MSCI Inc. (MSCI) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MSCI Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Edings Thibault, Head of Investor Relations. Sir, you may begin.

Thank you, Sam. Good morning, everyone, and thank you for joining our second quarter 2013 earnings call. I'm joined on the call this morning by our Chairman and CEO, Mr. Henry Fernandez; and our Chief Financial Officer, Mr. Bob Qutub. Please note that earlier this morning, we issued a press release announcing our results for the second quarter and first 6 months of 2013. A copy of that release may be viewed at msci.com under the Investor Relations tab. You will also find in our website a slide presentation that we have prepared for this call. 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 in which they are made, which reflect management's current estimates, projections, expectations or beliefs, and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect MSCI's future results, please see the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ending December 31, 2012. Today's earnings call may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Adjusted EBITDA and adjusted EPS exclude the following: restructuring costs, the lease asset charge, amortization of intangible assets and nonrecurring stock-based expense. Adjusted EBITDA also excludes depreciation and amortization of property, equipment and leasehold improvements, while adjusted EPS also excludes debt repayment and refinancing expenses and the income tax effect of the excluded items. Please refer to today's earnings release on Pages 14 through 17 of the investor presentation for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures. We will be referring to run rate frequently in the discussion this morning, so let me remind you that a run rate is an approximation at a given point in time of the forward-looking revenues for subscriptions and product licenses that we will record over the next 12 months assuming no cancellations, new sales, changes in the assets and ETF license to our indices or changes in foreign currency rates. Please refer to Table 7 in our press release for a detailed explanation. In our discussions of both revenue and run rate, we will also be referring to organic growth rate. As a reminder, organic growth rate calculations exclude the impact of the acquisitions of IPD and InvestorForce and the disposition of the CFRA product line. With that, let me now turn the call over to Bob Qutub.

Thanks, Edings. Good morning, and thank you for joining us. I'd like to share some highlights from our second quarter 2013 before we dive into the numbers. First, we reported our financial results for the second quarter with revenues growing by 8%, driven by the acquisitions of IPD and InvestorForce. Net income grew by 63% and diluted EPS grew by 67%. Adjusted EBITDA and adjusted EPS grew by 8% and 16%, respectively. Our revenue and EBITDA growth benefited from the seasonal strength in IPD revenues, which as we forecasted, came in at more than double the first quarter amount. We expect less seasonality from that product line in the second half of the year and more on that later. Our subscription run rate grew by 9%. Our growth was driven by acquisitions, an uptick in sales and by strong retention rates across all 4 of our major product lines. By product line, index and ESG remained the biggest driver of MSCI's organic run rate growth. RMA run rate growth picked up slightly and a sequential decline of PMAE. Governance run rate also continued to grow on an organic basis. Asset-based fees continued to drive growth for MSCI, notwithstanding that the transition of Vanguard ETFs was completed in the second quarter. Last but not least, we completed our December 2012 accelerated share repurchase program and announced our second $100 million ASR this morning. As Henry will discuss, today's ASR is part of the decision made by MSCI late last year to return $300 million in capital by the end of 2014 added an integral part of a very disciplined capital deployment strategy. Now as was the case of the first quarter, we will highlight the effect of the acquisitions and a divestiture in the context of organic growth as well the continued impact FX has had an our run rate. Now let's get into the numbers. MSCI reported second quarter revenues of $258 million, up 8% from second quarter 2012. Adjusted EBITDA was $117 million, also up 8% year-over-year and adjusted EPS rose 16% to $0.58. Net income was $61 million and diluted EPS was $0.50, representing an increase of 63% and 67% respectively over second quarter 2012. Most of the difference between the growth in adjusted EPS and diluted EPS was the $21 million of refinancing expenses we recorded in the second quarter of 2012, which is not factored into adjusted EPS. Our second quarter revenue growth was led by Performance and Risk segment, which reported revenue growth of $21 million or 10%, driven by higher growth in index and ESG and RMA revenues, partially offset by a decline in PMA. On an organic basis, Performance and Risk revenues rose by 1%. Our Governance segment revenues rose by 3% on an organic basis. On a reported basis however, governance revenues declined by $1.5 million or 5% as a result of the CFRA divestiture. By revenue type, MSCI's total subscription revenue grew by 8% over the second quarter of 2012, driven primarily by the acquisitions of IPD and InvestorForce. Asset-based fees also rose 8% and nonrecurring revenues rose $1 million or 17%. On a run rate basis, our total subscription business grew by 9% to $861 million. On an organic basis, subscription run rate grew by 4%, led by a 9% increase in index and ESG subscriptions, 6% growth in governance and 5% growth in RMA, partially offset by a decline in PMA. The growth in our run rate was driven by an increase in subscription sales to $31 million and a robust 92% retention rate. Changes of foreign currency rates continued to have a negative impact on our results in the second quarter. FX changes lowered our sequential subscription run rate by $1.3 million and changes over the past year have lowered our total subscription run rate by $6 million. Now turning to the performance of each of our 4 major product lines, starting with our index and ESG products. Revenues there grew by $22 million or 20% and 5% organically. In line with our guidance, IPD had a seasonally strong second quarter, contributing $17 million to index and ESG subscription revenues, up from $8 million in the first quarter. This seasonality in revenues is because one of IPD's major products consists of annual benchmarking reports, many of which are delivered in the second quarter. We expect second half revenues from IPD to be roughly equal those of the first half but with a much more equal distribution than the third and fourth quarters. Therefore, we expect to see a decline in IPD revenues in the third quarter. The seasonal strength in revenues also had a positive impact on our adjusted EBITDA as we'll touch on later. Index and ESG subscription run rate grew by 23% to $351 million or by 9% on an organic basis, driven by growth in equity index benchmark and data products. ESG product's run rate continued to grow at double-digit rates. After a $2 million negative hit in the first quarter of 2013, the FX impact eased significantly but still resulted in a $0.5 million sequential drag on run rate during the second quarter. Now let's take a look at our asset-based fees and the related run rate. During the second quarter, the transition of the 22 Vanguard ETFs that switched their index benchmarks was completed. This process wrapped up at the beginning of June, and those ETFs contributed only $800,000 of revenues in the second quarter versus $5.2 million in the second quarter of 2012. Asset-based fees continued to be an important driver of MSCI's growth. If we were to exclude the run rate associated with those 22 ETFs that changed benchmarks from the second quarter last year, MSCI ABF run rate would have grown by 23%. Even factoring in a loss, our asset-based fee revenues grew 8% versus the second quarter of 2012. That speaks to a significant shift in the mix of our fees from MSCI-linked ETFs and increased revenues coming from other index non-ETF sources. On a run rate basis, the difference between the decline in AUM and the growth in run rate is even greater. MSCI's asset-based fee run rate grew by 2% despite an 18% decline in the AUMs linked to MSCI indices. Effectively, the $60 billion increase over the past year in AUMs and other ETFs offset the loss of the roughly $120 billion of Vanguard AUMs that left. There was $270 billion of assets under management in ETFs linked to MSCI indices at the end of June 2013, down $88 billion from the end of March. Of that sequential decline in AUM, $75 billion was driven by the transition of the Vanguard ETF and $13 billion was a result of declines in the equity markets. Excluding the transitioned ETFs, the average realized fee on MSCI-linked ETFs was 3.6 basis points. The diversity of MSCI indices tracked by ETFs proved to be a strength in the second quarter as outflows from emerging markets linked to ETFs were offset by inflows to funds linked to Japan and other indices. 48% of the ETF AUMs are linked to global developed markets, excluding the U.S., while only 31% are linked to emerging markets. A further 16% of the AUMs are linked to U.S. indices. Now let's turn to risk management analytics revenues, which rose by 4% year-over-year and 1% on an organic basis. The run rate rose $22 million or 9% and by 5% organically. Sales rose 15%, driven by a combination of organic growth, as well as contributions from InvestorForce. Since the beginning of the year, we have seen stronger growth in sales to hedge funds and asset owners, offset by continued hesitancy on the part of asset managers. Retention rates remained strong and, in fact, picked up to 93% from 90% a year ago. FX changes, which had been a headwind in the first quarter, were a slight positive in second quarter and were essentially neutral on a year-over-year basis. PMA remains challenged. But an increase in the aggregate retention rates helped slow the sequential decline in run rate during the second quarter. Revenues fell 11% to $26 million and run rate also fell 11% to $105 million. FX changes reduced the run rate by $3.3 million year-over-year, including $700,000 during the second quarter. Now stepping back, when you look at the core equity analytics business, which represents substantially all of the PMA product line, the biggest pressure on its run rate has come from down sales at existing clients, which accounted for 1/3 of the $12 million decline in run rate. Now only 10% came from outright losses of equity analytics clients. The remaining 55% or so, the decline was driven by a combination of the FX impact, product swaps into other MSCI products and cancels of our Cosmos fixed-income analytics product, which we are winding down anyway. Turning to governance. Revenues rose by 3% on an organic basis. On a reported basis, revenues declined 5% to $29 million as a result of the sale of our CFRA product line last quarter. Run rate rose 6% organically to $112 million. The growth in governance run rate was driven by higher sales of executive compensation analytics products and services, as well as by continued strength in retention rates. Let's turn next to expenses. Our adjusted EBITDA expense rose by 8% to $141 million, with growth in both compensation and non compensation expenses. Total compensation expenses, which excludes nonrecurring stock-based compensation, rose 9% to $102 million. The growth in compensation expense was driven largely by the acquisitions of IPD and InvestorForce, which were offset only partially by the sale of CFRA. Our headcount rose to 2,957 from 2,384 a year ago and 2,844 in the first quarter as we continued with our investments. We continued to make progress in our efforts to leverage lower-cost centers, as the percentage of our workforce in those areas rose to 44% from 41% in the first quarter and 42% a year ago. Our ability to tap into a global talent base enabled us to keep our organic compensation cost below the rate of the increase in our organic headcount. Now on compensation expense, which excludes depreciation, amortization and the lease exit charge and restructuring cost, rose 7% in the second quarter of 2013. The increase was driven by the acquisitions. Excluding the impact of those acquisitions, non compensation cost remained in check. Adjusted EBITDA rose by 8% to $117 million in the second quarter 2013. Our EBITDA benefited in the second quarter from the seasonality of IPD revenue recognition. Because we recognized most of our cost ratably over the year, any seasonal increase or decrease in revenues has a direct impact on EBITDA relative to the prior quarter. Other expense was $6 million in the second quarter, down from $30 million a year ago. We recognized $21 million of refinancing expenses in the second quarter of 2012, the impact of which was excluded from our adjusted EPS calculations. Our tax rate was 33.1% in the second quarter and is 31.4% for 6 months through '13. We now expect our full year tax rate to be approximately 34%, which means we expect a higher tax rate in the second half of 2013. Let's now turn to our balance sheet and cash flow. We finished the first quarter with total debt of $818 million with a total cash position of $335 million, of which $82 million is held offshore. During the second quarter, MSCI generated operating cash flow of $86 million, bringing our year-to-date total to $157 million. During the quarter, we spent $4 million in capital expenditures and repaid $11 million of debt. Last week, we concluded the $100 million accelerated share repurchase that was announced in December 2012. As a result, we reduced shares outstanding by an additional 762,000 this week, bringing our total shares repurchased as part of that program to approximately 3 million at an average purchase price of $33.47 per share. We also announced today that we intend to enter into another $100 million accelerated share repurchase agreement following the close of the market today. As part of the ASR, we will receive tomorrow $70 million worth of MSCI shares at the onset of the program with the exact number of shares based on today's closing price. The balance of any additional shares would be delivered at the conclusion of the program, which we expect will be in December. So for example, if we used yesterday's closing price of around $35, we'd expect to receive approximately 2 million shares. If the share price goes up, we'd receive slightly less or if it goes down, slightly more. But the exact number of shares that we receive will be available in the 10-Q, which we expect to file tomorrow. As a reminder, both the shares we receive upfront and the 762,000 shares we received in the last installment of the 2012 ASR will come out of our share count calculations as of the beginning of August. After today's announcement, we have an additional $100 million remaining on our existing share repurchase authorization. Also looking forward, we continue to expect our CapEx budget to be in the $30 million to $35 million range for the full year. And our scheduled debt payments for the balance of 2013 are now $22 million. Let me turn it over to Henry for some additional comments.

Thank you, Bob. Good morning, everyone. Last quarter, when I spoke on this call, I talked about the operating environment and what we, at MSCI, are doing to focus on growing our business. This quarter, I want to continue that conversation by providing an update on the operating environment, our recent initiatives of innovation, the changes that we see that are occurring in our asset-based fee business and an update on our analytics businesses. I would also end the discussion with a few comments on the accelerated share repurchase agreement that we announced today and how it fits into our balanced approach to capital allocation. So first, the operating environment. It remained largely the same in the second quarter. Sales to asset owners remained healthy. And we saw some improvements in our sales to hedge funds as the managers across the world remained relatively cautious. Looking around the globe, we did see an improvement in the tone of our dialogue with our clients in the U.S., which is our biggest market. Elsewhere, some of the optimism that we saw in Asia in the first quarter was dimmed by market volatility in the second quarter. And Europe remained largely unchanged. As in the past, our pipeline of products remains healthy. On to innovation. Our focus at MSCI remains on driving growth via innovation. Many of the new products we have launched this year are starting to have an impact in the form of an increased engagement with our clients. Examples of these products include; the continued strong interest in our strategy indices, the addition of margin replication capabilities to our risk products and a new Japan model in equity analytics. We're also seeing a lot of interest from our corporate clients in our new QuickScore governance product. Innovation is also more than just new products. Increasingly, we are approaching clients as a single integrated company at MSCI rather than as a collection of several business lines. Our ultimate goal is to bring more of the unique value of MSCI's products and services to bear on our clients' investment processes. For example, we recently signed a large Asian asset manager to a deal that encompasses both BarraOne and RiskManager, as well as real estate data from IPD and governance services. In North America, we recently sold our comprehensive risk management product to a major Canadian bank that incorporates a core risk system with our hedge fund transparency products. In other cases, we're incorporating governance products in our pitches to start up hedge funds, especially activist hedge funds. These deals are not necessarily driving large dollar sales yet, but they are early examples of how approaching our clients with a more comprehensive suite of products makes our solutions more valuable to them. As part of the process of approaching our clients with MSCI as a single integrated entity, we're also building out a key client relationship program. Our goal is to deepen our relationship with our largest clients and keep our finger on the pulse on how their businesses and their business strategies are evolving. Let us talk about the changes that we see in our asset-based fee business. This area continues to be a driver of MSCI's growth. As Bob noted, asset-based fee run rate grew by 23% when you back out the loss of the run rate from the ETFs that switched indices. That growth reflects the continued strong demand for ETF products from a wide range of investors. It also reflects the steps we have taken to continue to make our indices the premier choice by a wide range of asset managers worldwide. Let me elaborate a bit. First, we have sought to strengthen our relationship with our largest clients. For example, over the past year, iShares has launched more than 20 new ETFs linked to MSCI indices. In addition, recently, we have entered into a marketing and trademark licensing agreement with iShares to promote the MSCI brand. Second, we have focused on broadening our business, both in terms of the total ETFs listed worldwide, as well as the number of ETF managers. Over the past year, we have added 5 new ETF managers. As we have focused on Asia, we have added new relationships with Harvest asset management from China and Mirae from Korea. In North America, we have new relationships with Van Eck, which is notable because they have traditionally been a self-indexer, and of course, with Fidelity, who is licensing our sector indices in the U.S. Third, we have also increased our revenues from other non-ETF index funds. Over the past few years, the share of our asset-based fees that we received from non-ETF passive funds has increased, and that trend has picked up in the past year. And fourthly, MSCI remains very focused on the continued development of strategy indices, also referred to in the industry as risk premia or smart beta indices. These strategy indices provide our clients with a differentiated set of indexed strategies to meet their investment goals. Examples include our Minimum Volatility Indices, Economic Exposure Indices, Dividend Yield Indices and so on and so forth. We are seeing lower-cost, differentiated investment strategies becoming an increasingly important component in our clients' investment portfolios. This approach is part of their intense focus on value for money. MSCI is uniquely positioned to exploit that trend given our capabilities across both indices and portfolio management analytics. Our analytics tools help clients assess the impact of their market views on their portfolios and identify gaps in those portfolios, some of which may be addressed by differentiated investment strategies. At the same time, our strategy indices are designed to reflect an increasingly large number of investment strategies in a transparent, replicable and passive way. These strategy indices are driving a significant amount of our new licensing activity across the world. During the second quarter, ETF managers launched 12 new ETFs linked to our strategy indices, and we expect further launches in the second half. Let me now turn our attention to our analytics businesses. Our risk management analytics unit had a solid second quarter. We have seen stronger sales of our RiskManager products to hedge funds and we continue to make very good progress in our sales to the asset owner community. During the second quarter, we were successful in convincing one of the largest Canadian asset owners to adopt our RiskManager system for measuring market risk. A key factor in our win was our ability to incorporate position-level risk reporting for hedge fund portfolios. We also sold a combined market and counterparty credit risk capability to a large U.S. regional bank. We now provide market risk systems to 4 of the top 6 U.S. regional banks. I mentioned earlier that we added a new margin replication offering for centrally cleared OTC products. This is an example of how we are adding capabilities designed to meet very specific needs that we have identified in the marketplace. With mandatory clearing of OTC derivatives, there will be a need for all parties, not only to make up key margin calculations in real-time and in pre trade situations, but also to be able to anticipate future margin requirements. In addition, dealers need to be able to explain those margin calculations to their buy-side clients. And some of the clients will want to be able to independently replicate those calculations. So our broad client reach, coupled with our ability to react quickly to emerging needs, are a major competitive differentiator and provide us with an ability to continue to grow our business. The performance of our equity analytics business improved in the second quarter. The new Japan equity model that I mentioned earlier incorporates innovative new factors in its analysis of market drivers. That model is an example of the kind of new approach that will be required to stabilize and eventually grow the PMA product line. Our enhanced Barra Portfolio Manager software has also been an important driver of our new sales for this product line this past quarter. Before I conclude my remarks, I would like to highlight again our announcement that we intend to enter into a new $100 million accelerated share repurchase agreement at the end of today. Our company and our board made a commitment last December that we will seek to repurchase $300 million of our shares before the end of 2014. Today's announcement is a step towards fulfilling that commitment. In fact, only 8 months after the initial announcement, we will be 2/3 of the way towards completing our current authorization. Beyond our commitment to return capital to shareholders, the ASR is a signal about the strong cash flow dynamics of MSCI's business model. We have put that cash flow to use in a balanced way to drive growth and return capital. In the past 18 months, MSCI's strong cash flow has enabled us to invest nearly $200 million to make strategic acquisitions and capital expenditures to fund organic growth. We have also repaid more than $260 million of debt and now buy back $200 million of our shares via these 2 ASRs. Let me now pause there and turn over the call to the operator to take your questions. Operator?

[Operator Instructions] Our first question comes from Alex Kramm of UBS.

Maybe just on the financial, starting with the expenses here a little bit. Those certainly surprised us. So maybe you can give -- on the positive side, being lower than what we expected. So maybe you can give a little bit more color, talk about maybe the outlook if there's anything else we should think about in the second half. And then maybe more specifically, you highlighted the whole emerging shift in terms of your employee base. So is that a function of maybe some of the salespeople related to Vanguard and other products like, moving or discontinuing? Or is there something bigger going on here that we should be thinking about?

Alex, this is Bob. A couple of things. The expenses on an organic basis remain -- when you start with non compensation, remain pretty much in check. Actually, they were down a little bit. The growth that we saw in there was coming from our acquisitions. And if you look back over time, we have kept our non compensation expenses pretty much in check. With respect to compensation expense, if I'll take you back a year, remember our cost, we had about $3.5 million, nearly $4 million of one-time changes that came through last year so that would naturally compress the year-over-year growth. But turning to your question on the emerging markets, this is really a continuation of a journey we started a long time ago. And you can see we're at 44% now. We were at 42% a year ago. We'd actually ticked up to even a higher number than that, 45%, before our acquisition of IPD, which brought us down. And what we're doing here is allowing ourselves to build capabilities in these lower-cost centers that allow us to have more capability to invest more within our company on an organic basis that we've talked to you about previously.

I would also add a couple of points. One, specifically referencing your comment on Vanguard, there is no expense savings at all associated with the loss of that revenue. So that did not factor into the expense equation here. Secondly and very strategically, what we have accomplished at MSCI, which I believe puts us in a great position to scale the business up, is an ability to -- in a significant number of emerging market centers, is to have an ability to recruit talent, onboard it, train the talent and put it to work effectively in obviously places like Mumbai, like Manila, like Beijing, Monterrey, Mexico, Budapest and the like. So we have a management infrastructure. We have the office space. We have the technology. We have the teams that operate globally and so on and so forth. So as we see a gradual improvement in the operating environment and as we see an ability for us to continue to increase the level of investment in new solutions or innovative products, all services to our clients, we will be able to scale up the company significantly by utilizing these emerging market centers. So that's something that we have been focused on developing and building. And we are largely there at this point. Clearly, there's always things that you could do, but we're largely there, and position us very well for continued investment and large investments in the company without taking a bite out of profitability and scaling up the company when the markets return in earnest.

Okay, great. That's helpful color. Just shifting then to the asset-based business or the ETF business, in particular. I know this is a difficult question to answer, but obviously, you had a laundry list of new products, new partners and so forth. So wondering if you can give us your best guess in terms of the fee rates, as you think about some of these newer, higher fee products versus you also have the iShares core, which is lower. So where do you think they will shakeout? And what's the trajectory over the next few quarters as these ramp?

As you'll see with new funds, we'll have certain minimums in place. So as the AUMs start to build, we'll see some differentiation in the pricing. But right now, when you exclude the Vanguard, as I said earlier, our overall is about 3.6 basis points. And for the near term until assets build, it probably would be stable around that. We'll just have to keep an eye on those AUMs as they grow and exceed the minimums.

I will say the fee is relatively -- the fee structure is relatively stable at this moment in terms of a lot of the new products. What we are accomplishing is even wider levels of diversification of this business, diversifying by listings across the world, by top of indices. Clearly, a lot of the launches in Asia have been China-related and Asia-related so that helps also diversify the index base. And we have a two-pronged approach, which is continue to deepen the relationship and the licensing activities with our largest clients, and at the same time, being able to pick up new clients, new ETF managers. So we're very comfortable where we are in the fee structure, which is stable. We're very comfortable on the level of diversification of the business, that doesn't rely on either one index or one country or one region of the world or one manager. So that has paid in spades in this environment, including the loss of the Vanguard funds.

Our next question comes from George Mihalos of Credit Suisse. Georgios Mihalos - Crédit Suisse AG, Research Division: So wanted to start off on the recurring sales side. I think this is the first time in 6 quarters that you had year-over-year growth and the first time in 3 years where you grew sequentially, 1Q to 2Q. Can you maybe talk a little bit about how much of that is really from better execution from the MSCI salesforce, that integrated approach, versus some of your clients with the market being up, actually starting to loosen their purse strings a little bit?

George, I think it's definitely a combination of factors, the quiver of arrows, right? It is -- one, it's definitely strong execution. I mean, we have been very focused on continuing to grow and defend the business in the last 8, 9 quarters. I mean, the sequential, gradual erosion, very gradual erosion started probably back in May of 2011, right, with the European debt crisis and continued quarter-by-quarter, as you mentioned. So we were extremely -- we have been extremely focused and we'll continue to be in executing better in all aspects, looking for new clients. If somebody wants to cancel, negotiating with them, to make sure that we address their problems and retain -- first of all, retain the client, and secondly, retain most of the revenue and so on and so forth. So that's one element. The second element is that there is a bit of a better tone, especially in North America, happening. And I'm not sure that translated into a lot more at the margin here. But it feels like it may translate at some point in the future into better sales. But that may have ticked up a bit, the conversion of the pipeline into sales. Our pipeline remained healthy. The issue continues to be the sales cycle, the approvals of the clients need to go through and so on and so forth. That has not yet changed dramatically, even though the tone has changed. So I think, overall, you feel that -- now there are areas that we have put a lot of more effort into it. So for example, in risk management analytics, we put a lot of focus on Asia, moved some senior people over there, hired some salespeople and the like, and we're seeing an uptick in there. We've looked at the hedge fund space and created differentiating pricing to emerging hedge funds and in mature hedge funds and the like. And that has helped those penetrate that space better. So there is a combination of all of those factors. And hopefully, it will bode well when that better tone translates into, at some point, better sales. Let me add one last point. In all of our businesses, you have to remember that we have a relatively higher reliance on 2 areas. One, a client segment called the active asset managers, which are going through structural changes, and secondly, the U.S. market. So what has happened in the last 12, 18 months is that the U.S. market hasn't been as ebullient, even though the economic recovery has been better than other markets. Hopefully, that will start to change. The tone is better, but we have to see it translated into sales. The active management segment is still undergoing some cautiousness around the world and we haven't seen that changing yet. But hopefully, with better equity values, less pressure from the passive managers and so on and so forth, that may get better in the near future. Georgios Mihalos - Crédit Suisse AG, Research Division: Okay. That's good color. And then Henry, you sounded very positive on the outlook for ETF launches, MSCI-linked ETF launches, over the back half of the year and going forward. Can you maybe parse that out between launches in the U.S. and internationally and if you're seeing a lot more momentum on the international side?

Well, look, what I specifically mentioned, George, was the launches of strategy in the ETF, right? That is -- we have some good momentum going there. That's what other people call smart beta or risk premia or the like. We continue to be cautiously optimistic about the launches of a lot of different ETFs. But that clearly has slowed down from a year or so ago across the world. We also continue to be cautiously optimistic about launches of ETFs in Asia, particularly in Hong Kong, with China-related ETFs. And that's an area that has been challenging to penetrate, even though the China markets are undergoing some bearishness. But I think the launches of ETF may bode well because the China regulators are also opening up the market to more and more international investors. So even though the markets are not performing as well, but ETF managers would like to get a presence there with their licenses to be able to invest in the China market. So I think, overall, we continue to progress well with launches. The key to the AUM and the profitability to the revenue of this business will be a balancing out -- a balancing act between current large ETFs that we have and the inflows or outflows and appreciation or depreciation of assets in those compared to the new funds.

Our next question comes from David Togut of Evercore Partners.

This is Rayna Kumar for David Togut. Have you seen any change in your sales cycle? Have they lengthened or shortened in your risk management business and your index business?

Well, largely the same. The tone is better in the U.S., a little better in Japan, the same in Europe, probably the same in non-Japan Asia. The tone is better in those specific markets, but the sales cycles remain about the same. The approval processes that we have to go through with clients remain the same. We're hoping that if this trend continues, a better, positive tone in the bigger markets, such as the U.S., that may translate into a little shorter cycles gradually and less approvals and the like. But that -- we need to remain cautious and we need to see that materialize before we claim any kind of victory.

And just one more quick question. I noticed SG&A was flat year-over-year. Could you just talk a little about the drivers of SG&A and if that level is sustainable?

I think when you look at it year-over-year, some of the costs that I referred to in the compensation side, for example, we had higher costs. Actually, we had probably between double occupancy. We had severance. We had cost that would be in there that increased, I would say, normalized numbers, if you go back and look at what we said in the second quarter of last year. So the growth was a little bit more than it may have appeared on a year-over-year basis. And the non compensation piece is actually, if you normalize it, as opposed to, as I said in check, it was up a little bit on a real-time -- on a same-time basis. Not a lot, but we've kept it in check.

Our next question comes from Toni Kaplan of Morgan Stanley.

I wanted to ask about -- I thought that the results in the asset-based fee business were strong. And you talked earlier on the call about the non-ETF sources contributing, specifically I think, the passive fund component. So I was wondering, is this a focus of yours on diversifying? So is it an internal push towards diversification? Or is this more client-driven with more assets going into these passive vehicles that are linked to MSCI? And also if you could give us an idea of the magnitude of how large this is now versus a quarter ago or a year ago, that'd be helpful.

Toni, we spend the better part of last sort of 10 years at very actively working with the institutional passive managers around the world, ensuring that the licensing arrangement they have -- that we have with them, converted from flat fee to AUM basis, clearly at levels that are much lower than the ETF because it's high levels of institutional passive. So pretty much the entire passive industry in Japan is under this and the U.S. and some of the clients that we have in Europe. So that was the work that was done and was put in place. So we keep focus on it in terms of incremental, but largely, a lot of that work was put in place a few years back. So therefore, the benefit that we're now receiving is as the world has, in the last few years, put a lot of emphasis on passive investment, of which obviously ETF is one example of, but there are other examples in institutional passive, passive accounts that are separate accounts or institutional pooled vehicles and the like in a lot of these places, as I said, like Japan, like the U.S. and places in Europe, then those assets have risen and the AUM fee that we charge of them, the asset-based fees have increased. We expect that trend to continue as the world continues to put more assets on a relative basis into passive compared to active equity management. So we expect that trend to continue and for us to be a beneficiary of that trend.

Okay, great. And then just lastly, I was wondering if you could talk about potential for expanding the business and derivatives based on MSCI indices.

Well, that's a great question because we are extremely focused on working really hard in developing very strong relationship with various derivative exchanges around the world to create complexes of derivative products that can be traded on MSCI indices. We clearly have such an arrangement with the New York Stock Exchange Liffe U.S.A. that has increased quite significantly in terms of creating an open interest and all of that. We're also increasing the number of indices that are being launched into derivative contracts there. In the first part of the year, we announced a licensing agreement with Eurex in Europe to do the same and a number of products have been launched there. We continue to strengthen our capability and relationship with SGA (sic) [SGX] Singapore Exchange in Singapore, as well, we're in dialogue with other exchanges in Asia. We're in dialogue with some of the exchanges in Latin America about this. So that's a big area of focus for us. It's an area though that products get launched, some of them work, some of them don't work. It takes time to accumulate volume and open interest. So it will take time to accumulate revenues of material magnitude. What we like about this is what we call the index ecosystem, which is it creates an ability from the asset owner being actively benchmarked to our indices to being able to execute a strategy passively with index funds or actively with our active management clients and being able to hedge or speculate or overlay risk with the derivative contracts that we put around the world. So all of it is an ecosystem that builds on one another, the legs, the feet on one another. And that's one of the more strategic reasons that we're doing it in addition to the revenue so that we can continue to strengthen the ETF business and the benchmark business with derivative contracts. So the revenue, sometimes you pick it up on the contracts themselves. But sometimes you pick it up by the ability of having more active and passive products on the benchmarks.

[Operator Instructions] Our next question comes from Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: On the strategy indices, stepping back a bit, Henry, do you see that market -- I guess, I'm just curious how you see that market evolving over the next few years. Is it a market where you think scale is going to matter as much as maybe it does in the traditional ETF business? And I ask because right now, it seems like there are a lot of different fundamental weightings being used out there from a multitude of providers, obviously some of whom are self-indexing.

Well, I believe that there is a quiet revolution going on in the index world from, what did you say, in addition to the provision of market betas, i.e. indices that reflect the beta of a market, so give me the performance of Japan or emerging markets or Europe or U.S. or whatever. In addition to that, to the provision of indices that capture the beta of an investment strategy depending on where you are in the investment cycle. So clearly, in this current part of the cycle, everyone is focused on yield and everyone is focused on volatility. And therefore, a lot of the work that is taking place in the strategy indices are on those 2 fronts. How do you reduce the volatility of a portfolio and still come up with a similar in return? And obviously, for more retail investors, how do you create an equity portfolio with sustainable and consistent dividend in the constituents of the portfolio? So I think that is here to stay. And obviously, depending on the cycle, the indices are going to be different. So if you think about cycle of growth, hopefully we'll get to that at some point, economic growth, it would be more on growth stocks, it would more on momentum stocks and the like. If you see a cycle of higher inflationary expectations, it will be -- give me a portfolio of -- or an index that has stocks that are more resilient to inflation and can pass prices to their consumers and investors and the like. So again, depending on the cycle, you're going to see different kinds of investment strategies, and therefore, you're going to see different kind of indices. We are uniquely positioned in the marketplace to do this kind of work because a lot of our research people come from the buy side, from asset management. Secondly, our PMA, our equity analytics capabilities, this is what we do. We build models and we build software to give it to clients to quantitatively develop investment strategies and back-test those strategies in order to come up with their own investment portfolios. So we're using a lot of those capabilities internally to develop with our teams, develop those quantitative processes to understand how these investment strategies can be replicated in the form of an index and back-tested and provide to our clients to be used either passively or actively. So clearly, the competition changes. Quite a lot of our competition is no longer index providers. The competition ends up being -- some of the broker-dealers, some of the investment management staff and the like that are trying to either self-index or broker-dealers trying to create a basket of securities that somebody can invest in. So we are a leading provider in this space. We're capturing quite a lot of the market and we want to be a premier provider in this area. And I don't think it's going to change. The only thing that would change is type top of indices you will be providing. But this is here to stay and is, as I said, a quiet revolution that is going on. Christopher Shutler - William Blair & Company L.L.C., Research Division: All right. And then just one more question. In the PMA business, thanks for some of the detail there, which was helpful on the run rate. Just given the 4 or 5 different pieces that, I think, Bob mentioned, how do you see those different components trending? And if you add all those pieces together, do you think there's reasonably the PMA run rate is going to stabilize over the next few quarters?

Well, the last part is what we've been trying to reach, right? And we did reach it for a little bit of time, and then it ticked down again. I think fundamentally, what has happened is that the end market for these products have changed. And some of our offerings were designed for part of the market but not for the newer part of the market. So what you see happening -- and that's obviously happening to the quantitative asset managers and the quantitative support of fundamental managers in the way they support their fundamental clients, right? What we're trying to do is reposition the business, right, to where the demand is going in many respects, at the same time, that we continue to sell and protect the current book of business in the context of clients that are also struggling with that transition. So quantitatively, asset managing has changed dramatically from August -- it started in August of 2007. And so what a lot of the change have been is people are now looking for different datasets that they can read signals from. So therefore, we're try to supply the ESG dataset, the economic exposure dataset and the governance dataset and the like. So people are looking for more customized models. People are looking for better software that helps them do more things, in particular, real-time things and the like. So again, we think there is a healthy demand for a lot of things in this space. It just is that we're working pretty hard on investing to move those products and those innovations to that part of the demand at the same time as we continue to protect the current set. So I am cautiously optimistic, but I have been for some time. And clearly, we've seen some downgrades here in the last few quarters. But we're working pretty hard at it and we believe that there is an opportunity here for us to develop a good business that will grow if we reposition it well.

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing comments.

Thank you, Sam, and thank you, all, for joining us on the call this morning. We appreciate your ownership and your support. Have a great day.

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