RiskMetrics Group, Inc. Q2 2008 Earnings Call Transcript

| About: RiskMetrics (RMG)

RiskMetrics Group, Inc. (RMG) Q2 2008 Earnings Call Transcript August 5, 2008 10:00 AM ET

Executives

Cheryl Gustitus – Head of Corporate Communications

Ethan Berman – CEO

David Obstler – CFO

Analysts

Peter Appert – Goldman Sachs

Giri Krishnan – Credit Suisse

Michel Morin – Merrill Lynch

David Scarf – JMP Securities

Michael Weisberg – ING

Pat Burton – Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the second quarter RiskMetrics Group earnings conference call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) I would now like to turn the call over to Ms. Cheryl Gustitus, Head of Corporate Communications. Please proceed.

Cheryl Gustitus

Thank you. Good morning and thank you for joining us to discuss RiskMetrics Group’s second quarter 2008 financial results. With us today are Ethan Berman, CEO of RiskMetrics and David Obstler, our CFO. This conference call is being recorded on behalf of RiskMetrics Group and consists of copyrighted material that may not be recorded, reproduced, retransmitted, rebroadcast, or downloaded or otherwise used without RiskMetrics’ express written permission. Your participation in the question-and-answer session constitutes your consent to have any comments or statements you make appear in any transcript or broadcast of this call.

Information provided during the call will include certain forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements made in this call. You should not place undue reliance on forward-looking statements.

Conference call remarks also will refer to certain pro forma results which assume that the January 11, 2007 acquisition of Institutional Shareholder Services closed on January 1, 2007 and the August 1 acquisition of CFRA also occurred on January 1, 2007. This is a non-GAAP financial measurement that management believes facilitates a comparative analysis of developments in the company’s business. Reconciliations of nonGAAP financial measures to the nearest GAAP equivalents are included in Tables D and E of RiskMetrics’ earnings release which was issued earlier today and is accessible on our web site at www.riskmetrics.com.

It is now my pleasure to introduce our CEO, Ethan Berman.

Ethan Berman

Thank you, Cheryl, and thank you everyone for joining us this morning. We are pleased to again be reporting strong financial results for another quarter. On a consolidated pro forma basis, RiskMetrics achieved 19% revenue growth in the second quarter and 19.2% for the six months ending June 30, 2008, with revenue accelerating in our Risk business.

Second quarter adjusted EBITDA increased 24% to $23.7 million on a pro forma basis, with an adjusted EBITDA margin of 32%. Adjusted EBITDA for the six-month period increased 29.7% to $46.9 million with an adjusted EBITDA margin of 32.3%, 250 basis points over the same period last year.

Cash flow was very strong with cash increasing from the end of quarter one. Cash flow from operations was $31.4 million for the quarter. For the second quarter, our adjusted earnings per share before amortization of intangibles, stock-based compensation, and one time IPO costs is $0.15, a $0.09 increase over second quarter 2007.

Let me expand on some of the revenue, sales and business trends driving the results and then have David take you through our financials in more detail.

First, revenue growth was strong across the board in the Risk business. Revenue continued to grow with both geographical and broad-based market sector diversification. Our second quarter and six-month Risk revenues were $38.8 million and $73.3 million respectively, representing a 32% and 29.1% increase over the same period last year.

For the second quarter alone, Risk revenues grew 12.7% sequentially over the first quarter in 2008. The major driver was the 40% plus growth in the RiskManager revenues. The RiskManager sales were about 50% to new and 50% to existing customers with significant uptake of our managed services offering.

On the governance side, ISS revenues were $35.3 million for the second quarter and $72.1 million for the six months, increases on a pro forma basis of 7.3% and 10.6% respectively. As in previous periods, ISS experienced stronger revenue growth in Europe than in the U.S., with Europe growing 14.9% and the Americas growing 9.4%.

Quarter over quarter, ISS revenues declined by $1.5 million from Q1 to Q2 2008, as we saw slowing of the business' overall growth rate. There are two reasons for this. First, the expected seasonal reduction in one-time revenue generated from our corporate compensation services. And second, the slow down of new ISS sales, partly the result of the focus of our integrated sales team on risk opportunities.

On this note, we clearly underestimated demand for our risk solutions in the current market environment. Having been integrated at the beginning of the year, the sales force spent time on the growing risk opportunity and did not focus enough on the governance business. In order to address this and to capitalizing the opportunities in both of our businesses going forward, we are in the process of increasing the size of the sales force across all regions and end markets by about 10%.

Our revenue growth is being driven by strong ACV growth particularly in the risk business with increased new sales and solidly improving renewal rates. At the end of the second quarter, our annualized contract value increased to $281.8 million, an increase of 25% on a pro forma basis.

Risk increased 39.2% from $111.7 million to a $155.4 million, and ISS grew 11.4% from $97.5 million to $126.4 million.

ACV growth consisted of $20 million of new ACV sales in the second quarter and $41.7 million in the six months ending June 30, up 35.9% and 50.2% respectively over the comparable periods in 2007. Risk in new ACV sales where $29.8 million in the first half of 2008 and $16 million in Q2 ’08, increases of 73.4% and 56.4% respectively over 2007.

We also continued to experience increasing average ACV per client on the risk side, with average ACV increasing from 173,000 in 2007 to more than 248,000 today. At ISS, on a pro forma basis, new recurring sales are roughly flat in the first half of this year.

Finally, we continue to see momentum in the cross-selling opportunities between the risk and governance clients. In Q2, $1.6 million in new ACV came from cross-selling, just over $3 million year to date.

For the six months ending June 30, 2008, our renewal rate was 89.9%, an increase over the 88.4% we reported at the end of the first quarter, and a slight increase over last year's first half renewal rate of 89%.

The risk renewal rate was very strong, particularly considering the volatility in the end market, with a first half renewal rate of 90.3% compared to 87.7% at the end of Q1 and 88.4% in the prior year.

For the first half, ISS had a renewal rate of 89.4%, slightly lower compared to that of 89.8% for the prior year and 89.6% reported last quarter.

To conclude, we are delivering strong results in the second quarter this year with 19.2% revenue growth, 29.7% adjusted EBITDA growth, broadly diversified new sales growth across geographies and market sectors, and average ACV per client growing steadily.

Renewal rates are solid at almost 90% and we expanded our margin 250 basis points over last year to more than 32%. Our risk business, and particularly our fully outsourced RiskManager solution is benefiting across the board from the market environment, with strong diversified performance coming from Europe and the Americas, as well as from each of the market segments we serve including asset managers, hedge funds and banks.

Our governance business is growing more slowly, but we are increasing our sales focus and investing in more attractive and scalable product offerings. We plan on spending $3 million to $4 million in 2008 on redoing our voting platform with about half of this spend accounted for in our first half results. This will continue to flatten margins in the short term, but we believe it will produce more compelling products and services, as well as stronger financial performance in the governance business in 2009 and beyond.

With that, I will now turn the call over to David to provide additional details on our financial results. David?

David Obstler

Thank you, Ethan. As Ethan mentioned, we had a very strong second quarter and first half in terms of revenue and ACV growth, EBITDA growth and margin expansion, and cash flow generation.

Total consolidated revenues for the second quarter were $74.1 million, up 27.5% on a GAAP basis and 19% on a pro forma basis. For the six months ended June 30, 2008, revenues were a $145.3 million, up 31.5% on a GAAP basis, and 19.2% on a pro forma basis. The pro forma numbers for the six months include $3.3 million of ISS revenues for the 11 days in January ’07 before the acquisition, and $8.1 million of CFRA revenues. And the second quarter includes $4.1 million of CFRA revenues, both before the August ’07 acquisition.

Looking first at risk revenues, second quarter risk revenues increased 32% to $38.8 million from $29.4 million last year. The risk growth rate accelerated from 26.1% in Q1 ’08. For the first six months, Risk revenues were $73.3 million, up $29.1 million over last year. The revenue increase was primarily driven by a 40.4% increase in RiskManager revenues due to strong demand in both the asset management and hedge fund sectors, as evidenced by the 73.4% increase in risk new sales versus last year and the first half of the year.

On a regional basis, EMEA revenues grew at 34% and Americas grew at 27% in the first six months. Revenues in the Americas in fact accelerated from just below 22% in Q1 to 32% in Q2. Recurring revenues were 99% of total risk revenues.

ISS revenues were $35.3 million for the second quarter and $72.1 million for the six months, increases of 22.8% and 34% on a GAAP basis. On a pro forma basis, the increases were 7.3% and 10.6%. For the six months, pro forma revenue growth in Europe was 13.9% and the Americas was 9.4%. ISS revenues declined by $1.5 million from Q1 ’08 to Q2 and the rate of growth of business slowed. The major reason for the decline was a reduction of nonrecurring corporate compensation revenues from Q1 to Q2 of $22.3 million. The corporate compensation business had a very strong Q1 ’08.

While the seasonality is normal in the ISS business, it was more pronounced in 2008 than in 2007 due to the timing and announcement of compensation proposals in client proxies in Q1 relative to Q2. As Ethan mentioned, the other reason for the slowdown of ISS revenues in Q2 was a reduction in new ACV sales in the quarter relative to Q1, particularly due to the deployment of our sales force to address the exhilarating new risk demand.

ISS' total governance revenues consisting primary of proxy research and voting increased 8.7% in the first six months on a pro forma basis to $45.8 million. The financial research analysis revenues or FR&A increased 14% to $26.3 million.

Consolidated adjusted EBITDA on a GAAP basis increased 33.3% in Q2 to $23.7 million and by 42.8% in the six months to $46.9 million. On a pro forma basis, consolidated adjusted EBITDA increased 24% and 29.7% for the quarter and six months respectively. EBITDA including stock-based comp of $2 million in Q2 and $5.4 million in the six months was $21.7 million and $41.6 million. Stock comp – based comp declined in Q2 from $3.4 million in Q1, which had included $1.4 million of IPO related stock comp.

Our consolidated adjusted EBITDA margin for the first six months increased to 32.3% versus 29.8% last year or 250 basis points above our 150 to 200 basis point target. The margin decreased relative to Q1, as we grew our investment in the ISS proxy voting platform, as Ethan mentioned, and we began to increase public company costs and also incurred certain one time costs at ISS which I’ll discuss below. The significant year-over-year margin increase was due to 19% pro forma revenue growth versus 14.8% adjusted EBITDA expense growth indicating continuing leverage in our operating model.

On a pro forma basis in the first six months, compensation expense which accounts for 67% of total EBITDA expenses increased by 12% as headcount growth was significantly less than revenue growth. Non-compensation expenses increased 20.8% due mainly to increases in occupancy, data, legal accounting, and insurance costs related to being a public company and increases in the ISS bad debt and non-income tax provisions that I will discuss below.

The adjusted EBITDA growth and margin expansion was largely driven by the risk business. Risk EBITDA was $14.1 million in Q2 and $26.1 million for the six months, increases of over 50% in each period. The risk adjusted EBITDA margin increased to 35.6% for the six months versus 30.1% for last year, an increase of 550 basis points. Revenues grew by just over 29% and expenses by 19%.

We are experiencing significant economies of scale in the risk business and are therefore planning to increase our investment in the second half of the year and investigate additional services that can be offered in the risk business.

For ISS, Q2 and year-to-date adjusted EBITDA were $9.7 million and $20.9 million, representing increases of 13.2% and 32.2% on a GAAP basis. On a pro forma basis, adjusted EBITDA decreased 2.2% for the quarter and increased 9.2% for the six months. Adjusted EBITDA in Q2 declined from $11.2 million in Q1 and margins for the six months declined slightly year over year to 29% from 29.3% and 30.5% in Q1 ‘08, as expenses grew slightly more than revenue.

The reasons for the flattening of the ISS margins and quarter over quarter decline in EBITDA included; one, the seasonality of corporate compensation advisory revenues that I’ve discussed above; two, our strategic investment in the ISS voting platform and other research projects at ISS; and three, certain one-time costs.

As to our investment, we are making a $3 million to $4 million investment in technology at ISS which on an annual basis reduces margins this year by 250 basis points. This is part of our plan to invest in the scalability of the voting and research platform at ISS which we believe will allow us to increase margins in 2009 and beyond.

As to the nonrecurring costs, we increased our bad debt provision at ISS by $587,000 in Q2. This was mainly related to a slowdown in collections due to our systems and sales force consolidation. We have made significant progress in these areas and do not expect this trend to continue. Secondly, we took a $350,000 charge for non-income taxes related to CFRA. Without these two expenses, ISS six months EBITDA margins would have been 30.3%, up 100 basis points versus last year.

Turning to net income, we are reporting net income and EPS on both a GAAP and adjusted basis. Adjusted net income and EPS excludes amortization of intangibles, stock based compensation, both of which will be recurring and certain one-time costs related to our IPO and debt repayment, all in a tax-effective basis.

GAAP net income increased from $0.4 million in Q2 ‘07 to $5.5 million in Q2 ‘08 and EPS increased from $0.01 a share to $0.08 a share. For the six months, EPS increased from $0.09 a share from $0.01 a share on a GAAP basis. On an adjusted basis, EPS increased to $0.15 per share in Q2 from $0.06 a share last year and to $0.28 per share from $0.11 a share.

In Q2, net interest, dividend, investment and other income declined to $5 million from $8.9 million in Q2 last year due to a decrease in interest expense from the debt pay-down and increased cash balances. The tax rate declined from 39.5% to 39.1%.

Turning to cash flow, we had a very strong cash flow quarter. As of June 30, 2008, cash, cash equivalents, and investments were $108.2 million, up $20.9 million over Q1 ‘08 balances. Cash flow from operating activities was $18.5 million in the first six months versus $1.1 million last year due to higher profitability, lower leverage and more contribution from working capital.

Cash flow from operations was $31.4 million in Q2 versus negative $12.9 million in Q1. This reflects both the growth of the business as well as the seasonality of our cash flow. As in the past years, cash flow is negative in Q1 and becomes increasingly positive throughout the year.

CapEx was roughly flat year-over-year and we made a $6.4 million principle debt payment in Q2. We do not have any other mandatory debt repayments in 2008. For the full year, we expect unlevered free cash flow to exceed adjusted EBITDA as previously guided.

In closing, RiskMetrics produced strong financial results for the second quarter. As Ethan mentioned, given the market dynamics we see and consistent with our risk ACV growth, we continue to see strong top line growth in our risk business, consistent growth in our governance business, and continued margin expansion relative to last year.

I would like to conclude with our updated guidance. Given our business momentum, we anticipate 2008 revenues and adjusted EBITDA to be above our previous ranges of $295 million for revenue and $95 million for adjusted EBITDA. And further, we continue to see renewal rates in the 89% to 91% range for the year.

With that, Ethan and I will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Peter Appert with Goldman Sachs. Please proceed.

Peter Appert – Goldman Sachs

Thanks. Good morning. David, you mentioned increased investment in the risk segment in the context of this (inaudible) momentum you are seeing in the business, exploring new products, new businesses, could you just expand a little bit on that in terms of magnitude of the investment you are thinking about and the kinds of products and offerings you might be thinking about?

David Obstler

In terms of the magnitude, we are slightly increasing hiring mainly in the business and research and development effort to continue what we’ve been doing in the past to further expand our service offerings. Some of the things that we have mentioned before are things like expanding our data sets and exploring areas like performance attribution, so given our client demand in the strong end market, are going to be exploring making those investments.

Ethan Berman

We are talking $1 million to $2 million maximum for the rest of this year.

Peter Appert – Goldman Sachs

Okay great. Thank you, Ethan. And then, Ethan, expanding on that, given the tremendous success you have enjoyed here in your first couple of quarters as public company in terms of demonstrating the margin leverage, are you rethinking what appropriate long-term margin targets might be for the business and could you share those with us?

Ethan Berman

Yes. I mean, I think as we have said, this is a 40% plus margin business if we don’t invest and I think we still see huge opportunities to invest in, and so we will continue to invest in them. If that leads us to slight higher margins in the 150 to 200 basis points that we have guided before, so be it, but I don’t think we want to be limited not to make those investments to get us back down to those levels, but obviously the natural course of the business is much higher levels than that.

Peter Appert – Goldman Sachs

Right. Got it, thank you. And then in terms of the increased expansion in the sales force, you feel David or Ethan that you are constrained in terms of revenue growth in the first half of the year by size of sales force? And then unrelated to that, any indication that sales cycle lengthening, shortening in the context of the market environment?

Ethan Berman

We saw certainly a shortening of the sales cycle in the risk business. What might have been a six-month sales cycle is a two to three months sales cycle as the sort of headlines and the urgency of better understanding risk is increasing. So, I think we have certainly seen that. I do think that we missed out on sales revenues due to the size of our sales force, particularly in the governance business, as it was more focused on what was frankly easier to sell in the current environment. It was not a case of losing contracts in the governance business or the risk business. It was just not getting to the contracts and get into the opportunities, so we do think that the added sales force will help us increase sales going forward. It will take some time to get there. That’s not immediate. It does take a couple of – three to six months for a sales person to be effective so that will not happen in the third quarter but hopefully will be in the fourth quarter and 2009.

Peter Appert – Goldman Sachs

I was thinking of the context of the sales growth that maybe 10% growth in sales organization still seems conservative. Any thoughts in terms of going beyond that?

Ethan Berman

Yes. We underestimated the first time, so let’s get to 10% and we will see where it goes. I think the third quarter seasonally especially given a year of shutting down is a quieter quarter. So, as we grow that team, train them up, I think the real impact will be sort of fourth quarter and beyond.

David Obstler

It is a ramp up time, so we’re taking there some (inaudible) we can digest in the next quarter plus and then reevaluating it.

Peter Appert – Goldman Sachs

Okay. And then one last thing then I will shut up, the competitive dynamics, any commentary in terms of any changes you are seeing in the competitive marketplace in either of your businesses?

Ethan Berman

I don’t think so. I think we saw fairly consistent – the percentage of wins was consistent where we had real new entrance frankly anywhere. There is obviously a lot more talk about risk in the marketplace. And so, trying to be putting some perspective, the expectation is that there are going to be more entrants and more investments made by potential competitors to the risk space going forward. But, we have certainly not seen that to date.

Peter Appert – Goldman Sachs

Okay. Great. Thanks gentlemen.

Ethan Berman

Thank you.

Operator

Your next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.

Giri Krishnan – Credit Suisse

Okay. This is Giri Krishnan calling on behalf of Kelly Flynn. Good morning guys.

David Obstler

Good morning.

Ethan Berman

Good morning.

Giri Krishnan – Credit Suisse

First question I had for Ethan regarding the demand environment. Clearly, the revenue and ACV trends are positive, but are there any subtle or changes from the demand environment you are seeing from three months ago? I think Ethan, you mentioned alternative asset managers becoming more important. Just trying to get a sense of – are there – is there greater demand for specific products that maybe might cause you to think differently about where you are investing in the future?

Ethan Berman

I don’t think so. With the exception of the fact that, August is a very slow month in Europe, and so we would not expect our third quarter sales to be as strong as our second quarter sales. That's a seasonal impact, not a lack of demand. You mentioned alternative investments. Hedge funds in general have been slightly stronger than they have been previously, but only slightly. Asset management is just as strong as it has been. And frankly, banks has been stronger than we expected given the environment. We have actually seen a pickup in our sales to banks despite the fact that obviously they are significantly cutting back on spending overall. They are not cutting back on spending in risk, in fact are reaching out to people like us to help with their risk management issues. So, I don’t think there has been anything new to it. As I said, I think the surprise has probably been the shortening of the sales cycle, which has created more business and the increased willingness for clients to outsource more and more of the activities that we are moving more and more people to our fully outsourced managed solutions offering, which in turn leads to significantly higher ACV per client, which you are seeing in numbers.

David Obstler

I think we are seeing that trend across all three segments, more fully outsourced deals are further outsourcing, and the result of that is larger average new deal signings.

Giri Krishnan – Credit Suisse

And on the risk ACV per client, clearly it's ticked up really nicely, I think 10% sequentially and maybe about 40% year over year. Is that all just up-selling of clients, is there any pricing element in that mix it all?

Ethan Berman

There is no pricing, but it is a combination of up-selling of existing clients which account for about 50% of the new sales and larger deals for initial new clients.

Giri Krishnan – Credit Suisse

Okay.

Ethan Berman

Both of those contributing.

Giri Krishnan – Credit Suisse

And I forget if the last time you disclosed those tasks [ph] for ISS and ACV per client?

David M. Obstler

Yes. The ACV per client – for ISS has been growing slightly. It grew from about 43,000 a year ago to about 50,000 at the June 30.

Giri Krishnan – Credit Suisse

Okay. And then on the new sales ACV, is there a breakout in terms of growth in Americas versus Europe?

David Obstler

Yes. The growth of new ACV?

Giri Krishnan – Credit Suisse

Right.

David Obstler

Yes. One moment.

Ethan Berman

You want the second quarter or the first half of the year?

Giri Krishnan – Credit Suisse

Just second quarter.

David Obstler

Yes, one moment.

Giri Krishnan – Credit Suisse

I don't think you have it. Either way it's fine.

David Obstler

The growth in the – I'm just going to give you for RMI for the first half, the growth in the Americas was over 50% and the growth in Europe was over 125%.

Giri Krishnan – Credit Suisse

Okay.

David Obstler

That is the risk business first half over first half.

Giri Krishnan – Credit Suisse

Right. Okay. And then the last question is on guidance. Clearly, it is more positive. I was trying to – without, and I am not trying to pin you to any numbers, but just trying to get a sense for what is the degree of outperformance might be, what sort of factors should we be thinking of puts and takes in terms of how you might be thinking about your numbers for the year?

Ethan Berman

I think the best way to look at is where the ACV is and use that 89% to 91% renewal rate. I think you’ll put out pretty easily to where we’re getting to. I think, as a company, we started this process and we are not going to give quarterly guidance and we sort of found ourselves if we revise every quarter where our guidance is, we’re basically giving quarterly guidance. I think it’s a pretty straightforward business. And again, if you look at those two metrics and make some assumptions on new sales, especially as you get to the second half of the year, new sales impact the total revenue for the year less and less as we go forward here. So, you just use your ACV and your renewal rate, you will get very close to, I think – you are going to come out and it’s obvious to us that we are going to be above the range of where we’ll previously guide and want to tell the market that.

Giri Krishnan – Credit Suisse

Okay. Thanks, guys.

Operator

Your next question comes from the line of Michel Morin with Merrill Lynch. Please proceed.

Michel Morin – Merrill Lynch

Good morning, guys. I think, Ethan, you mentioned that new clients accounted for about 50% of the new ACV and I think that’s an increase relative to what you had been reporting. Is that correct? And if so, can you elaborate a little bit in terms of where that new business or why you’ve been more successful at getting new clients?

David Obstler

Hi, this is David. That’s within the range that we’ve seen over the last number of quarters. It’s ranged from new clients to the upper 40s to 50s in every quarter. And where it’s coming from is it’s coming from, as you said, mainly on the risk side or constantly on the risk side and it’s coming from a pretty diverse mix of asset managers, hedge funds, and banks for internal risk reporting, for regulatory reporting, and for investor reporting and with very strong contributions from both Europe and the United States.

Michel Morin – Merrill Lynch

Great, thank you. And then, David, I think in your prepared remarks, you mentioned that the investments you’re making on the ISS side, if you look at things on a per forma basis, your margins were up. I think you mentioned about 100 basis points. Despite these investments, should we assume that you can continue to produce some better margin here on your – despite these investments and then once you’ve completed these investments, can you quantify a little bit for us what we should expect to see in terms of improved scalability of that business?

David Obstler

First, let’s take it in two points. One is, there were some one-time costs in the second quarter which we don’t see as recurring which resulted in the margins being 130 basis points less in the quarter. So, that’s a one-time and we see that not continuing. As far as the investments, we’ve increased the R&D spend at ISS for about 250 basis points and as we’ve been mentioning that's to invest in the platform and the scalability of the platform and we are making that investment to increase margins going forward. We are not providing guidance specifically for bidding [ph] this unit, but we see that ISS being able to contribute to that 150 or 250 basis points with potentially some acceleration above that after some investment made gone forward.

Michel Morin – Merrill Lynch

Okay, great. And then just finally, on your comment about increasing the sales force by about 10%, how should we think about the productivity of the sales force? Are you finding that you’re hitting a little bit of a ceiling there or how much more is there to go?

Ethan Berman

No, we think we are under-spending on sales. At this point, we think that they could be selling more, but we don’t have enough sales people. So, what we were concerned about going into the year given the state of the financial markets, the risk business has obviously exceeded expectations on that. We have found sales people spending significant or arguably from the government side too much of their time on the risk business and not enough on the governance business. So, adding to that sales force, I think, will increase sales and we think we can do that at a similar rate of new sales per sales person. So, we don’t see this as reducing the rate of productivity of salesperson by adding the team.

Michel Morin – Merrill Lynch

Great. Thanks very much.

Operator

Your next question comes from the line of David Scharf with JMP Securities. Please proceed.

David Scarf – JMP Securities

Hi. Good morning. Just about most of my questions have been exhausted, just a couple of add-ons. Ethan, you mentioned within risk that none of the average ACV increased as a result the pricing, that it’s all new services and fully outsourced offering. But given what you’re seeing in the market, the sales cycle being cut in half and such a headline focus on risk, do you feel there is any pricing leverage out there? And if so, is it something from a business perspective, a client perspective you would want to exploit?

Ethan Berman

Yes, I do think there is pricing leverage to the extent that we want to take advantage of it, but I don’t think that’s sort of in our long-term interest here. I think that we are quite fortunate in that we have good relationships with clients. They’re becoming more embedded within their process and obviously as they are buying a new [ph] service offering, we become more crucial to what they do.

At the same time, given that they are buying more products from us, they are paying us more money. There is a good amount of leverage in the business. We would much prefer them coming to us saying, “Hey, here’s another service we would like you to provide to us. You’re a good vendor, you’ve been fair, and you’re treating us well.” Then someone who passes over a 4% or 5% price increase every year because they can, and so through that – some of the new investments we are making is, that David referred to in the risk business, are direct reflections of clients saying, "You’re doing this with us. Can you also do that with us?" And they are willing to pay for it.

Because we’re getting more money from every client, for most clients year-on-year, because the services are so scaleable, we think at this point and certainly for the foreseeable future that price increases are not the right strategy to increase margins.

David Scharf – JMP Securities

Got you. Shifting over to ISS, I think you addressed a little bit of the timing of expanding the sales force. Just what’s the labor market like out there? I mean, is it actually more attractive given some pain in other sectors from the standpoint of expanding the sales force by –

Ethan Berman

We are clearly seeing stronger and stronger candidates throughout our whole business and obviously, as the company is growing, we continue to hire in all segments on the development side, on the sales side, on the account management side, on the research side, and to that extent, employee turnover – voluntary turnover at RiskMetrics is down significantly from last year and the quality of the candidates that we are seeing in the market place is much stronger. There is much less competition for people right out of school. Two years ago, we were competing with the investment banks, the hedge funds, the private equity firms. We are seeing far less of that competition this year. And therefore, we are pretty optimistic we’re going to get the strongest group of hires we had in quite some time.

David Scharf – JMP Securities

Good, good. So arguably training and productivity and all those things should be incrementally better. Can you walk me through a little bit just the dynamic of what you saw in terms of a diversion of sales focus towards risk away from governance, just given the demand? I’m trying to put myself in the shoes of an integrated salesperson, and particularly with half of the sales coming from the installed base, if I’m calling on a particular account, is it that much effort to kind of maintain a focus on sort of both product segments with that account? I’m just trying to understand.

Ethan Berman

The problem isn’t the maintaining focus. I think it’s really the fact that, right now, the risk person is making an incoming phone call to you saying, “I need more.” And the governance person is someone you need to call and say, “I’ve got more.” And given that our commission plan works out in two modes, the first and most important component of commission conversation is sales and cash collected on sales.

There is a second component which is diversification of sales, so you do get kickers for selling our two different products. So you do make more money if you sell X amount in both product lines, but that’s dwarfed by how much you get paid for the sale. So with so much incoming calls and a shorter sale cycles for those calls, we are finding that the integrated sales people are having more risk conversation than governance conversation.

To be honest, we feel that is a good thing. That is where the market opportunity is right now. We are very pleased with our results. We do look at the company as one company and we will go through different trends of what’s the hot commodity that we have to sell, and what are the best and most in demand products and services.

We are not discouraging that activity. Having said that, we have got more opportunities that we are not getting to, particularly on the governance business, and therefore we feel the need to add sales people to do that. It is not a case of recovering both from winning on risk and losing on governance. We’re just not getting to the governance call.

David Scharf – JMP Securities

Right.

David Obstler

Part of this is a tuning of the sales force integration. We did it where we’re seeing some opportunities to deploy more sales people in different patches and we are tuning what we did at the end of last year and beginning of this year.

David Scharf – JMP Securities

Right, right, now there are – listen there are more than a half of what companies that wish they had this kind of problem. Lastly, ISS growth in Europe is still trending ahead of the Americas obviously. There is more of a runway out there. As you think about penetration with – are the barriers primarily awareness or are there more sort of market by market regulatory things that have to take place for people to get more plugged into governance solutions?

Ethan Berman

I think regulation certainly plays into it in the sense that there is much stronger regulation here in the U.S. and therefore a deeper market here than there are in other parts of the world. There is clearly talk of regulation in many other locations especially in different parts of Europe. Interestingly, to some extent, what has happened in the financial markets with the credit crisis has I think postponed some of that regulation and moved that regulation to more risk related regulation and that is something that we are benefiting from in Europe. So, I think it is a trend that will certainly occur. It’s probably been delayed slightly by the current credit crisis. Interestingly, however, in Europe you get a – in general, broad generalization, more natural interest in governance, more natural interest in socially responsible investing, et cetera. And so even without regulation, you are seeing a pick up of demand.

David Scharf – JMP Securities

Got you, and lastly this is completely out in the left field, but from an awareness standpoint, did you get any benefit from showing up in news – around this financial related news (inaudible) when there is something such as the Yahoo!, or proxy [ph] it is such a high profile case – did your sales people actually notice an increase of awareness outside of the U.S. when there is something of that profile or is that just regular course of business for you?

Ethan Berman

I think that interestingly in Europe where there are more companies dealing with corporate governance issues certainly this year than they have been previously, especially very closely held companies that are either sort of run and owned by families and friends or governments, et cetera, we are certainly seeing more around the RiskMetrics name. I think the RiskMetrics name, ex the ISS business, is very niche here in the sense of if you are in the financial markets, if you understand risk, I am sure you know RiskMetrics. But if you are outside of that, you probably don’t. I think that the Yahoos of the world or CSX of the world, et cetera, clearly raised the RiskMetrics profile more broadly and we do think that overall that is a good thing for the firm.

David Scharf – JMP Securities

Terrific, thanks a lot guys.

Ethan Berman

Thank you.

David Obstler

Thank you.

Operator

(Operator instructions) And your next question comes from the line of Michael Weisberg with ING. Please proceed.

Michael Weisberg – ING

Hi everyone. Good job as always. Just a little input because you guys are new to the conference call equation here, maybe tighten up the sell side. Let them ask two questions, three max and get them off the line, and let us who actually own the stock, get in. It was droning on quite a bit. Just as an input.

Ethan Berman

Okay.

Michael Weisberg – ING

Anyway, you mentioned and I didn’t get the exact number, I apologize, was the $2.3 million sequential decline ISS first to second quarter because of the one-time sales?

David Obstler

That was the corporate compensation product change from first quarter to second quarter. The one time sales total was $1.5 million.

Michael Weisberg – ING

So, it was $1.5 million down from $3.8 million? Is that the way to look at it? Did I misunderstand that? I thought you said there was a $2.3 million sequential decline.

David Obstler

It was in one product line. The corporate compensation product is a nonrecurring subscription that corporations ascribe to every two to three years.

Michael Weisberg – ING

Is that once every three year project?

David Obstler

That is right.

Michael Weisberg – ING

Okay.

David Obstler

It's concentrated around proxies. In 2008, the revenues there were more concentrated in the first quarter than the second quarter based on the timing of the proxy examinations by our clients.

Michael Weisberg – ING

Okay. So again, the revenue decline on a sequential basis this year was $2.3 million in that business?

David Obstler

That was just – that was one product line. That was the one-time component of that business, that product line.

Michael Weisberg – ING

Okay. With a decline of $2.3 million and that was a greater – well, those sales probably weren’t there last year, right. Now, you do those once every three years?

David Obstler

No. We do that every year, but it’s mainly to, say, the S&P 500 and a typical client will only buy that every two or three years.

Ethan Berman

But it’s not every three years. It’s a third, a third and a third.

David Obstler

Every year, the decline from the first quarter to the second quarter is normally in that product line in the ones, 1.2, 1.3, and it was a more pronounced seasonal decline, so more of a weighting in the first quarter in that one product line than we have experienced in 2007.

Ethan Berman

The first quarter of 2008 was very strong in that product line mostly we think to the increased disclosure of the CD&A that came out, and so that’s what happened this particular year. And so the decline in that particular product was much more significant than the previous years and had overall impact of the sequential decline in revenues for the business.

David Obstler

I think when piece together the ISS numbers, you’ll see that the one-time line growth was stronger in the first quarter because of this than the second quarter because of a more pronounced seasonality effect.

Michael Weisberg – ING

Okay. Great. And what happens typically after that – what happens third versus second, fourth versus third in that business?

David Obstler

First is the highest and second and third are lower and then the fourth quarter is an uptake again in the one-time.

Ethan Berman

So it should flat to the quarter and then go up in the fourth quarter, but not as much as first quarter.

David Obstler

Not as much. The first quarter is the strongest for that one product line.

Michael Weisberg – ING

I see. That’s great. And then you mentioned – it looks like all of your discretionary is spend was up sequentially and certainly down year-to-year. I think you mentioned the $3 million to $4 million ISS spend, which would explain the R&D side. Did you say that was – half of that was actually spent in the first half?

David Obstler

Yes.

Michael Weisberg – ING

Okay. Great. Is that sort of a – one time is too strong a word, but would one expect that to be significantly less looking out into 2009?

David Obstler

Yes.

Michael Weisberg – ING

Okay.

David Obstler

I would rephrase that. That is not one-time. That doesn’t go away, but the increase in that line is most pronounced this year and then it would flatten out. And we are, as we mentioned before, we are investing in R&D to essentially lower the rate of growth or lower the cost of sales and more further, using technology, to achieve economies of scale in the proxy research and voting delivery process.

Michael Weisberg – ING

I see. The (inaudible) R&D will decline from this component in 2009 that will flatten out?

David Obstler

Right.

Michael Weisberg – ING

So, maybe we can get a decline on a percentage sales basis?

David Obstler

We will certainly see that and you will also see declines in cost of goods sold.

Michael Weisberg – ING

Okay. The benefit will come in cost of goods sold.

Ethan Berman

So far in ISS, you will see that there has been economies of scale in sales and marketing and we’re making some investments in G&A. And then R&D has been increasing, cost of sales has flattened out, but that is early in the process of the investment – harvesting the investing of R&D as it relates to cost of sales.

Michael Weisberg – ING

So we could see some benefit in cost of sales going forward? It sounds like G&A is sort of going to be a – it will decline going forward as a percentage of sales, but it’s at a permanently higher level because of the public company cost.

David Obstler

The effect – there was some efficiencies in the combination of that company offset by the higher public company cost.

Michael Weisberg – ING

If I missed this number, I apologize. What was the pro forma ISS revenue growth in the US and EMEA, did you give us that? I thought you gave us the actual amount [ph]?

David Obstler

Yes, one moment. The numbers were 9.4 Americas and EMEA 13.9.

Michael Weisberg – ING

Is that second quarter?

David Obstler

That’s six months.

Michael Weisberg – ING

Okay, it’s the second quarter. I’m sorry.

David Obstler

But we haven’t put that out.

Michael Weisberg – ING

You have not. Okay, I can do the math. And then one final thing, you talked about the sales force. Is there any thought of in certain circumstances segregating the sales force so they are just selling one of the two products, or is that just not – or you want to sell the whole platform and have everyone do that?

Ethan Berman

No, we are having specialists within groups, so within the hedge fund and market group, we would have governance specialists only sales people.

Michael Weisberg – ING

I see.

David Obstler

And within asset management, et cetera, only in a smaller market, for example Taiwan, we don’t have a specialist governance and a specialist risk, but for the larger end markets, we are putting together a plan to have specialists.

Michael Weisberg – ING

I see, great. Great job. Thanks a lot.

David Obstler

Thank you.

Operator

Your next question comes from the line of Pat Burton with Citigroup. Please proceed.

Pat Burton – Citigroup

Hi. Congratulations on the quarter. (inaudible) question. JP Morgan just sold off small business to market. Do you have any interest in that? And two, do you guys see market as competitive in the marketplace (inaudible) thanks?

Ethan Berman

It was not an asset that we were interested in though there are certainly assets that potentially banks like Morgan and others that are selling assets these days we might be interested in. As far as market as a competitor, in the short run no, in the long run yes, and I say that only in the sense that I think many of the financial technology providers like for sales and marketing, et cetera, are going to continue to extend our existing offerings and continue to consolidate in a similar way to our end market consolidating. And so, those who might not have been a competitor a year ago, two years ago, or even today are very likely to become competitor a year or two years, X years forward or obviously a partner. But clearly, end markets are looking for a more consolidated complete offering around financial data, analytics, risk performance evaluation, et cetera, and we are in that space, markets in that space and numerous other players like that will continue to expand.

Pat Burton – Citigroup

Thank you.

Operator

I show no further questions in the queue. I would now like to turn the call over to Ethan Berman, CEO, for any closing remarks.

Ethan Berman

Well, thank you all and we will hear from you again in three months. Thanks again.

David Obstler

Thanks.

Operator

This concludes the presentation and you may all now disconnect. Good day.

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