue to be very opportunistic in our repurchasing process of our shares to ensure we're optimizing the deployment of our capital to our shareholders.

As discussed before, again, this means that we expect to repurchase more shares when there is softness in the market, as we did in the fourth quarter and less shares when volatility is low, but the approach continues to be the same quarter-to-quarter throughout the year.

In summary, second quarter 2017 was another very good quarter for us, characterized by strong revenue growth, gains in productivity and efficiency, continued innovation for investment -- should say, continued investment for innovation and an ongoing and disciplined deployment of capital.

On Slide 5, we highlight the key drivers of revenue growth and profitability in this quarter.

Our Index franchise continued to grow with a total of 973 ETFs benchmarked to MSCI indices or roughly 23% of the equity ETF market.

Of the 973 ETFs, 204 are based on factor and 71 are related to ESG, which highlight the benefit of our innovation and market leadership in these areas.

The quarterly average AUM in non-ETF passive products linked to our indices grew 17% compared to the prior year, and revenue growth is also benefiting from increased contribution from higher fee products, including factor indices.

In market cap indices, we have launched 2 new data products and continue to enhance our existing flagship products.

In terms of equity factor indices and equity risk models, we had 61 asset owner benchmark wins in Q2 led by high dividend yield and minimum volatility allocations, particularly from Japan.

ESG rating and ESG indices were also strong this quarter with ratings benefiting from the enhancement of our offering, and we had 4 benchmark wins in ESG indices for the quarter.

We are increasingly seeing strong demand for a combination of ESG and factor indices.

We are working on new products to meet this demand, and we feel we're extremely well positioned in this area.

For example, one of the world's largest pension funds recently selected our MSCI Japan Empowering Women Index and the MSCI Japan ESG Select Leaders Index as benchmarks for their ESG investment strategy.

The Empowering Women Index is constructed on the basis of a quality factor and, obviously, factors attributed to those companies that are attracting, developing and promoting women.

In derivatives, we are very pleased that contracts linked to our Emerging Market Index on ICE U.S. crossed 1 million in open interest for a notional value of $50 billion.

This futures contract is now the fourth largest in the world in terms of open interest.

In terms of productivity and efficiency, as a result of our ongoing focus on efficiency, we're seeing improvement in our technology platform.

For example, we're able to generate indices and risk models much more rapidly and efficiently today because of our investment in our content manufacturing plan, so to speak.

We are continually prioritizing and executing on our key initiatives and investments to be sure they are meeting our capital return thresholds.

The key scorecard metrics for initiatives on investment are on track and in line with our expectations.

Please turn to Slide 6, where we highlight again, for you, the integrated franchise that MSCI is bringing to clients.

My goal is to update you each quarter on how we are doing with our integration by providing concrete examples of how the integration of our content, analytical applications and services help our clients make better investment decisions and more efficiently.

Please turn to Slide 7, where we highlight, in particular, the integration of our Index, factor, Real Estate and ESG content.

The integration of this content represents currently approximately USD 56 million in run rate and has grown at a rate of roughly 49% compared to the prior year.

What is compelling about this integration is that the strong growth potential of each individual part of our product line on a stand-alone basis is getting magnified when brought together and integrated.

So we are aiming to achieve both, high levels of growth of the individual product lines on a stand-alone basis and magnifying it with incremental growth by integrating the content and the product lines together.

The potential underlying value of this integrated content therefore is well in excess of the sum of the parts.

By integrating index, ESG, factor content, we are providing clients with a holistic view of the equity market opportunity that cuts across market cap, factor and ESG exposures and it cuts across whether it's index, as a benchmark to a portfolio or replication of a portfolio or whether it is the factors -- the risk factors that are driving performance and risk in those portfolios.

We're also integrating Real Estate and ESG content with our new Analytics platform.

By including Real Estate risk models in our multi-asset class analytics, we're able to provide clients with a comprehensive view of risk, which includes the very large and fast-growing real estate asset class around the world.

With the integration of ESG in Analytics, we're providing clients with the opportunity to interact with ESG content on a broader level by enabling performance attribution, risk attribution or even using ESG's screens or [stills] in their portfolios.

Next, by using our latest global equity model to construct factor indices with our applications, we are integrating our factor indices and risk models so that our clients are speaking the same factor language.

We're also integrating ESG and establishing direct pipeline for integration across all of our applications.

To simplify all of that internally, what we're doing is taking MSCI's equity data opportunity set and combining all of that with our best-in-class factor risk models and portfolio construction tools and analytics in order to create a significant economy in terms of all the inputs that are required for all of these products.

Because of this integration, we're able to go to our clients with new and innovative products and services that could not be -- have been done before this integration.

For example, a large asset owner in the U.S. is now able to create and maintain factor-based portfolios and launch investment products on them because they have the tools now and the ability to put them together as opposed to what they had before.

This client is leveraging our integrated data, our research expertise, our risk models, our applications, our ability to create indices in order to create manners, monitor and generate not only portfolios but also performance attribution reports.

It is important to note that this business model is not bespoke.

It is highly scalable and repeatable, and that's exactly what we're trying to achieve.

In summary, this is a great example of how we're leveraging a lot of our content and our applications together in order to create another layer of growth on top of the one that exists with the individual product lines.

On Slide 8, we illustrate the ways our content applications and services provide tools that help our clients make better investment decisions.

And by helping them, we are creating long-term value for our shareholders.

Overall, asset owners can use our products and services to help them identify those managers that generate alpha and those managers that can stay very close to the beta and generate efficiencies and low cost.

For our active clients, integrating Index, factor, Real Estate and ESG content allows them to add value as an active manager.

In other words, they're able to provide their own clients with different insights into the alpha they're generating.

Conversely, for passive managers, we're able to provide them with more product options for their asset owner clients or individual investor clients, and these solutions are very cost-efficient tools to capture factor-based premium.

Instead of going through each one of these bullet points in this slide, I would like to highlight 5 client deals from this past quarter, which illustrate the power of integrating our content applications and services.

First, one of the largest sovereign wealth funds in Asia, which is already a client of Index, Real Estate, ESG and Hedge Platform recently selected MSCI for equity risk analytics.

This client is increasingly focused on factor investing.

So we are actively speaking with them about bespoke factors and reserves for them to create exposure to some portfolios in this category.

Next, a very large Canadian asset owner with a large global real estate portfolio selected MSCI for our real estate portfolio analysis service, it's like a performance attribution service with a global custom benchmark.

Next, we established a new ETF partnership with a leading U.S. manager to launch 2 new ETFs based on MSCI U.S. equity indices and, therefore, significantly building strength in our MSCI -- U.S.A.

MSCI franchise and brand.

This client is very eager to leverage MSCI's leadership in Index and Analytics and our deep relationship with asset owners around the world.

Next, we signed 2 significant ESG deals in the quarter.

First, one of the largest mutual fund managers in the U.S. recently launched several U.S. and international ESG index funds based on MSCI indices.

And a very large wealth manager in the U.S. agreed to embed MSCI ESG content on their platform for over 2 million self-directed investment clients with our brand prominently featured on the platform.

Each of these examples are concrete evidence of how the integration of our content applications and services are helping our clients, and we believe this increase in integration will aid in our ability to generate a strong revenue growth over and above the sum of the growth in our individual product line.

Before I hand over the call to Kathleen, I would like to say a few words regarding our historic recent market classification announcement on the inclusion of China A shares in the Emerging Markets Index and our ACWI family of indices.

I would like to thank all of our clients who were instrumental in providing significant insights during the consultation leading up to this decision, which was made possible by the significant improvements in market accessibility as a result of the efforts of the Chinese regulators and stock exchanges with whom we have been working closely together for the better part of 4 or 5 years.

The quality of this overall process is a testament to the unique position that MSCI holds in the investment process, our research-driven focus, our independence and the relentless efforts of our employees to do what is best for our clients.

I would like now to pass the call over to Kathleen.

Thanks, Henry, and hello to everyone on the call.

I'll start on Slide 9. As you can see, we delivered another quarter of strong performance in Q2.

Revenue growth of 9% was driven by strong asset-based fees and recurring subscription revenue.

Adjusting for the impact of foreign currency exchange rate fluctuations, revenues increased 9.4%, excluding the impact on asset-based fees.

Operating expenses and adjusted EBITDA expenses increased 3% and 4%, respectively.

We continue to focus on strong cost management and productivity balance with continued investment.

Adjusting for the impact of foreign currency exchange rate fluctuations, both operating expenses and adjusted EBITDA expenses increased 5%.

We were delivering substantial operating leverage with operating income and adjusted EBITDA growth of 16% and 14%, and diluted EPS and adjusted EPS growth of 29% and 23%, respectively.

Free cash flow generation in the quarter was $10 million higher compared to the prior year, primarily driven by higher cash collections and lower income tax payments due to timing, partially offset by higher cash operating expenses.

This was another very strong quarter as we continue to execute our growth strategy.

On Slide 10, you can see the drivers of adjusted EPS growth in Q2.

Adjusted EPS increased $0.18 or 23% to $0.95 per share in comparison to prior year.

The main driver of our EPS growth continues to be our strong top line increase coupled with productivity net of investments.

The ongoing progress in aligning our tax profile with our operating footprint, combined with a positive impact of share-based compensation excess tax benefits resulted in a lower effective tax rate of 30.8% in the quarter, which benefited earnings by $0.03.

Lastly, FX and other had a $0.02 positive impact on EPS.

Now let's turn to our segment results.

I'll begin with the Index segment on Slides 11 through 13.

Index revenue grew at 16.5% this quarter, the highest rate of growth since Q1 2013.

The revenue growth was driven by a 35% increase in asset-based fees, which included strong growth in ETF-related revenue and also strength in non-ETF and exchange-traded futures and options.

Once again, ETFs linked to MSCI indexes were ranked #1 for cash flows in equity ETFs globally, both quarter-to-date and year-to-date as of June 30.

Recurring subscription revenue grew at 9%, driven by growth in core benchmark data products as well as our newer products, including factor, thematic and custom index products and usage fees.

Index recurring sales increased 4% in the quarter, mainly driven by strong demand for custom indexes, factor and ESG modules as well as higher usage fees.

We're continuing our track record of growth with another quarter of strong Index subscription run rate growth.

We continue to invest in and grow our Index franchise, and it continues to deliver significant value.

Turning to Slide 12, you have detail of our asset-based fees.

Starting with the upper left chart, we recorded strong growth in asset-based fee revenue across all products.

Revenue from ETFs linked to MSCI indexes was up 32%.

Revenue from non-ETF class of products was up 41%, reflecting growth in AUM and growth in higher free products -- higher fee products including factor indexes.

And revenue from exchange-traded futures and options increased 54%, driven by substantial increases in volume.

Turning to the upper right chart.

We've captured 46% or $45 billion and 34% or $83 billion of Q2 and year-to-date global equity ETF inflows, respectively.

Since the end of the quarter and through August 1, ETFs AUM linked to MSCI indexes has increased to a record $657 billion, driven by $9 billion in inflows and $24 billion in market appreciation.

MSCI was ranked #1 for the AUM linked to the new ETFs licensed year-to-date.

As shown in the lower left chart, quarter-end AUM by market exposure of ETFs linked to MSCI indexes reflected strong growth across all market segments.

The developed markets ex U.S. segment experienced particularly strong growth of $96 billion or 42% year-over-year.

This growth was primarily driven by inflows of $52 billion, which represented 37% of global cash inflow into this segment.

Within this segment, MSCI EAFE Index linked ETFs grew $42 billion since Q2 2016.

Lastly, as shown in the lower right chart, we've seen a stabilization of the average basis point fee at 3.07 in Q2.

Slide 13 illustrates how our differentiated licensing strategy has successfully optimized run rate for our ETF-related product line.

As we know, there's been a significant influx of funds to the ETF space over the last several years.

With this macro trend and our continuous innovation and introduction of our various ETF indexes over this time, we see a 23% CAGR in ETF AUM linked to our indexes.

We've also seen, however, faster growth over the past few years in lower-fee ETFs linked to our indexes, which has mainly led to the decline in the average basis point fee from 3.63 in Q2 2013 to 3.07 in Q2 2017.

The result is that the fast growth in AUM linked to MSCI indexes has more than offset the decline in the average basis point fee such that our run rate has grown at a CAGR of 18% since Q2 2013.

This data clearly reflects the strong price volume trade-off from which we are benefiting.

On Slide 14, we highlight the results to the Analytics segment.

Analytics reported revenue growth of 1% or 2% when adjusted for the impact of FX.

Analytics run rate growth ex FX was 3.7% in the quarter.

The lower level of reported revenue growth this quarter was primarily driven by 2 factors: first, the impact of elevated cancels in the prior year; second, the timing of client implementations for new sales which were included in run rate at the time of sale but are not recognized into revenue until implementation milestones are completed at a later date.

Analytics adjusted EBITDA margin was 28% in the quarter, down from 30% in the prior year but up from 26% in Q1 2017.

This margin rate is in line with our previously disclosed planning for the year.

Slide 15 provides you with the sales and cancels for the Analytics product segment.

Recurring sales were up 8% year-over-year.

Cancels decreased to 23%, which resulted in a 140% or $3 million increase in recurring net new.

This is a substantial uptick from prior quarters.

The increase in sales was driven primarily by strength in the asset manager and asset owner client segments across our multi-asset class offering, including RiskManager and BarraOne as well as equity analytics.

Despite weakness in select client segments over the last several quarters, our pipeline is very strong, and we're seeing good execution in closing deals so far in Q3.

Given the diminished impact of cancels and the timing of implementations as well as our continued cost focus, we are cautiously optimistic about the outlook for Analytics' performance in the second half of the year.

Turning to slide 16 now.

We show the results for the All Other segment.

Revenue growth is down 2% year-over-year on a reported basis, but up 1% excluding the impact of FX and the sale of the Real Estate occupiers business.

First, in terms of ESG, revenue was up 25% driven by continued strong recurring sales, which were up 61% year-over-year, principally driven by ESG ratings.

ESG total net new was a record $3.4 million.

We continue to see increasing integration of ESG into the mainstream of the investment process, and we continue to focus on investment in new products and marketing.

We're very optimistic about the continued growth of this product line.

Next, in terms of Real Estate, revenue was down 21% on a reported basis and down approximately 16% on an FX-adjusted basis, excluding the occupiers business.

The decline in revenue was primarily driven by higher cancels, principally from a discontinued index, the timing of report deliveries and the negative impact of foreign exchange rate fluctuations.

We continue to focus on restructuring the product offering to improve performance of the product line.

The softness in Real Estate revenue was the primary driver for the year-over-year decline in the adjusted EBITDA margin.

Turning to slide 17, you've an update on our capital return activities.

In Q2 2017 and through July 28, we purchased and settled a total of 0.5 million shares at an average price of $100.63 for a total value of $46.4 million.

There's been no change to our approach to capital return.

The lower pace of share repurchase activity was driven by lower levels of volatility in the market.

The board approved a 35.7% increase in the quarterly cash dividend to $0.38 per share, which equates to $1.52 on an annualized basis.

On Slide 18, we provide our key balance sheet indicators.

While reported cash on the balance sheet was $750.6 million at the end of the quarter, after deducting non-U.

S. cash and our minimum cash balances for operating purposes in the U.S., deployable cash is roughly $250 million.

The increase in non-U.

S. cash since year-end primarily reflects our progress in aligning our tax profile with our global operating footprint.

As part of this realignment, foreign cash has grown, reflecting growth in invoicing and earnings outside the U.S. and the impact of onetime transitional intercompany payments.

We expect the increase in the foreign cash balance to be generally consistent with the growth in foreign earnings of our foreign operations after the transition period is concluded.

Lastly on Slide 19, we have our full year 2017 guidance.

Based on the progression of our investments and the efficiencies that we've achieved year-to-date, we're tightening the range for full year 2017 total operating expenses, which are now expected to be in the range of $690 million to $700 million and adjusted EBITDA expenses, which are now expected to be in the range of $605 million to $615 million.

We expect our full year effective tax rate to be between 30% and 31%, down from the previous range of 31.5% to 32.5%.

The change in our effective tax rate guidance is being driven by the acceleration of benefits from aligning our tax profile to our global operating footprint as well as higher benefits from share-based compensation.

We're also reaffirming our long-term targets.

In summary, we continued to execute against our strategy and the MSCI algorithm in the quarter, delivering strong upper single-digit growth in revenue, and we're investing for growth and creating a more efficient infrastructure while at the same time achieving productivity and efficiency gains.

We're well positioned given the macro trends, and we are optimistic about our prospects for continued growth for the remainder of 2017 and beyond.

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

(Operator Instructions) Our first question comes from the line of Alex Kramm from UBS.

Just lots of detail here, so I think not much left.

But just coming to the Analytics' outlook for the second half, I think Henry mentioned that and you just mentioned it again.

But like, when I look at my model and I look at where the run rate is, of course, there should be an acceleration in the second half because the comps are getting much easier, and we know where we are already running.

But trying to understand if there is something else you're trying to communicate?

Is the business on itself getting better?

Are you seeing more sales?

Is there better reception?

Or is it just where the run rate is?

So maybe flesh it out a little bit more.

Yes, so let's step back a minute and just talk about the overall environment that we're seeing.

Look, it's a very fragmented market, and we've got lots of different client segments.

And as we've talked about in the past, some of those segments are happier and some have been more challenged over the last several quarters.

So what we're seeing now is that, I would say, a slightly strengthening environment in that we're seeing a higher retention rate, right.

Retention at 93.9%, up over the last several quarters.

And we're seeing favorable sales, up 8%.

And cancels more favorable as well.

So we are seeing strength in some client segments, particularly asset manager, asset owner client segments across our RiskManager offering.

BarraOne, equity analytics.

In fact, net new sales to asset managers were up 33% year-over-year.

We do still see some weakness in some segments, particularly hedge funds and, particularly, outside the U.S. So the way I would characterize it is that we are cautiously optimistic here.

We've seen -- we've got a healthy pipeline, we're looking at how we're progressing in Q3 in terms of execution and closing deals, and we've seen nice execution in July going into Q3 here.

The retention rate is healthy.

But we're being cautious.

And our profitability is on track with the way we planned the year.

So I'd say we're cautiously optimistic for the second half.

Okay, great.

And then, maybe just a second one and much quicker here.

On the asset base side, the non-ETF fees.

I mean, that was, I mean, substantial growth year-over-year and sequentially.

I know those can be lumpy.

So just wondering if this is a good run rate from here?

But then secondarily, can you just flesh this out a little bit more?

I mean, this is something we used to not pay a lot of attention to and all of a sudden, it seems like there are more, I guess, non-ETF funds benchmarking with you.

Like, is this something that can continue to grow at this pace or even accelerate?

Or how should we be thinking about this going forward?

Yes, so the largest -- so the non-ETF passive -- the largest category would be institutional funds, either separate pools or institutional mutual funds that are -- around the world that are managed passively.

And this would be passive managers in America, the Japanese trust banks running a lot of money for Japanese asset owners, for example, some of the big passive managers in Europe and the like.

So that's the definition.

Now the majority of the money that they have been managing is market cap, and it's very sticky.

And there is a 1 quarter delay in the way we account for this because of the nature of accounting is not publicly listed.

So we got to do a reconciliation of the AUM with our clients.

So bear that in mind that there's always a quarter delay, particularly as compared to the ETF, passive and the like.

Now the growth dynamics that are going on in this area is in the following front: one is we have put a lot more resources of our sales people, calling on these institutional investors and spending a lot of time with them in back testing index strategies for them to pick an index.

A lot of the effort is on factors and ESG.

And the fees associated with those are much higher than the fees associated with market caps.

So we have to see how it evolves, but I would pay a lot of attention to this area because it will continue to grow at a good pace, and we may accelerate a little bit because of the incremental assets that are being managed with the new innovations like ESG or factors or combination of ESG and factors at a higher level of profitability.

Our next question comes from the line of Manav Patnaik from Barclays.

This is actually Greg calling on for Manav.

I just wanted to hit on the index derivative piece, which also showed really strong growth, albeit it's a little bit smaller than -- for some of your peers.

Just wondering how you guys think about the growth trajectory of this piece of the business?

Well, we're very positive and optimistic about this area.

We've been at it for quite a long time, couple of decades, and we started with trying to launch with our exchange partners, either growth index futures contracts or single country index futures contract.

So the majority of the revenue in prior years was coming from the single country -- single currency, single country futures contracts.

And some time ago now, 5, 7 years ago, working with the then NYSE Liffe U.S.A.

Derivatives Exchange, which is now ICE U.S.A., we were able to crack the market for multicountry, multicurrency index futures contracts, which is a new area in the derivatives.

Most of the futures contracts around the world are single country, single currency.

Or in the case of the euro zone, single currency, even though multicountry.

So the area that we excelled at is, obviously, multicountry, multicurrency.

So we feel good that with these 2 contracts, Emerging Market and EAFE, trading in the U.S. already thriving, that gradually we can move this model around the world.

We can move more of these types of contracts into the European time zone and into the Asian time zone and the like.

So clearly it's a small base, but we have a lot of confidence and hope that this is an area that will grow -- will continue to grow fast over the years.

All right.

That's helpful.

And maybe as a second one.

Can we just get the update on the unified platform and the roll out there?

Yes, so just as a way of background.

A lot of our analytics content is currently sold through various types of platforms, at this point mostly MSCI platform, some non-MSCI but mostly MSCI platforms, which is the -- what -- think of it as the Barra platform, which has 2, 3 different applications that are on a common system, the Barra Portfolio Manager, the BarraOne and the like.

And that is mostly a factor based multi-asset class platform.

And then the RiskManager, RiskMetrics platform that is a litter shorter-term multi-asset class risk management.

And that has the Hedge platform with it, it has Credit platform and the like.

So what we're doing is building on top of that another platform, which we call the MSCI Analytics platform, that will take each one of those soft platform, so to speak, as an engine for the interface and a lot of the orchestration of the routines are going to be done by this new platform, and, therefore, aggregate all of our analytics content into one delivery mechanism as opposed to the fragmentation that we have had.

And on top of that, we want to put our other content: our factor indices, our market capital indices, our ESG indices, our ESG ratings, et cetera, et cetera into that delivery mechanism in addition to continuing to sell those content -- or, that content through other third-party platforms and also directly -- that content directly to customers.

So we launched already the -- a first version of this new platform which is, for now, only geared towards the equity portfolio management space i.e., the factor-based portfolio management space.

And we're in the early process of selling that.

And then, we are also beginning the work on adding the fixed income portfolio management into that and then adding the multi-asset class risk management and performance attribution to that.

So we're roughly, probably 1.5 years away from completing the -- all the functionality of the platform, in equities, in fixed income and in multi-asset class.

But the early tests and the early showing to clients is pretty positive.

Obviously, it's going to take time to build up revenues on this, and there will be -- the revenue that comes with it will have to be balanced between the revenue that is in the current platform and gets transferred to this platform, and therefore, it may be net neutral versus incremental revenue.

So we'll report on this, but we're very excited about it, but we're not yet in a position to be reporting on revenues or anything like that.

Our next question comes from the line of Bill Warmington from Wells Fargo.

So you mentioned the 2 new wins for MSCI's U.S. indices.

And I wanted to ask where -- whether you're seeing an increased number of mandates that are looking for a combination?

Or maybe better way of putting it is to looking for a single index family to cover both the U.S. and international, whether you're -- you've seen an uptick in those?

And how you're doing on those in terms of winning them?

Yes, that has always been the case, particularly with non-U.

S. clients.

We -- as you know well, MSCI USA Equity Index, as a component of our -- either ACWI or World Index, is the benchmark for institutional and so many individual investors outside of the U.S. So that continues.

We continue to get a significant number of mandates around the world to be benchmarked actively or passively against MSCI World, MSCI ACWI or the like, which incorporates the U.S. equity component, right.

So that continues like before.

What we're very excited about is that it's common -- is our ability to compete on the basis of U.S. equity indices, particularly with ETF managers in 2 categories.

The larger category is innovations on ESG and factors and the like.

Not just simply what we call market cap, but with the overlay of an ESG screen or a factor screen of various categories, and there is a significant number of ETFs on this area and the like.

If anything, I think in the last few periods, we've taken about 10% of the inflows of money into U.S. equity ETFs, obviously, from very low levels a few years ago.

So that's pretty positive.

This particular win is about the MSCI USA Market Cap indices, not factors, not ESG and the like.

And they will be launched in the next few months.

We're hoping that when we got to the day, our ETF manager there will gather assets in this category and the hope of this manager is also to market them around the world to all those institutional clients around the world that are actually benchmarked to MSCI USA.

Okay.

So for my second question, I'd like to ask about the share repurchases.

And I know you mentioned a couple of times that there hasn't been any change to the capital allocation strategy.

But in looking at Slide 17, it really looks like the level of repurchases versus the levels, certainly, for the last 2 years seems significantly lower.

I understand the point on the lower volatility, but also -- your gross leverage is running 3.5, that leverage is down just over 2x.

And so -- that's what I wanted to ask about.

Yes, look, I think the -- first of all, the level of available cash in the U.S. net of operating cash has come down.

We're at $250-or-so million today.

So if you're going to think about the amount of excess capital that can be deployable into share repurchases now has decreased because we've been hammering away.

We can use the non-U.

S. cash to bring it back.

Well, we could but we break the glass, and we have to pay taxes and all the other problems, right, on the non-U.

S. cash.

And, obviously, we need to maintain a level of, say, $100 million to $150 million of operating cash for operating purposes.

So because that level is smaller -- not small but smaller relative to the past, that has allowed us to be even more opportunistic and patient about how we do on a dual purchase.

We continue to believe that our stock is good value.

This is not a reflection of valuation on our stock whatsoever.

It's simply being opportunistic about weaknesses, softness in our stock and volatility to be able to buy back in size.

We continue to buy at all sizes, at all prices but the -- we were hoping that there is volatility, so we buy much more at lower prices.

Again because we're not worried about the level of excess cash, we're not worried about any of that, we're not worried about the valuation.

We're -- we simply want to be -- continue to be very opportunistic and smart about this process.

And that's -- there's no change in that.

That will continue.

Yes, I'll just add in here a little bit, Bill.

And it's a really good question, so thank you.

I mean, look, we look at the amount of available cash.

And, look, our approach to capital allocation is consistent here.

We're really disciplined about the way we look at it and being consistent about it.

And when we look at the amount of cash in the U.S. that's deployable and, again, we see the international cash balances growing as we've kind of made progress here on the tax structure.

But we look at the deployable U.S. cash, and we look for opportunity in terms of volatility in the market.

And we're going to be really disciplined about waiting for those opportunities.

We're in no rush here in that we need to be any less patient.

So we're pretty comfortable with the approach that we've taken here.

We're going to be consistent with that.

Our next question comes from the line of Chris Shutler from William Blair.

I want to follow-up on Alex's question from earlier around the institutional passive revenue just to make sure I understand this.

So if I look at Q2, I think you had $18.1 million of revenue in that category.

Year ago, it was $12.8 million.

Can you just bridge those 2 numbers for us?

Or at least kind of give us order of magnitude what the big items were that drove the growth?

Yes, so sometimes these comparisons may be a little bit lumpy because, again, the -- they are reconciliations associated with the lag that comes in reconciling a lot of these numbers with our clients.

But I think the way to think about it is that the drivers of these AUM are in 3 categories: one, obviously, the -- there has been a significant increase in equity values around the world.

So that applies to the passive equity and, therefore, higher levels of passive equity at fixed basis point fees give us higher revenue.

So that will be one category.

Second category is the same way that we'll talk about the flow of assets into ETF, which is our passive vehicles, there is also a flow of assets going into institutional passive.

Maybe from -- obviously, an ETF is from a lower base and institutional passive is from a much higher base and, therefore, the rate of growth may not be as high, but there is flows of money going into that category and that gives us a second layer of revenue.

The third category is that some of that incremental flows into passive -- institutional passive is not only in the market cap category where our fees are lower, but it's also in the ESG and factor category where we're able to price that at a much higher level.

So when you combine those 3 areas, that's what's giving you that double-digit revenue growth.

Okay, that's helpful.

And then, thinking of the prepared remarks, you mentioned you now have 204 factor ETFs.

I think I heard that right.

But can you quantify the -- either the AUM or the revenue from those factor ETFs?

And how much of it is single factor versus multifactor?

The vast majority right now is single factor.

We're -- the AUM is upwards of $60 billion.

Yes, well the year-to-date is $65 billion.

Yes, $65 billion in AUM in all those ETF of all categories.

As I said, the big impetus as of now has been the single factor, particularly the minimum volatility factor in our ETFs.

And what we're beginning to see is demand for diversified multifactors, in which you combine, say, quality, value and low volatility as an example, right?

So diversified -- but that's still small, but that will be -- that will definitely be another level of growth in the future.

So not only the single factor but the diversified multifactor ETFs as well.

And again, we're beginning to see some demand for that and some products are being launched on that, but it is not yet a big category.

Our next question comes from the line of Joseph Foresi from Cantor Fitzgerald.

In Analytics, how much of that is product improvement versus end market?

And do you expect -- or maybe could you remind as to what your long term growth rates and margin targets are for that business?

I'm sorry, repeat the question -- the first part of the question?

How much of that was what?

I'm wondering how much the turn in Analytics is product improvement versus end market?

And then, what your long-term outlook is from a growth rate perspective and margin for that business?

Well the -- it's hard to quantify because everything is about -- I mean, these product lines are always in a state of improvement because you're adding the models, you're adding new data, you're improving the risk management platform, the performance attribution platform and the like.

So -- but in any single quarter, the vast majority of your sales are based on the existing product line, not in further improvement to that product line.

Although when you sell a product line like this, there is an implicit contract -- social contract, so to speak, between us and the client that we're going to continue to evolve the product line to reflect the new asset classes or sub-asset classes or new ways to look at risk, new ways to understand performance or -- and the like.

So that's a concept that you want to do.

Yes, but in terms of your thinking about end market, looking at the data, looking for indications of is the end market getting better, is it less challenged?

You look at the quarterly sales and cancels that we've been seeing and as you recall, right, we saw elevated cancels in 2016, particularly in the back half of 2016.

And that level of cancels has come down in each of the last 2 quarters.

So that's kind of a good signal, good sign.

From a new sales perspective, we're still kind of in that same range that we had been ex the strong Q4 that we had but we're -- Q1, Q2 sales have been kind of in that same range.

So we're cautious here.

We see some signals that could indicate that maybe it's getting a little bit better.

But look, we planned the year, we planned 2017, being very cautious, and we're going to continue to operate that way because it's not clear yet as to where the market's going.

And our longer-term targets here are revenue growth in the high single digits and EBITDA margins in the 30% to 35%.

30% to 35%.

Okay.

And then I want to ask a broader question.

Can I get an update on your thoughts regarding the overall penetration rates of passive investing?

I mean, do you expect the present rates to continue?

If so, why?

Or should we think about factors and some of the other derivative products as sort of the second phase of passive investment?

I know it's a big question, but...

No, look, that is -- first of all, you got to understand we sell to both, right, to active managers and passive managers.

So if you think about the subscription, whether Index subscription or Analytics subscription, a category for us, that's a surrogate for -- or, that's an equivalent to selling into active managers around the world.

Not totally, but mostly, right.

And obviously, the passive fees are reflected -- the sales to passive accounts are reflected in the asset-based fees.

So we're hedged both ways.

There has been a lot of discussion about how high can passive go and our view is that it could go very high.

Now will it continue at this level?

It could, but you're beginning to see quite a lot of -- you're beginning to see some recovery of the active management process by differentiation, by concentration of portfolios.

It's hard to be -- to add an incredible amount of value as an active manager when you have asset prices being controlled by monetary policy or macro events or things like that.

So as these monetary injections begin to decrease and as you have more volatility in the markets, I mean, if you have bull and bear markets, and the like, the value of active will come back.

And we're banking on that, and we're -- that's where are helping a lot of our clients, but passive can continue to increase also significantly.

Our next question comes from the line of Toni Kaplan from Morgan Stanley.

So Index margins were about 73% this quarter, above the high end of your long-term target.

And I know 1 quarter doesn't make a trend, but I would expect at least part of the strength there came from strong result in high incremental asset-based fee business.

So as long as the asset level sort of stay where they are or go up, as long as they don't decline significantly, like, should we expect Index margins to continue to be around this level?

And so what do you think of sort of the persistency of it as well as just the long-term targets you have for this business?

Yes, Toni.

So for the quarter, we are outside.

We're above that 68% to 72% long-term target range.

As you noted, particularly strength on the ABF side.

But from a short-term perspective, you can see that happening sometimes quarter-to-quarter depending on what's happening with the market appreciation or depreciation and what's happening with AUM.

So on a short-term basis, in a particular quarter, you could see us go up or down.

Now look, we've got -- our job is to look at that set of conditions in the environment and, say, make an assessment about, look, how sustained is this going to be and then planning quarterly -- accordingly.

For now, we're sticking with that 68% to 72%.

We think that range continues to make sense as a target range of profitability.

Okay, got it.

And then during the quarter, BlackRock announced its intention to launch several new funds based on its own indices.

I was just hoping you could share your thoughts on self-indexing?

Do you view it as a threat to part of the business?

Where could, I guess, self-indexing see some traction versus where will asset managers continue to use the traditional indices from third parties?

And obviously, you haven't seen any sort of slowdown in adoption of your indices.

So just trying to figure out how much of a long-term threat self-indexing is.

And if there's a place for both?

Yes, so self-indexing is one more kind of permutation of indices that can be created, that are very, very different to MSCI indices.

So I'd like to always remind people that we're decades -- maybe there were not self-indexing approaches, but there's always a lot of family of indices that exist at least in equities that you could get for even a lower price than you building self-indexing capability.

And today, those indices exist and maybe there's even more indices -- index families that exist in that category.

So we at MSCI have always been thinking about it in competition with that.

And what we focus on is what is our value proposition?

What is the ecosystems that we have built in terms of the benchmark in institutional investors and other form of investors around the world that are following MSCI indices and the amount of active and passive funds, the amount of derivative contracts around the world and the like.

And we feel very, very good about that ecosystem, and we feel extremely good about that value of our brand and the value of our proposition.

So there will be people that go with extremely low-cost index provider or, in some cases, may even self-index.

That's normal.

It has happened in the past.

But in what we do is a completely different area -- completely different category.

Our value proposition is very different than all of that.

Our next question comes from the line of Anj Singh from Crédit Suisse.

I have another follow-up on Analytics, more on the profitability side.

Could you speak to the factors that give you the confidence on improved levels of profitability in the second half of 2017?

Is that coming from pullback in the pace of investment spend?

Or is it largely predicated on the better revenue growth you've talked about?

And is that sustainable into '18?

Yes, it's definitely sustainable.

Obviously, there's been a dip here because of the lower revenue growth associated with the quarter and, therefore, you'll adjust down your costs on the basis of that, right.

But I think what you'll see in this product line is that you -- we're cautiously optimistic.

There will be an acceleration in revenue on this based on a lot of what we're doing to the product line, the repositioning of the product line.

As an example, in addition to selling tools for people to use the tools, we're also doing the work for clients in the form of services and solutions and the like.

We're also integrating the various parts, as I talked about before, of the product line and the like.

And very importantly, embedded in this profitability is a very significant amount of investments that we're making to reposition that product line.

So we could show margins that are significantly higher than this, if we were disinvesting in the business.

Obviously, it's not a good thing because then you're not going to end up growing in the future.

So we feel very comfortable about that -- the prospects of this, at least, in profitability and, obviously, what we're really trying hard is to accelerate the revenue growth line.

So look, we're looking at the pipeline every day, and the pipeline looks very healthy right now.

Look, we have a decent sales quarter in Q2.

Sales were up 8%, yet we still have a healthy pipeline.

We had several large deals that kind of slipped from closing in Q2 to the -- closing in the early days of Q3.

We are looking at how we're executing in terms of closing deals in kind of month 1 and starting month 2 here of the quarter, and we're pretty happy with how we're executing.

We look at the retention rate.

The retention rate has been up for the last couple of quarters.

And you may recall, we planned the year pretty conservatively and from a profitability perspective for 2017, the way we planned the year was that we would expect to have margin rates at or about the same level of the exit rate in 2016.

Based on how we have progressed through the first half of the year, we think that is how the year will play out.

Okay, got it, that's helpful.

And for a second question, I wanted to ask about the integrated content, applications and services.

Could you speak to where you're having the most success from a client perspective?

Clearly, there seems to be broad appeal here with many types of clients, but the $55 million plus incremental run rate you guys talked about coming from this integration, have you had more success in penetrating any particular type of client that you'd call out?

Well, the most success, because we've been at it the longest, is in the integration of equity risk models and equity indices to create factor indices.

And that is -- has been, we've been -- that was when we started doing at the time of the Barra acquisition some 10, 12 years ago -- 12, 13 years ago.

It took a while for the market clearly to develop.

So since the financial crisis, we began to see quite a lot of that, and we are extremely well positioned to be the leading provider of that because we have both.

We have an extremely well-known expertise in building equity risk models and an extremely well-known expertise in equity -- building equity indices.

So the combination of that is extremely powerful.

We are now seeing quite a lot of growth in using the same process between the ESG ratings and ESG indices.

So if we take a lot of the -- different way, right, but if you take a lot of how we look at companies and we weigh them on the basis of ratings associated with a lot of this ESG criteria and then, we say, okay, how can -- how will we build an index to be the basis of a portfolio on that?

And that is embedded in the equity index run rate, somewhere around $14 million, $15 million in run rate at the moment and growing about 50-plus percent a year, we see significant upside on that as well.

So that's another category.

A lot of -- some of our multi-asset class analytic sales, particularly to asset owners like pension funds, sovereign wealth funds, it will need to have an equity risk model for real estate because real estate is an important allocation of that.

So we take in the real estate data coming out of the Real Estate product line and our research people have built private equity real estate risk models, then compare and contrast with the equity risk model, the fixed income risk models in order to create that holistic multi-asset class risk on performance solution.

So that's another area.

So again, all of this thing is early days, in all of this.

We believe that there is a lot more money in this sort of cross pollination of the product line.

Our next question comes from the line of Keith Housum from Northcoast Research.

(technical difficulty)

We couldn't really hear you.

Your line kind of breaks down quite a lot.

So we couldn't really hear the question at all.

Let me rephrase that.

The question is regarding the Analytical segment and the ability to reach the high single digits on a sustained basis.

For the past several years, you have been able to achieve that, giving confidence we have for the second half of the year.

What gives you the confidence, I guess, beyond the second half of the year that the Analytical area can grow in the high single digits?

So look, I think if I understood the question correctly, in terms of confidence in eventually high single-digit growth rate in Analytics.

I think there are 2, 3 sort of explanations to that.

One is some competitor -- there are not too many competitors in this space, but some competitors are growing faster than we are, and we know why, right.

So that gives us confidence on this.

Secondly, the area -- the big area here where we feel there is a lot more growth, and we are better positioned at it is the -- think of it as the buy side with the asset owners, the asset managers and some hedge funds.

So that's an area that we do well.

So we're growing pretty fast on asset owners around the world.

We have been recently growing well in the asset management community because they need, particularly, the -- purely the asset managers, they need all these tools to manage their business and lower their operating costs in their business.

So that gives us confidence.

Three, I think that we have grown well despite the fragmentation that we have in our product lines between the factor-based approach and the pricing stress testing based approach.

And we feel that once we combine that, all of that content, into a more holistic way and have one way to distribute that through an analytical application, that's going to help us.

And lastly, right now, we mostly have been selling tools for our clients to use the tools.

If we add our ability to do the work for our clients in our low-cost centers around the world, that should add another layer of growth.

So again, all of that transformation will take time, but that's what gives us confidence.

Great.

And then just a follow-up.

And I get this question from investors from time to time.

The addition of the China shares to your indexes, do you see that as a (inaudible) I guess.

In more detail, how would you see that as additional growth for you guys?

China -- talking about China.

Look, first of all, I mean, these are 2 separate parts of the company, right.

The editorial decisions of the company does not get influenced by what happens and doesn't happen on the commercial part of the company.

We try to remain extremely independent on that.

Having made the decision of a small amount of inclusion on China A shares into our indices, we have received a lot of interest by global investors, obviously, in China A share indices and the modules and the data in order for them to complete all of that in their Emerging Market Index.

We have been receiving quite a lot of inquiries about the launch of ETFs on China A share or portfolios that have China A shares in them.

And we have some of that in the pipeline, that's another example.

A lot of Chinese asset managers that are looking at risk models to be able to manage China A shares in the context of global portfolios, they are not there yet, but they want to prepare themselves for that.

So that -- there definitely is a layer of growth like in combination around the world on China A shares.

But again, it's been a separate decision between what our editorial people have done versus commercial.

Our next question comes from the line of Patrick O'Shaughnessy from Raymond James.

Hopefully just a couple of quick, short questions for you here.

First is, as you guys start to grow your international cash, does that potentially change your M&A strategy?

Maybe looking to use that cash for foreign acquisitions?

Well, we have always looked at any kind of acquisition, whether it's U.S. and overseas.

And we've been very disciplined about what we look at, and we are -- we have certain return hurdles that we are not going to deviate from or whatever.

That's going to apply to the international cash as well.

I mean, there are other people that put a lower threshold of return on their international cash, sometimes a negative threshold of return because it's money that is burning holes in their pocket.

We're not going to do that, whatsoever.

We feel it's capital -- trapped capital but there may be other ways to use it, right?

But we're always constantly looking at the M&A environment regardless of what it is, and if it is outside, and we can use the international cash with similar hurdle rates as we go anywhere else, that will be great.

All right, that's fair.

And then for my follow-up, is there any impact on the retirement of Barclays POINT in terms of some of the strong close sale that you've been seeing in the Analytics segment?

Marginally.

I think what we've done is, clearly, we've significantly increased our capabilities in fixed income overall.

We're doing that in fixed income mortgages as well, right -- in the mortgage sector of fixed income.

And we clearly have increased significantly our capabilities on solutions and applications on -- for fixed income portfolio managers.

And we surely have been talking to a lot of those clients that are faced with the decision as to what to do, right, in terms of replacing that system.

So early days at this point.

We have gotten -- the area where we've gotten good success has been a few in our fixed income portfolio management, but quite a few, actually, in multi-asset class risk management on the basis of all the great work we've done to strengthen our fixed income capability.

And at this time, I'm not showing any further questions and would like to turn the call back over to Stephen Davidson.

Thank you very much for your interest in MSCI, and have a great day.

Thanks, everyone.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.