MSCI Inc. (MSCI) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mr. Edings Thibault. Mr. Thibault, you may begin.

Thank you very much. Good day, everyone, and thank you for joining our first quarter 2014 earnings call. Please note that earlier this morning, we issued a press release announcing our results for the first quarter 2014. A copy of that release may be viewed at msci.com under the Investor Relations tab. You will also find on our website a slide presentation that we have prepared to accompany 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 on which they are made, which reflects 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 uncertainty 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, 2013, today's earnings release and our other filings with the SEC. 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: after-tax income from discontinued operations and the amortization of intangible assets. Adjusted EBITDA also excludes depreciation and amortization of property, equipment and leasehold improvements, while adjusted EPS also excludes the income tax effect of the excluded items. Please refer to today's earnings release and pages 20 through 22 of the investor presentation for the required reconciliation of non-GAAP financial measures to our numbers. With that, I'd like to turn it over to our Chairman and CEO, Mr. Henry Fernandez. Henry?

Thank you, Edings. Good morning, everyone. I am pleased to report our strong first quarter results. Our revenues of $240 million are up 9% versus the prior year, and our run rate grew organically by 10%, to $955 million. Our EBITDA slipped a bit by 2%, to $97 million, as we made important strides in executing on our investment plan. Our diluted earnings per share rose 42% as a result of a noncash tax benefit associated with the sale of ISS. Bob will review these numbers later on in the call. Let me take this opportunity to share with you, from my perspective, what I think are the 3 biggest headlines from this quarter. First, the investments we made in 2013 and earlier are continuing to pay dividends. Our subscription run rate growth accelerated to 8% versus 6% in the fourth quarter, for example of those dividends. Importantly, the improvement in the first quarter was driven by both stronger sales and an improved retention rate environment for us, which have been 2 key investment areas for us over the past year. Secondly, we continued to make important strides in our investment program, which we outlined at Investor Day. And therefore, we added a total of 43 employees in the quarter and nearly 400 over the last 12 months. And third, I am pleased to report that this morning we closed on the sale of ISS. The last 2 points, the investment program that we have set for ourselves and the close of ISS, are critical because they reflect our determination to make MSCI a more focused and faster-growing company, one that is well-positioned to take advantage of the big changes that we see in the investment industry worldwide. By investing in our products that create real solutions to our clients' investment programs and distribution so that we're very close to those clients and in servicing them and by shedding non-core units, we believe we can accelerate MSCI's revenue growth into the double digits over the next few years. Our first quarter results represent one important step in that direction. As I noted, our run rate grew by 10% in the first quarter of 2014, fueled by a 14% growth in our overall sales and a continued improvement in our retention rates. Our sales growth was driven by a combination of the investments we have made to add to our sales force and an increase in our product development initiatives. We have grown our sales force by almost 20% over the past year. We have increased our sales focus on ETF providers, a decision that is paying off. In the past, we have talked about our investments in countries like Korea and Canada, and how those investments are generating new sales. This quarter, we opened a new sales offices in Santiago, Chile, to cover clients in the countries of Chile, Peru and Colombia, which have fast-developing pension fund markets for us. Another contributor to our growth was the continued strength in our retention rates. Over the past year, we have made significant investments to strengthen our client service teams. Our key focus has also been on adding to the number of client consultant that support our analytics products. This client consultants are typically located in our major sales offices around the world, and have the day-to-day responsibility for ensuring that our clients get the maximum benefit from our tools. Increasing the quality and the quantity of our interaction with clients increases our retention rates; enables us to meet our clients' needs faster; and serve as a valuable pipeline of ideas for new problems. As we noted during the Investor Day, adding to our new product development capability has been and will continue to be the single biggest part of our investment plan. We want to be relentless in our focus on adding value to our clients and on accelerating new product development is critical to that goal. It is pretty gratifying to see some signs that our focus in these areas are starting to pay dividends in the form of improved operating results for us. One big example of where innovation is driving results is in the equity investment process. Equity investors worldwide are increasingly using quantitative tools to help them drive a desired investment outcome, which has lower volatility or higher dividend income without giving up the benefits of broad market diversification. MSCI's factor indices are used by our clients to help them achieve these goals. Assets under management linked to our factor indices have grown rapidly, expanding from $50 billion a year ago to approximately $95 billion at the end of the first quarter. New mandates won in the quarter added almost $10 billion in new assets, demonstrating the increasing acceptance of MSCI's factor indices and our increasing leadership in this market. One of our key advantages in building factor indices is the credibility that we bring to the market via our Barra factor modeling expertise. We are focusing on extending that leadership in factor investing. In the first quarter, we launched a series of 10 sector factor models for the U.S. market. These models enable investors to take a factor-based approach to market sectors in the United States for the first time. We also launched an emerging market model, a risk model or a factor model to help emerging market investors. All of these 11 new models incorporate our new and innovative methodology, which we call systematic equity strategies. Looking ahead, we anticipate a new release shortly of Barra Portfolio Manager that will significantly expand our ability to process large equity portfolios and extend the backtesting capability of some of our key risk models. In the multi-asset class investment process, we continue to benefit from the growing demand for greater exposure to alternative asset classes, among our asset-owner clients. During the first quarter, 2 large U.S.-based pension plan turned to MSCI to provide risk management and reporting systems because of our market leadership and our coverage of both liquid asset classes and alternative asset classes. We also made progress in deepening our relationship with pension fund consultants by leveraging the InvestorForce platform that we acquired a year ago. One of our key growth strategies is to reinforce that network effect or ecosystem effect that we can derive from the widespread use of our tools and methodologies by both asset owners and asset managers. So it's gratifying to see our continued progress on this front. Many of our large multi-asset class investment clients are placing increasing demands on our portfolio processing capabilities as they seek to bring more positions and more portfolios into our risk management and reporting technology platform. One of the largest deals for the first quarter was to a global asset manager who needed to upgrade their current usage to incorporate many more portfolios and cover a much wider set of securities in a much faster environment. Therefore, increasing the capabilities of our technology platforms is a key investment objective of ours, including expanding our data centers, expanding our use of virtualization technologies and storage capabilities. Through the second quarter, we will be releasing an upgrade to BarraOne, which will provide enhanced visualization capabilities in that software system and improve asset liability management capabilities, among other changes. We're also targeting a significant upgrade in our ability to process data around complex securities with lower latency in the second half of this year. We continued to make progress on our targeted investment plan during the first quarter. As all of you know, investments for us is really adding skilled people that develop and enhance our intellectual property. Our net headcount increased by 43 versus the quarter -- the fourth quarter of last year, and by almost 400 people versus the first quarter of 2013, which is an evidence of the investment program that we have set for ourselves. And approximately 50% of the first quarter additions of personnel were in our product development efforts, 1/3 came in client service and the remaining 15% were additions to our corporate infrastructure. Most of the new additions of personnel that we made over the last year have been in our emerging market centers, reflecting our focus on maximizing the efficiency of our investment dollars. Finally, as I said earlier, we closed the sale of ISS this morning. With the sale, MSCI is now even more focused on its primary goal of offering a full range of tools that offer insight to our clients on the risk and the performance of their portfolios in the major single-asset classes of the world and the combination of all of them for our multi-asset class investment portfolio -- investment clients. So let me sum up my remarks. First, we had a very solid start to 2014. The investments that we have made in sales, client service and product development, including our technology platform, have contributed to an increase in our overall sales and continued to drive higher and higher retention rates. Secondly, we are on track to continue that investment plan. We continue to push forward in our hiring plans, and I am pleased with the pace of our product development efforts. It is early, but we believe that we're also on track to increase our revenue growth to the double-digit goal that we have set for ourselves for the next few years. Third, and finally, with the sale of ISS, MSCI is a much more focused company with additional flexibility to accelerate our organic growth and our return of capital to shareholders. Bob?

Thank you, Henry. Before I get into the details of our results, let me point out some important changes that we have made in our financial reporting. The biggest change is that the results of our Governance business have been reclassified as discontinued operations in all periods. Our numbers reflect the operating segment previously reported as Performance and Risk plus some shared overhead expenses that have been reported as part of the Governance segment. Most of my commentary, unless otherwise noted, is going to be directed at the results of our continuing operations. I would also encourage you to look at Slide 16 through 19 of our presentation, where we've made available our 2013 full year and quarterly results in the new reporting format. We also consolidated reporting revenue and operating metrics of our energy and commodity analytics product line with that of our risk management analytics product line. RMA results have been restated for all periods to reflect this change. With that clear, let's go into the financial headlines from the first quarter 2014. Revenues grew 9% to $240 million. Net income from continuing operations declined 11% to $47 million, and diluted EPS from continuing operations fell by 7%, with adjusted EBITDA falling 2% and adjusted EPS falling 8% to $0.46 per share. We had a strong first quarter on an operating basis. Run rate grew by 9.5% to $955 million. This was driven by a growth in asset-based fee run rate and a 7.5% organic growth in subscription run rate. Retention rates remained strong. We continued to make progress in executing on our investment plan. Our adjusted EBITDA expense rose by 18% to $143 million, in line with our investment plan and the expectations we laid out last month in our Investor Day. We closed the sale of ISS this morning for $367 million, plus or minus some customary working capital adjustments. As part of the February 2014 ASR, we acquired 1.7 million shares of MSCI's stock. Now let's dig into the numbers. Revenues grew, as I said, by 9% to $240 million. The biggest driver of revenue growth was our subscription revenues, which grew by 8.5%. Asset-based fees rose 12% and nonrecurring revenues rose by $0.5 million. By product, index and ESG product revenues rose 14%. Risk management analytics revenues rose by 7% and portfolio management analytics revenues declined by 6%. On a run rate basis, our total subscription business grew by 7.5% to $793 million. Subscription run rate growth was comprised of an 11% increase in index and ESG subscriptions and 7% growth in RMA, partially offset by a 2% decline in PMA. Subscription sales rose 18% to $30 million, and MSCI's retention rate edged up 40 basis points to nearly 93%, with all products showing retention rates greater than 90%. Changes in foreign currency rates had a positive impact on run rate of $5.5 million year-over-year. The sequential impact was only a positive $600,000. Now let's turn to the performance of each of our 3 major product groups, starting with our index and ESG products, where revenues grew by $17 million or 14%. Index and ESG revenue growth was aided by the timing of revenue recognition related to IPD products, which contributed $5.2 million to our growth. Index and ESG subscription run rate grew by 11% to $382 million, led by equity index and data products. And with strong growth in ESG and IPD products, which on a combined basis, grew nearly 19% as we saw strong demand for ESG products and IPD real estate data. Index and ESG sales rose 14%, and retention rates remained strong at 95%. Changes in foreign currency lifted our run rate by $3 million year-over-year and had only a modest positive impact sequentially. Asset-based fee revenues rose by 12% to $41 million. Asset-based fee run rate rose 21% to $162 million, with assets under management ETFs linked to MSCI indices at the end of the first quarter declining 5% to $341 billion. First quarter 2014, though, was the quarter in which Vanguard began its transition of the ETFs that switched indices, so that we should start to see increasing convergence between the annual growth of asset-based fees -- asset-based revenue, run rate and the changes in assets under management over the next 2 quarters. Excluding the impact of the Vanguard transition, asset-based fees grew 20% and assets under management grew by $55 billion or 19%. Of that increase, inflows into MSCI-linked ETFs accounted for $37 billion or 2/3 of the change. Market appreciation accounted for only $18 billion. That pattern continued during the first quarter of 2014, as assets under management increased by $8 billion during the quarter, with $7 billion of that coming from inflows. It's also worth highlighting the diversity of AUM linked to our indices. Less than a quarter of the AUM in those ETFs are linked to our emerging market indices. More than 50% are tied to our non-U.S. developed market indices and our results are driven by a wide range of ETFs. Of the 667 ETFs linked to our indices, 62 have AUMs north of $1 billion. As I noted at the beginning of my remarks, RMA now includes results from our energy and commodity analytics products. Risk management analytics revenues rose by 7% year-over-year, and run rate also rose 7% to $307 million. Growth in the Americas and in Asia more than offset continued weakness in Europe. Retention rates in the quarter dipped but remained strong above 90%. FX changes lifted our run rate by $3.5 million over last year, but had very little impact sequentially. Moving on to PMA. Revenues fell 6% to $26 million and run rate fell 2% to $104 million. Big story in PMA was the very modest sequential increase in run rate versus the fourth quarter of 2013. And as Henry noted, we launched 11 new models in the first quarter. New products have yet to have a major impact on our overall sales figure but they are playing a part in our stronger retention rate, with retention rates rebounding sharply to 91% from 82% in the same period last year. FX changes contributed very modestly to the sequential growth but remained at $1 million headwind on a year-over-year basis. Now let's turn to expenses. Our adjusted EBITDA expense rose by 18% to $143 million. As we expected, the biggest increase in our expense resulted from our investments in product development, followed by sales and marketing. Total compensation expense rose 14% to $102 million. Growth in compensation expense was driven by the 17% increase in our headcount to 2,623. We worked hard to mitigate the impact of these additions by making most of the additions in lower-cost centers, some of that benefit was muted by the senior additions we have made to build out our leadership team. Non-compensation expense, which excludes depreciation and amortization, rose 31% first quarter -- versus first quarter 2013, as we strengthened our technology infrastructure and added to our overall footprint. Increases in other items such as professional services, market data and marketing expenses also contributed to the increase. Much of these expenses came online over the course of 2013 and our non-compensation expenses were more stable versus the fourth quarter of last year. As a result of the higher cost, adjusted EBITDA declined by 2% to $97 million and income from continuing operations fell 11%, as our tax rate was more normalized at 36% in the first quarter 2014 versus 29% a year ago. And before we turn to our balance sheet and cash flow, let me touch very quickly on our income from discontinued operations. We recorded income from discontinued operations of $33 million versus $6 million a year ago. First quarter 2014 results include a $31 million noncash tax benefit associated with our decision to sell ISS, which we completed this morning. The tax benefit will reverse in the second quarter, and we estimate this to have a product gain of approximately $75 million to be recorded from the sale. And I want to emphasize that we expect to incur no cash tax liability on the sale of ISS. Now let's turn to our balance sheet and cash flow. We finished the first quarter 2014 with total debt of $803 million with a total cash position of $260 million, of which, $61 million is held offshore. During the quarter, MSCI generated operating cash flow of $25 million. We spent $10 million in capital expenditures, repaid $5 million of debt and spent $100 million in February for the accelerated share repurchase program. As part of the February ASR, we repurchased a total of 1.7 million shares, that brings the total number of shares we have purchased as part of our December 2012 $300 million repurchased authorization to 7.1 million shares. We expect to receive additional shares in May at the conclusion of the February ASR. Share repurchase activity contributed to a 2.6% decline in the number of diluted weighted average shares outstanding in the quarter. Now before I conclude, let me review our current financial guidance for 2014. We expect our adjusted EBITDA expenses to be in the range of $569 million to $582 million. We also expect our cash flow from operations to remain in the range of $275 million to $325 million. Capital expenditures continue to be projected at $45 million to $55 million, with capital spending picking up in the second and third quarter, as we make additional investments in our technology infrastructure and server capacity. And finally, our full year tax rate is now expected to be approximately 36%, which excludes the impact of the R&D tax credit that has not been renewed. Now with that, I think we're ready to take your questions. Operator?

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

Just maybe starting on the RMA business, risk management business, I think the one thing, Bob, you weren't talking about, is the retention rate coming down, year-over-year? I think you mentioned it, but I think you didn't give an explanation. So maybe you can just flesh it out a little bit. Is this coming from a competitive front? Are you seeing any changes there? Or what's driving that lower?

Nothing significant to point out. We had a couple of cancellations, but I still want to emphasize that a 91% retention rate at RMA is a very strong retention rate for that business.

Yes, that's fair enough. And then, I mean, maybe just secondly on the expenses. If you look at that new chart that you gave us here and the employee growth, looks like the first quarter slowed down a little bit the pace of 2013. So maybe just talk a little bit in terms of where you are in your spending and hiring plans, as we think about the remainder of the year. I think if I look at your total expense guidance, I think you're kind of tracking at the lower end. So maybe just flesh it out a little bit where the incremental additions are coming in and where you are today.

As Henry outlined, we had 43 -- a net increase of 43 coming in, of which half of them are for our product development, which is very consistent with our investment spend, and a 1/3 coming in coverage and 15% in infrastructure. We still feel on pace. As you know, January and February tend to be a little bit slower in terms of getting people into seats. But our online offer acceptance rates are coming in strong, we feel good and we still have very focused view on where our investments dollars are being spent.

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

You've -- just another question on the comp. You mentioned hiring some senior people this quarter that led to the offset in the comp line from moving employees to emerging markets. Is there going -- a couple questions. One, is there going to be a mix change going forward with hiring more in developed markets than emerging? And -- based on your investment plan. And then, two, any additional senior people you're expecting, like any vacancies that you're expecting in the senior levels?

Toni, the -- we continue to be very focused on the growth of our employee, i.e. our investment plan in our call centers. So that is -- continues and is relentless. What we have found, especially in technology, the technology group, is that we have struggled to find very senior, highly skilled global operators in technology in some of the lower-cost centers that we're operating. So we have shifted a bit the focus on hiring those people in developed markets. And so in the last, for example, in the last few couple of weeks -- couple of months, I should say, we've hired 4 Managing Directors in our technology group. And 3 were, I mean, Managing Directors here in New York and 1 Managing Director in Mumbai.

Okay, great. And then just on ISS and the proceeds that you're going to be getting from the closing of the sale today. How -- you've talked a little bit about what you're expecting in terms of deploying the proceeds in terms of investing in the business and potential acquisitions or returning through buybacks. Just how quickly do you think that you would be able to deploy the proceeds? Or is this more of a very long-term process?

The proceeds, we are -- we remain, as Henry said and I said, very, very focused, and as you acknowledged, on our organic investments, and that's where our eyes are. We're still in the ASR right now. We're evaluating our options with the proceeds, as they have just cleared the bank accounts. So I would say more to follow on that.

Our next question comes from the line of George Mihalos from Crédit Suisse. Georgios Mihalos - Crédit Suisse AG, Research Division: Henry, maybe sort of a high-level question. I'm just wondering how much of your success in accelerating sales you attribute to better execution at MSCI versus what up until recently was an improving environment in the financial services space. And just curious if you're seeing any sort of change in client tone over the past month or so, as we've had a bit more of a choppier market?

Just elaborating a little bit on the dialogue that we have had with all of you with respect to the operating environment, I think the change that you have seen over the last, now, say 3 quarters or so, 2, 3 quarters, is an environment in which the clients are more receptive to dialogue, to ideas, to concepts, to discussions and the like; but they're not on an environment in which they're free to spend on what they want. So therefore, the strategy that we have been following is to see how we can capitalize on that receptivity by being a catalyst for fulfilling some of their needs. And the catalyst, typically, is in the form of a new product or an enhanced product, in the form of our consultants navigating through inside the organization and identifying new needs. And then we come back with a solution to those needs. And it's also -- the catalyst is also the ability of us to cover more clients or deeper into the current client organizations that we follow and, therefore, the additional sales and the like. So there is receptivity but it's not proactively on the part of clients. We need to go out and get it. We need to be a catalyst for that. So I would attribute a large part of our success in the last couple quarters in increasing the sales tempo. And now, for a good number of quarters, in high, very high retention rates, attributed much more to what we have done, much more to our ability to navigate those client organizations and be catalysts, as opposed to the operating environment just coming [ph] at all, so just giving us the sales. And your last comment is, we are -- we don't have an indicator that is kind of week-to-week or month-to-month with respect to our clients. So we haven't really seen much change on the choppy markets over the last few weeks, or haven't seen much change on -- in Europe [ph], for example, the geopolitical situation there. So there haven't been any items that have been taken out of the pipeline because of that, or slowed down in the pipeline because of that. So we haven't seen any effect of any of that. Georgios Mihalos - Crédit Suisse AG, Research Division: Okay. And then maybe, Bob, just digging in a little bit on the RMA. I'm just curious if -- the lower retention, is that predominantly just sourced from the hedge fund side of the business? And then maybe talk a little bit about the rationale of combining the RMA in the energy business.

I'll start with the second one. It just made logical sense to combine that within the RMA, given the multi-asset class nature of that business, that product line. So that was intuitive, something we'd talked about a while ago, and we felt the first quarter was the time to roll that out. I can't say there's really anything unusual in the retention rate in terms of it, other than the fact that we feel very good it's at 91% and our client service. I would say we're not losing clients, though, George, I just want to make sure that these are some modest potential down-sells that occur. We've seen a net growth in our net client base over the quarter, year-over-year and linked quarter, so there's nothing really -- there's no headlines to attach to it.

Now with that, George, on energy and commodity analytics, this has been a business that has as you -- small line item but has been impacted for a couple of years now. Because a lot of what we did there was the creation of auction [ph] models that were coupled with software to help people in energy and commodity markets hedge their exposure to electricity or natural gas or things like that. And that was highly dependent on the OTC market for companies, corporates and dealing with obviously broker-dealers and the like. And given the high levels of uncertainty that have existed in that market by the regulators, to move it to a centrally cleared [ph] market, exchange-credit market, that has been a painful process for that business. So what we're now trying to do is reposition that business into more of the mainstream of risk management for our clients, which would include commodities and energy markets. We have a project, internally, which is called FEA 2.0, which is a little bit of taking a lot of the capabilities of FEA and putting them in RiskManager, the risk metrics product line, and having a wider use case for that and all those capabilities in that business.

The next question comes from the line of Kevin McVeigh from Macquarie.

I wondered if you could give us a sense to just -- as clients are working their way through their budgets, Henry, are they looking to firm them up mid-year or kind of keep them more static? Or just thoughts on the budget process, given that we're kind of a quarter of the way through the year at this point.

Kevin, yes, I mean we were coming off last year and into this year, like the nature of your question, we were kind of wondering how clients were going to budget for their needs in 2014. And given the tough environment for the last few years, we were fearful that, on a straight budgetary process, that clients were going to keep a tight lid into their formal budgets going into 2014. That hasn't happened. They -- we're not in a spending spree kind of environment at all. I think a lot of clients have built flexible budgetary processes in which whatever they -- their basic and most important needs are being addressed versus, let's say, a year ago, in which even their basic needs were being postponed. But what I said before is the absolutely key to this process for us is be a catalyst in that process, so that -- as a catalyst that there is a need, we hit the need, we present with the product, a new product or an enhanced product, and it forces them to go out through the chain of approvals to get that done, and then we get the sale done. Being a catalyst in that process is usually important, and that is why we formed, clearly, this investment program because we felt that, probably in 2014 and maybe even 2015, your success in driving sales and high retention rates, it will be dependent upon being that catalyst. That typically is a new product, an enhanced product, a new functionality, something new to talk about and so on and so forth, right? The other part of this thing is that regulations are tightening and a lot of the regulatory environment that has been discussed extensively over the last 3 or 4 years is now -- a little bit in 2013, and clearly in 2014 is now coming into -- coming online for a lot of clients. Before, it was a question of consultations and debate and discussion. Well, the reality of that new regulatory environment is now coming online and, therefore, you have deadlines of fulfillment of those regulatory requirements by a lot of financial institutions, and we're capitalizing on that trend as well.

Understood. And then just is there any sense, Henry, as you make the investment in the sales force, would you expect some type of kind of -- I know there's going to be a transition period, and as they scale, part of that to drive the continued accelerating into kind of '15? So you hired them today, maybe they take, is it a 6- to 12-month window before they scale and then they ultimately execute that much better, or...? Am I thinking about that right?

Yes, I think there are 2 drivers, if I get the nature of your question, Kevin, there are 2 drivers that we are looking to benefit from. One is, clearly, it takes time, some products more than others, for those salespeople to become completely functional and producing at maximum levels. In the equity index business it's a shorter fuse, say, 3 months or so, maybe a little longer. At the other end, risk management analytics, it probably takes 6 to 12 months for salespeople to get more up to speed. So that 20% addition of personnel in the sales force is still going through those step functions of improving efficiency and productivity. So we should get the benefit of that as they become more up to speed with the product line. So that's one benefit that we hope to reap. The second benefit is that we are still in an environment in which the ticket items are on the lower end of what we're used to. So, therefore, a PMA sale is maybe $50,000 to $100,000, when they used to be maybe a couple of hundred thousand. An RMA sale, maybe, is $300,000 to $500,000, when they used to be almost $1 million. So the ticket size has decreased because people are being extremely more focused on reducing the -- just buying the functionality that they need. So therefore, our productivity per salesperson over the last few years has been in the low end of what is possible. So what we are also counting on as the recovery unfolds and gets better and better in the next 1 to 3 years is that, that size of a sales force that we have could have higher levels of productivity per salesperson because the ticket items are bigger, the sales cycle gets shorter as things improve. And therefore you get a lot of benefit from that, but we're not there yet. We're gradually seeing it, but we're not there yet. But that could be a significant dividend for us 1 or 2 years from now, right? Depending on, obviously, how fast the recovery in the budgets of our clients takes place in the next couple of years.

Our next question comes from the line of Joel Jeffrey from KBW. Michael Needham - Keefe, Bruyette, & Woods, Inc., Research Division: This is Mike Needham sitting in for Joel. I'm just curious, thanks for giving detail on some of the factor models that you guys put out this year. But is there really a clear second group of products where you're seeing the most demand for -- increasing demand from clients outside of factor indices? Or is most of the new product developments specifically in that area?

Look, I think the -- there continues to be a lot of demand, and I don't want to minimize this, because the bulk of our sales are coming from our existing product line and enhanced product line of market data indices, right? So there continues to be -- there's been a lot of demand from that. And the bulk of our sales are in that category, so the developed market module, the emerging market module. The frontier market added into the emerging market module. So for example, 2013 was a real banner year for the performance of frontier markets, much better than emerging markets. So that frontier market data set and indices are embedded in the emerging market module. So we did well in emerging market data module sales because of the frontier markets, for example, right? So that continues. Clearly, with the continued changes that we made in our index methodology to adjust to the changes in the marketplace, such as the addition of Qatar and UAE and things like that, the consultation we're doing on China now currently and the like, that creates also demand for the market cap indices. They are -- the majority of our licensing activity for ETFs and other forms of index funds and the like, continues to be the market capitalization indices. So that's important to note. Now a lot of the new product development, but not a lot yet of the bulk of the new sales are coming from factor investing and the like. And therefore, we end up talking a lot more about it, because that's the thing that we're focusing on to generate a new generation of products and build on the sales of the market cap indices. And they started with income producing indices some time ago, then it went to minimum volatility indices. Now, we're talking about quality indices and multi-factor indices of one form or another, quality mix and things like that. And therefore, there is a lot of demand that is going in that direction. And a lot of activity in our product development team. But again, the major focus of our activities on our sales force has been the market cap indices and the majority of our sales. So all we're trying to do is respond to the market needs for a lot of factor investing and create an even more diversified index business and equity analytics business than we've had before. Michael Needham - Keefe, Bruyette, & Woods, Inc., Research Division: Got it. And just on ETF inflows, they came in a little bit lighter in the first quarter, but it looks like, overall, international fund flows continue to be pretty good. Do you think that's just some noise in the first quarter or should we read more into that?

No, it's just noise. We have been extremely pleased with the performance of the ETFs that are linked to MSCI indices in the first quarter. If you look at the global equity index fund, equity ETFs, if you look at the data of inflows, we captured something like 40% of inflows of the total market. So a couple of things are happening. One, we're launching a lot of new products every quarter, all over the world. Secondly, we're capturing a higher market share of the inflows of money going into these ETFs than our average market share, so that puts us in a position to increase market share. And we're fairly diversified, so when the emerging market, which is about a quarter, a little less than a quarter of our total AUM in ETF, when the emerging markets are struggling, the money flows to developed markets, to Europe, in Asia places like Japan, Hong Kong, Singapore and the like. And then to the U.S., which -- where we have a smaller presence in the U.S., on U.S. equity ETFs, but an important one, nonetheless. So I think it's noise. And -- but this franchise is incredible, it's just enormous. And we're growing it every day, we're launching a lot of new products, the dialogue with our ETF clients -- my manager clients is incredible all over the world. We -- I could not say better things about the ETF franchise that we built.

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

So a question for you on free cash flow conversion. Without ISS in the picture anymore, what do we expect the free cash flow from EBITDA to be? Back in 2013 it was running about 62%.

I think that we provided you our operating cash flow. We look at it, we're gauging it between $275 million this year and $325 million, so that gives you the volume that we're looking at from operating cash flow before capital expenditures and any other equity distributions. Our EBITDA margin is around 40% that we convert from revenues. You can look at it from that perspective, Bill. I mean, those are the data points that we put out there for you. But we still -- high cash flow environment, high cash flow generation, we're very much out in front. A little bit lower in the first quarter, higher compensation expenses, a few things come through. Our outlook, again, we still remain confident in $275 million to $325 million for the full year.

Okay. And then I wanted to ask whether you're seeing a pickup in new cross-border institutional mandates, and if so, from where?

No. That is definitely the wave, the current and the middle -- the midterm and the future, right? It's one world. And I think a lot of institutions, especially in the U.S., that used to sort of segregate their equity investment into domestic equities on one hand, on the other hand, developed market equities, and thirdly on emerging market equities. And the ones that were investing in small cap had a fourth leg. Many of those institutions are looking at the equity world as one world, and then they overlay a domestic bias to that. So our ACWI strategy, as we call it, All Country World Index strategy, continuous unabated. So we didn't mention too much in this earnings call about that, but the rate of conversion of institutional investors in the U.S., especially, but also in other places so that ACWI world and ACWI format continues at the same pace that was happening in the last quarter. So we're very pleased with that. And if anything, we're planning to add more resources, a handful of salespeople and research people that meet with clients to accelerate that conversion process.

Okay. A couple of housekeeping items. If I wanted to do an apples-to-apples EPS number that includes ISS, was the accounting [ph] [indiscernible] for ISS about $0.02 to $0.03, is that what I'm getting from the footnotes? The sort of $0.48 to $0.49 number?

That's kind of a difficult question to answer, given now where we're showing a discontinued operations. We're really...

Right. Well that's why I'm just trying to see if -- I'm trying to do a calculation to say, all right, if we -- if they hadn't been reclassified, apples-to-apples, what would it have been? I know it's a...

I'm not sure of the relevance of that calculation, Bill, to be honest. ISS is out of our numbers and will be restated -- and is being restated from a retrospective basis. Continuing the full operation EPS, $0.68, $30 million of that was a gain -- a deferred tax gain. So I would encourage you to really focus on the continuing operations, the EPS and as we show it in our formats there.

Okay. And just confirming the net proceeds on the sale were -- was it -- it didn't sound like there were a lot of deductions to it, around $360 million?

We disclosed gross proceeds of $367 million.

Our next question comes from the line of Chris Shutler from William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: I know that, Henry, I think you talked about in your prepared remarks, you're going to release a new version of BPM soon, which will, I think you said, enhance the -- your ability to process large equity portfolios and help with backtesting. Is that something that I should view as a potential sales driver? Or is it more just kind of normal course of business improvement to the platform and, therefore, maybe more retention mechanism?

I think it's both. It's both, but with a much higher emphasis on the sales driver. So let me take a step back here to explain. Clearly, a lot of our level of innovation over the years on the risk modeling side has been okay. And clearly, in the last 2 years, we've stepped it up dramatically, and that's why you've seen the release of so many risk models. Our innovation on the technology front for a number of years going back to the mid-2000s was slow and therefore, clients were relying mostly on Aegis, which is a client-deployed solution, to look at these models. Or we would sell them the data directly and they would look at their model. So we started -- they would build their own software with our data. So we started a third front, which was can we offer a lot of this in third-party systems like FactSet and that has been a good driver of growth as well. So -- but what we've done in the last 2, 3 years, is really accelerate the investment in the new software, Barra Portfolio Manager, which eventually becomes a substitute for Aegis, but is much more than that. It is not just for the clients that use Aegis, but it's a lot easier to use. It has a lot of uses in the fundamental portfolio management process, in addition to the quantitative portfolio management process. So we are definitely selling at a good clip BPM subscriptions, and we're hoping to accelerate that in the next 1 or 2 years, as we are completing the investment plan on BPM. We're probably about 1 year away from having a complete investment plan, and after that it's enhancements more regularly. But we're very close to the end of that process, and therefore, the functionality that exists there is going to help us drive sales on a higher clip. Christopher Shutler - William Blair & Company L.L.C., Research Division: All right. Great. And then just one other one unrelated. The $15 million to $18 million of stranded costs which you outlined at the Investor Day. How should we think about that playing into your thought process when it comes to acquisitions?

What the $15 million to $18 million gives us -- and it's a little bit tighter than that now -- but still, what that gives us is, for example, we have space here in New York. We vacated, say, 15,000 square feet that we do not need to acquire new space. A similar situation that we have in London, as well as in other offices where we shared space with the ISS team. So that tells us marginal increase, we have that capacity to expand our data centers. That capacity will be removed out of the data centers that we used with ISS, and that will give us room to grow into as part of our investment process. So those stranded costs will be absorbed over time. And all the while, while they're still being utilized to a certain extent by ISS, we have TSA agreements that compensate us for that utilization. So it gives us capacity to grow, it gives us capacity to expand, but nevertheless, they don't go away, but it just slows down the rate of investment as we absorb them.

And to the extent we do smaller acquisitions, the space gets filled out faster, and they will relinquish this space of where the acquired companies were located. But you have to do good acquisitions to do that right.

And our final question comes from the line of Joe Foresi from Janney Capital Markets.

We talked a little bit at the Analyst Day about the products and customization of the ETFs as being potential drivers of growth going forward. I wonder if we could get an update on just sort of how you view those as you try to accelerate revenues.

Are you saying product customization?

The products are one piece of it, the new products which you've been rolling out. And then customization of ETFs, how do they fit into your growth plans?

Yes. I mean, the majority, I would even say the vast majority of our efforts in new product development is to create products that are off-the-shelf, so to speak, and can be used by a wide variety of clients. Only on a very selective basis do we try to go into the business of customizing a product for a particular client. And the reason is that, we put a lot of our effort into the product, there's only 1 client or 2, as opposed to you put a lot of -- the same effort on another product and you have 100, 200 clients, right? So we like leverage in building revenues and that's why we have -- we follow that philosophy. Others are much more on the customization business, but it's very hard to scale the company on the basis of that. Now, we have made exceptions. I mean there was a client of ours who came last year on this sector risk models, and we worked with them and we created some sector models for them and then we took that work, and made it more general and that was the genesis of this 10 sector models that we launched in the U.S. So we want to do a lot more of that. Now, with respect to ETF, again, it's not an issue of customizing an index for a particular ETF, what we do is try to create an index that can be -- that is an investment thesis that transcends cycles and markets and, therefore, could be the basis of an ETF, but the same index can be the basis of an institutionally passive product or a retail -- index mutual fund or an actively managed mandate or whatever. So occasionally, we make customized, but it's the high exception, a particular index or a particular ETF that is very customized, but that's not the vast majority of the business we want to do.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to speakers for closing remarks.

Thank you, operator. And to all of our fellow shareholders, we thank you for your ownership and support. And to all others, thanks for your interest in MSCI. Have a great afternoon.

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