Good day, ladies and gentlemen, and welcome to the MSCI Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr.
Stephen Davidson, Head of Investor Relations. Mr. Davidson, please go ahead.
Thank you, Sabrina. Good day and welcome to the MSCI Q2 2015 earnings conference call. Earlier this morning, we issued a press release announcing our results for Q2 2015. A copy of the release and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call may contain forward looking statements.
You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made. For a discussion of additional risks and uncertainties, please see the risk factors and forward looking statements in our most recent Form 10 ks and our other filings with the SEC. During today's call, in addition to GAAP results, we also refer to non GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non GAAP measures are more reflective of our core performance. You'll find a reconciliation of the equivalent GAAP term in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on Pages 28 to 32 of the earnings presentation.
On the call today are Henry Fernandez, Chief Executive Officer and Bob Qutub, Chief Financial Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry?
Thank you, Steve. Good morning, everyone. I'm very pleased to share with you our Q2 of 2015 results. Please turn to slide 3 in the presentation for an update on the quarter. We delivered solid financial discipline, resulting in double digit growth in adjusted EBITDA and continued margin expansion.
Despite some heavy currency headwinds. Adjusted EBITDA margin was 43.7%, an increase of over 200 basis points from the Q2 of 2014. This is the highest margin recorded by MSCI since the Q3 of 2013. We are on course with the execution of our growth strategy and we are seeing the returns from our investments. In index, we continue to extend our product set to equity investors across segments and markets.
We are selling more to our existing customers and we are building on our momentum in the factor or smart beta space with new factor index introductions. In our asset based fee products, we are focused on extending our research innovations and capabilities and new product development and we are seeing positive results with the leadership position that we have recorded in the first half of the year. More equity ETFs are linked to MSCI indices worldwide than any other index provider. Our investment in client service and consultants continues to pay us back with very strong client loyalty. Our aggregate retention rate in the quarter was 94.2%.
Higher retention rates have bolstered our total net new sales, offsetting a range bound gross recurring sales of approximately $30,000,000 per quarter. On analytics, we are continuing to take actions aimed at driving this product line to higher levels of performance. I will provide more detail about our plans later in my presentation. But for now, I would like to reiterate what I've said in prior calls. We are not satisfied with our performance in this area and we are taking aggressive steps to improve.
We continue to deliver on our commitment to return capital to our shareholders. Since we launched the enhanced capital return program in September of 2014, we have reacquired a total of almost 8 we acquired in the second quarter comprising of 1,000,000 shares in open market repurchases and 1,200,000 shares from the completion of the ASR, which brought the total shares for that ASR program to 5,700,000 shares. Subsequent to the close of the quarter and through Friday, July 24, last Friday, we repurchased another 1,200,000 shares at an average price of $63.24 I'm also pleased to report that our Board of Director has approved a 22% increase in our regular quarterly cash dividend to $0.22 per share. Please turn to Slide 4, where we show a set of KPIs that we believe are leading indicator of growth in the future. The first section of this slide highlights the drivers of higher performance subscription revenue growth over time despite the quarter to quarter variances that we saw in the quarter.
Policy benchmark mandates from asset owners were down 10% year over year, but are running around 2% up year to date. New index families launched during the quarter were up 14%. And our ESG client base increased 34% to over 800 new clients, primarily as a result of the GMI acquisition. In the next section, we highlight the sources of increased asset flows that lead to higher asset base fees. In the Q2, the total cumulative number of MSCI Linked Equity ETFs increased 15%, and the number of new MSCI Linked Equity ETF licenses decreased about 29% year over year, but are running 34% higher year to date compared to 2014.
Active and passive assets tied to MSCI factor indices increased 22%, but remained relatively flat when compared to the Q1. Quarter end AUM linked to MSCI indices amounted to $435,000,000,000 up 15%. Finally, listed futures and options trading volumes based on MSCI indices increased 11% to almost 10,000,000 contracts. You saw that we're breaking out our asset base fees between the ETFs and the institutional passive and now the listed futures and options because this is an area of increased focus for us to drive further growth in our indices. At the bottom of the slide, you also see the highlight that we provide on the drivers of higher portfolio management analytics growth.
Run rate from the new equity risk models that we have introduced over the past several quarters stands at 24,000,000 dollars up 41% from $17,000,000 in the Q2 of last year and up slightly from the first quarter of this year. On the next page, Slide 5, I would like to make a few comments about our performance products of index, real estate and ESG. Global investing trends and MSCI's leading global equity index family continue to drive demand for our MSCI indices, our existing indices and also our new indices. In the quarter, we expanded 9 existing index families. We released 1 new data module and we made an important enhancement to our core modules.
Our investments in asset based C products, especially ETFs linked to MSCI indices continue to pay dividend in terms of the strong inflows. I will touch upon this trend in more detail on the next slide. Our focus continues on a smart beta or factory investing to leverage our leadership in this space and secure a strong position in a market that is relatively fragmented now and with now clear leader. We are laser focused on leveraging our deep research capabilities in both in equity analytics part and our equity index part to continue to develop factors and new factor indices and win market share. Among the new factor indices we released for our ETF clients during the quarter were prime value indices, total shareholder yield indices and buyback yield indices.
Our thematic and custom indices are also seeing a strong year over year growth as clients seek new ways to differentiate their offerings in the market place. In our real estate products, after a period of significant investment in infrastructure, we are turning our attention to launching new products and realigning our client coverage teams for maximum sales and efficiencies. This week, we introduced a new real estate analytics portal that clients that gives our clients on demand access to data analytical content from us. Furthermore, we are continuing to leverage our real estate data with the launch of our new real estate modules, which includes a full suite of real estate indices. For the first time ever, investors around the world in private real estate will have a global market data set and a family of indices that are all produced using the same methodology, providing us with a very strong competitive advantage in the real estate marketplace.
We're very pleased with the growth we're seeing in ESG as the product line continues to move into the main stream of the investment process. We launched ESG ratings during the quarter, which is a major milestone after the acquisition of GMI. We are seeing more demand for our ESG data to create indices such as low carbon, governance indices and impact investing indices. In the lower right of this slide, we highlighted run rate by region of all the performance products. And we show that the growth in Asia been meaningful and this is an area that we're keenly focused on for both performance and analytics products.
On Slide 6, we highlight the strength of our competitive position as a leading index provider to the ETF marketplace. The global equity ETF industry stood at $2,300,000,000,000 in AUM at the end of the quarter, of which a record $435,000,000,000 was linked to MSCI indices, representing about 19% of the market. There were over 7.50 equity ETFs based on MSCI indices as of the end of the second quarter more than any other index provider in the world. Globally and year to date, MSCI ranked number 1 in net new asset flows into equity ETFs. A total of US44 $1,000,000,000 of net new assets flow into equity ETFs globally in the Q2, of which US24 $1,000,000,000 went to ETFs based on MSCI indices.
Year to date, about $97,000,000,000 has flowed into equity ETFs and $56,000,000,000 has come to ETFs based on MSCI indices or representing around 40% 58% of the net new flows. Currency HDTS have experienced significant growth over the last few quarters. In this particular in this past quarter, they experienced about $18,000,000,000 in net new assets down from the $28,000,000,000 recorded in the Q1 of 2015. Of that $18,000,000,000 in net new flows over $10,000,000,000 or about 56% went into currency hedge ETFs linked to MSCI indices. In just 6 months, global ETF assets linked to MSCI hedge indices have increased by 156% compared to the Q4 of last year, going from about 16,000,000,000 dollars to about $41,000,000,000 Additionally, there are now 69 currency hedge ETFs globally linked to MSCI indices more than the next 3 index next 3 highest index providers combined.
Turning to Page 7, I would like to provide an update on the key highlights and trends for analytics products. Favorable industry trends are serving as a solid foundation for us to improve the performance of this product line. Asset management firms are increasingly offering specialized investment products to differentiate themselves from the competition. As evidenced by the growth in factors, multi asset class solutions and levels of quantitative investing. The rising complexity of the global investment process for many of these asset management firms is requiring significant operational and risk management enhancement in their internal processes.
An increase in regulatory requirements are necessitating a strong analytics, flexible reporting infrastructure and timely and high quality data generation. So we're seeing increasing levels of interest by our asset manager clients in deeper relationships with MSCI to provide them with operational and risk solutions. And we are engaging all these clients in a way that we provide we can provide those solutions to them. The 2nd quarter saw a strong record for product enhancement and development in analytics. We delivered Barra Portfolio Manager 3.11 and Barra 1, no 3.11.
We have made important strides with the creation of an analytic content product management team in the quarter, so we can deliver that content not only through the MSCI applications, but also directly to clients and through 3rd party applications. During the quarter, we delivered the medium horizon U. S. Dollar market model, a revised or renewed Taiwan equity model and we also delivered a new revised BARRA Open Optimizer 8.2. We created a source that we call factor analytics, which is bringing together the 2 analytics platforms that are based on Bara factors and that is BaraOne and Bara Portfolio Manager to deliver higher value to our clients and to try to create efficiencies by merging these two applications of BorrowOne and Borrow Portfolio Manager.
Lastly, we are continuing to focus on managed services for our clients, which extends and strengthens our current offering to help them become more operationally efficient. In the lower right of the chart, we also highlight the growth that we've seen in our analytics products in Asia, as I mentioned before. On slide 8, let me provide more details about the actions that we are taking going forward to drive analytics to higher levels of performance. Our plan to improve analytics is focused on 4 areas: revenue growth, increased product development, cost efficiencies and a laser focus on clients. So revenue growth will come from better serving client use cases, monetizing our analytic content as I mentioned before and creating a new architecture, a new client interface that will have that will provide our clients access to all of our existing applications.
We will also place a new focus on managed services, which I mentioned earlier. As I said, our continue to be under intense budgetary pressure, which is forcing them to continue to be more efficient and we can provide solutions to them to achieve that. We're looking to extend our capabilities for clients who are interested in outsourcing non core operational risk and risk and portfolio management capability. We are aiming towards a unified and coherent product development effort that will be focused on client use cases as well as the delivery and accessibility of our content. The new architecture, a new client interface that I mentioned that we're developing will help to consolidate disparate applications that we have and focus on use cases of our clients.
The 3rd area is cost efficiency. This will be implemented through a rigorous expense reduction and a unified product development effort as I mentioned earlier. Lastly, we have a blue chip client base. We have been leveraging our senior account managers to grow our largest and more important client relationships to provide them with the set of content and applications that are going to help them solve their operational efficiency issues and help them differentiate their investment offering. We are confident that by focusing on these four areas, we'll be well positioned to return analytics to a stronger revenue growth and much higher levels of profitability.
On slide 9, we highlight the first half trend for company wide sales for 2013, 2014 and 2015 and the positive impact that our investment in client service has had on reducing cancels and driving higher retention rate. Total net new sales were up 24% when you compare the first half of twenty fifteen to the first half of twenty thirteen, but they're relatively flat when compared to the first half of twenty fourteen or last year. This growth compared to the first half of twenty thirteen was driven by an 8% increase in sales combined with a 15% decline in cancels allowing more of our sales to convert into run rate and into revenue. While we're very pleased with this development, sales have been range bound over the past few quarters and therefore there are limits to the levels of retention that we can achieve be able to add to the run rate. Given this, we're taking significant steps to try to reaccelerate this gross sales effort.
First, our senior account managers are critical to the success of this effort and we're really relying on them and pushing on them to be able to establish C level relationships that are going to help us make these sales more easily. Our client relationship model in the past has been based on a specialist catering to a user in the organization and not as much in developing those C level relationships. So we're trying to in addition to that relationship that we have at the user level move up to the C level and make our enterprise wide risk management sales more effective. The next step is obviously the consolidation of the analytics sales and coverage team that we believe that by doing that, we are we're going to be able to have efficiencies and hopefully also increase the level of sales. Again, all of this in an effort to try to break out of this range bound levels of sales or gross sales in the $30,000,000 range so far in the past few quarters.
Slide 10, we highlight the levers that we believe will drive revenue growth, higher levels of profitability and margin expansion in the quarters to come. Higher levels of revenue growth will come from continued double digit growth in index, a step up in analytics to high single digit revenue growth, continued strong double digit growth in ESG and a pickup in growth in real estate. While we grow our revenues, we will also continue to remain laser focused and disciplined on cost management. With an operating target of 5% to 7% annual growth in adjusted EBITDA expenses on a constant dollar basis. The other lever that we're focused on to drive higher levels of revenue growth and profitability and margin expansion is a stronger contribution from our recent acquisitions.
As we have stated, since our acquisition of real estate, we have been investing in the platform to upgrade the overall infrastructure, centralize the support functions to set the foundation to really globalize this business. We are largely finished with the investment phase. And now we're looking to consolidate all that investment and begin to launch new products and hopefully move to a break from a slight loss to breakeven and then better profitability on real estate in the quarters to come. The last two levers are related to our effective tax rate and to returning capital to shareholders. We are in the process of doing long term tax planning and are reviewing our global footprint and how best to realign it to become much more tax efficient.
As we have shown this quarter, we continue to be highly committed to returning capital to shareholders And over time, we will ensure that we're returning capital in the most effective and efficient way possible. And given this, we expect to continue to repurchase shares in the open market, buying more shares at lower prices and buying fewer shares as the stock moves up. Let me now turn over to Bob for a review of our financial profile.
Thanks, Henry, and good morning to all of you on the phone call. Please turn to Slide 11 for an overview of our financial results. We are including additional disclosures on the impact of currency fluctuations on our results to provide you with a more complete view of our operational performance. Our results this quarter were solid with 12% adjusted EBITDA growth driven by solid revenue generation and strong cost discipline with adjusted EBITDA expenses growing just 3%, also benefiting from the strong currency tailwinds. Our adjusted EBITDA margin increased 200 basis points from the prior quarter to 47.3%, and as Henry pointed out, the highest margin since Q3 of 2013.
Income from continuing operations before taxes was up 4% and included the impact of higher interest costs from the issuance of our 5.25% coupon bond in the Q4 of 2014. The prior year's Q2 tax rate was low due to several one time benefits. Excluding those one times, the effective tax rate in the quarter of the prior year would have been 35.6% compared to the 35.9% recorded in the current quarter. As Henry mentioned earlier, we are in the process of looking at opportunities to become more tax efficient by optimizing our operational and legal footprint. This work is underway, but we're not in a position at this time to provide any sense of magnitude or timing.
We will update you more on our progress in the coming quarters. Adjusted EPS was up 2% to $0.56 per share, benefiting from a 4% decline in the weighted average shares outstanding year over year and stronger operating results. Before moving to the next slide, I want to comment on the impact of foreign exchange on our results. As we have previously indicated, foreign currency fluctuations have been a headwind for our subscription revenues and run rate. This headwind has been mitigated by a significant portion of our expense base that is denominated in foreign currency.
Overall, approximately 15% of our subscription revenues are billable in non U. S. Dollars and nearly all of our ABF revenues are in the U. S. Dollars.
Offsetting this is the fact that 40% of our EBITDA expenses are incurred in non U. S. Dollars. Throughout this presentation, we are providing the impact of foreign currency fluctuations to our subscription revenues and run rate as well as to our expenses. However, we are not providing the impact of foreign currency fluctuations on our asset base fees tied to average assets under management because while our fees for index linked investment products are substantially invoiced in U.
S. Dollars, The fees are based on the investment product assets, of which 2 thirds are invested in securities denominated in currencies other than the U. S. Dollar. On Slide 12, we provide you with a bridge for the year over year change in our revenues, including the impact of foreign exchange on our subscription revenues.
Total revenues increased $16,000,000 or 6 percent to $271,000,000 The growth was driven by an increase of $9,000,000 or 4% in subscription revenues, which includes non recurring revenues of $4,000,000 and an increase of $7,000,000 or 16% in asset based fees. From a product perspective, the increase in subscription revenue year over year was principally driven by $11,000,000 or 12% combined increase in index and ESG revenue, as well as $4,000,000 or 3% increase in analytics revenues, partially offset by a decline in real estate revenue. Adjusting for a $2,000,000 negative impact from foreign exchange, analytics revenues would have increased by 5.4%. Real estate has also been particularly impacted by foreign currency fluctuations. Revenue decreased 26% on a reported basis, but adjusted for a $2,000,000 negative impact from currency fluctuations and timing of report deliveries, the year over year change would have been positive.
As you will recall from our Q1 call, real estate revenue in that quarter included the benefit of some early deliveries of client portfolio analysis service reports, which historically have been delivered in the 2nd quarter. The investments that we've made in the platform are allowing us to deliver reports with more regularity throughout the year, which will smooth out the traditional second quarter seasonality of this product. Now adjusting for the impact of foreign currency fluctuations, recurring subscription revenues would have increased $14,000,000 or 7%. The $7,000,000 or 16% increase in Asset Based C revenue to $51,000,000 was driven primarily by an $82,000,000,000 increase in average AUMs in ETFs linked to MSCI indices to $441,000,000,000 as well as a modest increase in revenues from institutional passive AUM. The reported average basis point fee for ETF AUMs linked to MSCI indices was 3.43 points at the end of the 2nd quarter, down from 3.53 reported at the end of the Q2 of 2014, but up from 3.38% at the end of the Q1 this year.
The decline year over year was the Q1 was driven by a positive mix shift. Let's turn to Slide 13 and we'll provide you with the year over year adjusted EBITDA expense bridge. The 2nd quarter adjusted EBITDA expense increased $4,000,000 or 3 percent to $152,000,000 but declined 2% when compared to the Q1 2015. The year over year increase was driven by higher compensation costs, driven mainly from the impact of 20 14 hires and same store inflationary compensation, which is noted here on the chart as the net carryover inflationary increase. This increase was partially offset by the benefit, a positive benefit of foreign exchange currency fluctuations.
Excluding the impact of foreign currency fluctuations, our adjusted EBITDA expenses would have increased $11,000,000 or nearly 8%. It is important to note that while severance is going to be ongoing as we continue to strive for efficiencies, our underlying core expenses included here as net carryover and inflationary costs were only up 5%. Employees in emerging market centers increased to 51% in the Q2 2015, up from 49% in the Q2 of 2014 and in line with 51% reported in the Q1 of 2015. Now while the 2nd quarter expense exit rate would indicate full year expense levels well below our 2015 adjusted EBITDA expense guidance range. For the remainder of the year, we are expecting incremental costs for new hires, technology infrastructure, professional fees and severance.
And in terms of phasing this in for your models, for the remainder of 2015, we expect incremental cost to be more heavily weighted towards the Q4. So with this in mind, we now expect our full year 2015 adjusted EBITDA expenses to come in at the low end of the previously stated range of $620,000,000 to $640,000,000 and that will be on a constant currency basis going forward. Now turning to Slide 14, let's take a look at the run rate bridge for the quarter. Our reported run rate increased 8%, consisting of a 6% increase in subscription run rate to $862,000,000 and a 14% increase in ABF run rate to $201,000,000 Adjusting for foreign currency fluctuations, subscription run rate grew 9% year over year. First, in terms of subscription run rate, recurring sales in the Q2 of 2015 amounted to a total of 29,600,000 dollars compared to $29,100,000 in the prior year quarter.
Higher index and ESG sales growth and performance and 6% growth in risk manager sales and analytics were offset by declines in sales and real estate in Performance and Performance Portfolio Management Analytics. The decline in real estate recurring sales year over year was driven by timing and to a certain extent FX fluctuations and the decline in analytics was driven by lower equity model sales through Verra Portfolio Manager. Cancels amounted to a total of $12,000,000 for the quarter, a decrease of 8% from the prior year quarter, resulting in net new recurring sales of $17,000,000 or an increase of 9% year over year. The lower level of cancels drove year over year increases in retention across both performance and analytics products areas, resulting in an aggregate retention rate of 94.2% for the quarter 94.3% year to date. Foreign currency fluctuations had a $22,000,000 rolling 4 quarter negative impact on our subscription run rate.
Also, GMI acquired in August 2014 contributed $7,000,000 to our run rate build year over year. We'll reach our 1 year anniversary of that acquisition in August. So our 3rd quarter results will reflect this change as GMI will then be considered part of our organic revenue and run rate. Now turning to ABF run rate, the $25,000,000 increase was primarily driven by a $57,000,000,000 period increase in ETF AUM linked to MSCI indices on net inflows of 70 $6,000,000,000 partially offset by net market depreciation of $19,000,000,000 Growth in institutional passive AUM as well as higher futures and options trading volumes in contracts based in MSCI indices also contributed to the year over year increase. On Slide 15, let's take a look at our key balance sheet indicators.
We ended the quarter with cash and cash equivalents of 455 dollars which includes cash held outside of the United States of $97,000,000 We've been active in the markets repurchasing our shares after the end of the quarter for a total of approximately $75,000,000 through the July 24. As general policy, we prefer to maintain a U. S. Cash buffer of approximately $100,000,000 to $125,000,000 for operational purposes. Our gross leverage was 1.9 times based on our total debt of $800,000,000 to our trailing 12 month adjusted EBITDA.
And one comment on leverage. On July 28, the Board of Directors has authorized the company to explore financing alternatives that could increase interest expense and the target leverage to 3.0 to 3.5. The timing and success of any potential financing will be subject to, among other things, market conditions and the company's ability to obtain the terms and conditions authorized by the Board. We will keep you updated. Capital return continues to be a strong point for MSCI with a total of 2,200,000 shares repurchased in the 2nd quarter through open market transactions and the maturity of the $300,000,000 ASR.
The average price for the repurchase of the 1,000,000 shares was $61.90 in the Q2 of 2015. Repurchased at an average price of $63.24 A total of $413,000,000 remains open on the outstanding Board repurchase authorization and a total of approximately $500,000,000 of the $1,000,000,000 capital return commitment has been realized as of July 24, 2015. Free cash flow year to date was $72,000,000 in line with the prior year. In the second quarter, free cash flow was lower than the prior year just due to timing of expense disbursements. We expect $12,000,000 in CapEx we spent $12,000,000 in CapEx in the quarter, in line with the prior year.
We are lowering our CapEx guidance, which I will discuss in the next slide. And finally, our Board approved a 22% increase, as Henry mentioned, in our regularly quarterly cash dividend to $0.22 from $0.18 per share, which is payable on August 31 to holders as of August 17. Let's turn to Slide 16, and I'll give you some update on our guidance for the full year 2015. As I stated earlier, we expect adjusted EBITDA expenses to come in around the low point of the range of 620,000,000 dollars to 640,000,000 assuming a constant currency going forward. There is no change to our interest expense guidance, which we expect to be approximately $45,000,000 unless, as previously noted, we increase our leverage this year.
We have recently adopted free cash flow to replace cash from operating activities as a metric for cash generation. We expect that we will generate between $245,000,000 $275,000,000 in free cash flow for 20 15. Part of the refinement of our free cash flow guidance was our change in CapEx, which we will now expect to be in the range of $45,000,000 to $55,000,000 compared to the previous range of $55,000,000 to $65,000,000 reflecting lower technology infrastructure spend. And finally, the effective tax rate is still expected to come in between 35% and 36% despite being at the high end of the range in the current quarter and for the year to date period. Now turning to Page 17 and in summary before we open up the line for questions, I'll wrap up the call by providing a summary of key takeaways.
In the Q2, we continued to execute our growth strategy and we delivered strong financial performance. We have developed a strong track record for returning capital to investors as evidenced by the $500,000,000 that we have returned of our $1,000,000,000 commitment by the end of 2016. We have several levers that will drive our future growth including continued strength in our core products, incremental revenue from the investments that we have made with our enhanced investment program, improved performance from our recent acquisitions and we are actively exploring opportunities to bring our tax rate more in line with peers. And we are committed to returning capital to our shareholders. With that, I'd now like to open up the line for your questions.
Thank
Our first question comes from
the line of Toni Kaplan from Morgan Stanley. Please go ahead. Thank you. You mentioned just now that the Board gave you authorization to explore increase leverage to 3 to 3.5 times. Just want to clarify if that's gross leverage or net leverage and what the plan is for the capital?
Is it basically just buybacks or something more? Thanks.
Tony, it's Bob. It's based on gross leverage. And like I said, we're exploring the opportunities, but we've consistently been returning capital. We'll make those decisions when and if we increase the leverage to 3x to 3.5x.
Okay, great. And just as a follow-up, I wanted to reconcile really great expense management this quarter. It looks like you reduced headcount by about 100 people. So just wanted to reconcile cutting costs and managing expenses with the growth goals that you have increasingly sort of gross sales. So just wanted to find out I guess where the headcount reductions are that you're lowering your headcount and where you're planning to increase your headcount because you mentioned hiring plans?
Thanks.
We've been making headcount reductions in areas where we've been finding efficiencies that we referred to in the comments on the call here. Your numbers are right, we did reduce and you've seen that evidenced by the severance. And so we're capturing those efficiencies, but we're actually using those efficiencies to ensure that we maintain whether it's infrastructure, whether it's stability or whether it's growth in our products. So as we said that we will have some step up and redeployment of that over the course of the year, but it really has given us over the past year the investment program the opportunity to really capture some of the inefficiencies and turn them into productive growth.
Thank you.
Thank you. And our next question comes from the line of Chris Shutler of William Blair. Your line is now open.
Hey, guys. Good morning. The sequential improvement in the constant currency run rate growth rate, I think it was about 8% the last couple of quarters. It was 9.1% this quarter. Given sales activity and retention rates were basically flat sequentially, should we view that as the vast majority of that was price?
And then secondly, if you look at the total run rate, how much incremental benefit do you think, let's say over the next 1 to 2 years that you will realize from price? Is it more like 100, 200, 300 basis points, 300 basis points? How should we think about that at least directionally?
On 2013 to now 8%. So we've seen that from an improvement in our product suite. Go back earlier in that period, it was PMA along with the models and that we came out with in 2013 and 2014. Price has always been a factor on our index side. And as we get more and more confidence in the analytics products, we'll see pricing come into play.
I wouldn't see it 50% or 300 basis points that you were talking about, but I would see us over time lightening into a higher percentage of our increase coming in from pricing. But that would be gained by client confidence, that would be gained by new product innovation and as Henry talked about the senior account manager program that we have in place.
Okay. And then Bob on that last point, the senior account managers, I know you talked about in the prepared remarks. Any changes that you guys have made to the incentive structure to make to try to really push the accelerator on the growth? Thanks.
Yes, Chris. We are we have been for some time now reviewing the most appropriate way to incentivize our client coverage organization. And we have a salary and bonus structure that is highly correlated obviously to sales performance. But we have that under review to see if there are more direct leverage the direct levers that we can put in place to provide even more alignment to that. And we're still in the middle of that process.
We won't be able to really report back on that until sometime next year.
Thanks, Henry.
Thank you. And our next question comes from the line of Alex Kramm of UBS. Your line is now open.
Yes. Hey, good morning. Just wanted to come back to the comments you made earlier and get the question on the I guess the levering up the balance sheet more. And I think Bob you then mentioned capital returns probably one of the avenues. But can you maybe remind us a little bit like what the specific returns are that you're looking at when you do that?
So when you say evaluate buybacks versus dividend or maybe even do something on the M and A front again, what are the metrics we should be looking for? And I guess I'm asking because your stock is trading at a optimum high relative to the S and P and obviously the return at this valuation is getting limited and limited from buying back stock. So any additional color would be helpful.
Sure. I think in the past, Alex, great question. We benchmark all of our investments on our weighted average cost of capital and the accretive value to that whether it would be a buyback, whether it would be a total shareholder return through a dividend or whether it would be acquisitions externally or investments we make organically. But the watermark would be our weighted average cost of capital, ensuring we have accretion to that for our shareholders.
Yes. The other thing that I will say, Alex, is that the we can't comment ourselves on the valuation of our shares by the market. What we can comment though is that we see a significant amount of opportunities in our client base to continue to drive revenue growth even in the context of a mixed operating environment. And then when you look at the mix of our products, as I indicated, we think we're hitting in a lot of cylinders on the index product line. We have meaningful opportunities for expansion in revenue growth in analytics and in real estate.
And if we can continue the pace of growth in ESG that should provide meaningful amount of revenue growth. Secondly, we went through that period of investments for about a year and a half half of twenty thirteen and twenty fourteen is now we now feel we have the right sort of footprint and infrastructure and are now concentrating on that and really focusing on creating efficiencies out of that. So we believe that there's continued meaningful amount of margin expansion in our shares in our business. So I don't know what the right price for that is, but we're feeling pretty good about the company.
That's good. Thank you. Maybe just then secondly and I guess picking up on the last comment and you mentioned also the sales you're not really satisfied with. Can you talk maybe about the competitive environment a little bit too in particular in analytics and maybe risk specifically, sorry. Anything you're seeing there that makes it harder on the sales side?
Do you think there's some competitors you would highlight that are being stronger than they were in the past? And or is it more the selling environment or your own doing that is lacking right now?
I think it's the latter. Honestly, it's we clearly are our company and our space or our industry is clearly in an area, which is we're creating a new market. We're creating a lot of new use cases. We are going into our client organizations and providing them with things that they weren't really doing before like as I said indexing factor investing or a new sort of risk and data sets or in data sets or in the U. S, I mean, we're creating a new industry for real estate indices benchmarking and so on and so forth.
So a lot of growth therefore is predicated on being able to provide understand the right use case, provide the right product and obviously convince the client at the right price to embrace a lot of these new offerings. Much less driven by competitive dynamics in the marketplace. So we can go into more detail as to some level clearly of competition that exists in various product lines. But I think that the my overall message to you is that this range bound has to do with clearly it's a mix environment. A lot of active managers around the world are not feeling that great given that they're being squeezed on one hand by passive managers and on the other hand by real big large alpha highly concentrated portfolio managers and that type of investing.
So therefore, we are our job is to try to really galvanize the client base to help them achieve their investment differentiation, their operating efficiencies, their reporting requirements and all of that. And that's where we need to work harder at it in order to get out of this bound this range that we've been at for a few quarters now that has us all rallied up, right?
Very good. Thanks for the color.
Thank you. And our next question comes from the line of Vincent Hung from Autonomous. Your line is now open.
Hi. How's it going?
Hi, Vincent.
So you talked a lot about your disappointment with the range bound sales. What is like an aspirational level of sales for you guys?
I'm not sure we have yet 1. Our first step is break out of that range. And we're not there yet. And the pipeline is always good. It's healthy.
We had great engagement with clients and everything, but we're not yet seeing that breakout. And that's what we're trying to do, break out of that recurring sales of let's say roughly around 30,000,000 dollars or so. But clearly, we want to break out of that and we want to achieve sort of double digit gross recurring sales growth, right? So grossrecurring sales growth that will make us a little more comfortable. But again, historically in the last few quarters, we have been trading around this range.
We continue to be in that space right now. So I don't want to raise any expectations. But we clearly wanted to highlight to all of you that we're not happy with that and we're really focused on trying to break out of it.
Yes. And what's the main pushback you're getting from clients?
Clearly, clients are not extremely liberal with their budget, right around the world. I mean, we are living in a highly cost conscious environment anywhere you go in the investment industry. But for the right things and the right use cases and the right solutions, clients will spend money and we've demonstrated that with our I think a lot really depends on it's not just us pushing our sales to clients. We need to have the right level of engagement especially on this enterprise wide deals for risk management and performance. And that's why we have formed this group of senior salespeople to be focused at that fee level, the CEO, CIO, CRO level to try to help that sales process.
We need to in our applications, we have all the content. A lot of our content is great, especially in analytics. What we need to do is do a better delivery of that content through more fungible applications that can be accessed by the client through that content or through the content delivered directly to the client for their own application. So that is that effort that I mentioned about this new architecture and this new interface, this new platform that will be able to have the client access all of our other applications to that one in order to make it more fungible. So we're taking a lot of steps.
We're clearly pushing the salespeople. We're clearly pushing our senior account managers. We clearly are pushing our content. But I think a meaningful part of it is also breakthroughs that we have achieved in consolidating a disparate set of applications that we have from Aegis to Bara Portfolio Manager to BaraOne to Risk Manager to hedge platform. We need to be able to put that in a more holistic fungible way to achieve the efficiencies that the client is looking to achieve through the various use cases.
Okay. And just on your decision to increase the target leverage, just curious a few details around that. So firstly, what kind of term structure would you look for in incremental debt? And then also would you look to get to the 3x to 3.5x sooner rather than later?
Yes. I think the we've had a lot of deliberations with our Board over the last few years as to what the right leverage is in a company like us that has a book of long term assets that are producing great growth and profitability that are highly reliable and subscription based and so on and so forth in order to balance out the leverage amount in the company and risk associated with that with the with levering up your equity returns in a company like that. So we had a lot of those debates and discussions. That whole effort concluded in the Board meeting this week in which the Board approved the increase in the gross leverage to somewhere between 3% and 3.5%. And we're now that's what just happened, right?
So we're now exploring based on that mandate what are the types of offerings that we can provide on the debt side to match those goals. But it's early. We're still exploring all of that and we'll have to see what happens in the marketplace and what is convenient for us to achieve.
Can we expect that you do it all by Q4?
It depends on market conditions. It depends on market environment. It depends on a
lot of
things. We clearly are really focused on it now given all the work that we've done for the last couple of years and given the approval by the Board. But it's we can't really tell you until we see we have a bear
in mind. We remain very disciplined in terms of as my comments indicated that it's terms, conditions, it's all those factors that come into play, Vincent. So thank you.
Thank you. And our next question comes from the line of Joe Foresi from Janney. Your line is now open.
Thank you. This is actually Robert Simmons on for Joe. I was wondering if you could talk a little bit about where you think we are in the ETF growth cycle and also about the movement towards custom products?
Yes. I think that in the U. S, we have filled out quite a lot of the matrix so to speak on market betas on ETF. So a lot of our effort and our clients' efforts are in raising more assets based on a lot of those products. And therefore, the second major emphasis is in creating more specialized investment vehicles such as factors such as currency H, ETF and so on and so forth.
In Europe, there is it's in an earlier stage of development on the market beta and we're also clearly pushing the smart beta. In Asia, the market is totally virgin. There's not a lot at this moment. We're extremely focused on developing that market. In two ways, we are supporting our clients in with our indices and then explaining how those clients can invest in ETFs in the U.
S. And in Europe and from Asia. And secondly, we're working with those ETF clients to be able to develop and launch local product in the region to also for the clients for investors in Asia to invest locally. So it's a 2 prong approach.
Okay.
And then can you talk a
little bit about your margin expansion trajectory going forward? Like how long it's going to take to get up to like the 46% -ish level?
Can you say the question? I didn't quite catch it.
Sure. Can you talk a little bit about the margin expansion trajectory going forward after this year? Like when do you think you might get to the 46% level?
Or continue, we're marching deliberately towards margin expansion. We haven't given a cap or we haven't given a time line, but we did say margin expansion through 2015 and we gave our expense guidance that we would stay true to 5% to 7%. And obviously, this quarter, we've carved out the normalization of it. FX has had some help in that journey and some headwinds that we talked about earlier. So I can't really tell you 46%, but I can tell you that we're at 43.7% and we're not retreating from continued margin expansion.
Great. Thanks.
Thank you. And our final question comes from the line of Keith Possum of Northcoast Research. Your line is now open.
Good morning, guys. Thanks for taking my question. Question for you, Bob, on the non recurring revenue. If I look at this quarter, I think it was $5,700,000 in non recurring sales you have. But in terms of what you recognized through this quarter's income statement was about $3,900,000 What's the trajectory of when that $5,700,000 is recognized as part of that this quarter and perhaps the rest of following quarter?
It has a whole host of constraints to go with it. That really depends upon when we actually deliver the product to our client. Now sometimes we can do data sales, history sales and that can be recognized within the quarter. Sometimes when we have long term implementations where we have to really get a client hooked up and connected to risk manager that could take 12 part of the fees could be deferred until we're actually delivering the full product suite. So it's hard to give you a good line of sight on that because it really depends on the underlying sale and the product being delivered.
It tends to be mainly driven though by the implementation deals where we get volatility. If you go back to the Q2 of last year, we had a really high revenue recognition. A big chunk of what we talked about was a lot of deals were completed for clients fully implemented. We're able to take the revenues. A more elongated sales plan revenue recognition could be on the real estate side.
Okay. But there's generally no real thumb like 60% next quarter or anything like that? No. It's tough to give you guidance on that because we do keep a pipeline, but some of these deals are contingent upon the client being able to deliver certain things to us as well as us delivering to them. So it's a small amount.
Okay. Very well. If I can circle back to an earlier question regarding the reduction in the headcount and the efficiencies. I guess, is your thought process that the reduction in headcount is probably has hit its I guess, high point and you're probably going to be adding personnel going forward? We don't target a headcount.
We're looking at the physicians. I mean the positions that we took out, we took out. Those were efficiencies that we gained. Now there was some turnover that was a part of it, but you can see the severance was $4,000,000 the quarter. We eliminated those positions.
We do have other positions that are different that are open that we will be filling through the course of the year that I talked about. Would we expect severance to be declining then for the rest of the year? Severance is tough for us to give you a number on that, but we expect to have it as a part of our continuing DNA as we continue to find efficiencies that are out there.
Okay. Thank you.
Thank you. I would now like to turn the call back over to MSCI. Please go ahead.
Thank you all very much for your interest in MSCI and we will talk to you soon. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.