MSCI Inc. (MSCI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter and Full Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the call over to Mr. Stephen Davidson, Head of Investor Relations, you may begin.

Thank you, Kate. Good morning, and welcome to the MSCI Fourth Quarter and Full Year 2014 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2014. A copy of that release may be viewed at msci.com under the Investor Relations tab. You will also find on our website the slide presentations that we have prepared for you for this call. Let me remind you that this call may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. For a discussion of additional risks and uncertainties, please see the risk factors on forward-looking statements in our most recent Form 10-K and our other filings with the SEC. For today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses and adjusted EPS. We believe our non-GAAP measures are more reflective of our core performance. You'll find a reconciliation to the equivalent GAAP term in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on Pages 30 to 32 of the investor presentation. On the call today with us are Henry Fernandez, Chief Executive Officer; and Bob Qutub, Chief Financial Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry?

Thank you, Steve. Good morning, everyone, and I am pleased to share our fourth quarter and full year 2014 results. Before I begin my prepared remarks, let me provide some comment about our new format. For the better part of last year, we have been listening intently to feedback and comments from many of you about what interests you and what concerns you about our company. Since our last earnings release, we have been hard at work in designing new slides, providing additional detailed information and a new script. I hope you like it, and please give us further feedback and comments to improve even more. Now let me move on to my script. I will begin with a strategic update, review the financial highlights and milestones for the year and provide you with a recap on the investment program. I will conclude by providing some additional context around the drivers of our margins over the past 8 quarters and our new guidance calling for margin expansion beginning in the second half of 2015. After Bob reviews the financial results, I will wrap up and we'll take your questions. Let me step back a bit and provide you with a strategic update that begins on Slide 3. In 2014, we delivered strong financial performance and significantly enhanced our business through the investments that we initiated in 2013 to drive our future growth. We are pleased with the progress of our enhanced investment program, which is now largely complete. The investments we made in products, sales and technology have driven near-term returns, principally in the form of much higher retention rates. We expect that these investments that we have made in product development and technology will deliver returns over the medium-term as well in the form of higher sales, higher run rate and higher revenue. We're now able to wind down our spending growth to more normalized levels, assess how things are working and focus on ensuring that our investors are rewarded for the patience they have shown as we have executed this program. To our defense, we're working to ensure that the investments we made in each initiative achieve the expected return, and any initiative that was not achieved, expected ROI will be modified or stopped. We also announced today internally at MSCI that we have reorganized the firm to put Baer Pettit in charge of all MSCI products; Laurent Seyer, who joined us in December, continues to head all client coverage; and Chris Corrado continues to head all technology and data services. And all 3 will continue to report to me. As part of this reorganization, we have combined PMA and RMA into one analytics product line under Peter Zangari, who has successfully restarted the growth engine for PMA over the last couple of years. Peter and his team will be focused on generating more revenue and increase operating efficiencies from our combined analytics product line. Based on the encouraging early returns on our investment and our continued focus on ensuring their benefits, we now expect margin expansion to begin in the second half of 2015 and continue thereafter. This is earlier than our previous guidance of margin expansion beginning in 2016, and is predicated on a stable operating environment going forward, especially in asset-based fees. Moving on to capital allocation. In the third quarter of 2014, we announced an enhanced capital return policy with a commitment to return $1 billion in capital to investors by the end of 2016. Over the past year, we have been very disciplined in our approach to M&A, and given that our focus is basically on organic growth and the return of capital to our investors, we are well positioned to continue to do so. I am pleased to report, therefore, that we returned $420 million to investors in 2014 through buybacks and dividends, and our board just declared our first quarter 2015 dividend. Finally, as part of our continued commitment to ensure that investors can accurately value our franchise, we are in the process of evaluating new ways to increase transparency in our financial reporting. We expect to introduce new reporting segments in the second half of 2015, and we will work to make sure that this process is as smooth as possible to the investment community. Please turn to Slide 4 for a review of full year 2014 results. We reported strong results across all metrics. MSCI's run rate grew 8% and adjusting for the impact of foreign exchange, our subscription run rate grew 9%. Revenues grew 9%, driven by strong increases in both recurring subscription and asset-based fees. Adjusted EBITDA was up only 1%, which reflects the effect of $37 million in investments and costs from GMI that flow through our P&L in 2014. Finally, our adjusted EPS grew by 6%, principally due to lower income tax expense and a lower share count. We also took a number of operational actions in 2014 to enhance our competitive position in the near and medium term. We completed the bolt-on acquisition of GMI, our complementary provider of ESG ratings and data and research. We significantly enhanced our internal capabilities by bringing in new market-leading talent in key functions, including a new Chief Human Resource Officer to help us foster and attract great talent and a new Head of Client Coverage to deepen our client relationships. As you know well, we divested ISS to focus our attention, resources and capital on our core capability. We made a commitment to do so in 2013 and we delivered on that commitment in 2014. In summary, 2014 was a very strong year for us. We significantly expanded our capabilities and we're now in a very strong position to take full advantage of the many growth opportunities that we believe lie before us. Let me now provide you with more details around our investment program. On Slide 5 are the benefits that we're seeing from our 2014 investment spend related to sales, client service and marketing. To drive sales and deepen our relationship with clients, we hired 109 net new sales and client service people in 2013 and an additional 44 people in 2014. The training cycle of our sales people varies by product area. Training a sales person in our equity index product line takes about 6 months, whereas a salesperson in risk management analytics might require 1 year or more. The hires that we made in 2013, therefore, had a negligible impact on our sales in 2013. But we are beginning to see their impact in the last year of 2014 with total sales of $37 million in the fourth quarter, the highest level since the first quarter of 2011 or almost 4 years ago. So subscription sales of $32 million in the quarter were the highest since the third quarter of 2010. Higher sales, combined with the lowest level of cancel of any fourth quarter ever resulted in our highest fourth quarter net new sales since the fourth quarter of 2008 or at the start of the financial crisis. This has therefore translated into an aggregate retention rate of 93% in 2014, an increase of 150 basis points over the previous year. So we are already seeing significant returns primarily in the form of higher retention and we're beginning to see the benefits of our sales hires with a stronger sales which we expect to translate into run rate and revenue growth over time. On Slide 6 is the adjusted EBITDA expense development from 2012 to 2014 or the 2-year period of enhanced investments. We are providing you with a detailed -- the details on this slide in response to the desire for more transparency around development in our expense base and detail around our enhanced investment program. Over this 2-year period, we recorded expense growth of $151 million beginning with a baseline in 2012 of $437 million. Let me break this down for you in the key components that make up this $151 million increase. First, moving from left to right, we have incremental organic growth in expenses of $36 million. This includes investments in our technology platform, in client service, retention, inflationary spend and onetime costs. This is normally what you will call business-as-usual incremental costs. These dollars help us acquire resources and capability, direct near-term returns, such as retention, sales and product enhancement. In the middle, you see the impact that acquisitions has had on our expense base principally from IPD, what we call real estate nowadays, the GMI acquisition and InvestorForce. In total, these acquisitions reflected in the first 12 months of expenses after closing were $71 million. These acquisitions, as we have reported in the past, were to fill gaps in our portfolio, expand our exposure to new asset classes and accelerate capabilities, all within a 3- to 5-year window that we set for acquisitions to be accretive in our financial results. On the right then, you'll see the enhanced investments of $44 million in 2013 and 2014. These investments were directed at new indices, new factor models, geographic expansion, data center expansion and to bring in our critical executive leadership to our firm. In summary, with our enhanced investments, we have acquired the resources to develop, build and sustain MSCI for growth. And to complete the bridge, we ended 2014 with adjusted EBITDA expenses of $588 million. Let us now turn to Slide 7, which shows the incremental growth in our revenues from this 2-year period of enhanced investment. We generated incremental revenue growth of $170 million. Again, moving from left to right, we generated $75 million in incremental organic revenue from the build out of our existing asset-based fee products and subscription product offering. Incremental revenues from our acquisitions of IPD, GMI and InvestorForce were approximately $59 million. This is initial revenue from these acquisitions, and we're surely focused on their growth and their return to levels of profitability. We expect these acquisitions to be accretive in the 3- to 5-year timeframe that we discussed before and we are well on our way to achieve that. For example, IPD, which represents a considerable part of the $71 million in incremental adjusted EBITDA expenses recorded 9% year-over-year revenue growth and run rate growth of 12%, excluding the impact of foreign exchange while a lot of the revenues and the run rate of IPD is in pounds and in euros. We earn $24 million in incremental revenue from the investments we have made in the asset-based fee product line, principally the ETF product line. From the end of 2012 through the beginning of 2014, our asset-based fee revenue grew from $140 million to $177 million, a $37 million increase. This is above the $22 million negative impact from the net loss revenue on EBITDA from the transition of Vanguard. So our total growth in ABF was, in effect, $58 million in this 2-year period, reflecting our tremendous performance on winning back significantly more than the revenue we lost at the time of the Vanguard transition. This $58 million in growth was split between $24 million from our recent investment and $34 million from what we call organic asset based fee growth, which is a combination of inflows and market appreciation of existing older products. Let me touch on a few statistics that reflect the very strong results on our ETF franchise. 43% of the inflows into our ETFs were in products that we have developed over the past 2 years. We saw a surge in demand from ETF providers for MSCI factor indices, with almost half of new MSCI-based ETFs launched in 2014 linked to this MSCI factor indices that we have inherent at work. Lastly, we have the incremental revenue of $34 million from the investment that we made in our subscription business. That is towards the right of the chart. The incremental revenue was driven by increased retention rates, the 24 new index families we launched in 2014, enhanced capability in Barra Portfolio Manager and the new slew of risk models that we have launched in the past year or 2. Turning over to Slide 8. We show a set of KPIs that we believe are leading indicators of growth for the investment that we have made in product development and technology. As you can see, our investments have enabled us to increase our production of new indices, specialty factor indices and custom indices, we have deepened our relationships with ETF providers and developed relationships with new ones, we have produced quite a number of new risk models and we have build out data center capabilities to process more portfolios and provide better service in our multi-asset class platform. In the equity investment process as a whole, policy benchmark wins in 2014 were 182, up 8% from the prior year. New index families have seen a 243% increase in the past year compared to 2013. The number of new ETF linked to MSCI indices grew 20% year-over-year and represented approximately 22% of the total number of ETFs launched globally by all index providers and ETF managers in 2014. Active and passive assets tied to our factor indices continue to increase more than 60-plus percent to $122 billion in 2014, a key metric given our leading position in factor indices. Given market volatility at the end of the fourth quarter, I want to provide you with more detail on ETF linked to MSCI indices. First, U.S.-listed ETFs. In Q4, U.S. equity ETFs in general altogether for all index providers, captures 76% of cash flows which reduced MSCI's market share of cash flows during the quarter. Despite that trend, we continue to see successful ETF launches based on our indices in Q4. Two of the largest launches in 2014 were based on the MSCI ACWI Low Carbon Target Index. We also continue to see growth in our client base. We've developed the ETFs based on MSCI indices exceeding $2 billion in AUM and Deutsche Bank ETFs based on MSCI indices exceeding $3 billion in AUM. Turning to Europe. While the focus on U.S. equity has reduced MSCI's market share of cash flow for the quarter, Europe had a record-breaking inflows of $44 billion into European domicile equity ETFs, on which MSCI took $17 billion or 39%. MSCI increased its AUM market share to 35% of inflows in Europe from 33% the prior year. Stepping back and looking at full year 2014 on a global basis, we saw a surge in demand from ETF providers for MSCI factor indices, with almost half of new MSCI-based ETFs launched in 2014 linked to MSCI factor indices. 42 of MSCI factor index ETFs were launched in 2014 compared to 6 only the prior year. 95 ETFs based on MSCI indices were launching in 2014, almost twice as many as the next index provider. And amongst all index providers, MSCI has the highest market share of AUM from new ETF launched during the year. MSCI's idea of market share increased in 2014 with our share of cash flows from 2014 being higher than our market share of AUM on the year prior to that. Quite a great deal of the leading franchise that we have in MSCI factor indices is a result of the combination of capabilities and skill set from our Barra product line and our MSCI index product line. In our Equity Index analytics product line, we have been very pleased not only with the pace new model generation but also with the way in which MSCI's research capabilities produced models that are strongly differentiated from what our competitors are offering. We launched 25 new risk models in the 2-year period of '13 and '14. Now that we have essentially caught up with the launch of new risk models, we expect to launch about 12 of these models in 2015. We're tracking the revenue that we generate from these new models, and I am pleased to say that we had $20 million in 2014 from these new models that we created, a 57% increase over 2013. Finally, in the multi-asset class investment process, we processed a total of 31 billion securities in 2014, most of which was in risk management analytics. Just a couple of years ago, the technology and processing capability of the RMA product line had reached its limit and was in need of significant upgrade. As a result, over the last 2 years, our investment in the RMA product line has been focused on upgrading our processing and our technology capabilities. If we had not focused the spend on our technology platform, we would not have maintained the relatively stable growth that we have seen in the run rate for this business and the high retention rate that we have achieved. We have the confidence that our platform and processing capabilities are robust, our new client numbers are growing, and we're well positioned to reap the rewards of our investment in this area. Let me conclude my section on Slide 9. We saw the trend -- where we saw the trend in our adjusted EBITDA margin beginning in the first quarter of 2013, again, the 2-year time period that we've been engaged in an enhanced investment program. The decline in our EBITDA margin from 45% in the first quarter of 2013 to the low of 40% in the first quarter of 2014 was driven by 2 factors that we undertook to create value for our shareholders over the near and medium term. The first is the impact of acquisitions. In November of 2012, we acquired IPD, the real estate performance measurement and performance attribution service group. In January 2013, we acquired InvestorForce, our performance reporting for consultants. Finally, in August of 2014, we acquired GMI Ratings, the pioneer in the application of nontraditional risk factors to investment analysis and risk modeling. We are on track with each of these acquisitions to achieve our stated goal of delivering returns above our cost of capital within the first 3 to 5 years. But until we achieve those returns, they are a drag on our margin. If you aggregate them together when you look at the slide, you see that we're operating them at a slight EBITDA loss. Real estate, for example, as you can see in our supplemental disclosures in the appendix, generated $50 million in revenue from the real estate quota [ph] carrier. So as these acquisition move to increase profitability, we expect each to generate a more meaningful contribution to EBITDA and to earnings. The second factor in the decline of our margin is the investment program, which we began 18 months ago. Our margin decline includes a loss of $19 million in revenue and adjusted EBITDA in the first half of 2013 from the Vanguard model. We have since regained more revenue than we lost higher levels of profitability, as I noted before. Based on the near-term return and the emerging medium-term returns that we are looking for, we're now expecting to achieve margin expansion in the second half of 2015 and we expect progressively higher margin to follow thereafter as we achieve the payback on these investment. Again, all of this is predicated on a stable operating environment, especially in asset-based fees. We will not be able to achieve this without developing broader product relationship with our clients. Roughly 65% of our top 100 clients use products from the entire MSCI product line. This is not a small slice of our business. These clients represent 43% of our subscription run rate. Since we began our investment program, the revenues from these clients is growing at a rate of about 9%, well above our growth in revenues of 7%. This is why we're building a model that enables us to deliver our full suite of products and services to our entire client base. Doing business with our client this way results in significantly higher revenues and we're only at the start of capitalizing on that cross-selling opportunity. Let me now turn over to Bob for the financial results.

Thanks, Henry, and good morning to all of you on the phone this morning. Let's get right into the numbers on Slide 10. Our performance across our key metrics in the fourth quarter was strong. Run rate and revenues were up 8% and 6%, respectively, versus the prior year with subscription run rate of 9% year-over-year, excluding the impact of FX. Adjusted EBITDA was up 4% to $104 million. Adjusted EPS was up 23% to $0.49, benefiting from a lower tax rate in the current quarter and a 5.5% decline in the weighted average shares outstanding year-over-year. On Slide 11, we provide you with a bridge for the year-over-year change in our revenues. Total revenues rose $14 million or 6% to $251 million. The growth was driven by an increase of $8 million or 4% in subscription revenues and an increase of $6 million or 16% in asset-based fees. Over the past several quarters, we have seen significant fluctuations in the currency markets. The FX impact manifests itself in several ways into our financial statement but overall, the net effect to our income statement has not been significant. Approximately 15% of our revenues are billed in currencies other than the U.S. dollar. A much larger percentage of our operating expenses, approximately 45%, are incurred in foreign currency because of the large global footprint of our firm. Turning to Slide 12, we provide the adjusted EBITDA expenses trend. While our fourth quarter adjusted EBITDA expense rose 8% to $147 million, this is the second consecutive quarter in which the year-over-year growth has declined from the 21% we recorded in the second quarter of 2014. It should be noted that the quarter also includes $2 million in professional fees related to our recent shareholder matters. Adjusted EBITDA expenses increased $80 million or 16% full year 2014 compared to the prior year. Consistent with our guidance on Investor Day, in March last year, let me highlight some of the major drivers of the increase. $46 million of the increase or 58% has gone towards product development and technology and this also includes our investment in GMI. Sales, client service and marketing accounted for $22 million or 27% of the new spend. These investments have had a more immediate impact, helping us lift our overall level of sale to the highest level since the first quarter of 2011 and these investments are contributing to the increase and maintenance of our very strong retention rates. At $588 million in adjusted EBITDA expense, we came in below our adjusted full year guidance of $595 million to $605 million. Turning to Slide 13, we provide you with the adjusted EBITDA expense bridge to show you the drivers of the year-over-year increase. We ended 2013 with $500 million of adjusted EBITDA expense. The increase of $80 million or 16% can be broken down broadly as follows: $43 million spent on our enhanced investment program, including $6 million related to GMI, the remainder reflect increases associated with running our business as well as higher advisory and other fees. Excluding the $43 million spent on investments in GMI, adjusted EBITDA expenses were up just over 7% in 2014. Turning to Slide 14. We provide you with more detail regarding the $43 million in investments we made in 2014. As you can see, the investments made have been broad-based across all of MSCI, directed at developing new products, expanding capabilities and improving client service. We estimate these investments have resulted directly or indirectly in additional revenues of approximately $57 million in 2014 and will be the basis for driving long-term shareholder value creation. Turning to Slide 15. We have a summary of the fourth quarter operating metrics. Total run rate grew by $72 million or 8% to just over $1 billion, driven by a $55 million increase or 7% increase in subscription run rate and a $17 million or 10% increase in asset-based fee run rate. The 7% increase in our subscription run rate to $832 million, which includes the impact of FX rate, was driven by a 12% increase in index, real estate and ESG subscriptions and a 3% and 4% growth in run rate for RMA and PMA, respectively. Turning to our sales metrics. Total sales rose by 5% to $37 million, the highest quarterly sales number we have recorded since the first quarter of 2011, as Henry pointed out. In Q4, we had $17 million in annualized cancellations, the lowest Q4 level for cancellations since 2008, reflecting the continued benefit we are seeing from our investments in client service and our consultants. The combination of higher sales and lower cancellations resulted in net new recurring subscription sales of $15 million, the highest Q4 level since 2008. This resulted in MSCI's aggregate retention rates increasing across all products, both year-over-year and the full year 2014 with aggregate retention rates of over -- of 91% for the fourth quarter and 93% for the full year 2014, the highest fourth quarter retention rate since our IPO. On Slide 16, we'll drill into our run rate to show the impact of FX and acquisitions. Given the strengthening of the U.S. dollar, FX had a significant negative impact on our subscription run rate in the fourth quarter, especially on our analytics product line. Total changes in FX lowered our subscription run rate by $15 million year-over-year. Excluding the impact in FX and the acquisition of GMI, which contributed $7.4 million to our run rate, total subscription run rate grew by 8%. Since the first quarter of 2013, our organic subscription run rate X FX -- excluding foreign exchange, has increased from growth rates of 4% in the first quarter of '13 to 8% in the current fourth quarter. Now let's turn to the Slide 17, where I'll begin my review of the performance of our 3 major product lines. Index, real estate and ESG subscription revenues grew 7% to $100 million. On an organic basis, subscription revenues grew by 5%, excluding GMI. Now drilling into the components. The index revenues increased 8% to $84 million, real estate subscription revenues declined $2 million or 24% to $8 million from the prior year, due in part to timing of product deliveries and revenue recognition. Total ESG revenues increased 50% to $9 million or 16%, excluding the impact of GMI. Total index real estate and ESG subscription run rate grew by 12% to $414 million. The index run rate grew 10% to $335 million with negligible FX impact. Real estate subscription run rate increased 3% to $45 million, but adjusting for the impact of FX, the run rate increased 12%. The run rate for the Americas showed particular strength in real estate increasing to $5 million or 25%. The ESG run rate of $34 million represented an increase of 51%, but on an organic basis, excluding the impact of FX and ESG, run rate grew 22%. The retention rate for index, real estate and ESG increased to 93% and was 94% for the full year of 2014. Now please turn to the index asset-based product discussion on Slide 18. ABF revenues grew 16% to $45 million in the quarter driven by strong inflows into ETFs and non-ETFs asset funds. Run rate grew by $16 million or 10% driven by a 12% increase in assets under management linked to MSCI indices which was the $373 billion as of December 31. Looking at the fourth quarter 2014 in isolation, we entered the period with AUMs of $377 billion. There were $4 billion of cash inflows and market depreciation of $8 billion for a net decline of $4 billion. This was driven by a spike in volatility at the end of the year resulting in period ending AUMs of $373 billion. On a full year basis, we saw $49 billion of net inflows offset by lower market performance of $9 billion and excluding the effect of Vanguard in 2013, this is approximately 7% higher than it was in the prior year. On Slide 19, we have the key indicators of our risk management analytics product area. Revenues grew by just over 1% year-over-year and run rate rose by 3% to $310 million. Excluding the impact of FX, run rate rose by 5%. The aggregate retention rate rose to 89% for the quarter versus 86% in the prior year and was 91% year-to-date. Sales rose 9% versus fourth quarter 2013. And as Henry mentioned earlier, we have invested in building and expanding our capacity which has created a better environment to meet the needs of our client, and this has resulted in improved retention. On Slide 20, we have the key indicators in the portfolio management analytics area. Revenues were relatively flat to the prior quarter. Run rate increased 4% and by 6%, excluding the impact of FX. The growth in run rate continues to be driven by both stronger sales which rose 63%, and by a much stronger aggregate retention which increased to 93% from 89% a year ago. On a year-to-date basis, aggregate retention rates rose significantly to 93% from 87%. The growth rate in sales of portfolio management analytics was driven by higher sales of equity models and Barra Portfolio Manager. The return to growth is directly attributable to the investments we have made in this product area. Now turning to Slide 21. Let me give you a quick snapshot of our profitability metrics. We reported EBITDA of $104 million for the quarter, which represented an increase of 4% year-over-year; adjusted EBITDA margin of 41.5%, declined from 42.4% in the prior year quarter but increasing sequentially from 40.5% in the third quarter 2014. The fourth quarter 2014 effective tax rate of 38.8% was higher relative to the full year 2014 guidance of approximately 36%, reflecting a negative impact of certain discrete items in the quarter partially offset by the reenactment of the research and development credit. On Slide 22, we're incorporating more metrics for our fixed income investors. We ended 2014 with cash and cash equivalents of $509 million, which includes cash held outside of the United States of $102 million. And as a general policy, we prefer to maintain U.S. cash buffer of approximately $100 million to $125 million for operational purposes. Our gross leverage was 2x based on our total debt of $800 million to our 2014 adjusted EBITDA, well within our stated policy of maintaining leverage of 1.5 to 2.5x. We generated strong operating cash flows of $305.7 million for the full year within the guidance and right about the midpoint of the range we provided for the year. We spent $51 million in CapEx for the full year 2014 ending the year at the low end of our guidance range we provided for the year. In 2014, we repurchased 6.9 million shares as part of the 2 ASRs bringing the weighted average diluted shares outstanding to 113 million shares for the quarter, and shares outstanding at the end of the period were $112.1 million. As a reminder, our current ASR is scheduled to mature between early March and mid May. Lastly, as a quick refresher on our commitment to return $1 billion to shareholders by the end of 2016, we executed the most recent $300 million ASR in September under the plan and we paid our first quarterly dividend in October. Further, our board approved our first quarter 2015 dividend to be payable on March 13, 2015. We currently have $550 million remaining on the outstanding share repurchase authorization from our board, and as we move forward, we'll continue to be opportunistic in terms of executing repurchases to ensure that we have -- we optimize the method by which we return capital to our shareholders. And before tuning the call back over to Henry for his closing comments, we provided you with a full year 2015 guidance on Slide 23. We expect adjusted EBITDA expense to be in the range of $620 million to $640 million. Incremental is driven by several components. First, a full year effect of the investments we have made in 2014 will be the principal driver of the increase of approximately $15 million to $20 million when you annualize them into 2016 [ph]. Next, we'll have moderate inflationary costs for compensation and noncompensation and this will include incremental technology, costs related to continued capacity, though in a small magnitude. We're expecting margin expansion to begin in the second half of 2015 and continue thereafter. Due to the seasonal first quarter effect on compensation increases, payroll taxes and benefits, we expect that our margins will be impacted slightly from the Q4 levels and then by the second half of 2015, return to the approximate Q4 '14 exit rate of $41.5 million and from there, we expect margin expansion to begin and continue in the subsequent quarters. We expect our cash flow from operations to be in the range of $275 million to $325 million and capital expenditures are projected to be $55 million to $65 million. And finally, we anticipate that our full year tax rate will be approximately 35% to 36%. And lastly, our indicative payout ratio remains at 30% to 40% of adjusted EPS. With that, let me turn it over to Henry for some closing comments.

So before I open the line to questions, I would like to welcome our 3 new prospective board members, Wayne Edmonds; Rob Hale; and Wendy Lane. We very much look forward to benefiting from their experience and perspective when they join our board in March. I realize we gave you quite a great deal of information and detail. It has compressed a bit the Q&A period. We'll take some questions now but in the event we run out of time, we'll be more than happy to take your questions after the call in the next day or 2 as well. Operator?

[Operator Instructions] Our first question comes from the line of Georgios Mihalos with Crédit Suisse. Georgios Mihalos - Crédit Suisse AG, Research Division: Henry and Bob, just sort of 2 quick things here. One, just maybe talk a little bit about what will drive the $620 million or $640 million, that $20 million of delta in your expense looking out into '15? And then somewhat related to that, on the prior quarters, Henry, you spoke about revenue growth in '16 sort of correlating with EBITDA growth sort of in the double-digit range. Is the new sort of formula for MSCI -- are you more comfortable looking at the business as sort of a sustainable high-single-digit top line grower with double-digit EBITDA growth for margin expansion and then adding onto that incremental points from buyback and dividend?

Let me address the second question, George, and then Bob will take on the first one. Yes, so this -- what we did in the last quarter or so was -- we just going -- we always do this at the end of the year when we are preparing our budgetary process -- we're going through our budgetary process for the following couple of years. We really took stock on where we were with all of our capabilities, all the investments that we have made, all the opportunities that we see in the marketplace, we discussed it with our board and clearly, one of the key functions of a board and a management team is to size up the company to the appropriate opportunity. So we felt that we had already completed a big part or the major part of what we set out to achieve a couple of years ago, and it was earlier than expected when we took this deep dive. So to that now changes the guidance that we gave you with respect to EBITDA -- adjusted EBITDA expense growth and revenue growth in terms of the link between the 2 that you mentioned. We are still very much of the view that our business will achieve sort of double-digit growth as we discussed before. The only change we made is clearly the rate of growth of our expenses and the timing being reduced -- rate of growth of the expenses being reduced sooner rather than later at this point.

And George, on your second question, it's really 2 parts, one is the annualization of the hires and we hired people, mid-year obviously, in the second and third quarter as part of these initiatives. It's just the continuation of the annualization of the compensation, and the other piece would be the annualization of the cost related to GMI. Georgios Mihalos - Crédit Suisse AG, Research Division: Okay. And just last question. The retention rates look great, they continue to improve well ahead of what we were looking for. You commented on the new sales improving as well, but if we sort of look at them, at least the recurring sales, over the back half of '14 versus the back half of '13, they're sort of flattish there. Can you talk a little bit about what you're seeing in the environment and kind of your thoughts on driving those higher?

Yes. So the area, we clearly -- in terms of our investment plan, 2, 3 areas that we're clearly, clearly the most proud of is the enormous increase in retention rates, right? Way and above our highest expectations. We set out to put an enormous amount of servicing around on our existing client, so that has paid in spades and clearly, also, our ABS business and our ETF had paid in spade and the PMA business and others, right? The one area across the company that is lagging naturally is the sales in terms of payback of the investment. That is normal because we added a lot of salespeople, obviously, and those take time, as I mentioned in my script, take only the product development that we're going, take time and running through the system and being launched. And then when you launch them, it takes time to obviously accumulate sales. And then three, we're not completely in a normal operating environment. By normal, I mean pre-'08, and there is a little bit of an impact there. But we're still hopeful that we'll see a continued grinding upward of the pace of sales and as we get the payback from all the things that I mentioned.

Our next question comes from the line of Chris Shutler with William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: Really like the new format. First question, just on the RMA and PMA and just want to get a little bit more detail on the rationale for combining those. And from a client's perspective, what that will look like. And then kind of in relation to that, one of your shareholders had made a comment about the One MSCI strategy and criticizing that and maybe you could talk about what's worked and what changes you've been making and you're thinking there?

I'm glad you liked the new format. So we clearly want to do it more in the coming quarters, Chris. So I think the -- there are a couple of ways to address that question, Chris. The first one is that there is a significant amount of convergence going on between our equity index product line and our equity analytics product line because the vast majority of the new product development effort and the new activity in this business is factor indices. So the equity analytics business is about building factor models, right, that discern the factors that are affected, return and risk of portfolios and, therefore, we're taking all of that know-how experience, people and all of that and combining it with our equity index capability to arrive at a leadership position in factor indices and factor investing that I mentioned before. The second convergence that is happening, which is the one that you're alluding to is the convergence between front office, analytical capabilities, so just equity portfolio management capabilities, and that's part and parcel of the equity analytics product line, and risk management central of the risk management analytics sort of capabilities. So what we're trying to do is we clearly are announcing the combination of what we call -- we used to call PMA and RMA in order to capture that convergence and generate higher revenues, higher sales and all of that but also better efficiencies in how they work together. What we didn't combine, because it's already working really well, is the equity analytics research team working very closely with the equity index research team in building all these great factor indices that we're doing. So that's what we're trying to achieve there. With respect to the -- and that's what clients want us to do. They -- we constantly get our clients saying, can I have one person that can help me look at the entire product line that you have, and bring all of that capability to bear to my initiatives, my objectives, what I'm trying to drive in my firm. So we're clearly pushing that pretty strongly on the client end with the senior relationship managers and the like. With respect to comments about the One MSCI, I think there is a little bit of a misinterpretation. This approach of trying to put all of our capabilities in front of our clients is not at all in order to subsidize one product against the other one or to reduce the prices of any one single product. If you check around MSCI, definitely not well known for giving too many breaks, right, including some of your organizations. This is an attempt to service our client better, create better -- it can create better impact on them and therefore generate incremental revenues from them because we're serving them better and solving problems better for them.

Our next question comes from the line of Alex Kramm of UBS.

Maybe just to follow up on some of the -- the question that you just heard in terms of some of the public investor commentary you received so far this year. Just, obviously, you reacted and we saw some of the board changes here. But just curious to what degree increased discussions and public commentary has impacted some of the views on expenses going forward, some of the investment spend. Clearly, there's been a little bit of a change here. So curious how that's been impacted. And bigger picture-wise, if it's also impacting the way you think about acquisition strategy, divestitures, capital return, anything you want to share.

So the -- only way you know are in terms of the dialogue with those shareholders starting August of last year and running through January, first a private phase and then obviously a public phase or semipublic phase of that in the last 5 weeks. A lot of the dialogue has been more of strengthening the board and adding people to the board and who the right people should be in that. There's clearly been a dialogue with them and every other shareholder that has been -- and this is a response of that of where is the investment going? How do we provide better clarity of that, better metrics, better representation and the like, and we have been hearing that from quite a lot of our shareholders and from many of you in the analyst community. So we have been working on that for quite some time in terms of trying to provide that additional disclosure, additional clarity in the company. In terms of operating differently, no -- not yet so to speak. I mean we -- these people are coming to our board, we have an expanded board now of 12 directors. The discussions are going to be robust, as it always have been in terms of how do we do differently and the like. So we welcome that. But a lot of what we're doing right now, a lot of our -- a lot of these metric, a lot of this fine tuning of our investments and our plans and all of that, has been ongoing for some time now.

Okay, that's helpful. And then just coming back on the cost side of the business, 2 comments here or questions. One, you made a quick comment about your guidance for this year is recognizing stable asset-based fees. So if we do have a great year in terms of inflows -- what does stable asset-base fees mean and if there's upside to that, would that just flow through to the bottom line? And secondly, just going back to one of your earlier slides around where the expense growth has come from over the last couple of years in terms of organic investments, it looks like the organic growth has been about 4% per year. Is that a good number to use for outyears now? And if that is a number which is also contemplated every 2, 3, 4 years you have to go through another cycle of incremental investment spend. So again, like how are you thinking about the cost growth longer term, if there's any more color you can give.

Yes. So on the first question, the -- you noticed that a few times I mentioned, predicated or not, in a stable operating environment especially asset-based fees, what I really mean there is that if there is a better market in equities around the world, that's going to put some pressure on the margin, right, because that declines our revenues immediately and our cost structure will have to gradually adjust to that. So embedded in our expansion of margin is a continuation of some meaningful level of return in the equity markets in terms of appreciation, in terms of new product development, new product launches, new inflows and ETFs and the like. If that were to be -- if that equity environment of new product launches and equity values were to accelerate further from what we have, what we see here, that will expand the margin faster. And we will not be spending that incremental. Bob, do you want to address the second part?

Expense growth, if you look at the chart that Henry used, it showed in terms of organic, I think, it was $75 million, a lot of it was driven by the tremendous inflows that we talked about from ABF, I mean, a lot of that piece will be the volatility on that but we're continuing to generate the new products that we talk about, directly and indirectly, we're receiving benefits on it. So the investment returns that you see in here become organic. And we continue to use the investments to leverage the organic, that's where you're getting the growth.

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

I appreciated the breakout of the investments on Slide 14. Just looking ahead to the next year, where will your investments be focused? Would you expect that like it should be similarly proportional or are there certain areas or segments that have more opportunities than others that you're looking to invest in?

Yes. So we -- Toni, I'm glad you like it, please continue to give us feedback, all of you, for all the things that you like to see. The -- at this point we're really, really focused, Toni, on what we've done so far, how do we capitalize on it and pay back and obviously creating efficiencies from that and all of that. We haven't yet started any kind of planning process as to what other areas of enhanced investment would occur because it's premature. We are -- but in general, we are very happy with the progress we're making. In fact, there's going to be more of that, clearly. We're really, really focused on this expansion of the PMA business and trying to broaden it to fundamental managers, not only the quantitative managers. Clearly, a lot of fundamental managers are looking at this onslaught of factor indices and passive management against the factor indices and a lot of what they do is one way or another in factor investing is qualitatively or quantitatively sometimes, right? So we need to provide tools for them to do that and get the business models continuing to grow. We're very focused on the -- we're very much focused on the return of the RMA business to significant growth. The last 2 years have been a bit more of trying to ensure that the technology platform that has served us well but reached the limit was invested in and we did a complete overhaul of that and so on and so forth. We now need to put more time and effort into launching new products and new services on that business in order to increase sales. I think we're happy with the retention rate. So those are areas and obviously you have the real estate and ESG part, which are really performing very well. So I think we're very focused on what we have today and making sure that it pays as opposed to expanding into any new areas.

Okay. And just one follow-up. On the index subscription revenue, I know Bob mentioned that there was some product timing in terms of why it was organically only about 5% this quarter. Was there anything else that we should be thinking about?

That was really driven by the pace and the supplemented disclosures back there, Toni, that shows that the revenues which in the real estate business, you recognize it when the products deliver. We had a slowdown in the fourth quarter. It's not affecting the pipeline, it was really more of timing, Toni. And that's why it dropped and you can see it decline 24%. That's sort of the small piece of it that brought it down to 5%.

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

I want to say I like the format very much and also welcome to Steve. So first question on margin. The first question on margins. I just want to understand the trajectory of the margin expansion. And just to be clear, when we're talking about margin expansion, you're talking year-over-year change in the adjusted EBITDA margin, just to be very clear so I don't misinterpret it. So are we talking that those margins are likely to be -- continue to be down on a year-over-year basis for the first and second quarters, and then starting in the third quarter they start to move up? And then finally, in the fourth quarter '15, you're going to show improvement. Is that the right interpretation on that?

Well, Bob is going to give you the answer, but before that, we do also welcome Steve and he's been hard at work to create all of this. We wanted to get him baptism by fire, so a lot of this is a lot of his efforts as well. Bob?

Bill, we're looking at -- we're going to have seasonality issues, which is why we provided the data table back on the supplemental disclosures. You see some of the fluctuations that happen with the real estate business that are out there. We're going to hit the first quarter like I talked about with some seasonal increases namely related around compensation. As we move through the second into third quarter, definitely, year-over-year progression margin, without a doubt. That's where we're moving towards and successively, we'll be working to progressively expand the margin each quarter. Again, we'll get some volatility with ABF but our inflows continue and the markets goes the way we're looking at, we should like to see it progressively for a while.

Is there anything that's changed in the business that would keep you from getting back up to the high levels of 46% that you had previously?

Yes, I think -- we don't see it that much, but obviously levels of competition will be something that we need to -- we monitor closely, that has been stable in the last year or 2, across. That's something we need to continue to look at, right, to make sure that we don't lose market position. No, I think all of you, in our discussions, both shareholders and analysts, have always, always recognize that there is an inherent expansion of margin in a business like ours because you have a relatively fixed cost structure that grows to a certain level and then the incremental revenues, the growth of incremental revenues is at a higher pace than the growth of the incremental cost structure. And on top of that, a lot of the product development that we do is enhancement of existing products and built off the existing cost infrastructure, right? So there is an inherent pressure there for the margin to rise. What we're trying to do, and this is always a debate, we're trying to do strongly is to not look at the next few quarters in terms of the health and the progress and the success of the business but to look at it on the medium-term for that process about 3, 4, 5 years to ensure that we're not sorry 3, 4 years from now that we haven't captured market positions and we're not in a position well in the areas that we want to be and get hurt. That was a little bit of the problem with the PMA business which we were harvesting the company or the business or the product line and not looking across the 3-, 5-year horizon. That should never happen to us again. So there will be a level of investment that we will need to keep in order to ensure that, that doesn't happen to us, but for sure, the embedded machine of MSCI as a grinding of gradually increasing profit margin.

Our next question comes from the line of Kevin McVeigh with Macquarie.

Henry, you had mentioned that if the investments don't meet certain ROI thresholds, you would reconsider. How should we think about those thresholds in terms of ultimate returns relative to the business?

We look at -- first, when we're acquisition-related, we look at our acquisitions to be value accretive 3 to 5 years, that Henry pointed out in his comments. When you do organic investments, Kevin, I mean you're leveraging an existing infrastructure so the value accretion should be significantly higher, and we look for that. And -- but always the bottom of that would be the weighted average cost of capital. The timing, as we've talked about before, tends to be a little bit longer than acquisition sometimes, but we're looking at pretty significantly having ROIs much higher. If they fall below these high levels, they're competing for other investments that are out there.

And Kevin, what we're telling you is that we're very dogmatic, we're very disciplined, we're very focused in how we look at everything we do. And our comment is attributed -- the large majority of what we've done in the last 2 years is paying back in a major way and we'll continue to pay back. There are a couple of pockets that we're evaluating, of things that we have done that are not performing at the level we wanted to see, and are evaluating whether we continue with them or not. Those are -- that's what we normally say at MSCI, the tail of the dog. The dog is really the majority of the investment plan that is working well, right? But we want to be truthful and tell you that we're looking at those as well.

That's fair. And just, Henry, as you're working your way through the budgeting process, any sense, obviously, the fundamentals look pretty good, but people feeling better just relative to how budgets are coming together this year?

Yes, it's -- that's a question we always ask ourself because a year ago or so, people were feeling fairly good. At the end of last year with some of the news from Europe and geopolitical news and obviously slowdown in China and things like that, we monitor that like a hawk to try to see how the budget and spending patterns of our clients around the world are coming together. And we have not seen major change yet, right? So that's the good news. But we are monitoring that intensely because there are pockets -- big areas of the world, with the exception of the U.S., right, are slowing down and we want to make sure that we're getting our fair share of their budgets or even a higher share of their budgets, right, going forward. So we're monitoring that. But so far, we're fine, but that's an area -- meaning the pipelines are fine, the time approach, the pipeline and all of that, so -- but it's also that all of us keep looking [indiscernible].

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

Thanks, everyone, for joining us today. We took up a little bit more of your time than expected but we appreciate all your interest in MSCI. Thank you.