Welcome to the MSCI Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Stephen Davidson, Head of Investor Relations. Mr. Davidson, please go ahead.

Thank you, Sabrina. Good day and welcome to the MSCI Second Quarter 2015 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for second quarter 2015. A copy of the release and the slide presentation that we've prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they 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. During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures are more reflective of our core performance. You'll find a reconciliation of the equivalent GAAP term in earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on pages 28 to 32 of the earnings presentation. On the call today are Henry Fernandez, Chief Executive Officer 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. I'm very pleased to share with you our second quarter 2015 results. Please turn to slide 3 in the presentation for an update on the quarter. We delivered solid financial performance with higher levels of profitability driven by solid revenue generation and a strong cost discipline resulting in double-digit growth in adjusted EBITDA and continued margin expansion. Despite some heavy currency headwinds, adjusted EBITDA margin was 43.7%, an increase of over 200 basis points from the second quarter of 2014. This is the highest margin recorded by MSCI since the third quarter of 2013. We're on course with the execution of our growth strategy and we're seeing the returns from our investments. In Index, we continue to extend our product set to equity investors across segments and markets. We're selling more to our existing customers and we're building on our momentum in the factor or smart beta space with new factor index introductions. In our asset-based fee products, we're focused on extending our research innovations and capabilities and new product development and we're seeing positive results with the leadership position that we have recorded in the first half of the year. More equity ETFs are linked to MSCI indices worldwide than any other index provider. Our investment in client surveys and consultants continues to pay us back with very strong client loyalty. Our aggregate retention rate in the quarter was 94.2%. Higher retention rates have bolstered our total net new sales offsetting a range-bound gross recurring sales of approximately $30 million per quarter. On analytics, we're continuing to take actions aimed at driving this product line to higher levels of performance. I will provide more detail about our plans later in my presentation, but for now, I would like to reiterate what I've said…

Thanks, Henry and good morning to all of you on the phone call. Please turn to slide 11 for an overview of our financial results. We're including additional disclosures on the impact of currency fluctuations on our results to provide you with a more complete view of our operational performance. Our results this quarter were solid, with 12% adjusted EBITDA growth driven by solid revenue generation and strong cost discipline, with adjusted EBITDA expenses growing just 3% also benefiting from the strong currency tailwind. Our adjusted EBITDA margin increased 200 basis points from the prior quarter to 43.7% and as Henry pointed out, the highest margin since third quarter 2013. Income from continuing operations before taxes was up 4% and included the impact of higher interest costs from the issuance of our 5.25% coupon bond in the fourth quarter of 2014. The prior year's second quarter tax rate was low due to several one-time benefits. Excluding those one times, the effective tax rate in the quarter of the prior year would have been 35.6% compared to the 35.9% recorded in the current quarter. As Henry mentioned earlier, we're in the process of looking at opportunities to become more tax efficient by optimizing our operational and legal footprint. This work is underway, but we're not in a position at this time to provide any sense of magnitude or timing. We will update you more on our progress in the coming quarters. Adjusted EPS was up 2% to $0.56 per share, benefiting from a 4% decline in the weighted average shares outstanding year-over-year and stronger operating results. Before moving to the next slide, I want to comment on the impact of foreign exchange on our results. As we have previously indicated, foreign currency fluctuations have been a headwind for our subscription revenues…

[Operator Instructions]. Our first question comes from the line of Toni Kaplan from Morgan Stanley. Please go ahead.

You mentioned just now that the Board gave you authorization to explore options to increase leverage to 3.0 times to 3.5 times. Just want to clarify if that's gross leverage or net leverage and what the plan is for the capital? Is it basically just buybacks or something more?

It's based on gross leverage. And like I said, we're exploring the opportunities but we've consistently been returning capital. We'll make those decisions when and if we increase the leverage to 3.0 times to 3.5 times.

And just as a follow-up, I wanted to reconcile really great expense management this quarter. It looks like you reduced headcount by about 100 people. So just wanted to reconcile cutting costs and managing expenses with the growth goals that you have increasing the sort of gross sales. So just wanted to find out, I guess, where the headcount reductions are that you're lowering your headcount and where you're planning to increase your headcount because you mentioned hiring plans?

We've been making headcount reductions in areas where we've been finding efficiencies that we referred to in the comments on the call here and your numbers are right, we did reduce and you've seen that evidenced by the severance. And so we're capturing those efficiencies, but we're actually using those efficiencies to ensure that we can maintain, whether its infrastructure, whether its stability or whether its growth in our products. So as we said that we will have some step up and redeployment over the course of the year, but it really has given us over the past year, the investment program, the opportunity to really capture some of the inefficiencies and turn them into productive growth.

And our next question comes from the line of Chris Shutler from William Blair. Your line is open.

The sequential improvement in the constant currency run rate, growth rate, I think it was about 8% for last couple of quarters. It was 9.1% this quarter. Given sales activity and retention rates were basically flat sequentially, should we view that as the vast majority of that was price. And then secondly, if you look at the total run-rate, how much incremental benefit do you think, let's say over the next one to two years, that you will realize from price? Is it more like a 100 basis points, 200 basis points, 300 basis points? How should we think about that, at least directionally?

I think going back to on a constant currency basis, you can see that our run rate has grown basically from 4% back in 2013 to now 8%. So, we've seen that from an improvement in our product suite. Go back earlier in that period, it was PMA along with the models and then we came out within 2013 and 2014. Price has always been a factor on our index side and as we get more and more confidence in the analytics products, we'll see pricing come into play. I wouldn't see it 50% or 300 basis points that you were talking about. But I would see us over time lighting into a higher percentage of our increase coming in from pricing but that would be gained by client confidence, that would be gained by new product innovation and as Henry talked about, the senior account manager program that we have in place.

On that last point, the senior account manager [indiscernible] talked about in the prepared remarks. Any changes that you guys have made to the incentive structure to make to -- to try to really push the accelerator on the growth?

We have been for some time now reviewing the most appropriate way to incentivize our client coverage organization and we have a salary and bonus structure that is highly correlated always into sales performance. But we have that under review to see if there are more direct levers that we can put in place to provide even more alignment to that and we're still kind of in the middle of that process. We won't be able to really report back on that until sometime next year.

And our next question comes from the line of Alex Kramm of UBS. Your line is open.

Just wanted to come back to the comments you made early and get the question on the, I guess, the levering up the balance sheet more and I think, Bob, you then mentioned capital returns as probably one of the avenues. But can you maybe remind us a little bit like what the specific return are that you're looking at when you do that, so when you say evaluate buybacks versus dividend or maybe even do something on the M&A front again, what are the metrics we should be looking for and I guess I'm asking because you're stock is trading at an all-time high relative to the S&P and obviously the return at this valuation is getting limited and limited on buying back stock. So any additional color would be helpful.

Sure. I think in the past, Alex -- great question, we benchmark all of our investments on our weighted average cost of capital and the accretive value to that, whether it would be a buyback, whether it would be a total shareholder return through a dividend or whether it would be acquisitions externally or investments we make organically but the watermark would be our weighted average cost of capital and sure we have accretion to that for our shareholders.

Yes, the other thing that I will say, Alex, is that -- we can't comment ourself on the valuation of our shares by the market. What we can comment though is that we see a significant amount of opportunities in our client base to continue to drive revenue growth even in the context of a mixed operating environment and then when you look at the mix of our products as I indicated. We think we're hitting in a lot of cylinders on the index product line, we have meaningful opportunities for expansion in revenue growth in analytics and in real estate and if you can continue the pace of growth in ESG, that should provide meaningful amount of revenue growth. Secondly, we went through that period of investments for about a year and a half, half of 2013 and 2014. We now feel we have the right sort of footprint and infrastructure and are now concentrating on that and really focusing on creating efficiencies out of that. So we believe that there is continue meaningful amount of margin expansion in our shares, in our business. So I don't know what the right price for that is but we're feeling pretty good about the company.

Maybe just then secondly and I guess picking up on the last comment and you mentioned also the sales you're not really satisfied with -- can you talk maybe about the competitive environment a little bit too, in particular, in analytics and maybe risks, specifically. Anything you're seeing there that makes it harder on the sales side, you think there's some competitors you would highlight that are being stronger than they were in the past or is it more the selling environment or your own doing that is lacking right now?

I think it's the latter. Honestly, it’s -- we clearly are -- our company and our space or our industry is clearly in an area which is, we're creating a new market, we're creating a lot of new use cases. We're going into our client organizations and providing them with things that they weren't really doing before like as I said index in factor investing or a new sort of sophisticated risk management system or new ESG datasets or in the U.S., we're creating a new industry for real estate indexes and benchmarking and so on and so forth. So, a lot of our growth therefore is predicated on being able to provide -- understand the right use case, provide the right product and obviously convince the client at the right price to embrace a lot of these new offerings. Much less, much, much less driven by competitive dynamics in the marketplace, so we can go into more detail as to some level clearly a competition that exist in various product lines, but I think that the -- my overall message to you is that this range bound has to do with -- clearly its a mix environment, a lot of active managers around the world are not feeling that great, given that they're being squeezed on one hand by passive managers and on the other hand by real big large alpha highly concentrated portfolio managers and that type of investing. So, therefore, our job is to try to really galvanize the client base to help them achieve their investment differentiation, their operating efficiencies, their reporting requirements and all that and that's where we need to work harder at it in order to get out of this range that we've been at for a few quarters now that has us all rallied up.

[Operator Instructions]. And our next question comes from the line of Vincent Hung from Autonomous. Your line is open.

You've talked a lot about your disappointment with the range-bound sales. What is like an aspirational level of sales for you guys?

I'm not sure we have yet one. Our first step is break out of that range and we're not there yet and the pipeline is always good, it healthy. We had great engagement with clients and everything but we're not yet seeing that breakout and that's what we're trying to do, breakout of that recurring sales of roughly around $30 million or so but clearly we want to break out of that and we want to achieve sort of double-digit gross recurring sales growth, right. So gross recurring sales growth, that will make us a little more comfortable but again, historically, in the last few quarters, we have been trading around this range. We continue to be in that space right now. So, I don't want to raise any expectations, but we clearly wanted to highlight to all of you that we're not happy with that and we're really focused on trying to break out of it.

And what's the main pushback you're getting from clients?

Clearly, clients are not extremely liberal with their budgets around the world. We're living in a highly cost conscious environment anywhere you go in the investment industry, but for the right things and the right use cases and the right solutions, clients will spend money and we've demonstrated that with our -- I think a lot really depends on -- its not just us pushing our sales to clients. We need to have the right level of engagement, especially on the enterprise-wide deals for risk management and performance and that's why we have formed this group of senior sales people to be focused at that C-level, the CEO, CIO, CRO level to try to help that sales process. We need in our applications. We have all the content. A lot of our content is great, especially in analytics. What we need to do is do a better delivery of that content through more fungible applications that can be accessed by the client through that content or throw the content delivered directly to the client for their own applications. So that it that effort that I mentioned about this new architecture and this new interface, this new platform that we'll be able to have the client access all of our other applications through that one in order to make it more fungible. So, we're taking a lot of steps. We're clearly pushing the salespeople, we're clearing pushing our senior account managers, we clearly are pushing our content, but I think a meaningful part of it is also breakthroughs that we have achieved in consolidating a disparate set of applications that we have from users to Barra Portfolio Manager to BarraOne to Risk Manager to Hedge Platform, we need to be able to put that in a more holistic fungible way to achieve the efficiencies that the clients is looking to achieve through the various use cases.

And just on your decision to increase the target leverage, just curious to get details around that. So, firstly, what kind of term structure would you look for in incremental debt and then, also would you look to get to the 3.0 times to 3.5 times sooner rather than later?

We've had a lot of deliberations with our Board over the last few years as to what the leverage is in a company like us that has a book of long-term assets that are producing great growth and profitability that are highly reliable and subscription based and so and so forth in order to balance out the leverage amount in the company and risk associated with that with the levering up your equity returns in a company like us. So we had a lot of those debates and discussion. [indiscernible] were concluded in the Board meeting this week in which the Board approved the increase in the gross leverage to somewhere between 3.0 and 3.5 and that what's just happened right. So we're now exploring based on that mandate what are the types of offerings that we can provide on the debt side to match those goals but it's early. We're still exploring all of that and we have to see what happens in the marketplace and what is convenient for us to achieve.

Can we expect that you do it all by fourth quarter?

It depends on market conditions, it depends on market environment, it depends on a lot of things. We clearly are really focused on it now, given all the work that we've done for the last couple years and given the approval by the Board. We can't really tell you until we see it [indiscernible].

We remain very disciplined in terms of -- as my comments indicated that it's terms, conditions, it's all those factors that come into play.

And our next question comes from the line of Joe Foresi from Janney. Your line is open.

This is actually Robert Simmons on for Joe. So, talk a little bit about where you think we're in the ETF growth cycle and also about the movement towards custom products?

I think that in the U.S., we have filled out quite a lot of the matrix so to speak on market datas on ETFs. So, a lot of our effort and our client’s efforts are in more raising more assets based on a lot of those products and therefore the second major emphasis is in creating more specialized investment vehicles such as factors, such as currency hedge, ETF and so on and so forth. In Europe, there is in an earlier stage of development in the market data and we're also clearly pushing this beta. In Asia, the market is totally virgin. There's not a lot at this moment. We're extremely focused on developing that market in two ways. We're supporting our clients with our indexes and then explaining how those client can invest in ETFs in the U.S. and in Europe from Asia. And secondly, we're working with those ETF clients to be able to develop and launch local product in the region to also for the clients for investors in Asia to invest locally. So, it's a two prone approach.

Can you talk a little bit about the margin expansion trajectory going forward? After this year, like when do you think you might get to 46%?

We continue marching deliberately towards margin expansion. We haven't given a cap or we haven't given a timeline but we did say margin expansion through 2015 and we gave our expense guidance that we would stay true to 5% to 7% and obviously this quarter we carved out the normalization of it. FX has had some help in that journey and some headwinds that we talked about earlier. So I can't really tell you a 46%, but I can tell you that we're 43.7% and that we're not retreating from continued margin expansion.

And our final question comes from the line of Keith Housum of Northcoast Research. Your line is now open.

Question for you about the non-recurring revenue. If I looked at this quarter, I think, it was $5.7 million in non-recurring sales you have but in terms of what you recognize that this quarter's income statement was about $3.9 million. What's the trajectory of when that $5.7 million is recognized? Is it partly this quarter and perhaps the rest the following quarter?

It has a whole host of constraints to go with it. That really depends upon when we actually deliver the product to our client. Now, sometimes, we can do data sales, history sales and that can be recognized within the quarter. Sometimes when we have long-term implementations where we have to really get a client hooked up and connected to Risk Manager that could take 12 -- part of the fees could be deferred until we're actually delivering the full product suite. So, it's hard to give you a good line of sight on that, because it really depends on the underlying sale and the product being delivered. It tends to be mainly driven though by the implementation deals or again volatility go back to second quarter of last year, we had a really high revenue recognition and a big chunk of we talked about was a lot of deals were completed for clients fully implemented, we're able to take the revenues. A more elongated sales plan, revenue recognition could be on the real estate side.

[Indiscernible] next quarter or anything like that?

No, it's tough to give you guidance on that, because we do keep a pipeline, but some of these deals are contingent upon the client being able to deliver certain things to us as well as us delivering to them. So, it's a small amount.

If I can cycle back to an earlier question regarding the reduction in the headcount and the efficiencies, I guess, is your thought process that the reduction in headcount has probably has hit its highest point [indiscernible] be adding personnel going forward?

We don't target a headcount. We're looking at the positions. The positions that we took out, we took out. Those are efficiencies that we gain. Now, there is some turnover. There was a part of it, but you can see, the severance was $4 million for the quarter, we eliminated those positions. We do have other positions that are different, that are open that we will be selling through the course of the year that I talked about.

Would we expect severance to be declining then for the rest of the year?

Severance is tough for us to give you a number on that, but we expect to have it as a part of our continuing DNA as we continue to find efficiencies that are out there.

Thank you. I would now like to turn the call back over to MSCI. Please go ahead.

Thank you all very much for your interest in MSCI and we will talk to you soon. Thank you.