Good day, ladies and gentlemen, and welcome to the MSCI First 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 follow at that time. If anyone should require operator assistance during the conference, please press star and then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Steven Davidson, Head of Investor Relations. You may begin.
Thank you, Abigail. Good day, and welcome to the MSCI First Quarter 2015 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the first quarter 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. For the earnings presentation today, we have tried to make the information more additive to avoid repeating information that can be found in our release, so we are happy to take your feedback on this different approach. 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 may speak 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-K and our other filings with the SEC. During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, and adjusted EPS. 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 29-32 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 am pleased to share with you today our first quarter 2015 results. For the quarter, we continued to execute our growth strategy. We deliver solid financial performance and the benefits of the enhanced investment program continue to build. In the slides today, we have provided you with new naming conventions for our product lines. Performance consists of our index, real estate, and ESG products. Analytics consists of our risk management and portfolio management analytics products. First, let's talk about our financial performance. We generated 10% growth in operating revenues, driven by 13% growth in performance subscription revenues. We recorded positive operating leverage in the quarter in advance of our second-half 2015 commitment, and we expect to deliver continued margin expansion throughout the remainder of this year.
We achieved 9% growth in subscription run rate, excluding the impact of currency fluctuations, and we continue to achieve exceptionally strong retention rates across all of our product lines. We'll talk about the enhanced investment program. For the call today, we will be highlighting how our investments have helped us position MSCI as a leading index provider to the ETF market and a leader in factor indices and analytics and how our investments are driving growth in our index and ESG products. I will highlight how our investments have driven higher retention rates for the analytics product line. The steps that we have taken to reorganize analytics and why we feel this product line can return to higher growth, particularly exemplified by the client wins that we recorded in the quarter.
On slide four, we show a set of KPIs that we believe are leading indicators of growth. The first section of this slide highlights the drivers of higher subscription revenue growth over time. Policy benchmark wins from asset owners were up 7% year-over-year, and new index families launched were up 300%. Growth in ESG is being driven by growth in clients who increased about 35%, reflecting the contributions of GMI as well. In the next section of this slide, we highlight the drivers of increased asset flows, which lead to higher asset-based fees. The number of MSCI-linked ETFs launched during the quarter increased 81% year-over-year. Active and passive assets tied to factor indices of MSCI increased 29%. Peer and AUM linked to our indices amounted to a total of $418 billion, up 23%.
Since the end of the first quarter, ETF AUM linked to our indices have continued to grow, reaching $451 billion as of yesterday and representing a further 8% growth since the end of the quarter. Lastly, listed futures and options trading volumes based on MSCI indices increased 23% to 10 million contracts. The whole area of derivative products associated with our indices is a major focus of our strategy and investment as well. Lastly, we highlight the driver of higher portfolio management analytics revenue. Run rate from new risk models that we have invested in and introduced over the past several quarters stand at $23 million, up 64% from $14 million in the first quarter of 2014 and up from $20 million or so at the end of 2014.
The strong year-over-year increases across all these KPIs reflect the growth that we are seeing across the company. Slide five highlights the strength of our competitive position as a leading equity ETF provider to the exchange-traded fund market. The global equity ETF industry stood at $2.3 trillion in AUM at the end of the quarter, of which a record $418 billion was linked to MSCI indices. Net new assets have flown primarily to European, Japanese, and other non-U.S. developed market equities during 2015, with U.S. equities experiencing net outflows, reversing the trend that we saw at the end of 2014. Therefore, MSCI has been a major beneficiary of that trend. We rank number one in net new assets in equity ETFs globally in the quarter.
A total of $53 billion of net new assets flow into equity ETFs globally in the quarter, of which a record $32 billion or about 60% went to ETFs based on MSCI indices. As the U.S. dollar soared against other currencies in the quarter, currency hedge ETFs have seen $28 billion in net new assets, with nearly half of those assets going to MSCI-linked ETFs. In just three months, global ETF assets linked to MSCI currency hedge indices have increased by 94% compared to the fourth quarter of 2014, going from $16 billion- $31 billion, largely due to positive flows into MSCI currency hedge index-linked ETF from Deutsche Xtrackers, UBS, iShares, and others. Additionally, there are now 68 currency hedge ETFs globally linked to MSCI indices, more than all other index providers combined.
Therefore, we are poised to continue to benefit from the volatility of currencies and the U.S. dollar in the months to come. Globally, there were over 700 equity ETFs based on MSCI indices as of the end of Q1, more than any other index provider. In the first quarter also, three ETF sponsors launched their first MSCI index-linked exchange traded fund, and therefore continuing to expand the relationships that we have with various ETF managers. If we turn to slide six, here we provide a bridge of our new record ETF AUM linked to our indices, a record that continues to grow, as I said, since the end of Q1 due to record inflows that we're seeing.
In the top half of the slide, of the total $137 billion of cash inflows since 2012, a net $32 billion or 23% of these inflows are from new funds that were launched in the las two years. This is a direct result of the investment that we have made in launching new index families, which I referred to before, to the first quarter, and in marketing to ETF managers around the world. In the bottom half of this slide, we have broken out for you the three primary buckets of what we call ETF revenue. In addition to the fees that we earn on ETF AUM, we also earn fees on our clients' institutional passive investment products, which amounted to $11 million in quarterly revenue.
We also earned $2 million from exchange-traded futures and options contracts that are based on our indices. In addition to these, volume-based revenues on exchange-traded futures and options contracts, we also generate, another, meaningful amount of revenue in subscription, fees related to broker-dealers licensing our products for, over-the-counter equity derivative contracts. That part of the revenue is in the, subscription revenue, area.
If we get a file and we can't model.
If we turn to slide seven, here we showcase our factor indices, also known in the industry as smart beta indices, which are a key driver of our future growth. We have invested considerably in our factor indices over the last year or two by bringing together our extensive equity index and equity risk model research capabilities and combining them with our wealth of data over 40 years of Barra factor data history. This unparalleled expertise is what differentiates us in our factor offering from our competitors. We have developed one of the leading factor index and factor risk model franchises in the world. Asset owners really get the best of both worlds, as shown on the left side of this slide.
They get the advantages of active management, where they have the opportunity to outperform the market over long periods of time due to these factor indices. That is combined with the advantages of indexation or index investing, where you have transparency and lower costs. This has resulted in a strong growth in factor-related AUM for us, as shown in the upper right chart. Active and passive AUM benchmark to MSCI factor indices grew 29% year-over-year. Included in these numbers is ETF AUM and institutional passive AUM and AUM related to clients who pay us subscription fees for data. This latter category is not required to report their AUM to us, so there is an element of estimation of the AUM these customers have in their assets linked to our indices.
In the lower right chart, we show the 67% year-over-year growth in the quarterly run rate related to factor indices. We're also leveraging our research capabilities to assist ETF providers in launching new factor ETFs. Year to date, there have been 11 ETFs launched that track MSCI factor indices. Of the record $32 billion of net new assets going into MSCI- linked ETF in the first quarter, over $4 billion of that, or 13%, flow into ETF tracking MSCI factor indices. Next, on slide eight, we provide a snapshot of the index subscription product line. As you may remember, this is data that we sell to active managers for benchmarking purposes of their portfolio.
On the left side of this slide, we show the growth progression in the index subscription product line, which has grown steadily over the past few years at around 10% compounded growth rate. This growth has been driven in part by the investments that we have made to innovate and develop new products to sell to our existing customers, as well as the investments we have made in distribution and marketing to sell into new segments, such as insurance companies. For example, one of the areas where we have seen significant growth in subscription revenues is in our thematic and custom indices. The run rate related to this product area has grown about 13% year-over-year.
The steady growth of the index subscription product line has been complemented by a strong retention that we have achieved with a record 97% in the first quarter of 2015, as shown on the right-hand side of the slide. All of this is a good indicator of the health of this flagship index subscription product line for us. Going to slide nine, we show the strong growth of the ESG product line, as well as the benefits that our index products have received from ESG. As asset owners and asset managers around the world become more and more aware of the potential risk and the potential performance effects of environmental, social, and governance factors, they are employing a range of ESG investment strategies and screens that are supported by MSCI's ESG offerings.
The chart on the upper left side shows the growth in run rate related to ESG indices, which is recorded in the index subscription line and not in ESG. This is another example of how we're leveraging product capabilities across MSCI. While we're still in the early stages in developing ESG indices, as shown by this lower dollar amount, we are very pleased with the trajectory of growth.
ESG index clients grew 56% year-over-year, and the run rate is up 50% to $1.3 million, and we expect that to continue as all these ESG factors are taken into account more and more in the global investment process. In terms of when you look at the lower left part of the slide, the chart, the chart there shows organic subscription run rate of 22% in ESG and about 46% growth, including the GMI acquisition. This is clearly an area of fast growth for us, and we're very much focused on expanding it and investing in it. Slide 10, we highlight the new reorganized analytics product line.
As we announced in the fourth quarter earnings call, we are taking steps to reorganize and streamline the analytics product line under the leadership of Peter Zangari, who has worked for the past three years to return the portfolio management analytics products to growth. We're hoping that he and his team can help us do the same on the risk management analytics product line. This change was made because, as I said in the past, our risk management analytics product line is not where it needs to be in terms of its level of growth and profitability. This is a product line that we believe strongly has very strong fundamentals, has strong growth potential, and leverages a lot of the core strengths and capabilities of MSCI, so we cannot tolerate low levels of growth or profitability at this time.
The non-cash charge that we took in the quarter was to stop a technology project that, while profitable, was not the right platform to take analytics to the higher level of performance. We're now moving in a new direction with a new technology platform that will serve as the basis for growth for the entire analytics product line and service lines. While we're still in the early stages of the reorganization, we are focused on moving analytics from a product-centric approach to a more use case, focused approach based on client demand. We are focusing on what client problems that we're solving for, then what services will line up against the client use case. By moving to this approach, we will be able to better leverage our core capabilities to deliver value-added solutions. This is what MSCI does best for its clients.
We believe that we have significant competitive advantages in analytics products. We offer established best-of-breed solutions, research analytical content that sits at the center of our value proposition with an incomparable set of assets across indices and multi-asset class analytics. We have deep experience computing the risk of very large, very complex, you know, trading portfolios. When we line this competitive advantage up against the key trends in the market, we feel very good about our positioning. We're seeing a growing focus by our clients on multi-asset class investing and the tools necessary to understand performance and risk of those multi-asset class portfolios. Clients are looking for flexible and complete analytical tools. They're also looking for partnership with their providers in order to develop solutions that help them address their needs.
Lastly, they're looking for quantitative tools that are becoming more and more standard and used widely as evidenced in some of the growth that we that we're talking about in factor investing. In short, we believe we have the right capabilities. The market is very large and the competitive environment is stable. There is no reason, you know, to tolerate, you know, lower levels of growth or profitability for this product line. We will keep updating you on the progress on this area on how we can return it to higher levels of performance. On slide 11, we show here four examples of clients that we have won over the quarter in risk management analytics that we believe reflects the underlying strength of the value proposition.
This win speak to the strength of our brand globally. They're also a validation that increased regulation is a driver of adoption of multi-asset class risk offerings. Overall, we also have a pipeline in our business that is strong with several large deals which slipped from the first quarter and have closed in the second quarter, and we hope to report that in the next call. With that, let me now pass it on to Bob. Thank you.
Thanks, Henry. Good morning to all of you on the phone. Please turn to slide 12 for a brief overview of our financial results. Our results this quarter were strong, with 10% revenue growth and adjusted EBITDA expense growth of 8%, driving 11% growth in adjusted EBITDA and a return to positive operating leverage, which is well in advance of our second half 2015 commitment. Our adjusted EBITDA margin increased 67 basis points from the prior year quarter to 41%. Our net interest expense for the quarter now fully reflects the quarterly impact of our bond issuance in the fourth quarter 2014.
The higher-than-expected tax rate was driven by an increase in operating profits in higher tax jurisdictions, but we continue to guide to an expected 35%-36% effective tax rate for the full year 2015. Adjusted EPS was up 9% to $0.50 per share. Benefiting from a 4% decline in the weighted average shares outstanding year-over-year and stronger operating results. The increase in share count compared to the fourth quarter reflects the impact of stock-based employee compensation in the first quarter. Before moving to the next slide, I wanted to comment on the impact of FX on our results. As we previously indicated, foreign currency fluctuations have been a headwind for our subscription revenues and run rate. The headwind has been mitigated by a significant portion of our expense base that is denominated in foreign currencies.
As a result, the net impact of foreign currency fluctuations on our earnings was not material in the quarter compared to a year ago. This framework, however, does not reflect the impact of foreign currency fluctuations on the underlying assets held in AUMs linked to MSCI indices, which is the basis for our asset-based fees. To a large extent, foreign currency fluctuations are reflected as part of market appreciation or depreciation, along with other market factors. Now turning to slide 13, we provide you with a bridge for the year-over-year change in our revenues. Total revenues increased $23 million, or 10%, to $263 million. The growth was driven by an increase of $18 million, or 9%, in subscription revenues and an increase of $5 million, or 12%, in asset-based fees.
From a product perspective, the increase in subscription revenue year-over-year was principally driven by the performance product lines, which increased $13 million or 13%, driven by a strong growth in the equity index benchmark and ESG product-related revenues. Analytics revenue grew $5.4 million, or 5%, driven by a 7%, or $4.9 million increase in risk management analytics. As Henry made very clear earlier, we are not satisfied with the performance of the RMA product line, but we are not standing still. The actions that we are taking will take time, but we are confident of a positive outcome. Our real estate business has been particularly impacted by foreign currency fluctuations. Revenue increased 2% on a reported basis, but adjusted for a $2 million negative impact from currency fluctuations through 19%.
Real estate revenue in the quarter included the benefit of some early deliveries of client portfolio analysis service reports, which normally would have been delivered in the second quarter. This is improving the efficiency of our platform, has been a focus of our investments, which has allowed us to deliver client reports faster. The $5 million increase in asset-based fee revenue to $46 million was driven primarily by $62 billion increase in average AUM in ETFs linked to MSCI indices to $393 billion, as well as higher revenue from futures and options trading in contracts linked to MSCI indices and revenues from institutional passive AUMs.
In the first quarter 2015, cash inflows to the ETF market were a total of $53 billion, of which $32 billion, or 60%, flowed into ETFs linked to MSCI indices, reversing the trend we saw at the end of the fourth quarter 2014 as flows then moved into the U.S. Of the $32 billion in inflows for the quarter, $13 billion was related to assets linked to currency hedge indices, with another $4 billion of inflows into factors. The reported average basis point fee for ETF AUMs linked to MSCI indices was 3.38 at the end of the first quarter, down slightly from 3.39 reported at the end of the fourth quarter 2014, driven primarily by mix shift. Let's turn to slide 14, where we provide the adjusted EBITDA expense trend.
First quarter adjusted EBITDA expenses rose 8% to $155 million as we continue to move more towards normalized levels of cost growth. The year-over-year increase was driven by a 13% increase in compensation expense, partially attributable to a 10% increase in headcount, but also because compensation expense includes $2.9 million of the total $3.4 million non-cash charge we took in the quarter to terminate a technology project in analytics. Employees in emerging market centers increased to 51% in the first quarter 2015, up from 47% in the first quarter of 2014 and in line with 51% reported in the fourth quarter 2014. The increase in compensation expense was partially offset by a 3% decline in non-compensation expense driven by general corporate efficiency efforts.
Of the total $9 million growth shown on this chart, the $5 million was carryover from the 2014 spend. While the first quarter included a non-cash charge and seasonally higher payroll tax expense, in the coming quarters, we expect to see higher costs based on compensation-related inflationary increases, backfills of positions, and other corporate costs. For the full year 2015, given some efficiencies that we have achieved on our expense base, we now expect our adjusted EBITDA expenses to come in solidly in the lower half of the previously announced range of $620 million-$640 million.
Obviously, FX will continue to have some impact on the reported full year, but on a constant currency basis, we remain comfortable with this guidance. Turning to slide 15, we provide the run rate bridge for the quarter. Our reported run rate increased 8%, consisting of a 6% increase in subscription run rate to $840 million and an 18% increase in ABF run rate to $191 million. Adjusting for foreign currency fluctuations, subscription run rate grew 9% year-over-year. In terms of subscription run rate growth, sales in the first quarter of 2015 amounted to a total of $29.5 million compared to $30.4 million in the prior year quarter. Performance, recurring sales increased 3%, negatively impacted by a 23% decline in real estate sales.
The decline in real estate sales, year-over-year was driven by timing and to a certain extent, FX fluctuations. Analytics recurring sales declined 9%, driven by a 19% decline in risk management analytics sales, partially offset by a 37% increase in portfolio management analytics sales. The first quarter in analytics of 2014 included very strong sales of InvestorForce and RiskManager products for the risk management analytics, and several deals in the first quarter of 2015 rolled into the second quarter, some of which have already closed. Cancels amounted to $12 million for the quarter, a decrease of 17% from the prior quarter, resulting in net new recurring sales of $18 million, an increase of 9% year-over-year.
The lower level of cancels drove year-over-year increases in retention across both products, for performance and analytic product lines, resulting in aggregate retention of 94.4% with a record index subscription retention of 97.2%. FX fluctuations had a $25 million rolling four-quarter negative impact on our subscription run rate. GMI acquired in August 2014 contributed $7 million to our run rate build year-over-year. Now, turning to ABF run rate, the $29 million increase was driven primarily by $77 billion period increase in ETF AUMs linked to MSCI indices on inflows of $75 billion that I discussed earlier. Strong growth in institutional passive AUMs, as well as higher futures and options trading volumes and contracts based on MSCI indices also contributed to the year-over-year increase.
Just to note, revenue recognition for trading volumes is on a one-month lag. A total of 10.1 million futures and options contracts on MSCI indices were traded in the prior quarter, up 23% year-over-year, and open interest was a total of 1.1 million contracts. On March 16th, aggregate volume in MSCI index-based futures listed on ICE topped 395,000 contracts, a record trading day for MSCI-linked contracts. CBOE also recently launched options trading on our emerging markets and EAFE indices on April 21st. Turning to slide 16, we provide our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $538 million, which includes cash held outside of the U.S. of $84 million.
As a general policy, we prefer to maintain U.S. cash buffer of approximately $100 million-$125 million for operational purposes. Our gross leverage was 1.9x based on our total debt of $800 million to our trailing twelve-month adjusted EBITDA, within our stated guidelines of maintaining leverage at 1.5x-2.5x . We generated strong operating cash flows of $67 million, up from $25 million in the prior year, which were lower due to timing of accounts receivable collections. We continue to expect that we will generate between $275 million and $325 million in operating cash flows for 2015. We spent $6.3 million on capital expenditures in the quarter compared to $10.1 million in the prior year.
The lower CapEx in the first quarter was due to timing. We are reaffirming our fiscal year 2015 capital expense range of $55 million-$65 million. Our board approved the second quarter dividend of $0.18 per share, which is payable on May 29th. Lastly, as you know, we are in the market now with our current ASR, and we are committed to returning cash to our investors. Before we open the line for your questions on slide 17, I want to wrap up the call by providing a summary of key takeaways. In the first quarter, we continued to execute, and we delivered solid financial performance. The benefits of our investments are taking hold, and we continue to see continued momentum in the coming quarters.
In our core analytics product area, we have the right team in place, and we are taking the right steps to drive future growth, and we look forward to updating you on our progress in the second quarter. Lastly, we remain committed to returning excess capital to shareholders. With that, I'd like to now open the line for your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you limit yourself to one question and one follow-up question. Our first question comes from the line of George Mihalos with Credit Suisse. Your line is open.
Hey, guys. Thanks for, thanks for taking my questions. Henry and Bob, you guys, you did a nice job sort of segmenting the businesses, going into a lot of detail. You mentioned several times you're not pleased with where the analytics business is presently. I'm just curious, as you think of your subscription run rate business on the index side, which is sort of a, you know, call it a low double-digit grower from a run rate perspective, where do you ultimately think with the investments you've made that you can take the analytics business to relative to that growth rate in index?
Yeah, George, I, you know, first of all, I think we have made tremendous progress in returning the equity analytics products, you know, to growth. If you see the growth in run rates there excluding, you know, the impact of foreign exchange, you know, fluctuations, you know, we are in the 7%, you know, or so, 6%-7%, you know, growth category. It continues to feel good because, you know, we have launched a lot of new risk models that we're selling well, as I mentioned. The Barra Performance, the Barra Portfolio Manager analytical application is complete and now really getting into strides, you know, for sales.
Obviously the overhang, the negative overhang that we have is the Aegis product line that is shrinking. Obviously a large part of that shrinking is going to BPM, and we're trying to, you know, encourage customers to move there. That's, you know, that is a fairly good indicator of continued growth. All of that is a very good indicator of continued growth in the equity analytics line. We expect that in the coming quarters and coming, you know, couple of years that equity analytics growth rate and run rate will continue to increase.
We have to see how far it goes, but we are, we're pretty hopeful that it'll continue to increase to the high single- digits and maybe at some point get to the low teens, right? I think on the risk analytics product line, we are, you know, we are clearly lower in run rate growth there, when you exclude foreign exchange, you know, fluctuations. I think we're about, what, 5%, Bob, or something like that? 5.5% or so growth in the risk analytics product line, excluding foreign exchange fluctuations.
We're hoping that, you know, given the refocusing of the business, the streamlining of the teams, that, you know, we're gonna have a similar progression to what we did with equity analytics. First, you know, getting it to the high, you know, single digits and maybe eventually getting it into the 10%, 11% range, you know. At this point, you know, it's too early to tell when that will happen. You know, those are our expectations. Very importantly also, you know, we're very focused on the cost structure of all of this. They're fairly profitable, we like them to be even more profitable.
We're focusing on combining functions, combining costs, combining technology, combining a lot of things so that we can expand the margins of this product line.
Okay. I appreciate that color. Just a point of clarification. You sounded a little bit more encouraged about your sales, you know, some that may have slipped from the first quarter into 2Q. Should we be assuming that on the RMA side, you are likely to post a sales number in 2Q higher than the $10 million in Q1?
Hard to tell at this point. I would say that, you know, the comment that we made was that we had a couple of larger deals that just slipped, you know, by a few days, you know, the end of the quarter, and therefore, they carry over into the second quarter. We obviously have to work, continue to work the pipeline, you know, in the second quarter. If, you know, if everything closes, you know, in the way, you know, we would like it to be there, you know, it'd be a good quarter. We may have, again, two, three larger deals at the end of the second quarter that slip into the third quarter and so on and so forth.
I think importantly, you know, the way to think about risk analytics right now is without the actions that we are taking, you know, our sales are kind of trading in a range. What we're trying to do by the actions that we wanna take, that we are taking, is to try to break out of that range, you know, into a higher amount of sales. We'll be able to update you more on where we are on that, you know, by the next call. Your expectation should be that we're in that sort of narrow range of sales per quarter of the risk analytics, and it could be plus or minus, which is fine.
You know, what we're trying to do is break out of that range to a much higher number.
Okay. Thank you.
Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open.
Hi. Thanks for taking my questions. Just to follow up on the risk management analytics, could you just talk about the market environment there? Basically are the challenges that you're seeing market-related as well as just company-specific ? And, you know, when customers aren't using RiskManager, are they going to competitors or are they not using any products?
Yeah. Toni, the large majority of our clients, you know, when they don't buy from somebody like us, they're not necessarily going to a competitor. It just means that the product or the functionality that they're looking for, you know, does not exist or doesn't exist in the way they wanted it, and therefore they sit and wait or things together internally in a suboptimal, you know, fashion.
Now we want to continue to move forward the state-of-the-art in multi-asset class risk management and performance, you know, management analytics, and that's because we believe that there is a fairly large field here to help fulfill a lot of needs that people have to, you know, take a whole scientifically of their portfolios and understand on a more timely and more scientific basis, you know, what's happening with those portfolios, those total portfolios and multi-asset class portfolios.
I think you know, going back to your first question, I attribute a meaningful part of our, when you look at it globally, a meaningful part of our slower growth, to the fact that, you know, over the last two years or so, we have been really focused on upgrading the technology platform, including the data centers, you know, making sure that our resilience was high, making sure we're complying with the increasing number of demands that people have about data security and internet security and sort of cyberattack security. Many of the diversified financial companies that have asset management subsidiaries are really, you know, wanting to see the vendors like ourself, you know, have airtight procedures and that.
We've been working on putting all of that in place and therefore, with a limited investment, you know, plan on this product line, you know, we haven't been as aggressive in building a lot of new functionality, a lot of new products, a lot of new features and the like.
Largely, but not totally, you know, we're finding ourself selling just an upgrade of what we have been selling a couple years ago, and therefore, you know, a meaningful part of the process here is to refocus the investment, the operating expenses, if you wanna call it, of the business, streamline it, consolidate and the like, so we can free up some operating expenses to put into building more functionality, more capabilities and all of that, which is gonna be, you know, good to grow. That's what we did obviously on the equity analytics, you know, product line. We tighten up a lot of costs. We refocused efforts and refocused people and all of that, and we started launching a lot of new models.
We finished the upgrade on BPM and the completion of that, you know, you start selling a lot more. It's not very complex. You know, it's not very difficult. We just gotta tackle it and focus on it and get going because we believe that there is demand there. That's not to say that parts of the world are challenged. I mean, clearly, a lot of asset managers in Europe, in continental Europe, for example, are going through, you know, difficult times because of the economy and the investment market there.
They may be less expansive in investing, but we have a lot of clients in Asia, a lot of clients in the Americas and in other parts of the world that are waiting for us to give them, you know, better products and enhanced capabilities.
Great. Just a quick one on the share of the flows. I think you mentioned a 60% share of global inflows this quarter. I think last quarter, the number that you gave was like a 40% ex-U.S. number. Are those comparable? Also, like, you know, very big increase, so just wanted to know your thoughts on the drivers behind the increase. Thanks.
No, not comparable, Toni. This is Bob. We had significantly reduced inflows. We had positive inflows, but recall in the fourth quarter, a significant portion of inflows flowed into the U.S. You saw it in the S&P, and you saw in the first quarter, a lot of them flowed out. Total flows into ETFs were $53 billion. We captured $32 billion of it, which is 60%. You can see some of the tone in there, which was interesting. It continued inflows into factors, which is $4 billion. The interesting piece was we saw currency-hedged ETFs become popular in the first quarter given all the FX volatility. That's not necessarily a new product for us. That was something that we had in our toolkit, and our investors were prepared to use and offer that to their clients and their investors, not comparable, back to your first question, but, you know-
The methodology is comparable.
Methodology.
Yeah, the methodology is comparable. It's just that where the money flows is different, right, Bob?
Correct.
Yeah.
Yeah.
Yeah, so the I think in a nutshell, you know, when you know, we're strongest around the world, you know, developed markets, emerging markets and the like. When you see major flows of assets going to a lot of markets around the world, developed, emerging and the like. You know, we benefit, you know, significantly. When you see a lot of flows coming into the U.S., we do have a lot of U.S. products. We see inflows into in those U.S. products, but relative to, you know, some of our own competitors and relative to the strength that we have around the world, you know, you don't see as large amount of inflows.
The second part is that we're benefiting from factor indices, obviously a lot of money going into there, as Bob indicated, and we're benefiting from, you know, the, the strong dollar and people wanting investment products that are hedged, you know, against the, you know, the dollar, right? That's, you know, that's what's happening, right? Look, this can reverse, right? If you see a huge amount of money, you know, flowing back to the U.S. at some point, you know, we'll continue to get a meaningful share of the flows because this is a category that is growing, but it may not be 60%, right? I mean, it may be lower.
Thank you.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Your line is open.
Hey, guys. Good afternoon or good morning. On the non-cash charge, Bob, I'm just curious to get some more details on, you know, exactly what the project was that you discontinued and what the new direction is that you're going in?
Sure, Chris. We were focusing in on working on, you know, bringing together our product lines in the risk management analytics area, and that had been going on internally. The accounting convention for that is capitalizing internally developed software cost. $2.9 million of that was compensation, $0.5 million was non-compensation. You know, as Henry pointed out, we reached a point where, yes, we could still continue to achieve sales. There's a better way to look at the platform as we combine the analytics, and we made a decision that this was not the highest and best use of where we focused our attention, and now we're looking at a new platform going forward. Again, it was an accounting charge on previously deferred costs that were related to an analytics technical project.
What is the difference between the old platform and what you're the new platform? I don't know if you can be any more specific there.
No, let me, let me try that. The, you know, the challenge that we're facing, you know, at the company is that we have a few analytic application platforms that are as a result of our own sort of growing and as a result of the acquisitions that we made, right? If you think about we have the RiskManager platform that came with the RiskMetrics acquisition and that supports a large number of use cases and significant amount of run rate. Then you have the BarraOne technology platform that also has a lot of multi-asset class risk management capabilities, some fixed income portfolio management capabilities, and some equity portfolio management capabilities.
You have Barra Portfolio Manager platform, which has a lot of equity portfolio management capabilities and is built on top of the BarraOne, you know, platform. What we're trying to do is, in order to satisfy the convergence that clients have or need of having a much more integrated content and applications that unite the risk management function, the equity portfolio management function, and the fixed income portfolio management function into one consolidated approach, we've been taking instead of trying to rebuild the whole thing, which is not a good thing, we have been trying to come up with various technologies and programs to pull them together, think about it, at the operational level, and then provide a much more integrated approach to the client.
We went down this path with this project with technology that was good and tested, but it didn't do what we wanted it to do. Simultaneously with that, we had another approach to look at a different kind of technology that is probably newer and more innovative that could do it, and we are going with the second one and therefore stop doing the first one and discontinue it. Given that, you know, the accounting rules indicate that capitalize the time and effort in building that, then we wrote it off.
One thing I want to add on that, Chris, is that in between here, we're still going through the research and development phase. The deferred capitalizations are not occurring because we haven't reached that point. As Henry pointed out, we're still going through the review process of it.
The goal is still the same. I'm glad you asked this question, Chris, because the goal is still the same, which is: How do we take the existing operating system, so to speak, that we have built and the data libraries, the analytical libraries, the computational abilities, the data centers and the like, and how do we glue them together and put them together with an overarching technology that connects them all so that we can provide a much better integrated service to our client that unites all these processes in an efficient and fast way? I think this new thing that we're looking at that is still in, obviously, developmental stage is very promising.
Again, we'll have to report, you know, more on that in the future, right? There's a little bit of good news and bad news. The bad news is that we wrote it off. The good news is that we found an alternative way that is better and it holds more promise. We're on that path right now.
Okay. Thanks for the detail. Just one more, Bob, on the guidance, which I recognize on the adjusted EBITDA expense, it didn't change, so it's $620 million-$640 million. How much growth does that imply, I guess, in dollars on a constant currency basis?
The growth would be, as I related to, if you take the first quarter and analyze it, is more inflationary based, you know, related to compensation. We had a little bit higher turnover in the first quarter. We'll be backfilling some of that. We've got some other charges out there that maybe, you know, that we see in the future coming through. I would hesitant to call it growth other than normal business as usual, Chris.
As I looked at it, Bob, at the midpoint of $630 million, it was, I believe, somewhere in the low $40 million range is what the year-over-year increase implies. FX is maybe helping that number by, you know, let's call it $15 million-$20 million. You also have the $15 million, $15 million-$20 million that you called out last quarter of investment spend. Kind of fair, ex-ante investment spend and ex- currency are in that low $40 million sort of ballpark for the at the midpoint constant currency.
I think the message is that constant currency, you know, we're looking now at the lower end of $620 million-$640 million, you know, probably benchmark somewhere at the lower half on a constant currency. Obviously, FX seems to be volatile. Look what's happened in this first quarter or the second quarter. You know, sterling has climbed back up, you know, euro's climbed back up. You know, that's why I said, you know, the impact has been on FX, given our exposure. Yes, it's been there, that could be a reversal as we proceed through the year, which we focus on the constant currency. Again, a piece of that growth is really, I call it growth, but it's carryover that I mentioned, you know, in the first quarter.
That'll continue on a year-over-year basis, that we talked about last quarter.
Okay. Thanks.
Thank you. Our next question comes from the line of Joel Jeffrey with Keefe, Bruyette & Woods . Your line is open.
Hey, good morning, guys.
Hi.
Just thinking about, it looks like you guys are getting more comfortable with your margin growth. Just curious, I mean, how quickly do you think you can get margins back up into kind of the mid 40 ranges, and how dependent is that on the improvements from the analytics business?
When we look at our forecasting, as we take a look at it, we feel, I mean, our run rate is giving you a very good indication top line in what's happening out there. You know, we're managing our expenses to what we told you would be a midpoint. As Henry pointed out, you know, we're pulling forward the timing of when our margin expansion would occur year-over-year to the first quarter. We'll continue to see that steadily increase, and we'll measure our costs going forward, you know, as we move forward progressing and expanding the margin over the course of the year.
I guess in terms of thinking about your business lines, I guess, is the Analytics business, you know, enough of a headwind to slow that down? Or could you just actually grow the margin meaningfully enough through the Performance Line?
I think, look, if we look at this, you know, completely, we've had some very strong top-line performers, as Henry has pointed out. The index subscription, which is core, continues to show double-digit growth. The AUMs have been phenomenal on the ETF. Again, there could be a reversal of fortune out there, then again, that's a significant piece of our revenue. Very promising top-line growth on both ESG. When you currency adjust the real estate, that continues to grow as well. Now remember, that's the currency adjusted for real estate. Remember, there's, you know, exposure on the expenses, so we get a benefit offsetting that as well. The PMA business grew significantly when you think about it from that context, so it really is isolated to the RMA. As Henry pointed out, the constant currency run rate was about 5.5%.
We're not all dependent on RMA. It does have a piece. If it does taper off, that does have some headwinds, you know, that's focusing in on the run rate on there. No, as of the end of the first quarter, we feel confident of continued margin expansion over the course of the year based on our analysis.
I would also add that the, you know, everything that I said about the, you know, the better leverage and better profitability of analytics, including RMA, it not factor in in all the communication that we have given you about the margin expansion in the course of this year, right? If that were to happen faster, it will be better. Obviously, you know, it's hard to tell at this point where clearly how fast we can turn growth around to a faster level and higher profitability. That would be, if we do it and happen this year or next year, that will be on top of the of what we're thinking in terms of margin expansion.
Yeah, Henry's point is we're proactively managing our costs. You know, we're constantly looking for efficiencies. We've demonstrated that in the first quarter. You know, we'll continue to demonstrate that and make trade-offs going forward for the rest of the year with an eye on profitability.
Great. Just on the CapEx side, you know, I know you said there was some timing and it was a little bit lower, clearly lower than the sort of run rate would imply for the full year based on guidance. Just from a cash flow perspective, is there any sort of significant CapEx charge you're expecting in the coming quarters, or should we just think about it as sort of a, you know, a $16 million per quarter run rate through the end of the year?
It's kind of chunky. I mean, Joel, I would look at it because, you know, as Henry talked to you got timing related to certain projects that go on. Hesitant to, you know, make it a straight line. We're trying to give you a guidance on where we come in for the full year $55 million-$65million for the full year. Obviously, it was a little bit lower in, so anticipate it higher in the out quarters for the rest of the year.
Great. Thanks for taking my questions.
Thank you. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is open.
Hey. My first question is on smart beta factor indexes. How do you think that what MSCI offers in that arena is differentiated from your competitors? Is it mostly just a function of your underlying strengths, and then you just apply factor indices to those ETFs? Is there something in your methodology and your mechanisms that differentiates you from the other index providers?
I mean, through the equity analytics product line, you know, we have been the leader in factor investing since 1975. When you think about the content that goes into the analytics product line, remember, there is a lot of content that then gets enabled by an application like BPM. The content is all about factor investing. It's about what are the factors that give you the sources of risk and return in an equity portfolio. You know, the entire DNA of our equity analytics organization is about understanding market factors that are driving risk and return in portfolios.
When you combine that expertise with the significant expertise, you know, that we have in building equity indices, you end up with something that no other competitor in the marketplace has right now, which is a major expertise on understanding factors and understanding how factors drive portfolios and back testing those portfolios and so on and so forth.
Okay, great. For my follow-up, I know it's only been a couple of months, but can you characterize the contributions that you've gotten from your three new board members?
Well, we've had, by now two board meetings, you know, with them. There was a fairly extensive onboarding process. Wendy Lane, which is one of our new directors, is sitting here in the room with us. Welcome, Wendy-
Thank you.
To the, to our first quarterly call here. You know, it has been a significant amount of contribution because they went through a rigorous onboarding process. They are looking at the business with, you know, fresh eyes, you know, and it's, that's always good, you know, including, you know, people like me looking at it for a long time. It's good to see people looking at it, you know, from a fresh perspective. They are, you know, very, very good directors that are really eager to contribute to the success of the company. There's been a lot of discussion and debate about all of that.
Importantly, because we are, you know, we are in the next, you know, few months, we have our usual, annual strategy discussion with the board in the summer. They're very engaged in doing that with us and helping us sort of think through all the opportunities that we have ahead of us.
Great. Thank you.
Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Your line is open.
Thanks, guys. I appreciate the opportunity to ask questions. In looking at your employee count, you know, sequentially, it actually went down, I think, by 37 employees. Was this intentional decrease in the headcount, or is this a factor of hirings and firings that go on in traditional day-to-day work?
Remember, investments for us is largely people, right?
When we said, you know, we invested as much as we wanted to by now, and now it's more of a consolidation of that investment plan. It's with, you know, a lot of return, you know, out of that investment plan, and therefore come back to more normalized levels of investment in the company and expense growth in the company. You know, you're likely to see that tapering of the growth of headcount. You know, since we have expanded quite a lot in the last 18 months, you know, there was a meaningful deceleration in growth in the first quarter.
Not clear that that is what's gonna continue, you know, for the next few quarters because, you know, it was one of those things in which we felt we had enough, and we took a pause. That's the rationale for it. I would not read too much into it on the quarter-to-quarter change at this point. We're not really managing to a headcount, we're managing to an expense base, right?
First quarter's always got a higher turnover.
Yeah. Yeah.
Gotcha.
[audio distortion] .
Okay. For my follow-up, if I may. Yeah, the non-comp expense also came down, and I think you guys cited increased discipline. Was there any one-time items in there that perhaps would say that we shouldn't expect the same level of discipline for the rest of the year?
The only item, I mean, there is obviously is gonna be seasonality to some of it. I mean, you can look at the non-cash charge of $500,000 that I referred to in my comments. You'll recall $3.4 million non-cash, $2.9 million of it was related to compensation. The other half was reversed in non-compensation. There's gonna be some other seasonal charges in there. Obviously, CapEx was low. We can correlate some of the non-compensation costs to CapEx as we get equipment up and running and get licenses. There'll be some correlation there. You know, we're really effectively managing, you know, the costs on a discretionary basis as tight as we can, as well as we can with good corporate governance.
Gotcha. Thank you.
Thank you. I would now like to turn the call over to Steven Davidson for further remarks.
Thanks, everyone, for your interest in MSCI, and we look forward to speaking with you all soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.