MSCI Inc. (MSCI) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MSCI's Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's program, Edings Thibault, Head of Investor Relations. Sir, you may begin.

Thank you, Andrew. Good morning, and thank all of you for joining our second quarter 2014 earnings call. Please note that earlier this morning, we issued a press release announcing our results for the second quarter of 2014. A copy of that release may be viewed at msci.com under the Investor Relations tab. You'll also find in 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're 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, 2013, other SEC filings and today's earnings release. Today's earnings call may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA, adjusted EPS and adjusted EBITDA expenses. Adjusted EBITDA and adjusted EPS exclude the following: after-tax income from discontinued operations, the lease exit charge 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. Adjusted EBITDA expenses consist of operating expenses, excluding depreciation and amortization and lease exit charges. Please refer to today's earnings release and Pages 15 through 18 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. With that, I will now turn the call over to our Chairman and CEO, Henry Fernandez.

Thank you, Edings, and good morning, everyone. MSCI reported strong second quarter results. Our revenues of $254 million are up 11% versus the prior year, and our run rate grew organically by 12% to $987 million. Adjusted EBITDA was flat at $106 million as we made important strides in executing on our investment plan. Our diluted earnings per share rose 82% as a result of the gain from the sale of ISS. Bob, later on in the call, will review the numbers that we reported this quarter. I would like to share with you my own takeaway from the second quarter results. First, we had strong operating results driven in part by the investments we have made in our business. Second, we are well underway in executing on the investment plan that we laid out on our Investor Day in March. We're starting to see some of the benefits of our stepped-up level of investments in the form of higher sales, strong retention rate and new product launches. And third, as a result of the progress we are making and viewing a continued strong demand for our products, we have decided to increase the scope of our investment plan for the balance of 2014 and for all of 2015 in order to take full advantage of that strong demand for our growth and to accelerate our efforts to upgrade our technology platform to continue to service our clients. Let me start first with a review of our operating results as it relates to our equity investment tools. Global equity market have performed well in recent quarters, so it should be not a surprise that sales of our equity investment tools are helping to fuel our operating results. Equity tools at MSCI, including equity indices, equity portfolio analytics and ESG tools, account for 64% of our total aggregate run rate at the firm and helped drive the acceleration we reported in our overall business. A big contributor to that higher growth has been the investments that we have made in these products over the past few years, and I'm here to give you a few examples of those investments and the results that we have seen due to them. Sales of equity index subscriptions rose more than 30% versus the second quarter of 2013. Over the past 18 months, MSCI has grown our global index sales force, expanded our presence in new markets and added to our product management team in every region of the world. Those investments are enabling us to continue to combine a global product scope with an increasingly local and regional focus on the needs of our clients in each market. These global/local strategy is helping drive double-digit run rate growth in countries like Canada and Korea, where we have added sales resources. It has also paid out in the form of our -- of new clients in new countries, such as the first-ever client that we got in Colombia, Latin America and also many other notable wins that we have had. These investments are helping us gain share in the U.S. market, where a major asset manager recently made the decision to switch the benchmark for its global funds to MSCI and away from our competitor. We're also increasing significantly our focus on the domestic U.S. equity assets in order to take advantage of the increasingly global approach for our U.S. clients in terms of their equity investment strategies. These efforts were rewarded with several notable U.S. domestic benchmark wins during the second quarter. In Asia, we transfer a senior index executive to Shanghai from London in 2012 with a mandate to build a regional product management team. The additional focus of this team, plus the sales team in Asia Pacific, has helped us win 47 new clients over the first half of this year. Each of these new clients and benchmark wins are small in the context of our total business. But in aggregate, the small wins have been the building block of the rapid growth of MSCI indices over the past 18 years. And staying with our equity index products, asset-based fees were a big contributor to MSCI's overall growth in the second quarter. More than 50% of the growth in ETF assets under management linked to MSCI indices was the result of positive fund flows, rather than simply market performance. That sticks to the widespread appeal of MSCI indices to investors in this ETF and is also due to the investment that we have made to better serve our ETF clients worldwide. Over the past 2 years, we have increased the size of our broad management teams to enable our senior managers spend more time on the ETF market. We have designated senior salespeople to focus solely on our ETF provider -- in our ETF manager client and have dramatically increased our investment in marketing. We also began to invest more heavily in our index production capability in order to increase both the number of indices that we create, as well as to take on the added complexity inherent in producing factor indices. All these efforts are paying off. Over the first 6 months of 2014, MSCI-linked ETFs have gathered a net total of USD 29 billion of new fund flows. This is a third of all flows into equity ETFs worldwide. That is almost twice as much as the flows of the second-ranked index provider this quarter. In addition, 75 new ETFs, based on MSCI indices, began trading during the quarter, accounting for more than 1/3 of all new equity ETF launches. Again, that is significantly more than any other index provider in the world. We're also starting to see some of the benefits of our investment in our index production capacity. We launched as many index families over the first half of 2014 as we did for all of 2013, including new fair value indices, and continue to launch factor-filtered indices. Continuing on our equity tools. It was gratifying to see a return to run rate growth for our equity portfolio management analytics. The growth in PMA is the direct result of a decision that we made in 2011 to step up our level of investment in this product line. Over the past 3 years, we have overhauled and expanded the management team in PMA, sharply increased our investment in new product development and invested heavily in client service. Our investments in client service and in upgrading our existing products began to pay off last year in the form of increased retention rates. The investments in new products took longer, but we started to see a growing stream of new products introductions over the course of 2013. In this most recent quarter, we're starting to see tangible evidence that these new products are having a meaningful impact on new sales, not just on increasing the retention rates that began to happen last year. These 2- to 3-year lag from new product investments to meaningful increases in sales is not unusual in our business, and it is worth bearing in mind when we think about the impact of our current investment plan. Continuing on our equity tools. Another example of where our investments are beginning to bear fruit is in our ESG product line. When MSCI acquired this product line as part of RiskMetrics in 2010, we have been coupled together via string of acquisitions that had never been integrated. It took us 2 years of investments to rationalizing the product line, upgrading the technology infrastructure, adding to the sales force and investing in the product management team before MSCI was really in a position to tap into the growing demand for ESG products. All of these efforts over the last 3 or 4 years have helped drive now a run rate growth of our ESG products to the high teens to low 20s, including a 23% growth in the run rate in the second quarter. During the second quarter, we announced the acquisition of GMI Ratings, a complementary provider of ESG ratings and research, and this is expected to close in the third quarter. The acquisition of GMI, we'll view as a propriety data source from a range of corporate governance data and will broaden the product line for all of ESG. While sales of our equity tools have been strong, sales of our tools to multi-asset class investors were slower in the second quarter. Despite this slowdown, MSCI continued to make progress in targeting key accounts and enhancing our products. This off-sale figures was driven in part by the timing of contract signing. You have heard us talk over and over again about our multi-asset class tool sales being bumpy. Some quarters, a little higher, some quarters, a little lower, so therefore, it is important to not -- not to draw too many conclusion on a single quarter of sales. Our pipeline in this product line remains healthy, and client activity remains robust. We had some notable wins in the quarter, including another large U.S. public pension fund. That fund selected MSCI because our long-term risk models and the coverage of private asset classes matched their investment approach, and because of our managed services offering would simplify their use case and ability to operate the software platform. We also had important wins this quarter in our RMA business or our liquidity risk products. On the multi-asset class product line front, we introduced an updated version of our BarraOne multi-asset class risk platform, adding new analytical features and further expanding our asset class coverage. As part of our global focus on enabling our clients to get more insights into their investments in alternative asset classes, we also added coverage of European and Asian markets to our private equity risk model. In each of the examples I have cited this morning, our expanded lineup of ETFs, the greater focus on new markets in Asia and MSCI's growing role as a provider of risk management systems to asset owners, our success has been the result of investments that we have made in our product development teams, our sales and client service and our technology platform. Each success gave us the confidence to expand our program in the middle of 2013, which we outlined to you on Investor Day, and we're making good progress on executing on that plan. Today, we're announcing an additional expansion of our investment plan. While we will lay out the impact of our new investments and what the impact that they will have in our 2014 expenses, so let me give you a quick rundown of where we're investing these additional resources. First, our clients rely on our technology infrastructure to perform mission-critical calculations that they need to better understand risk and performance in their portfolios. At the same time, they are asking us to handle many more portfolios with much more complex securities and even more global in nature and at much faster rate. We're adding to our storage capacity and we are buttressing our infrastructure and technology to increase our overall capacity while enabling us to more rapidly and thoroughly try out new product releases for our clients. Secondly, today, our clients access our risk and performance tools over several different platforms at MSCI, and we are committed to enabling these platforms and continue to improve their accessibility. Many clients though, especially those in Europe, want to access the full range of MSCI tools and data on a single integrated platform. To meet that demand, we are adding to our software and technology development teams to begin the process of creating a unified technology platform that can cover many of our products, from equity indices to risk -- portfolio management analytics to risk management analytics and beyond. Our increased level of investment will enable us to begin building for the future while, at the same time, making the enhancements to our existing platforms that are needed to continue to service our clients and grow. Thirdly, as I noted at the outset, we are seeing a strong demand for our index products. In order to take full advantage of that growing demand, we will be increasing our investment in our index production capabilities in order to speed our time to market for new indices and to put us in a position to increase our asset class coverage. We will also be investing more heavily in sales and marketing with the goal of deepening our relationship with our existing clients and accelerating our efforts to reach out to new client segments, so just insurance companies and especially private wealth management firms around the world. We will also be further increasing our focus on the U.S. domestic market and in stepping up our investment there in new product development and in client service and in client outreach. We are pursuing many of these strategies today. And our incremental index investment will enable us to do more, faster than we have previously planned, and we're hoping that, that will eventually accelerate our rate of growth of this product line. Lastly, the fourth driver of our higher planned spending is obviously the acquisition of GMI, and Bob will touch upon that later on. These investments will have an impact on both 2014 and 2015. But we believe that they will strengthen our ability to provide our global clients with world-class products and services, and they will drive higher sales, higher profitability and, therefore, higher shareholder value in the years to come. Let me name out some of my comments before I turn the call over to Bob. One, we had strong second quarter. Two, our growth is being driven by the investments that we are making in our business. And then three, we are increasing our investment levels in 2014 and 2015 as we seek to develop new tools to help our clients understand the risk and opportunities in their portfolios, to enhance our technology and to expand our sales and client service and marketing efforts worldwide. Bob?

Thanks, Henry, and hello, everyone. Let's go ahead and get right into the numbers. Our revenues grew by 11% to $254 million. Subscription revenues continued to be the biggest absolute driver of our growth, and they grew by 10%. Asset-based fees rose 19% and nonrecurring revenues declined slightly. By product, index and ESG product revenues rose 14%, risk management analytics revenues rose by 11% and portfolio management analytics revenues rose 1%. Income from continuing operations increased 1% to $57 million, and we recorded a gain in net income for discontinued operations at $48 million related to the sale of ISS, which closed on April 30. And as you recall from the first quarter of 2014, we reported a $31 million noncash benefit associated with the proposed sale. So the total book gained on the sale of ISS was $79 million. Diluted EPS rose 82% to $0.91 per share, thanks largely to a gain from the sale of ISS, and adjusted EBITDA was flat with adjusted EPS rising 6% to $0.55 per share. We had another good operating quarter, as Henry outlined. On a subscription run rate -- excuse me, on a run-rate basis, our total subscription business grew by 8% to $810 million. Subscription run rate growth was comprised of a 12% increase in index and ESG subscriptions, 5% growth in RMA and a 2% growth in PMA. Subscription sales rose 6% to $29 million, and MSCI's retention rates rose to 93%. Changes in foreign currency had a positive impact on run rate at $7.2 million year-over-year and the sequential impact was just under $1 million. 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 $18 million or 14% to $150 million. Index and ESG revenues received a boost from the seasonal strength in real estate products revenues, which increased by $5 million sequentially. Total index and ESG run rate grew by 18%. Index and ESG subscription run rate grew 12% to $394 million, led by growth in equity index benchmark and data products. Index and ESG run rate also benefited from strong growth and demand for ESG products and for IPD real estate data. Index and ESG sales rose 14%, and retention rates remained strong at 94%. Changes in foreign currency lifted our run rate by $4 million year-over-year and by just over $0.5 million sequentially. Asset-based fees revenues grew 19% to $44 million, and the run rate rose 34% to $177 million. Assets under management and ETFs linked to MSCI indices at June 30 rose $109 billion or 40% versus a year ago to $379 billion. Of that increase, inflows into MSCI-linked ETFs accounted for $61 billion and market appreciation accounted for $48 billion. Inflows continue to be the biggest contributor to AUM growth in the second quarter as well, accounting for $23 billion of the $38 billion total change. Risk management analytics revenues rose by 11% year-over-year, aided in part by the timing of revenue from implementation projects, and the run rate rose 5% to $310 million. Retention rates in the quarter were largely stable at 92%, and FX changes lifted run rate by $3 million year-over-year but have little impact sequentially. We had a slow sales quarter in RMA, which contributed to an 18% decline in sales and a deceleration in our run rate growth versus prior quarters. Part of the decline can be attributed to a relative handful of deals which were delayed during the quarter and which can be expected to close in the third quarter. Our overall pipeline remains healthy. Moving on to PMA. We're pleased to see more signs of recovery for this product line. Revenues increased 1% to $26 million, and run rate grew 2% to $106 million. FX changes had a very modest benefit on both year-over-year basis, as well as sequentially. The revenue run rate growth at PMA are evidence that the investments we have made in these products, both in terms of developing new products, as well as in sales and service, are starting to pay off. On the new products side, our new market models and enhanced software platform helped our product line to have the strongest sales quarter in 3 years, at the same time, while modest enhancement to our existing products, coupled with an increased investment in client service, helped push our quarterly retention rate to its highest level since 2008. Again, lone quarter does not make a trend but these results are encouraging for PMA because we can trace the results back directly to the investments we have undertaken. Our investment plan continues, and that is having an impact on our expense items, as Henry outlined. Our adjusted EBITDA expense rose 21% to $148 million. Total compensation expenses rose 17% to $103 million. The growth in compensation expense was driven by the 18% increase in our headcount to just over 2,700 employees. The percentage of our workforce in lower cost centers grew to 49% from 43% a year ago and 47% last quarter. Non-compensation expense, which excludes depreciation and amortization, rose 31% versus a -- versus second quarter 2013 as we strengthened our technology infrastructure and added to our overall footprint. Increases in other items, such as professional services, occupancy and recruiting costs, also contributed to the increase. Relative to the first quarter, we spent more on professional services and IT, as well as T&E, recruiting and other costs. Adjusted EBITDA rose slightly to $106 million. Adjusted EPS rose 6% on the back of a modest increase in income from continuing operations and a 4% decline in diluted shares outstanding. Now turning to the balance sheet. The total cash proceeds from the sale of ISS were $367 million. Those proceeds, along with normal cash generation, helped push our total cash balance at the end of the second quarter to $683 million, of which $71 million is held offshore. MSCI generated operating cash flow of $69 million during the quarter, and we spent $12 million in capital expenditures and repaid $5 million of debt, leaving a total debt balance of $798 million. We also closed out a February 2014 ASR in May. As part of that process, we acquired another 600,000 shares, bringing the total share repurchase as part of the program to $2.3 million with an average purchase price of $43.10 per share. And we also continue to have the authorization to repurchase up to an additional $300 million of MSCI stock, and we'll evaluate all options for the use of our cash, including a return of capital or acquisitions that would meet our strategic criteria. Speaking of acquisitions, MSCI announced a small acquisition, GMI Holdings, for $15 million, which we can expect to close in the third quarter. That acquisition is expected to contribute modestly by $2 million to the index and ESG run rate. Before I conclude, let me review our updated financial guidance for 2014. We expect our adjusted EBITDA expenses to be in the range of $595 million to $605 million, an increase from our prior guidance of $569 million to $582 million. As Henry discussed, our revised guidance includes new spending initiatives for our index product line, additional spending on our IT infrastructure and new sales investment as it also incorporates the impact of the acquisition of GMI ratings. We expect our cash flow from operations to be in the range of $275 million to $325 million. That guidance is unchanged. Capital expenditures are projected to be in the range of $50 million to $55 million, and that's a slight narrowing of our original $45 million to $55 million range. And finally, we continue to project that our full year tax rate will be approximately 36%. And one final note. I mentioned the seasonal strength of revenues from our real estate products benefiting our index and ESG product line during the quarter. We are now past the seasonal peak, and we expect that our revenues from those real estate products will decline by $6 million to $7 million sequentially. So please, factor that into your expectations for the third quarter. 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 wanted to start on the expenses. I guess the comment I would make -- rather the new expense guidance. The comment I would make is I think -- you, Bob, in particular, last time we talked, a couple of months ago, I think the question was actually raised like how you feel about the guidance, and I think the comment you made was like, look, it almost like this is the first time we gave some guidance and this is what we should get measured against. And today, you're obviously raising that guidance again, and you obviously, over the last couple of quarters, have a history of changing your tone on the expense and on the investment spending. So I obviously hear your outline on seeing all these opportunities, but maybe a little bit more of like what changed, when that thinking changed and how we can expect you to not, last -- next quarter, come back with the same story and see more investment spending. And does this strength continue? I think you know what I'm getting at.

Well, look, we live in a dynamic world, in a rapidly changing world, and we need to change and adapt to a new world, particularly when we see significant opportunities ahead of us. So nothing that would say we'll never set this [indiscernible] will never be forever, right? So what we see now is incredible amount of opportunity. Especially in the index business, we see enormous demand for indices, for passive investing. We see enormous demand for factor indices to create all sorts of products in ETFs and institutional passive and the like. We see a significant amount of demand compared to a couple of years ago in benchmark indices around the world and the like. You will see, obviously, a lot of demand in ESG. It's a trend that is continuing and the like. So we evaluated with our Board of Directors this summer. We do a manual strategy outside with our board to try to understand what's happening in our environment, what opportunity exists. And our board and the management team concluded that we needed to step up our ability to meet that demand so we can generate, over time, better products for our clients and, hopefully, more revenue opportunities for also in our shareholders.

Okay, fair enough. And then I guess just -- on the PMA business, in particular. I mean, that's obviously a nice turnaround there. Could you just talk a little bit more about maybe the lumpiness in this business? I mean, is this one quarter that benefited from a lot of strong sales? Or is the pipeline still very strong? I mean, the way I calculate it -- and I don't know if you look at that metric like this. But it's like net sales rose like 10%, 11%. I mean, that's a very, very big turnaround. So is that -- are those kind of like the numbers you're going to continue to expect? Or can this continue to be lumpy this year, in particular as, you're just turning the corner, I guess?

Look, I think it could be lumpy. The pipeline is very healthy, the dialogue with our clients is very robust. We feel very good about slew of new product introductions that we have made in the last 12, 18 months, from a large number of new risk models that we have launched to the almost completion of a lot of the functionality in our Barra Portfolio Management software application. The environment for quant investing is changing also, to the better. Many of our tools are now reaching "much more than ever before" fundamental asset managers, not just the quantitative managers or the quant support of the fundamental managers. So -- but it could be lumpy, right? I mean, it's -- we've been here before, and things have gone up and down. What is new now is that this is very much predicated on a very strong tightness with our client that is reflected in the high retention rates is we have a lot of trials going on with customers of new products, both on the content side with the models with -- and the software side. So it feels -- the environment feels a lot better. Our position feels a lot better. But it's obviously early days to say that we completely turned around the business. And it could be that we end up in a few quarters on a bumpy basis, but it feels a lot better. And the pipeline is very good, and the dialogue with client is very good. And also, importantly, our competitive position -- I mean, this business is competitive. We feel very good in any of the -- our fees that we go to, and we're gaining quite a lot of share compared to our competitors in this space, sir.

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

Could you break out how much of the increase in the expense guidance is from the GMI acquisition versus higher spending in more organic areas? And can you clarify if the spending in the organic areas is still proportional roughly to what you laid out in Investor Day? Or is there more spending on IT infrastructure?

I think that the -- first, I'll start with the second question, is the allocation of our spend is still more than 50% allocated in product development and support. And as Henry outlined, we're still continuing to work on sales and marketing. With respect to GMI, we really -- we're still going through the early days. But as a piece of our increase, maybe 20%, 25% of the increase of our cost that we're looking at in our guidance here. We also have some investments to go with integration and things of that sort. But we'll lay that out in more of a detail. But again, it is small. And like I said, we'll have a modest "just a few million dollar" increase to our index and ESG overall run rate.

Great. And you mentioned that there was an issue with timing of sales in RMA that didn't close in 2Q, that you expect to close in 3Q. Can you just give us a sense of the magnitude of that?

It was a modest amount. It was a handful of few large deals that we fully anticipate to close, and we'll see the benefit in the third quarter. I'm not going to give you any amount of it, but it was a substantial amount, a good number of sales here in Americas.

Our next question comes from the line of George Mihalos from Crédit Suisse. Georgios Mihalos - Crédit Suisse AG, Research Division: Wanted to circle back on the expenses again. Maybe if you can help us sort of provide some color as to what you're thinking is for 2015? For '14, I know you've had an increase of about, call it, $90 million to $100 million in expense. When you talk about investing or continued investing '15, is there a way to think about that, maybe in terms of absolute dollars or some metric like that?

I think there's 2 ways to look at it, very similar to the way we laid it out for you during Investor Day. We're stepping up on our spend for the balance of this year, so you'll see an annualization of it, George, going into 2015. And these opportunities will continue to -- as these opportunities continue to present themselves, as Henry outlined, we'll continue to spend on and through 2015 on new investments as we see them.

So I think, George, also, the -- look, we are -- we're entering a very positive world here. If you think about -- and reflect back on -- in the last, say, 2 years, from about, say, May of 2011, 3 years, May of 2011 to now, we had the sovereign debt crisis in the summer of 2011 that began to create a lot of problems, then we have in the U.S. budget crisis and then we had problems in Asia and all that. So for a period of 2 last years -- I mean, 9 quarters, the operating environment was challenging. And we kept talking in this call, every single call, with a -- we kept talking about the challenging operating environment. That environment began to turn right around last summer, maybe early fall, and it accelerated quite a lot to December. And on a trended basis, things took -- continued to move forward and accelerate, especially in the equity index -- in the equity business overall, in the last 6 months. So we have been cautious in over a period of 2, 2.5 years because of the operating environment. We are now being increasingly pushed extremely hard by our client to meet their demand and their requirement of -- they're beginning to create new products, they're beginning to go into new territories and the like. It's not global years by any means. It's not open checkbooks by their budgets or even like that. But there is a marked -- a very, very distinct and marked difference from about a year ago. Our business has lagged, right? Products, it takes time for those to get monetize on the like. So they are -- we're beginning to adjust to that more positive operating environment, and we're doing it gradually because we want to make sure that we're not jumping into things too fast. We do it gradually. And that's what we did last summer, that's what we did in Investor Day, that's what we did with our board this summer, and that's we'll get paid to do, right? I don't get paid to do -- to sit here and pretend the world doesn't change, right? We get paid to analyze the operating environment, to size up the opportunity and to see what that investment will entail. So far, we're comfortable where we are, but we're going to take another look at this in -- at the beginning of next year and say, what does the environment look for 2015 and shall we remain at the current expense levels and investment levels or should we step it up? We don't know yet. Right now, we're comfortable where we are. But for sure, if we see a continued acceleration of the positive environment, we're likely to accelerate the investment plan. If we don't, we'll probably be more cautious.

What we did do about these investments are tied to our revenue growth, and we feel confident. The other part of your question, George, is during report [ph], we're really not -- we're not focused on a margin expansion. We're focused on growth over time. Georgios Mihalos - Crédit Suisse AG, Research Division: And just a follow-up. Henry, you sound a lot more upbeat about the U.S. opportunity. You highlighted a nice wind there as well. What's changed in the environment? Is it your spending? Is it your approach to the sort of the domestic market? What's making you a little bit more bullish on your opportunities there on the index side?

Yes. So to be very specific, what we -- what I was referring to is the increasing trend of U.S. institutional investors, about pension plan, mutual fund complexes and wealth management and the like, to look at the other equity investment on a global perspective as opposed to chalk it all up between domestic equities, developed market equities, emerging market equities, small cap equities and the like. So we're beginning to see -- we continue to see -- not beginning to, we continue to see the trend and, potentially, an acceleration of the trend of our U.S. institutional clients of saying, "It's one world, one equity world, and therefore, our -- we should be benchmarked to one equity -- global equity benchmark in which the domestic U.S.A. is a component of that as opposed to a separate, distinct benchmark to that." So therefore, we want to put -- we see that trend. We've been participants of it. We see it developing. We put resources on that. We want to put more and more resources on that, because if we do, we're going to continue to gain market share and the money invested by U.S. investors in U.S. equities, right? And we feel pretty upbeat about that development.

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

So I had a follow-up question on the 2015 expenses. So the way I was trying to look at it is if you did $143 million in the first quarter, $148 million in expenses in the second quarter and it looks like to get to the midpoint of the new guidance at $600 million, you need about $154 million in the third quarter and the fourth quarter. Is that a good run rate to use going into 2015? Or should we be thinking about the $25 million approximate increase in -- or annualized increase in expenses that we're seeing right now with this new guidance? Should that be added incrementally to our 2015 estimate? I happen to be estimating $650 million in expenses in 2015. Should I be thinking about that going to $675 million?

I think your math is -- falls right in line with ours when you look at the full year outlook? And our stepped-up spending for the rest of the year, whether it's $154 million or $153 million or $155 million.

Right, right.

I think the balance of the year. It goes back to what Henry was saying. 2015, yes, we're going to get the annualization of these quarters, and they'll -- so they'll round out to 2015. But there will be some opportunities that we'll evaluate as we go into the remainder of the year and as we look at the balance to 2015. So I can't tell you what they'll be, I can't tell you how much they'll be, but we know the opportunities are out there.

Well, in terms of the timing, what do you need to see from the new investments starting to impact performance before you start spending more, I guess, would be the question. Or is that a gating factor? Because it...

Not for sure it's a -- yes. Definitely, it's a gating factor. So if you look at -- so think about it in the final way. Look, in the last 6 to 12 months, we have been putting some investments on our PMA business. With that 2011 to 2013 period, we began to see a very sharp increase in retention rates due to that -- those investments, especially in the client-servicing part, our consultants, our outreach to clients, the -- showing the product roadmap and all that. So that gave us strength to continue putting in more investments in that. And we saw -- we have put investments in the new product development and launched a lot of things last year. But we were waiting to see for all of those to turn into real sales. So we've seen that. We have been -- since October of 2012, with that -- it happened -- what happened then, we've changed radically the way we were looking at the ETF market and stepped-up our dialogue with clients, our dialogue with the ETF managers and the like, and so we've been gradually doing that. So in the last 6 months, we've seen -- 12 months, right, we've seen a huge payoff on that relative to market and relative to other ETF index providers. So was it a time to -- so it has been successful. So it's time to step it up and, particularly, step up the -- for example, our outreach of product management to wealth managers, which is an area that, increasingly, many ETFs are being sold to right now.

Yes. And then one question, if I may. The LSE's purchase of Russell recently, what does that mean to the competitive environment for you guys? Does it create more opportunity, less opportunity? And does that -- the timing of that tie into the timing of this increase in expenses?

First of all, given the valuations, right, it makes us feel pretty good about our assets, in our indices, right? Giving that I'm the largest individual shareholder of MSCI makes me feel pretty good about my shares, right? Secondly, it reinforces the point that I made earlier to George that, increasingly, institutional investors around the globe are looking at one equity world as opposed to a segregated equity world. And obviously, you see an international equity index provider buying a domestic index provider, so that reinforces that. Three, it reinforces our strategy that we're a global equity shop, right? We try not to look at the world in local terms. We're a global equity shop. So it reinforces our position in the marketplace, our strategy in the marketplace and the like, and therefore, it creates enormous opportunities for MSCI to be that one place of choice for people to go to get their global benchmarks in one global integrated equity investment process. So -- now that's not going to happen by us sitting and then waiting to receive the call from clients, right? So, therefore, we have been investing, over the last 3 or 4 years, in this outreach of convincing clients to follow this principle of one equity investment in the world. And therefore, it's time to step up that investment significantly so we can capitalize on the opportunity that is ahead of us and for us to be the major beneficiary of that trend of having one equity world.

Our next question comes from the line of Joel Jeffrey from KBW. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: Bob, I just want to follow up. So I appreciate the comment you made about not being focused on margin expansion. But just sort of thinking about the current investment strategy, is there a pathway to getting back to sort of a mid-40% margin rate if you continue to invest like this? Or does it sort of -- at some point, do you sort of see this exhausting? And what kind of timeframe would you be thinking about?

Yes. So for the foreseeable future, we have -- for the foreseeable future, we have refocused our financial metrics that we follow to really focus on high revenue growth, obviously, if we can achieve that, and high profit growth. That's what we have focused on. And in the past, maybe we were too focused on EBITDA margin as a name in itself, and that was fine. It served us well and all of that. But we want to focus on EBITDA margin as a means to an end, and the end is high revenue growth and high levels of profitability over time. For the foreseeable future, we do not see an expansion of our EBITDA margin at all, because we're putting investments in place in order to see an acceleration of sales and obviously the revenues and, eventual, an acceleration of profit -- profits, not profit margin but profits in the company. And therefore, there's a step-up that we need to do upfront in order to achieve that to then see that higher revenue growth and higher profit growth in the future. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just lastly for me, maybe a little different tactic. But -- so in terms of the strong influence you saw during the quarter, how much of that was being driven by interest in emerging markets?

There was an uptick in -- I think -- if you think about 2 quarters ago, the percentage of our -- of emerging market -- the percentage of the AUM, of ETF-linked to MSCI in emerging market was 23%, 24%, something like that, it's hovering around 26% today or something to that effect, so definitely seen a little bit of an uptick in that. But we see an upticks all over in our Asian indices. We've seen, clearly, in our European indices. There's been quite a rally in the last couple of years, obviously, in the European markets and the like. So it's a very -- our business is very diversified. So I will not chalk up the great progress we made and the great performance on our ETF at all purely to emerging market. It's been a contributor but not a significant one.

We see in a lot of cases, given our global presence in ETF investment, we'll see outflows of developed -- and we'll see outflows from developed market ETFs into emerging markets. That trend will reverse and go from emerging markets into developed markets. We've talked about that last year when we saw an exodus from emerging markets went right into our developed market. So I wouldn't say we're agnostic. I would say that as we get larger in that space, that we see these flows between emerging markets and developed markets, and we don't break those out for disclosures. But as Henry said, 26% of our AUMs are in emerging markets relative to our total.

Our next question is from the line of Chris Shutler from William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: Henry, in your prepared remarks, I think you said that you want to be in a position to increase asset class coverage in the index business. So can you just flesh out that comment a little bit more?

Yes. I think that is -- a lot of that is factor index investing, right, being able to look at the entire equity opportunity set and being able to understand how the assets underneath the global equity opportunity sets can be re-weighed [ph] or the re-made [ph] in a wide variety of ways to create strategy indices. We call them factory. This is what people call them are smart beta indices or people call them advanced beta indices. So proliferation of names for this. But it is quite a fundamental revolution that is going on in passive investing, to go from investing in market data to basically go on investing strategy data. So we are the leader, currently, of that revolution in terms of index, in providing indices. And we need to ramp that up, not only in the ability to cover the assets, but also in the ability to create the methodologies and back system and show that to our client and then put all of that into a highly scalable production environment. Our production environment is largely built for market data, and now -- and therefore, we -- and have added quite a lot of capacity for factor indices. But we want to make sure that we have the capacity to scale it even higher.

And we have time for one more question from the line of Kevin McVeigh from Macquarie.

Henry, any sense of -- with these incremental investments, we have an incremental step-up in organic growth kind of from the targets we had initially set. And would we expect them to come into the fold quicker? Or is it the same type of step-function in terms of the step-up in organic revenue growth?

Yes, for sure. I mean, we want to make these investments because we believe that they would increase our revenue growth over and above what we thought a few -- 2 quarters ago and the prior investment plan. The timing of all of this is very similar to the timing of what we talked about in Investor Day and what we talked about it the prior investment plan, right, and that is there are so -- well, we try to do a balance of investment. There are some investments that we put in sales, in client service, in consultant and in product management that have an impact on -- directly on sales in the first 12 months, have an impact on higher retention rates in the first 12, 18 months and the like. And there is a big part of this investment plan that goes in that direction. Then you have the product investments per se. And then by the way, those new sales, new client service, new [indiscernible], that is to service the existing product line in order to sell more of the existing product line and to retain more of the existing product line. Then we put another layer of investment, which is can we create new products, significantly new products. That investment typically takes 2 to 3 years to begin to bear fruit. Look at the example on the PMA part. We've been launching -- we've been investing in products. We launched all the products and all that. So when you look at the whole cycle, it was a 2- to 3-year cycle to begin to see meaningful payoff. That -- it will continue, but I'm saying just initial meaningful payoff in terms of new sales and the like. And then there's a third level of investment, which we try to make it a smaller part, but an important part, which is the investment on the overall technology infrastructure of the organization that is going to position the company to generate additional sales 3, 5 years from now, right? That's kind of the way we look at it. Front-office investment for one to -- 12 to 18 months, product investment for 2 to 3 years and then infrastructure investment for 3 to 5 years.

Understood. And then just, obviously, there's a fair amount of cash on the balance sheet at this point. Any thought in terms of buyback versus acquisition? Has the preference changed at all? Or is it more opportunistic?

I think -- well, like I said in my comments, that we're evaluating the potential return of capital, along with acquisitions that may be in front of us, and we'll get back to you. We're in discussions with the board.

But in terms of the philosophy that we have established over the last 2 years of return on capital, that has not changed at all. What we have to weigh is, clearly, the ability to do that and, clearly, the big -- all capital -- all excess cash in the balance sheet versus M&A opportunities that present itself. And I don't want to overemphasize the M&A focus of this company, because the vast majority of the focus of this company is organic growth. So I want to go on record continuing to emphasize that. That is what we're focused on. That's what we do everyday and the like. But there are times in which sort of properties that are unique, that are once-in-a-lifetime or once-in-a-generation opportunity that could add significantly to the strategic footprint of the company. And they come to the market, and you're going to look at them. And when you're looking at that, you got to preserve your optionality. And therefore, that's the kind of space we're in right now. But the philosophy of returning excess resources back to the shareholder that we don't need is black-and-white part of our strategy.

And that is all the time that we have for questions today. I'd like to turn the call back over to the speakers for closing remarks.

Well, thank you, Andrew, and thank you, everybody, on the call for your interest in MSCI. We certainly appreciate your ownership and followership, if you will, of MSCI, and we look forward to updating you again at the beginning of October. Have a great morning.

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