MSCI Inc (MSCI) — Q1 2016 Earnings Call Transcript

Thank you, Kevin. Good day and welcome to the MSCI First Quarter 2016 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the quarter. 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 were 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 on forward-looking statements in our most recent Form 10-K and our other filings with the SEC. During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide a baseline for the evolution of results. You'll find a reconciliation to the equivalent GAAP terms 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 28 to 32 of the earnings presentation. On the call today are Henry Fernandez, Chief Executive Officer; Bob Qutub, Chief Financial Officer and Rich Napolitano, Principal Accounting Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry?

Thanks, Steve and thanks everyone for joining us this morning. Before I go into prepared remarks, a couple of programming notes. This was supposed to be Bob Qutub's last earnings call, but unfortunately he has developed severe back issues. So he's not able to deliver his prepared remarks, but Bob is joining us on the line. Bob?

Thanks Henry. I can say I've never had back issues in my life and I'll tell you what, I hope I never have them again. But I really wanted to be on this final call and say thanks for the opportunity to work with all of you on the call. It's been an honor to be a part of this fantastic journey that MSCI is on and I'm really looking forward to the following successes to come. I'll miss the team at MSCI but I'll tell you what, I'm really looking forward to spending more time with my family, without the back pain I hope. Henry?

Thanks, Bob, and continued best wishes for recovery on a speedy basis. Given Bob's painful injury, Rich Napolitano, our Principal Accounting Officer, will deliver Bob's prepared remarks. For the Q&A session, we'll have Rich and our colleague, Andy Wichmann, who heads up our Corporate Development and Financial Planning and Analysis Group. I will leverage both of them in responding to your questions, and if there are any specific questions for Bob, he will continue to be on the phone line. As all of you know, Bob announced his retirement several months ago, and since then, we have been in the process of recruiting his successor. I would like to thank Bob for his many contributions to MSCI during what was a period of tremendous growth and change for the Company. After a successful conclusion to this process, I am pleased to introduce Kathleen Winters, who will be joining MSCI as our new CFO officially this Monday, May 2. The press release went out last night, and I thought it would be great to introduce Kathleen, who's here with us this morning to this important group and have her say a few words. Kathleen?

Thanks, Henry. This is a very exciting time for MSCI as the firm continues to expand and grow its products. I look forward to joining the firm's leadership team Monday, and I look forward to meeting and working with all of you on the call as well. Thank you.

Thank you, Kathleen, and welcome. I hope this journey is as wonderful as Bob's. Now, let’s discuss the results. I'm pleased to present our first quarter 2016 financial results, which build on the strong momentum we established at the end of 2015. In my initial comments, I will outline how we executed our strategy in the first quarter, leading to increased revenues, enhanced operational efficiency, and optimized capital management. I will provide a strategic update for each of our product segments and share our current position in the cycle of investing for growth and profitability. Given the market volatility we experienced during the quarter, I will highlight how we are using our research-enhanced content at MSCI to develop new analytic services that assist our clients in managing their portfolios during turbulent times. I will present a couple of slides illustrating the resilience of our recurring subscription revenues and the inflows into ETFs linked to MSCI indices. Finally, I will conclude with an update on our capital return efforts and the foundation of our capital allocation strategy. Now, let’s move to Slide 3 to review our financial results: a 6% revenue increase, driven by double-digit growth in Index recurring subscriptions. This was accompanied by a 6% reduction in adjusted EBITDA expenses, resulting in a 24% rise in adjusted EBITDA. These strong operating results, combined with a lower effective tax rate and a significant number of share repurchases, led to a 36% increase in adjusted EPS. To begin, let’s discuss revenue growth. Our top-line growth was impacted by market volatility during the quarter, which resulted in a decline in equity values and consequently, the AUMs of ETFs linked to MSCI indices. Additionally, the timing of revenues in our Analytics product line contributed to the slowdown, but we expect this to improve in the quarters ahead. We continue to invest and innovate at MSCI by leveraging our existing research-enhanced content and developing new ones to create products and services that will generate additional revenue growth. Turning to operational efficiency, we are relentless in our focus on ensuring that our cost base is right-sized and aligned with the most attractive investment opportunities. We are gaining greater visibility and insight into the drivers of our cost base through our new segment reporting, our new activity costs and a large number of new operating and financial metrics that we are developing. For example, we're working hard to further break down our regional profitability, and we're looking to analyze our sales to gain insight into client profitability and client behavior. One of the byproducts of this initiative will be a more granular view, for example of pricing or price increases and volume in our sales. As a result of these efforts so far on the new initiatives, we believe that we're well-positioned to achieve incremental operational efficiencies, while at the same time, maximizing growth. Our tax planning work is on track to deliver further improvement in our operating tax rate in the quarters ahead. Finally, in terms of capital optimization, we took advantage of the significant volatility in our stock price in the quarter to repurchase 4.9 million shares at an average price of $68.45 for an aggregate amount of $333 million. On Slide 4, we show how we delivered in the first quarter against our areas of focus in 2016. In our Index product segment, we are hitting on all cylinders, with strong execution against all the key opportunities in 2016. The one area where the metrics were not favorable was the equity market, which was obviously out of our control, but it has since recovered, since the volatility in the first quarter. In Analytics, we're launching new products and services and we are keenly focusing on profitability, while at the same time continuing to invest for growth. Price increases in the Analytics product line are having a positive impact on sales. At the same time, our retention rates are quite strong at 95%. Lastly, in our All Other segment, in ESG in particular, strong 20% plus revenue growth continues to be driven by the integration of ESG into the investment processes of mainstream asset managers. And in real estate, the work that we have done so far over the past few quarters is improving the performance of this product line with the transformation of the products and services and the launch of a new real estate analytics forum. On slide 5, we highlight where we are in terms of the cycle of investing for growth versus profitability. As our overall operating profit margins have expanded due to continued solid revenue growth and improved profitability in Analytics, we are continuing to invest and innovate to drive future growth. Our long-term targets for the Company and each of the segments reflect a balanced level of investment that allow us to continue to innovate and sell our products and services and at the same time, continue to deliver higher profitability to our shareholders. While we'll increase investment for the remainder of 2016 relative to the quarterly run rate of the first quarter, we're also focused on profitability as reflected in the lowering of our full-year 2016 adjusted EBITDA expense range. On Slide 6, we highlight just one example here of how we are innovating in Analytics to help our clients manage their portfolios through volatile times and market dislocations. We are continuing to address this client problem by generating research, models, methodologies that help our clients think through solutions to this problem that they are facing. Then we take this research and the accompanying models and methodologies and commercialize it by creating new services like, for example, the macroeconomic stress testing that we launched in the quarter which lets our client stress test their portfolios for events like a Fed tightening or a China slowdown or a downdraft in commodity prices, etc. It is because of innovations like this that MSCI was awarded Best Sell-Side Market Risk Product for RiskManager in the 2016 Waters Technology Awards. Please turn to Slide 7, where we highlight the resiliency of our recurring subscription model. We did build some analysis here to help you think through this and the conclusion that we've reached is that the larger our clients get in terms of run rate with us, the more secure they get. So when we go through periods of significant volatility, we would expect high retention from our larger clients, which is the majority of our run rate and lower retention sometimes from the smaller clients that make up, say, less than 10% of our overall subscription run rate. Not a bad position to be in and of course, as we develop and deepen our penetration with the larger clients, hopefully, this virtuous circle will continue. The challenging start to 2016 affected the growth rate of our asset-based fees, as shown by the daily progression of ETF AUMs linked to MSCI indices. It’s important to focus on the journey rather than just the starting or ending points. Our revenues from the indices we licensed to ETF providers depend on the average daily AUM throughout each quarter. This chart demonstrates how daily AUM levels compare to the average during the quarter, specifically from Q1 through April 26. Because of the significant decline and subsequent recovery of daily AUM during this period, the average daily AUM for Q1 is considerably lower than both the beginning and end levels. Fortunately, thanks to the recovery of equity markets and continued inflow into ETFs linked to MSCI indices, our average daily AUM in Q2 so far is significantly higher compared to Q1. On Slide 9, we highlight the resiliency of these inflows into ETFs linked to MSCI indices. We've done another amount of sharp work here to understand the behavior of this. Growth in revenue from the indices that we licensed to the ETF providers has been pretty resilient in periods of market decline because ETFs linked to MSCI indices have consistently captured positive cash flows, and the magnitude of those cash flows has far outweighed the negative impact from market declines. This chart illustrates the impact that cash flows and market movements on AUM in those ETFs linked to MSCI indices since 2012 and through the first quarter of 2016. ETFs linked to MSCI indices have captured positive cash flows in 15 out of the 17 quarters since 2012, including five out of the seven quarters when the impact from market movement was negative and in some cases, rather negative. As measured by dollars, the net impact from cash flows was 15 times greater than the net impact from market movement since 2012 or about $221 billion compared to $15 billion. This strong trend can be attributed to the overall growth, secular growth of the equity ETF market combined with the strength of our indices, our brand, our client support, our relationship with ETF providers, and of course, the investment pattern of our clients. On slide 10, we have an update on our capital return efforts. Now that we have paid incentive compensation and taxes in the first quarter and excluding the upcoming dividend, we have approximately $200 million in excess cash. We have delivered on our commitment to not store excess capital and as our cash balances have declined to more normal operating levels, we now have even more flexibility to be more opportunistic and discerning with our share repurchases. We expect to repurchase more shares at lower prices and less at higher prices, as we have done before with a little more discernment to that effect. Capital deployment is a dynamic process that is constantly being evaluated with our Board against various competing users. As we begin to explore the possibility of adding incremental leverage, given our natural de-leveraging as we grow, and given our target of gross leverage of 3.0 times to 3.5 times, we want to ensure that we maximize every dollar deployed and that we get an appropriate return and a high return for our shareholders on those dollars, all of which weigh above our cost of capital. Given all of this, please turn to slide 11, where we try to highlight the hierarchy of uses of capital that support our capital allocation framework. Our first dollar typically goes to a high return organic investment, followed by some inorganic investment if they exist, principally small bolt-on acquisitions if they provide high returns. Next, we look at returning capital to our shareholders through the most efficient and accretive method and lastly, we examine a time to repayment of debt if necessary or if appropriate given the cycles. Our Board of Directors is keenly focused on this capital allocation framework to ensure we achieve the highest return on our capital and equally the most optimal amount of capital base to support our business. So, with all of that, I like to now pass it on to Rich Napolitano, who'll be stepping in for Bob.

Thank you, Henry. Please turn to slide 13, where I will begin my overview of our financial results. Our results this quarter were solid, with a 6% increase in revenue and a 6% decline in adjusted EBITDA expenses, driving a 24% increase in adjusted EBITDA and a 680 basis point increase in our adjusted EBITDA margin of 47.8%. Again, as a reminder, in the slides that follow, we provide the impact of foreign currency fluctuation on our subscription revenue and cost, but we do not provide the impact of foreign currency fluctuations on our asset-based average AUM of which approximately two-thirds are invested in securities denominated in currencies other than the U.S. dollar. On Slide 14, we showed a positive impact on our adjusted EPS from the various levers we're pulling to create value for our shareholders. Adjusted EPS increased $0.18 or 36% compared to the first quarter 2015. First, in terms of core growth, our subscription revenues coupled with more muted ETF revenue growth as a result of the decline in equity values at the beginning of 2016 benefited EPS by $0.10 per share. Turning to operational efficiency, strong expense management and a lower effective tax rate contributed $0.05 per share. In terms of capital, the adjusted EPS benefit from share repurchases was partially offset by higher net interest expense but resulted in accretion of $0.02 per share. And lastly, FX contributed about $0.02 to adjusted EPS, again, excluding the impact of FX on our AUM. On Slide 15, we provide you with a bridge for the year-over-year change in our revenues by segment and by revenue type. Total revenues increased $16 million or 6% to $279 million year-over-year, driven by an increase of $13 million or 6% in recurring subscription revenues principally due to a 10% increase in index recurring subscription revenue and an increase of $3 million or 6% in asset-based fees. Currency fluctuations had a negligible impact on the recurring subscription revenues. Turning to Slide 16, we provide you with the year-over-year adjusted EBITDA expense bridge. Overall, the combination of a 5% reduction in headcount, a $3 million non-cash charge in the prior year and strong expense management drove the year-over-year decline in our adjusted EBITDA expenses. First quarter adjusted EBITDA expenses increased $9 million or 6% to $146 million and decreased slightly compared to the fourth quarter 2015. Excluding a $4 million benefit from foreign currency exchange fluctuations, our adjusted EBITDA expenses would have increased $6 million or 4% year-over-year. As shown in the upper chart, the non-cash charge in the prior year was a significant driver of the year-over-year decline and is reflected in lower research and development costs which we have shown in the lower chart. While total research and development costs were down, we continue to invest in areas to support our growth strategy. The $7 million decline in cost of revenues was broad-based across client service and consultant, technology, data services, product management, and research functions. On a linked-quarter basis, costs were relatively flat as a reduction in technology-related professional fees, stock-based compensation, and severance mostly offset first quarter seasonal increases in compensation and benefits. On Slide 17, we provide you the run rate bridge for the quarter. Our reported run rate increased 8% to $1.1 billion, consisting of a 9% increase in subscription run rate to $913 million, and a 5% increase in the ABF run rate to $199 million. Over the past two quarters, we've been encouraged by the higher levels of new recurring subscription sales as well as higher non-recurring sales, which has generated significantly higher levels of gross sales. Strong recurring subscription sales, combined with lower cancels resulted in net new recurring sales of $20 million in the quarter, which is the highest level since 2009. Our aggregate retention rate was a record 95% across MSCI in the quarter. While it is too early to call a change in the trend, we believe that many of our sales initiatives are beginning to take hold. So we are cautiously optimistic in the outlook. On Slides 18 through 22, I will go over our segment results. Starting with the Index segments on Slide 18, revenues for Index rose by 8% on a reported basis. The increase in recurring subscription revenue this quarter was driven by strong double-digit growth in revenue from small cap modules in both developed and emerging markets, as well as from our innovative custom, factor, thematic, and ESG-based products. The adjusted EBITDA margin for Index was 69%, compared to 70% in the previous year and 69% in the fourth quarter, which aligned with the guidance we provided during the fourth quarter earnings call. The year-over-year margin decline was a result of higher research and development, selling and marketing costs, along with increased general and administrative expenses. Index recurring subscription sales grew by 14%, supported by robust sales of core benchmarking products. Cancellations were in line with our expectations, and we achieved a strong retention rate of 96%, just below the record 97% we reached in the previous year. On Slide 19, we provide you with our leadership position as an index provider to the ETF market in the first quarter. On Slide 20, we provide you with detail around our asset-based fees. Challenging market conditions early in the quarter dampened the growth of average ETF AUM linked to our indices, but this headwind reversed by the end of March, and we ended the quarter at $438 billion in AUM with inflows of $7 billion in the quarter, which we show in the upper right chart. Turning to the upper left chart, overall asset-based fee revenue increased $3 million or 6% driven by a $2 million or 20% increase in institutional passive revenue, as well as a $500,000 increase in revenue and a 47% increase in exchange traded future and option contracts based on our indices. Average AUM in ETFs linked to our indices increased $15 billion year-over-year or 4% but that increase was offset by a 4% decline in the average basis point fee as indicated in the lower right chart. The decline in the average basis point fee year-over-year was driven by a mix due to the movement away from higher emerging market products to lower fee developed market products, including the U.S., which we show on the lower left chart, as well as a product mix within the developed market funds to lower fee products. On a linked-quarter, asset-based fee revenue declined approximately $2 million or 3% driven by a $2 million or 5% decline in ETF revenue. This was partially offset by modestly higher revenue from institutional passive and exchange traded future and options linked to our indices. Subsequent to quarter-end and as of April 26, AUM and ETFs linked to our MSCI indices have increased to $450 billion on inflows of $3 billion and market appreciation of $9 billion, which brings the second quarter to date average to $441 billion for AUM. We have continued to see strong inflows into high shares MSCI USA minimum volatility. On Slide 21, we highlight the financials in the Analytics segment. Revenues for Analytics increased 3% on a reported basis and adjusted EBITDA margin increased to 28% compared to 13% from the prior year quarter. The increase in revenue was primarily driven by higher RiskManager, equity models, WealthBench, and InvestorForce products. While revenue grew 3%, run rate grew 7% year-over-year with the divergence reflecting when sales were booked and recorded in run rate versus when recognizing in revenue. This divergence between revenue and run rate should close in the quarters ahead. The dramatic increase in margin year-over-year was driven by a 14% decrease in adjusted EBITDA expenses as the product area continues to transform and improve profitability, while at the same time investing in future growth opportunities. The margin was higher than guided on the fourth quarter call due to decreases in non-compensation expenses, which more than offset seasonal increases in compensation and benefits. While new recurring sales were soft during the quarter, driven by lower RiskManager and equity model sales, lower cancels more than offset the decline in recurring sales and retention increased to 95%, up from 93% in the prior year. Lastly, for our segments, turning to Slide 22, we have the all other segment. Revenues for all other increased 7% to $24 million on a reported basis and grew 9% on an FX adjusted basis and adjusted EBITDA margin turned positive at 11%. First, in terms of ESG, a $2 million or 21% increase in ESG revenue to $11 million was due to strong sales, driven by the increasing integration of ESG into our investment process, as Henry has mentioned, with approximately 40% of the sales coming from new clients. Run rate growth of 22% was driven primarily by growth in ESG ratings, with particularly strong growth in ESG ratings in the Americas, which grew 39%. Turning to real estate, a tough year-over-year comparison due to the early delivery of our PAS flagship reports in the prior year, partially was offset by higher market information, product revenue in the current quarter, resulting in a slight decline in revenue to $13 million. Excluding the impact of FX, real estate revenue would have increased 1%, compared to the first quarter last year. In the quarters ahead, we anticipate that the performance of real estate should continue to improve, reflecting our restructuring effort and the launch of our real estate analytics portal. On slide 23, we provide our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $445 million which includes $126 million in cash held outside the United States and a domestic cash cushion of approximately $125 million to $150 million, which as a general policy, we maintain for operational purposes. Free cash flow in the quarter of $28 million was below prior year levels due to the timing of collections and higher interest payments, and the decline compared to the fourth quarter was primarily due to the seasonal payment of our annual incentive compensation and bonus. On Slide 24, we highlight the progression of our full year 2016 adjusted EBITDA expense range. We now expect full-year adjusted EBITDA expenses to come in between $600 million and $615 million, down from a range of $610 million to $625 million. $3 million of that $10 million decline in the range was due to positive currency moves, but $7 million is from savings from general expense management and corporate efficiency efforts. We expect that higher adjusted EBITDA expenses, principally from technology-related professional fees and information technology costs will flow through in the back half of 2016. With the introduction of our segments and activity costing, we are beginning to acquire better visibility into our expense base, and opportunities to become more efficient are being identified. On Slide 25, we'd like to reiterate our guidance for full-year 2016, with the only change being our full-year adjusted EBITDA expense range, which I just discussed. Lastly, we continue to work hard toward our long-term targets, and with that, we'd like to open up the line for questions.

Wanted to talk about the sales, and in particular, as it relates to pricing, I think in the last quarter, you alluded to the fact that in particular on the risk side, you were starting to take pricing for the first time in a while. Meanwhile, though the environment has certainly gotten a lot tougher, right? So just wondering how those pricing discussions have gone. If you're seeing some of the impact already reflected here, or if there is more to come and obviously, how much push back you're getting from clients.

We are actively working to align the pricing of our Analytics product line with the value we provide to our clients, and we have implemented price increases across the board. Those discussions are progressing well. While no one likes to pay more, we are managing the conversations effectively. So far, we haven't noticed any significant concerns or cancellations from clients regarding this pricing adjustment. Clients are starting to realize that increased investment in our product line is necessary for improvement and profitability. Currently, about 20% to 25% of our sales this quarter come from these price increases, and we expect this trend to continue throughout the year.

Great. That's helpful. Thank you. And then just secondly, on the tax rate, you talked about continued efforts to bring that down. Can you just give us an update on where you stand on that and maybe as part of the answer, there obviously has been some new guidance recently from the Treasury Department around all the earnings stripping and things like that, that's going on. Is that going to hinder some of your journey there or do you think you can still bring that tax rate down materially with maybe some of the new rules here?

We are looking very closely at the new rules that are being proposed. At this point, we are still standing firm with our guidance of 33% and 34% in our plan for this year, but at this point, we don't see this is going to materially change our goals.

In terms of long-term goals, you've done a lot of work on where you could be in the next few years. Will that change anything, or is it too early to tell?

At this point, we expect a gradual reduction in the tax rate as we continue to implement our strategies. We began with a cost-plus model, and at the end of last year, we initiated a process to allocate profits more accurately based on where activities take place globally, which has been beneficial. Ultimately, we aim to adopt a principal-hub model, but it likely won't be in place until the end of this year, which would further lower our tax rate. We're focused on this goal, but achieving it involves significant operational efforts. Currently, the existing regulations from the Treasury do not impact us, though we are aware that new challenges can arise from various tax authorities worldwide.

On Slide 5, you're discussing how to strike the right balance and invest in margin with Q1 being tactical. I'm curious about where spending will increase in the back half of the year. Can you provide more specifics? I believe you mentioned professional IT costs, but what exactly will you be allocating funds towards that would raise expenses? Additionally, will this increase be balanced out by other initiatives you have planned?

The first quarter was somewhat unusual, as indicated by the average of $145.7 million. We began the year with a strong budget and plans for ongoing investments, trying to balance profitability with these investments. However, due to market volatility during the quarter, we chose to slow down certain investments because we were uncertain whether we were entering a bear market or just experiencing a significant correction. We wanted to avoid getting stuck with high costs if it turned out to be a prolonged bear market for the rest of 2016. As a result, we reduced some initiatives, particularly in index coverage. Now that the market has rebounded, we aim to increase some of those investments while still targeting profitability. This will not significantly impact our profit margins for the year, but some adjustments are necessary. We plan to invest in coverage, sales personnel, client service, and consulting, as well as enhance backend technology. For instance, capital expenditures for the quarter were lower than desired, and we need to increase them to meet our targets. Operating expenses in technology have also decreased and need to be realigned. I want to stress that these backend investments may not happen in the second quarter, which could resemble the first quarter. However, we must increase spending at some point to ensure future growth in product management, technology, data efforts, and coverage.

Thank you. I have a question regarding your fixed income capabilities, particularly in relation to what was previously known as RMA and Index. It was once thought that MSCI might acquire a company to enhance its fixed income capabilities, but that hasn't happened. Could you discuss your initiatives to develop a more comprehensive fixed income offering as part of your multi-asset class solutions? Is this goal still as significant for MSCI today as it was a few years ago?

I think it's more important today than it was in the past. Underneath some of the efforts in the Analytics product line, there is a significant amount of investment occurring in both the new architecture and interface that we've discussed and are continuing to develop and showcase to clients. Although we haven't started selling it yet, we are in the beta testing phase. Importantly, there is also a considerable investment in fixed income analytics, both for multi-asset class risk and performance as well as for portfolio management in fixed income portfolios. Since December, we have devoted a lot of time to consulting with key clients globally, conducting about 50 consultations to understand their needs in fixed income portfolio management and analytics, which informs our investment decisions. The way we have funded these initiatives has been through a continuous review of our analytics cost base, prioritizing long-term projects that may have a positive impact by reallocating resources and creating efficiencies. This allows us to invest meaningfully in the new technology platform and the new software that will enhance our existing products, as well as in the area of fixed income analytics, which we are heavily focused on in relation to our financials. The team has done an excellent job of maintaining high sales and retention rates while rigorously managing the cost structure and making room for these investments, all while increasing profit margins.

Last one, quick one. Henry, you called out earlier kind of rough 20% to 25% of sales or price increases. Is that specific to analytics or the business overall and could you compare that to a year ago?

Yes, that pertains entirely to Analytics. We no longer differentiate between RMA and PMA; we are integrating everything into a comprehensive offering for portfolio and risk management. It all revolves around Analytics. A couple of years ago, we began raising prices in portfolio management analytics, particularly in equity portfolio management analytics, and we maintained a smaller scale increase last year in the overall PMA product line. Currently, we are focusing on establishing the appropriate pricing, which has resulted in increases based on the value of the multi-asset class portfolio analytics, including RiskManager and BarraOne, as well as managed services. This is what we are implementing, which I referenced at the start of the Q&A.

How did 20% to 25% compare to a year ago in the analytic segment? So if you're at $12.4 million of recurring sales this is the first quarter, $13.5 million last first quarter?

No, it's much higher, much higher than the first quarter last year. The comment I've just made, right, if you look at the price increases we are doing on the old PMA run rate was $100 plus million. With the analytics, the multi-asset class run rate was $300 million plus. So those selected price increases that were on PMA don't compare to the price increases in aggregate dollar to the price increases we're doing in the all multi-asset class risk analytics.

I had a question. As we look at the success that you guys have had with the margin growth in the other segment, obviously still below the longer term or medium to longer-term target of 15% to 20%, but as we consider the returns in ESG versus real estate, how should we be thinking about product mix in those categories? Is one product meaningfully more profitable than the other?

Yes, certainly. Currently, the All Other segment consists of two product lines: the ESG product line and the real estate product line. The ESG product line is performing exceptionally well, with revenues increasing by 21% compared to the first quarter of last year and a run rate growth of 22%. We are leveraging the relationships that MSCI has with major asset managers to integrate our product into their investment strategies, especially as they begin to focus on ESG criteria. This has resulted in improved profitability for that product line, which was unprofitable two to three years ago, reached breakeven a couple of years back, and now has a small profit margin. We recognize the need to invest in this large opportunity, including in product development, coverage, and sales. Therefore, we are encouraging the team to enhance profitability through discipline and operational efficiencies while continuing to reinvest in the product line. The real estate product line, however, is at a different stage of development. We understood that significant changes were necessary when we acquired this business to prepare it for global expansion. This involved revamping the product line, automating data processes, developing new technology, and enhancing client delivery through a new real estate portal. We also relocated most of the staff from the UK to emerging markets, particularly to India, representing a major transformation for that product line. While we might have experienced the most significant challenges during this transition, we anticipate continued improvement in financial performance. The product line was notably impacted because sales were primarily in pounds, which affected dollar translations. Nonetheless, it continues to grow, and profitability has shifted dramatically from a loss to a small profit this year, which we aim to build upon. Overall, one of our key objectives across the company is to maintain the profitability we have in the Index segment, to significantly enhance the profitability of analytics—which we have made progress on—and to develop the All Other segment to contribute meaningfully to the company's profit margin. However, we need to be realistic about the necessity for ongoing investment in this area, so we will prioritize investment over immediate profitability. While we expect to see improvements in profitability, they may not yet reach levels comparable to our other business segments.

That's helpful. Thank you very much. And I guess, as we think about operational efficiency, obviously, you guys have made great strides in automating process and limiting growth in headcount, but we've also seen a shift towards headcount in emerging markets. I think it's up to 53% of the total versus closer to 50% a year ago. Should we continue to see that happening? Do you have a target in the next maybe three to five years as the amount of headcount you'll probably see in emerging markets relative to developed?

Yes, we definitely want to keep moving forward in all the areas mentioned. At this point, you'll notice that the EMC and DMC split continues to gradually improve. It's not entirely clear where our targets lie yet, but we are making every effort to push them higher. Once we start reaching the 60s range, we may be approaching a limit due to the concentration of our senior product teams, coverage staff, and consultants in major financial hubs where our largest clients are located, such as New York, London, Boston, Chicago, major European capitals, and Tokyo and Hong Kong. These locations are naturally more expensive than emerging markets, and we need to have a significant presence there to serve our client base effectively. Additionally, I want to highlight that over the past two to three years, we have been focused on extracting as many operational and financial metrics as possible, implementing financial software systems to automate these processes. We've also hired finance directors to collaborate with business professionals to embed this metric-driven approach within our culture. As a result, the entire company is now managed based on various metrics, including daily operational and financial figures. We're on a journey that’s about a third completed, and that's why both Rich and I have expressed cautious optimism. As we refine our metrics, we'll gain better insights into costs and how to optimize them, alongside an improved understanding of profitability. This will help us target higher-value areas and refine our value proposition to clients in relation to pricing. Therefore, we are hopeful that this operational efficiency and revenue growth will continue as we intelligently allocate resources and invest in new products.

Focusing on the asset-based fee business for a second, you highlighted that the fee rate ticked down because of the mix shift between EM and developed. So just putting that aside, in terms of contract renewals in that business, can you talk directionally about how the fee rate is trending? And also, have you been gaining market share of U.S. flows or was it more market-driven and is gaining U.S. flows a strategic priority right now?

The fluctuations in basis points are entirely driven by the mix, which is beyond our control. There has been no change in the renewal of contracts and fees compared to our previous practices, so essentially there is zero change there. Additionally, we are making significant efforts in factor investing, which enables us to launch a variety of domestic products using indices and licenses for our EPF clients, and this is a top priority for us. This strategy is crucial for maintaining our relevance in major domestic markets. For instance, the MSCI iShares or the iShares MSCI minimum volatility ETF has attracted a substantial amount of inflows, which is positive because it represents a domestic product that generates good fees and revenues for iShares. It benefits us and enhances our relevance in the domestic market.

Okay, great. And just another question on higher level of investment for the remainder of this year. Is that going to be focused more on some certain segments? I know Analytics margins have been a little bit higher than the 25% that you've been talking about as like a normalized level. Like is that 25% still the right normalized number to think about, or is it a little bit higher than that in Analytics?

Yes, on Analytics, the last two quarters have been great positive surprises, clearly for us and for you and a lot of it is because we keep hammering and hammering away of the allocation of cost and investments and all of that, and that has yielded positive results. But the product line needs investment. This new architecture is hugely important in order to not only create the platform for higher growth of the product line, but also making us even more efficient, because we have so many platforms that we had to maintain, right. And now with this new initiative since the fourth quarter on fixed income analytics, again, we're incubating that initiative by getting it going. So if it puts at some point as we see the development of revenues, then that initiative will have to fund it additionally. So that's why I think that we got to be realistic and I think 25% is not a bad number to use. And lastly, regarding M&A, can you just give us some color on the pipeline and are there any areas that you're more focused on right now? Yes. In terms of mergers and acquisitions, over the past decade, we have completed the major acquisitions we aimed for to strengthen the Company’s position. We are not actively searching for larger acquisitions unless they are obvious fits, align with our core business, and promise significant shareholder returns. Otherwise, we will pass. Currently, we are concentrating on smaller, bolt-on opportunities, which are opportunistic and not always available. Our primary goal is to create value, so we remain disciplined and focused on returns.

Can you talk about the improvements in your go-to-market in light of new subscription sales number that you've talked about? What particular business lines do you feel like you're having the most success there?

Laurent Seyer, our Global Head of Client Coverage, is here with me and has made significant contributions since joining us 16 months ago. He has effectively revamped our go-to-market strategy in several ways. We have significantly updated our compensation system, which we implemented at the start of this year to create a more incentivized structure. While it’s still early, we have already seen favorable results attributed to this incentive plan in both the fourth quarter and first quarter. We have also streamlined many of our efforts, focusing on higher-performing individuals and ensuring we target the right territories. A considerable amount of effort has been dedicated to enhancing our senior account managers' ability to engage with the C-level executives of our clients, alongside our strategies for both bottom-up and top-down selling, which are beginning to show promising results. Furthermore, we have merged all product lines under Laurent's guidance, from real estate to ESG, and regionalized them under the leadership of our regional managers. The collaboration among these regional teams has been remarkable, and Laurent along with his finance team has successfully established metrics to manage our entire coverage strategy. All these initiatives are yielding excellent results, and we anticipate even more success moving forward.

Got it. And maybe we could delve a little bit more into Analytics. How sensitive is that business to market volatility? I think you mentioned maybe some delays in 1Q because of what we saw there? And where do you stand from a progression standpoint in improving the overall portfolio? Like what inning do you think you're in from an average perspective?

Yes, there are two conflicting trends in market volatility affecting Analytics. When volatility increases significantly, the demand for our product rises as people focus on risk and performance. However, some top suppliers may hesitate, slowing down decision-making and consequently the sales pipeline. We often find that what we expect to occur in a given quarter gets pushed to the early weeks of the following quarter, leading to some volatility in sales. Looking ahead, I believe that over a 10-year period, Analytics could potentially grow larger than the Index business due to the increasing number of use cases worldwide. There are many asset managers and owners who require a platform to assess performance, risk, portfolio construction, and asset allocation. We are still in the early stages of delivering this, and despite dealing with legacy systems and products, we are striving to overcome these challenges to accelerate growth and profitability. This represents a significant opportunity, and I hope it ultimately benefits MSCI.

Got it. And last one for me real quickly, can you talk about other opportunities for potential cost containment? Obviously, you're going through the portfolio and you talked about being a third through the journey of understanding the costs. But are there any particular areas that you're focused on, examining the cost structures right now, and think that there may be more opportunities?

I believe it comes down to basic strategies. We are focusing closely on people's performance, so when someone is given an opportunity and performs well, we upgrade them, which leads to increased productivity at a consistent cost. Additionally, this metric I’m discussing is significant. We have always had a good sense of instincts and made solid decisions, but we are working to enhance that decision-making process significantly by promoting the same approach we advise our clients: manage their portfolios using quantitative tools. Therefore, we aim to make decisions based on metrics, which has shown much potential for improvement. There is theoretical improvement regarding costs, particularly concerning the payback from those investments and the returns generated. It’s important to allocate funds to areas with higher evaluation multiples rather than lower ones, as not every dollar of EBITDA carries the same value. As I mentioned, we are still in the early stages of this process, and I believe it will produce substantial results over time.

So you guys gave us a lot of good sort of updates on the level of price increases you guys have been able to pass along across the Index side and the Analytics side I think over the past year. But could you give us a sense of maybe where or how much of the current subscription run rate is yet to be repriced for both of those areas?

One thing that is very important to keep in mind is we are in the middle of a lot of work in understanding the pricing and the level of price increases and renegotiations of contracts versus the volume versus volume, how much of the run rate is subject to this, how much of it is not and all of that and we're giving you directional comments because we're not yet in a position to give you very specific metrics. And this is part of the metrics where hopefully in the next couple of quarters we'll be able to give you very specific things with a high degree of confidence. We know a lot but we want to double-check and triple-check fully those numbers. At this point a lot of the multi-asset class risk management analytics run rate is not yet priced at a level that is commensurate to the value that it provides.

Okay. Fair enough. And I guess, with some of the M&A or I guess, proposed M&A out there, are you guys seeing any signs of increased opportunity for index switches on the ETF side at all?

We are and we're seeing a major differentiation between those index providers that are revenue centers to the client like we are versus those that are cost centers. So we're seeing a bit more pressure by ETF sponsors to rotate out of those that are lower cost if they don't add a great deal of value. The benefit of MSCI is that given our $10 trillion plus of client assets that are benchmarked to MSCI, a lot of ETF launches are option contracts, so to speak, on a call on that money to be invested in those ETFs. So we become a revenue center for our clients. So we are constantly in dialogue with our clients to see what do they have in their portfolio that it is managed against an index that is not giving them what they want, but we want to be in the areas where we add a lot of value and we have a premium pricing and we do not want to be in those areas that we're competing on cost.

Question for you around the cash flow. Obviously, that number is lower than it was first quarter 2015 and I think you cited the incentive compensation accruals and timing of payments. Can you provide just a little bit more color on I guess, the decline in the year-over-year decline of free cash flow for the first quarter?

Mainly, just as we indicated due to timing. So, essentially, when you look year-over-year, we've had substantial growth in our business, including our invoicing. And a lot of that invoicing happened later in the quarter. Therefore, some of the collections that we had expected in the first quarter actually moved to the second quarter. Plus, in terms of interest expense, with the two new debt offerings that we have, we now actually make an interest payment every quarter, right. So we have two debt offerings, they pay semi-annually, but the way it works out is every quarter we'll have one interest payment, roughly in the $20 million to $25 million range.

Got you, okay. Appreciate that. And a follow-up question, if I could. You guys talked about being a one-third way through in terms of your cost containment initiatives. Can you perhaps just drill down a little bit further on in how you're doing that? Are you guys putting in a SAP system that's giving you better visibility or, how are you guys doing your performance metrics, I guess? Is there a tool that you're using to do that?

Yes, so let me just say, and Rich will answer that as well, is that, look, when you look at the G&A line, you see meaningful increases year-over-year, which are not the way typically we want to run the Company. A lot of those increases have to go with the fact that we're putting a significant amount of resources into the financial technology that underpins the operations of the Company, including SAP and we clearly are putting a lot of money in the tax projects.

Overall, internally, we call it our business intelligence initiative, which as Henry mentions is the ultimate goal to provide very transparent timely decisions support information to all the business heads. And it's not just about SAP, right, that's one tool and a portfolio tool that we've been investing in. And we're investing in SAP to do a lot of the ERM and the general ledger functions. We're using other tools like Clarity to do project management, workforce management, as well as activity-based costing. We use Workday and Concur for either people management or expenses. And what we're doing is basically linking all these tools together into what we are calling this new business information platform. Again, we're along that journey. We still got some time to get there, but every quarter, we pump out better and better information as Henry has mentioned to help us manage.

On Slide 7, on the client side, those greater than $1 million, how many clients does that relate to?

It's likely that more than three quarters of our clients fall into this category. We evaluate our clients in two ways. In a low parent-child relationship, we have about 6,500 clients, and when we look at it at the parent level, we have approximately 3,800 clients. I would estimate that around three quarters of those clients are within that range.

Okay. And we talked a lot about Analytics and maybe I missed this. As far as your longer term outlook on Analytics, pretty interesting. Can you provide any insights into the competitive environment currently in that business?

Yes, the competitive landscape hasn't changed significantly. All our product lines are becoming increasingly competitive, so our focus is on competing and succeeding, and we're structuring the company to achieve that. There hasn't been much change. There are only a few providers in the multi-asset class risk analytics space, depending on the client segment, such as asset owners or asset managers of hedge funds. Similarly, there are a limited number of providers for equity portfolio management analytics. We are aiming to make a significant entry into the fixed income portfolio management analytics space, and while there are other providers, we want to approach it in a way that aligns with our existing work in equity portfolio analytics and multi-asset class risk analytics for our clients.

Thank you very much for your time. We went over a bit, but we wanted to get to everyone on the line. So we will talk to everyone soon. Thank you.