Executives
Edings Thibault – Head of Investor Relations
Henry A. Fernandez – Chairman of the Board, President & Chief Executive Officer
Michael K. Neborak – Chief Financial Officer
Analysts
James Kissane – Bank of America Merrill Lynch
David Scharf – JMP Securities
Andrew Fones – UBS
Suzanne Stein – Morgan Stanley
Aaron Teitelbaum – Keefe, Bruyette & Woods
[Drew Caputis – Davenport]
Robert Riggs – William Blair & Company, LLC.
Michael Weisberg – Crestwood Capital
[John Nash – Anchor Capital]
MSCI, Inc. (MXB) Q1 2010 Earnings Call April 8, 2010 11:00 AM ET
Operator
Welcome to the MSCI first quarter 2010 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Edings Thibault, Head of Investor Relations.
Edings Thibault
Thank you for joining our first quarter 2010 earnings call. Please note that earlier this morning we issued a press release describing our results for the first quarter of 2010. A copy of that release can be viewed on the company’s website at www.MSCIBarra.com under investor relations.
This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date which they are made which reflect managements’ 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 the affect the future results of the company, please see the description of risks factors and forward-looking statements in our form 10K for our fiscal year ended November 30, 2009 and registration statement on form S4 filed with the Securities & Exchange Commission on April 2, 2010.
Today’s earnings call may also include discussion of certain non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures. Since we will be referring to run rates frequently in our discussion this morning, let me remind you that our run rate is an approximation at a given point in time of the forward-looking fees for subscriptions and product licensees that we will record over the next 12 months assuming no cancelations, new sales or changes in the assets and ETS license [inaudible]. Please refer to table five in our press release for a detailed explanation.
Henry Fernandez will begin the discussion with an overview of the first quarter and then our CFO Michael Neborak will provide some details on our financial results. In the prepared remarks both Henry and Mike will focus on commentary that will supplement the information that can be found in the earnings release. Following our formal remarks we will open up the line for questions. I will now turn the call over to Mr. Henry Fernandez, our Chairman and Chief Executive Officer.
Henry A. Fernandez
This morning we reported record Q1 revenues of $122 million and adjusted EBITDA of $57 million. Excluding onetime expenses related to our planned acquisition of RiskMetrics, we generated $59 million of adjusted EBITDA and an adjusted EBITDA margin of 49% which is at the high end of our target range. Revenues grew by 15% year-over-year and adjusted EBTIDA grew by 18%.
We are encouraged to see more signs that business conditions continue to improve. The market for our products has not yet fully recovered but demand for our investment decision tools now appear to be on the rise. Our recurring subscription sales rose sequentially for the fourth consecutive quarter and our retention rate improved but sequentially and year-over-year. Our asset based revenues reached record levels for the third consecutive quarter fueled by the partial rebound in global equity markets and by a continue of the strong inflows in to equity ETS.
Our revenue growth is underpinned by three long term secular investment trends. First, the globalization of investing which drives demand for indices and portfolio construction tools that cover global markets. Secondly, the increasing and widespread use of risk management tools leading to demand for tools that help understand, measure, management and report risk across multiple asset classes, multiple portfolios and various markets worldwide. Thirdly, the growing popularity of passive investing worldwide and the resulting need for indices and index tracking quantitative tools.
The continuous and increasing importance of this long term secular trend have been a factor in our performance since the beginning of this downturn and continue to propel us forward. In Q1 new recurring subscription sales rose by almost 10% to $18 million from Q4 ’09. New sales rose in all three of our major product categories. The aggregate retention rate increased sequentially to 92% from 82% at the end of Q4 and from 91% in Q1 ’09.
In dollar terms cancellations fell by 56% from Q4 and by 13% from a year ago. The combination of improving new sales and rising retention rates drove the sequential acceleration of our subscription run rate growth. Our asset based fee business also continues to be a strong driver of growth and benefitted from an increasing average assets under management in ETS linked to our indices driven for the most part by the strong performance of global equity markets in the fourth quarter of ’09.
While markets dipped during our first quarter of 2010, they have since rebounded. Total assets under management in MSCI link ETS closed last night at $263 billion and the second quarter-to-date average AUM is $252 billion up 5% from the average AUM in Q1. Finally, we continue to invest in our business by adding staff in key areas to drive growth and profitability and of course by making a substantial investment in the form of our planned acquisition of RiskMetrics.
Before discussing our investment plans, let me provide some additional details regarding the performance of our business in Q1. In my prepared remarks, I will be referring only to run rate figures and my comments later on in the call will focus on financial accounting numbers. I will be speaking to comparisons to Q4 ’09 unless otherwise noted. Our total run rate in Q1 grew by 1% to $467 million compared to Q4. Our subscription run rate grew by 2% to $373 million and was partially offset by a 1% decline in the run rate from our asset based fee business.
The overall run rate in our equity index business increased 2% compared to Q4. The equity index subscription run rate rose 3%. Usage fees rose 9% on the back of several large global deals during the quarter. Run rate for our core index modules of developed, emerging and small cap markets rose by 1% and other index products such as value and growth indices rose by 3%. Equity index subscription run rate grew across all client types and across all regions with relative strength coming from EMEA and the Americas.
The retention rate in equity index subscriptions rebounded to 95% from 85% in Q4 and was in line with the levels that we saw back in Q1 ’09. Structural changes in a few of our clients like mergers and acquisitions and firm and fund closures continued to account for about half of the equity index cancels in the first quarter. Finally, at the beginning of last month we informed our equity index subscription clients that we plan to raise prices for select international equity index products by an average of 3% to 4% beginning in May of this year.
Later in this call, Mike will provide more color about the other part of our equity index business, the asset based fee side. Equity portfolio analytics, the run rate grew half of 1% in Q1 compared to Q4, the first positive sequential changes since the second quarter of 2008. We are encouraged to see signs of stabilization in this product line. The strengthening of the US dollar also had a negative impact of $1.4 million or 1% on the sequential growth run rate in this product. A large reason for the growth in the run rate during the quarter was an increase in the retention rate. The retention rate for equity portfolio analytics increased to 92% from 79% in Q4 and from 86% a year ago.
By client types, the run rate increased at broker dealers and were essentially unchanged in all other client types. On a regional basis strong growth in Asia Pacific was offset by small declines in EMEA and in Japan. The stabilization in the equity portfolio analytics product line was driven by solid growth in demand for equity risk content. As you may remember, equity risk content which is delivered either directly or via third party software systems and it grew by 3% sequentially.
That growth was based by demand for our new and revised models such as our global equity risk model and our new European risk model. The positive results we recorded for our equity risk content were offset by a decline of 1% for our [inaudible] products which as you remember is a product that bundles our equity risk content with our proprietary software. We have invested significantly in equity portfolio analytics in recent years to improve the quality of our underlying data and our ability to produce new risk models at a much faster pace.
Therefore we view this stabilization on this business as an important validation of this effort. In the second quarter, our new product pipeline is robust. We recently launched our new extreme risk analytics and a new Asia Pacific risk model is coming out shortly. Our investments have also enabled us to selectively raise prices and roll back discounts, the combination of which accounted for almost half of the new sales growth achieved in the first quarter.
Finally, we continued to work on the development of Barra Portfolio Manager, our new proprietary ASP software that is targeted for release at the end of 2010. We believe these investments in data, in new models and in new software systems will help us drive growth in our equity analytics business. The multi asset class analytics run rate increased 2% compared to Q4 comprised of 5% growth to $36 million for BarraOne and an 18% decline to $5 million for total risk.
The strengthening of the US dollar during the quarter reduced our run rate by about $1.4 million or about 4%. The aggregate retention rate for multi asset class portfolio analytics rebounded to 83% from 60% in Q4 largely reflecting seasonal trends. The overall retention rate continues to be affected by expected cancellations of total risk, a product that as you know we are in the final stages of decommissioning. For BarraOne specifically, the retention rate increased to 88% from 79% in Q4. BarraOne sales resulting from total risk conversions accounting for about $800,000 or about 20% of total BarraOne sales in the quarter.
By client type BarraOne run rate increased at asset managers and custodial institutions but declined at asset owners. By region BarraOne run rate rose in the Americas, in Japan and in Asia Pacific but declined slightly in EMEA. When we reported our fourth quarter 2009 results we discussed our plans to rate our level of investment overall in our business. Before I give details regarding the status of this investment I would like to take this opportunity to reiterate our determination to continue to invest prudently in our business in order to take advantage of the significant opportunities that we have to accelerate medium to long term revenue growth.
Three months ago we laid out plans to make an additional 105 hires over the next three to six months with approximately 90% of these hires expected to be in our emerging market centers. At the time we broke down our investments in to three categories and let me give you an update on what we’ve achieved so far. The first category was product development which includes investments that are expected to lead to the launch of new products and the enhancement of existing products. In the first quarter of 2010 we added 32 new employees in the product development area.
The second category is client coverage which includes investments that should help our sales force and our client service teams reach new clients and increase the penetration of existing clients. We added 14 new employees in the client coverage area. The third category is work productivity which includes investments that should result in better decision making across the company and better expense management throughout the organization. We added five new employees in this category.
Of course, we also committed to making what will be the biggest investment in our company’s history, the planned acquisition of RiskMetrics. The combination of MSCI and RiskMetrics will greatly expand our capabilities in the high growth, high margin business of multi asset class risk management analytics. As a combined company we will significantly accelerate our efforts to take advantage of what will be an important theme for at least the next decade, the critical need to understand, measure, manage and report risk across multiple asset classes, across multiple portfolios and on a global basis. This is going to be a key growth area for our company for a long time to come.
In addition, we expect the increased scale and scope of our combined business to enable us to leverage our existing common platform of data, data processing, model development and software and technology infrastructure. This operating leverage should result in higher margin, increased investment in new products and capability and lead to accelerated revenue growth in the future. This is the virtual circle that has created so much value in our equity index business and it is our vision and determination for our combined analytics business.
Since the announcement or our planned acquisition of RiskMetrics on March 1, we have been working hard to complete the steps necessary to close the transaction as soon as possible. On March 16th we submitted our application for antitrust approval in the United States and on April 2nd we filed an S4 combined registration and proxy statement with the US SEC. We continue to expect the deal to close in our fiscal third quarter.
We have also been very hard at work planning the integration for our combined company. Both MSCI and RiskMetrics have established large integration teams to make the planning as efficient and as useful as possible. Our employees are very excited and eager to plan for the integration and put ourselves in a position to hit the ground running post closing.
Let me now turn it over to Mike for a review of our financial highlights for the quarter.
Michael K. Neborak
My first topic is to discuss our asset based fee business. Revenues from that product category were up $11.8 million or 90% [inaudible] $25 million versus Q1 2009. Similar to prior periods the substantial majority of that revenue was related to the equity ETS business. We sold have the inflows in to all of the major ETS linked to our indices with the exception of those linked to the [inaudible] and Brazil indices.
In flows for the quarter totaled $4.4 billion. ETS linked to our Japan indices was the biggest beneficiary of $1.2 billion of inflows. Over the course of the first quarter 2010 we estimate that roughly one third of all in flows in to equity ETS went in to those linked to MSCI indices. Our overall market share of equity ETS was essentially flat at 29% at the end of February versus 30% at the end of 2009 but was up substantially from 22% at the end of Q1 2009. MSCI’s market share in US listed ETS dipped slightly to 33% in Q1 2010 from 34% in Q4 2009 and rose in Europe to 30% in Q1 2010 from 28%.
The number of ETS linked to MSCI agencies rose to 291 a net increase of 23 during the quarter which most of that growth coming in Europe. Finally, the top 25 ETS linked to our indices had a combined AUM of approximately $173 billion. That is 73% of our total AUM linked to our indices. 45 ETS linked to our indices had AUM balances greater than $1 billion. At February 28th iShares accounted for approximately 56% of the AUM linked to our indices. That is down from 61% a year ago. At February 28th iShares accounted for approximately 66% or our ETS run rate.
The AUM and ETS linked to our equity indices at the end of the quarter was $236 billion with a run rate equal to $76.5 million. That’s 81% of our asset based fee run rate. The weighted average base point fee excluding minimum fees was approximately 3.1 basis points. Revenues from our subscription product categories grew 4.3% versus Q1 2009 reflecting a modest increase to our subscription run rate during the past 12 months.
As new recurring subscription sales increase and retention rates improve, revenue growth from our subscription business should increase but on a lag basis versus run rate growth. In the first quarter we generated $57 million of adjusted EBITDA down 4% from $59.3 million in Q4 2009 and up 17.6% from $48.5 million a year ago. However, included in our expenses was $2.2 million of costs associated with our planned acquisition of RiskMetrics group.
Excluding those onetime expenses we generated adjusted EBITDA of $59.2 million, in line with Q4 2009 and up 22% from a year ago. The $2.2 million of expenses related to the acquisition of RiskMetrics consists of financial advisory, legal and accounting fees. Please note that most transaction related fees which historically have been capitalized as part of the purchase price are now required to be expensed under US GAAP. Looking forward, we will be providing regular quarterly updates of all onetime expenses related to the acquisition and integration of RiskMetrics.
Overall, total cash operating expenses which excluded depreciation, amortization and founders grant costs rose 12.6% to $64.7 million in our first quarter. Compensation costs rose 12.2% while non-compensation expenses increased 13.4% versus the first quarter of 2009. The increase in compensation expense was driven by increased investment in our product development and research capabilities as well as more investment in our sales and sales support functions. Excluding the impact of the $2.2 million of expense related to the planned acquisition of RiskMetrics non-compensation expenses rose by only $.3 million or 1.7%. In summary, we continue to manage our expenses very tightly.
GAAP earnings per share for the quarter was $0.26. Our cash earnings per share which is a non-GAAP measure and which we derive by adding back the after tax costs of the founders grant expense in the amortization of intangibles was $0.29, up 17% from the first quarter 2009. Excluding the impact of the onetime charges associated with our planned acquisition of RiskMetrics, cash earnings would have been $0.31 per share.
As of February 28th MSCI had 105 million shares outstanding. Fully diluted shares outstanding for EPS calculation were 105.8 million. Also, as of February 28th, we had $442 million in cash and cash equivalents and $369 million of debt outstanding. On April 1, 2010, we utilized $147 million of our cash to prepay a portion of our debt.
With that, we’d be happy to take questions. I’ll turn it over to you now operator.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Analyst James Kissane – Bank of America Merrill Lynch.
Analyst for James Kissane – Bank of America Merrill Lynch
A couple of quick questions, can you just maybe talk about now sort of your early read here in Q2, what you’re seeing in terms of BarraOne sales? Are you seeing any sort of an influence given the RiskMetrics acquisition?
Henry A. Fernandez
I think there’s no change at all with the announcement of the planned acquisition of RiskMetrics. BarraOne continues to be provoking high demand across the world and across a variety of different client types so no change that we can discern at this point.
Analyst for James Kissane – Bank of America Merrill Lynch
Any update you guys can provide with respect to your discussions with BlackRock at this point?
Henry A. Fernandez
With BlackRock? The relationship with BlackRock continues to be the same which is very good. It’s an excellent client. We have a lot of different touch points in various aspects of our business and their business and there really is no change whatsoever in that relationship.
Analyst for James Kissane – Bank of America Merrill Lynch
Just last question, I want to make sure that now given the integration teams at work, that is not slowing down your plans to hire the full 105 by the first half of this calendar year, is that correct?
Henry A. Fernandez
Correct.
Operator
Your next question comes from David Scharf – JMP Securities.
David Scharf – JMP Securities
Just a couple of things, first I just wanted to confirm Henry the very steep ramp in Barra renewals, there weren’t any sort of one time promotional or pricing initiatives that drove that were there? That pretty much is clean number?
Henry A. Fernandez
A completely clean number. No influence for any kind of intervention on pricing or anything like that understanding that in my remarks, if anything, we have been renewing contracts on the basis of slight increases in prices in some cases and in other cases rolling back some of the discounts that we offered during the crisis.
David Scharf – JMP Securities
Then on the index side, more of a general question, clearly a lot of these sales are sort of packaged and priced along the lines of number of offices you’re selling to. Obviously the end markets have firmed up considerably, we’re really running on kind of three quarters now where we’ve probably seen trough levels of demand and questionably across all asset class categories your markets have improved, but can you give us a sense for how perhaps headcount reduction, offices consolidation, should impact the demand for index subscriptions going forward? Whether we’ll ultimately rebound to the kind of growth we saw a couple of years ago or if you think our sort of normalized level of subscription growth and equity indices is perhaps a little below the peak levels we saw in the last peak?
Henry A. Fernandez
We continue to be fairly optimistic and bullish on the medium to long term demand for our equity index subscription products. We clearly went through a period of higher cancels during the crisis particularly in those products that were not the most core in client usage and maybe selected shaving of offices or different software platforms and the like but overall the demand is robust, it’s on the rise. We don’t see any negative impact coming from any potential cancellations of offices, or usage, or whatever.
If anything when you saw in my prepared remarks, a 9% increase sequentially was driven by what we call usage fees and those are important in what we call the global deals, the very large asset managers that when they renew a contract they want to add more people globally. That’s on the rebound, the early signs are on the rebound and obviously we feel very optimistic about the strong demand that allows us to do a price increase of 3% to 4%. Obviously that will still [inaudible] through the system as the contracts get renewed. So we continue to be very positive. We think that this product line will continue to rebound at some point strongly and we feel good about it.
Operator
Your next question comes from Andrew Fones – UBS.
Andrew Fones – UBS
I wanted to ask you just about your hiring plans. You guys gave us an update of where you stood at the end of Q1, thanks for that. I was just wondering where you stand now and where you still anticipate hiring the 105 people by the end of Q2 or whether that could push in to Q3 as well?
Henry A. Fernandez
We continue to focus strongly on hiring these people in Q2 to try and complete the 100 plus headcount hire that we had anticipated. I think two things are out there that are slowing us down. One, the labor market in financial sectors have picked up and tightened and therefore that could impact us on both sides. One is the ability to continue to attract talent and secondly some level of turnover of staff. We continue to be very bullish about our ability to hire the people that we want to hire in the emerging market centers as opposed to the financial centers so you should see some progress on that.
No matter how much we try hard and very hard to make sure nobody is focused or distracted by the RiskMetric acquisition inside our company, people that are looking to hire positions and the like. There probably will be some minor affect on that but I think our plans for hiring continue unabated particularly and strongly in those areas that have pretty much nothing to do with the combination of the two risk management businesses of MSCI and RiskMetrics.
Andrew Fones – UBS
I was wondering if you could remind us what the negative impact was on your retention rate a year ago from some of the discounting you did on some prices of some large clients? And, what proportion of clients are rolling back to original prices? Are you rolling these back for everybody or is it select things?
Henry A. Fernandez
I don’t think we’re in a position to provide a lot of detail on that. Let me just give you some commentary though. When the renewals come for clients that were under stressed situations, we made a strategic decision that it was best to work with the client and try to figure out a way in which both of us will end up in a win/win situation. So in some instances we will give them additional products for some of the same run rate, in some instances we will work with them and cut down some subscriptions and in some instances we would temporarily lower slightly in some cases, more in other cases, the list price of the products that they were renewing with the view that we will roll back those deals at the next renewal of the contract.
So that is precisely what we are doing. As clients renew and we examine their business we see if their business is now in recovery and there’s no reason why they should not be back to partially or fully some of the levels of prices that we had prior to the crisis. That’s the process we’re going through. It’s across the board but obviously it doesn’t get done in every single client because there are still some clients that are still affected by what went on in the last two years.
Michael K. Neborak
Some numbers for you Andrew, in the first quarter of 2009 we had total cancels in terms of dollars, it was $8.2 million. That $8.2 million included $2.1 million of what we would call discounting with the idea that we would get that discount back over time. Just to give you a point of comparison, in the first quarter of 2010 our cancel number in terms of dollars was $7.2 million. In that add in about $700,000 from discounting. So quite a bit of decline between Q1 2010 and Q1 2009 in terms of that aspect.
Operator
Your next question comes from Suzanne Stein – Morgan Stanley.
Suzanne Stein – Morgan Stanley
Can you provide us some additional detail about the integration plan? Maybe just some high level key dates that you’re targeting for some of the major steps in the process? And also, just overall what the time frame is for the complete integration?
Henry A. Fernandez
We have established close to 30 different working groups within MSCI composed of various peoples across the world and RiskMetrics mirrors that organizational structure with a similar number of working groups and is staffed with people from their side. There have been a large number of meetings that have taken place in the last two or three weeks in various cities across the world by those 30 or so working groups and the purpose has been to go deeper in to learning about each other’s businesses with the constraints that we have from the regulatory environment.
We are obviously seeking antitrust approval and therefore we have certain constraints and we obviously don’t have a shareholder vote yet on the part of the RiskMetric shareholders so there are constraints as to what we can do so we’re trying to basically put a lot of the things together, spend hours or days together and share in very significant detail what each one of the two businesses [inaudible]. That’s a process that will go on for a few more weeks.
Subsequent to that the idea will be that the respective teams will then create integration plans and hopefully at some point pass some of the regulatory hurdles. Then, we can begin to discuss those plans among the various teams in the company and be ready for execution at closing.
Suzanne Stein – Morgan Stanley
My final question is are you willing to put any numbers around where you think you can get long term EBITDA margins or are you not ready to discuss long term objectives in that level of detail yet?
Henry A. Fernandez
I think for what I would call the short to medium term MSCI standalone we have not changed our EBITDA margin target of high 40s. That has at some point obviously embedded in it an expectation of revenue growth and at some point acceleration of revenue growth and a continued amount of investment in headcount in those three areas, the product development area, client area and work productivity.
Obviously as we put these two companies together, RiskMetrics and MSCI, we will have to come back to you all with a revised EBITDA margin for the combined company which we haven’t even started doing and we have to see what the combined company looks like on a pro forma basis and particularly beyond the realization of the cost synergies and some of the revenue synergies we have outlined at the time of the announcement of the acquisition.
Operator
Your next question comes from Aaron Teitelbaum – Keefe, Bruyette & Woods.
Aaron Teitelbaum – Keefe, Bruyette & Woods
A couple of quick questions, could you remind us how the magnitude of your expected price increase in the index data business compares to pass price increases?
Michael K. Neborak
In May of 2008 we introduced a price increase of approximately 5%. That’s related to the equity index data business and again, I want to emphasize that that price increase was rolled in over the course of the next 12 months as contracts came up for renewals. In May of 2009 the price increase was around 2% and then this price increase as Henry mentioned is between 3% and 4%.
Henry A. Fernandez
Those are average numbers, average throughout the entire product line. There are some products that are higher, there are some products that are lower in the product line. Also bear in mind that not all of the run rate in equity subscription will be subject to that in the next 12 months because we have a number of what we call global contracts that at times are two year contracts, or three year contracts, particularly with the large asset managers that obviously they get protected with these price increases during the period of time.
Aaron Teitelbaum – Keefe, Bruyette & Woods
Just one more follow up, could you maybe provide some broader color on maybe some of the demand for some of your products that you would qualify as discretionary in the eyes of your clients and arguably could be seen as a confidence indicator for your clients for their spending habits and behavior going forward?
Henry A. Fernandez
We believe that pretty much all of our products are mission critical to our clients. But, they all sort of fall in to a line or a spectrum of mission criticality, some at the high end, some at the middle and some at the low end of the mission criticality of that. I think what is exposed after the fact when we examine the significant increase in renewals rates there in the last three to six months, there are two components to that. The first one, there is a seasonal component. As you may remember, renewal rates always start very high in the first quarter and decline throughout the course of the year to the fourth quarter.
The second part which is one that is more as a result of the crisis, we believe that those clients or products that were in the lower end of the mission critical spectrum may have cancelled or partially cancelled and therefore what we would deem to be a weak hand signal were flushed out during the process and therefore it becomes harder now and it cuts deeper in to bone for people to increase the cancellation. That is just a theory, we don’t know if it’s going to pan out but that’s kind of the feeling that we’re getting at this point.
Operator
Your next question comes from [Drew Caputis – Davenport].
[Drew Caputis – Davenport]
I just have a question on the selling environment within the analytics products particularly in equity analytics and multi asset class. I guess new product sales are a little bit below our expectations, can you talk about how this trended sequentially and remind us of any seasonality within the selling environment for those products?
Henry A. Fernandez
There are two very distinct product lines, very distinct that cater to very different use cases and needs. Equity portfolio analytics is for equity portfolio management and the multi asset class analytics is mostly for the middle office risk management function so they baked to different drivers, different cycles, different seasonality, different demands and all of that. In equity portfolio analytics the reason why we took higher than we would have liked decline in run rate during the crisis was because a lot of the investment that we have been making on this product line was not yet ready to translate in to new products, new risk models, new software, new functionality, etc., etc.,
We’re beginning to see some of that coming out now in the last 12 months or so with the launch of [Gen 2] and with the launch of the European risk model, the new Asia Pacific model, the new extreme risk analytics and obviously with the launch of the new software as an ASP version called Barra Portfolio Manager, which eventually will revival the Aegis software application. We believe that is an area and we’re beginning to see that, that would allow us to increase sales and it will allow us to hold firm on price and potentially increase prices in this product line over time.
That’s what we see as to what happened is sort of lower sales through the crisis and of course the low renewal rate and what we’re seeing happening in the rebound of that decline. With BarraOne, our risk management software mostly sold to the middle office of asset owners and asset managers. This product on a run rate basis continues to grow at a fast clip during ’09. I think it was 30% plus growth. It gets masked a little bit in the total aggregate because of the way we’re pushing the total risk clients to either go out and cancel or move on to BarraOne. But, if you just selected it out it continues to grow healthily.
We have expectations that that growth will stay or at some point move up in the medium term given the demand that exists for this area. But, it is bulk, it is very bulky, there are some quarters that is more, some quarters that is less. Some of the ticket items are larger than the equity portfolio analytics and therefore there’s going to be a lot more variability in rate.
[Drew Caputis – Davenport]
On the equity analytics side is it fair to say that there’s some new sales being damaged perhaps in the near term by the anticipation of Barra Portfolio Manager down the line?
Henry A. Fernandez
No, not at all because the two software eventually will converge but initially the Barra Portfolio Manager Software if you’re a heavy [QUAN] manager or [QUAN] analyst for [QUAN] support, the functionality that you’re going to have in Aegis for now is going to be significantly more than Barra Portfolio Manager. We plan to over time add clearly dramatically to the functionality of Barra Portfolio Manager to rival and eventually replace Aegis but that is a multiyear process.
Operator
Your next question comes from Robert Riggs – William Blair & Company, LLC.
Robert Riggs – William Blair & Company, LLC.
One final question, as you start to think about the combined sales force for your company with the core risk business and by that I mean excluding the ISS portion of that, as you think about the incentive piece of the compensation are there any noticeable differences between the way your sales forces is compensated and the group at RiskMetrics? Maybe one is skewed more towards retaining clients, growing those existing clients versus seeking kind of new client wins?
Henry A. Fernandez
Let me address that, within MSCI we have mostly and largely except for in the small markets, we have especially sales force that is broken down by regions, by client type and by products so it you aggregate it from a bottom up basis you have a variety of people selling equity indices, a variety of people selling equity portfolio analytics globally and people selling BarraOne or risk management systems to front and middle office. Within that actually we have a specialty sales force selling that to asset owners and different kind of people selling the BarraOne to asset managers.
The idea here in combining the two organizations, and by the way all of them sell their respective products but they also are incentivized to cross sell, i.e. if I’m a MSCI specialist you are expected to cross sell with the other sales people in to your client base selling equity portfolio analytics and BarraOne to the extent that there is not a fully dedicated person doing that which in most cases there is but in some there is not.
But, what we are talking about here is really combining the two risk management sales forces i.e. BarraOne and risk manager so that each sales person will continue to sell both products and for that matter any other product in to a client type that they are assigned to. The second point is the total compensation attributed to every sales person in their sales organization at RiskMetrics and MSCI is very comparable and the organizational structure that we have versus what RiskMetrics has is very comparable.
We have different labels, different reporting lines but the underlying functions are extremely comparable from one another. In terms of specific compensation we are a salary and bonus structure within MSCI with our very high correlation to sales and retention rates to the sales people. The sales commission structure which obviously also has a very high correlation, 100% correlation to sales, we are examining what is the best approach to take in the combined company but our bias will be to move towards a salary and bonus structure with a very, very high correlation of course, again, to sales production.
Operator
Your next question comes from Michael Weisberg – Crestwood Capital.
Michael Weisberg – Crestwood Capital
A couple of things quickly, you had very strong ETS growth in March. Can you give us a break of how much was appreciation, who much was in flows?
Michael K. Neborak
We’ll get that for you.
Michael Weisberg – Crestwood Capital
Second, if I look at non-comp and comp expense, the non-comp you’ve kept remarkably low in terms of the rate of increase. I think you mentioned it’s 1.3%, is that kind of growth sustainable for the year or is it expected to increase?
Michael K. Neborak
It will definitely increase because we’re going to have additional onetime types of expenses. But, if you exclude that type of expense it would increase at a higher rate than 1.7% but it’s going to be mid to high single digits.
Michael Weisberg – Crestwood Capital
It could be mid to high single digits, is that excluding the RMG expense?
Michael K. Neborak
Yes, I’m just speaking about MSCI standalone right now.
Michael Weisberg – Crestwood Capital
On the comp side, which you’re adding a lot of people to build for the future, I think total comp expense was up something like 12%. I’m just trying to think, you have more adds to make and yet you were adding people a year ago. Can you give us some sense of where that rate of growth might be as we move through the year?
Michael K. Neborak
Our comp expense year-over-year was up 12%. I think our headcount was up 15%. A lot of the headcount was in low costs centers so that 12.2% we didn’t achieve that 105 people in the first quarter. I think we added about 50 if I count the numbers that Henry sited, so if we had hired an additional 50 people that number would probably be up 14% to 15% versus 12.2%. So I mean in that general area I would say 14% to 17% would be kind of the year-over-year comp increase with all the items you factored in there.
To answer your last question, these are general numbers so during the month of March, the total change in AUM linked to our indices was approximately $27 billion and approximately $22 of that was appreciation and $5 to $5.5 billion was from asset inflows.
Operator
Your next question comes [John Nash – Anchor Capital].
[John Nash – Anchor Capital]
Just two quick questions, first the asset based run rate as a percentage of the quarter end ETS assets, that was less than four basis points? In my records that’s the first time in six quarters so I was just curious if something might be behind that, maybe fewer sort of up front license sales during the quarter or something along that line? If you could just explain maybe what might have caused that? Then a second question for Mike, can you just give us the rationale for the debt pay down here in April and what the current effective interest rate on the debt is?
Michael K. Neborak
In terms of your first question around the basis points, I think what you’re doing is you’re taking the whole asset based fee line in the numerator and dividing it by our ETS AUM in the denominator. I think that’s a calculation that doesn’t really make a lot of sense. What you really need to do is to take in the numerator the revenues for the run rate associated with ETS divided by the average ETS in the denominator. If you do that, our basis point fee excluding minimums was 3.1 basis points. It might be down slightly from where it was which I would attribute to maybe a mix shift between some of the ETS products that we have but it was not substantial.
Then in terms of your second question about paying down our debt, I think to describe it historically we’ve maintained a fixed rate swap against 50% of our outstanding debt and paying down $147 million was the largest amount we could repay while still achieving an effective hedge for GAAP accounting purposes. So I could tell you right now we’re evaluating whether or not we should make further prepayment prior to closing. If we do we would accelerate the cash payment on our swap liability. Right now our swap is underwater and we would also accelerate the recognition of additional interest expense on our income statement.
Now, that’s all accounting because we would eventually recognize that interest expense through the maturity of the swap which is November, or in the case of the RiskMetrics deal which we pay our credit facility anyway at closing, so economically to the extent that we decide to pay more, basically we’ll be saving the difference between the 20 basis points we earn on our cash and the interest cost on our floating rate debt which is about 245 basis points. So, that would be times the amount we decided to repay obviously for the time period from when we do it and otherwise when we would have done which would be the closing of the RiskMetrics deal.
In terms of the last part of your question, our effective interest rate from April 1st through the end of the quarter will be about 5% which is basically we have all fixed rate debt outstanding essentially right now because we’re 100% swapped and our swap is at 2.88%. Then we have a B term loan, an A term loan that have margins of 175 to 250 so it will be a little bit more than 5% from the effective interest rate on the remaining outstanding debt.
Operator
I’d like to turn the call back over to our moderators for any closing remarks.
Henry A. Fernandez
Thank you very much everyone for participating and as Mike indicated, our intent will be to make any announcement throughout the quarter if need be for any further updates on progress on the RiskMetrics acquisition and then secondly on every quarterly call give you a breakdown of what is onetime expense associated with the acquisition and the merger and what it is that are recurring items and try to break it all out for you so you can use it for your analysis. Thank you very much everyone and have a good day.
Operator
Ladies and gentlemen thank you for participating in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day.
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