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. 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 Q1 2015 earnings conference call. Earlier this morning, we issued a press release announcing our results for the Q1 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 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 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 to 32 of the earnings presentation. On the call today are Henry Fernandez, Chief Executive Officer and Bob Cutum, 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 Q1 2015 results. For the quarter, we continue to execute our growth strategy. We delivered 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 twenty fifteen 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. Next, 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.
Lastly, 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 4, 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 base 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%. Tier N AUM linked to our indices amounted to a total of $418,000,000,000 up 23%.
And since the end of the first quarter, ETF AUM linked to our indices have continued to grow, reaching $451,000,000,000 as of yesterday and representing a further 8% growth since the end of the quarter. And lastly, listed futures and options trading volumes based on MSCI indices increased 23% to 10,000,000 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 $23,000,000 up 64% from $14,000,000 in the Q1 of 2014 and up from $20,000,000 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 5 highlights the strength of our competitive position as a leading equity index provider to the exchange credit fund market. The global equity ETF industry stood at $2,300,000,000,000 in AUM at the end of the quarter, of which a record $418,000,000,000 was linked to MSCI indices. Net new assets have flowed 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. And therefore, MSCI has been a major beneficiary of that trend. We ranked number 1 in net new assets in equity ETFs globally in the quarter.
A total of $53,000,000,000 of net new assets flow into equity ETFs globally in the quarter, of which a record $32,000,000,000 or about 60% went to ETFs based on MSCI indices. As the U. S. Dollar soared against other currencies in the quarter, currency hedges have seen $28,000,000,000 in net new assets, with nearly half of those assets going to MSCI linked ETFs. In just 3 months, global ETF assets linked to MSCI Currency Hedge Indices have increased by 94% compared to the Q4 of 2014, going from $16,000,000,000 to $31,000,000,000 largely due to positive flows into MSCI Currency hedge index linked ETF from Deutsche X Crackers, 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 Q1 also 3 ETF sponsors launched their 1st MSCI Index Linked Exchange Credit Fund and therefore continuing to expand the relationships that we have with various ETF managers. If we turn to slide 6, 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 this slide, of the total $137,000,000,000 of cash inflows since 2012, a net $32,000,000,000 or 23 percent of these inflows are from new funds that were launched in the last 2 years. This is a direct result of the investments that we have made in launching new index families, which I referred to before to the Q1 and in marketing to ETF managers around the world. In the bottom half of this slide, we are broken out for you the 3 primary buckets of what we call ABF revenue.
In addition to the fees that we earn on ETF AUM, we also earned fees on our clients' institutional passive investment products, which amounted to $11,000,000 in quarterly revenue. We also earned $2,000,000 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. It.
If we turn to slide 7, 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 2 by bringing together our extensive equity index and equity risk model research capabilities and combining them with our wealth of data of over 40 years of Varafactor data history. This unparalleled expertise is what differentiates us in our factor offering from our competitors. As a result, we have developed 1 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 the 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. And 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 AUN 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 and of the record 32,000,000,000 dollars of net new assets going into MSCI linked ETF in the Q1, over $4,000,000,000 of that or 13% flow into ETF tracking MSCI factor indices.
Next on Slide 8, 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 the 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.
And the run rate related to this product area has grown about 13% year over year. The steady growth of the India subscription product line has been complemented by a strong retention that we have achieved with a record 97% in the Q1 of 20 15 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 airline for us. Forward to slide 9, 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 $1,300,000 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 there shows organic subscription run rate of 22% in ESG and about 46% growth including the GMI acquisition.
So 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 Q4 earnings call, we are taking steps to reorganize and streamline the analytics product line under the leadership of Peter St. Gary, who has worked for the past 3 years to return the portfolio management analytics products to growth. And 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. So 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 we 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 and analytical content that sit at the center of our value proposition with an incomparable set of assets across indices and multi asset class analytics that and we have deep experience computing the risk of very large, very complex 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. And 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're talking about in factory investing.
In short, we believe we have the right capabilities. The market is very large and the competitive environment is stable. So there is no reason to tolerate lower levels of growth or profitability for this product line. We will keep updating you on the progress on this area and how we can return it to higher levels of performance. On slide 11, we show here a few for 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 speaks to the strength of our brand globally. There are also a validation that increased regulation is a driver of adoption of multi asset class risk offerings. And overall, we also have a pipeline in our business that is strong with several large deals, which slipped from the Q1 and have closed in the Q2. We hope to report that in the next call. With that, let me now pass it on to Bob.
Thank you. Thanks, Henry, and 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 twenty fifteen 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 Q4 2014. The higher than expected tax rate was driven by an increase in operating profits and higher tax jurisdictions, but we continue to guide to an expected 35% to 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 4th quarter reflects the impact of stock based employee compensation in the Q1. 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 significant portion of our expense base that is denominated in foreign currency. As a result, the net impact of foreign currency fluctuations on our earnings was not material in the quarter compared to the 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 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 $23,000,000 or 10% to $263,000,000 The growth was driven by an increase of $18,000,000 or 9% in subscription revenues and an increase of $5,000,000 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 $13,000,000 or 13%, driven by a strong growth in the equity index benchmark and ESG product related revenues. Analytics revenue grew $45,400,000 or 5 percent driven by a 7% or $4,900,000 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 $2,000,000 negative impact from currency fluctuations grew 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 Q2. 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 $5,000,000 increase in Asset Based C revenue to $46,000,000 was driven primarily by $62,000,000,000 increase in average AUM in ETFs linked to MSCI indices to $393,000,000,000 as well as higher revenue from futures and options trading in contracts linked to MSCI indices and revenues from institutional passes AUMs. In the Q1 2015, cash inflows to the ETF market were a total of $53,000,000,000 of which $32,000,000,000 or 60% flowed into ETFs linked to MSCI indices, reversing the trend we saw at the end of the Q4 2014 as flows then moved into the U. S. Of the $32,000,000,000 in inflows for the quarter, dollars 13,000,000,000 was related to assets linked to currency hedged indices with another $4,000,000,000 of inflows into factors. The reported average basis point B for ETF AUMs linked to MSCI indices 3.38 at the end of the Q1, down slightly from 3.39 reported at the end of the 4th quarter 2014, driven primarily by mix shift.
Now let's turn to Slide 14, where we provide the adjusted EBITDA expense trend. 1st quarter adjusted EBITDA expenses rose 8% to $155,000,000 as we continued to move more towards normalized levels of cost growth. The year over year increase was driven by 13 percent increase in compensation expense, partially attributable to a 10% increase in headcount, but also because compensation expense includes $2,900,000 of the total $3,400,000 non cash charge we took in the quarter to terminate a technology project in analytics. Employees in emerging market centers increased to 51 percent in the Q1 2015, up from 47% in the Q1 of 2014 and in line with 51% reported in the Q4 of 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 $9,000,000 growth shown on this chart, the dollars was carryover on the 2014 spend. While the Q1 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 physicians 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 previous announced range of $620,000,000 to $640,000,000 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 Adjusting for foreign currency fluctuations, subscription run rate grew 9% year over year.
In terms of subscription run rate growth, sales in the Q1 of 2015 amounted to a total of $29,500,000 compared to $30,400,000 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 19% decline in risk management analytics sales, partially offset by a 37% increase in portfolio management analytics sales. The Q1 in analytics of 2014 included very strong sales of investor force and risk manager products for the risk management analytics And several deals in the Q1 2015 rolled into the Q2, some of which have already closed.
Cancels amounted to a $12,000,000 for the quarter, a decrease of 17% from the prior year quarter, resulting in net new recurring sales of $18,000,000 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 $25,000,000 rolling 4 quarter negative impact on our subscription run rate. GMI acquired in August 2014 contributed $7,000,000 to our run rate build year over year. Now turning to ADF run rate.
The $29,000,000 increase was driven primarily by $77,000,000,000 period increase in ETF AUMs linked to MSCI indices on inflows of $75,000,000,000 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. And just to note, revenue recognition for trading volumes is on a 1 month lag. A total of $10,100,000 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 1,100,000 contracts. On March 16, aggregate volume in MSCI index based futures listed on ICE topped 395,000 contracts, a record trading day for MSCI linked contracts.
CDOE also recently launched options trading on our emerging markets and EFA indices on April 21. Turning to Slide 16, we provide our key balance sheet indicators. We ended the quarter with cash equivalents of $538,000,000 which includes cash held outside of the United States of $84,000,000 As a general policy, we prefer to maintain 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. Within our stated guidelines of maintaining leverage at 1.5 times to 2.5 times. We generated strong operating cash flows of $67,000,000 up from $25,000,000 in the prior year, which were lower due to timing of accounts receivable collections. We continue to expect that we will generate between $275,000,000 $325,000,000 in operating cash flows for 2015. We spent $6,300,000 on capital expenditures in the quarter compared to $10,100,000 in prior year.
The lower CapEx in the Q1 was due to timing. We are reaffirming our fiscal year 2015 capital 15 capital expense range of $55,000,000 to $65,000,000 Our Board approved the 2nd quarter dividend of $0.18 per share, which is payable on May 29. And lastly, as you know, we are in the market now with our current ASR and we are committed to returning cash 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 Q1, we continued to execute and we delivered solid financial performance. The benefits of our investments are taking hold.
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're taking the right steps to drive future growth and we look forward to updating you on our progress in the Q2. And lastly, we remain committed to returning excess capital to shareholders. With that, I'd like to now turn like to open the line for your questions.
Thank you. Our first question comes from the line of George Mihalos with Credit Suisse. Your line is open.
Hey, guys. 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 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?
Yes, George. I First of all, I think we have made tremendous progress in returning the equity analytics products to growth. If you see the growth in run rates there excluding the impact of foreign exchange fluctuations, we are in the 7% or so 6%, 7% growth category. And it continues to feel good, because we have launching a lot of new risk models that we're selling well as I mentioned. The Vara performance the Vara portfolio manager analytical application is complete and now really getting into strides for sales.
And obviously, the overhang the negative overhang that we have is the Aegis product line that is shrinking and obviously a large part of that shrinking is going to BPM and we're trying to encourage customers to move there. So that is a fairly good indicator of continued growth. All of that is a fairly good indicator of continued growth in the equity analytics line. And we expect that in the coming quarters and coming couple of years that that Equity Analytics growth rate and run rate will continue to increase. We have to see how far it goes, but we are pretty hopeful that it will continue to increase to the high single digits and maybe at some point get to the low teens, right?
So I think on the risk analytics product line, we are clearly lower in run rate growth there when you exclude foreign exchange fluctuations. I think we're about what 5% Bob or something like that. 5.5 percent or so growth in the risk analytics product line, excluding foreign exchange fluctuations. And we're hoping that given the refocusing of the business, the streamlining of the teams that we're going to have a similar progression to what we did with Equity Analytics. 1st, getting it to the high single digits and maybe eventually getting it into the 10%, 11 percent range.
But at this point, it's too early to tell when that will happen. But those are our expectations. And very importantly also, we're very focused on the cost structure of all of this. They're fairly profitable, but we like them to be even more profitable. So 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.
And then just a point of clarification. You sounded a little bit more encouraged about your sales. Some of them may have slipped from the Q1 into 2Q. Should we be assuming that on the RMA side, you are likely to post a sales number in 2Q higher than the $10,000,000 in Q1?
Hard to tell at this point. I will say that what the comment that we made was that we had a couple of larger deals that just slipped by a few days the end of the quarter and therefore they carry over into the Q2. We obviously have to work continue to work the pipeline in the Q2. And if everything closes in the way we would like it to be there, it'd be a good quarter. But if we may have again 2, 3 larger deals at the end of the second quarter that slip into the 3rd quarter and so on and so forth.
So I think importantly, the way to think about risk analytics right now is without the actions that we are taking, our sales are kind of trading in that range. And what we're trying to do by the actions that we want to take that we are taking is to try to break out of that range into a higher amount of sales. And we'll be able to update you more on where we are on that by the next call. But 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. But 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 a follow-up on the risk management analytics. Can 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 when customers aren't using Risk manager, are they going to competitors? Or are they not using any products?
Yes. So Tony, the large majority of our clients 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 does not exist or doesn't exist in the way they wanted it.
And therefore,
they sit away or things together internally in a suboptimal fashion. So now we want to continue to move forward the state of the art in multi asset class risk management and performance 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 take a whole those portfolios, those total portfolios of multi asset class portfolios. I think the going back to your first question, to the fact to the fact that over the last 2 years or so we have been really focused on upgrading the technology platform, including the data centers, making sure that our resilience was high, making sure we're complying with the increasing number of diversified financial companies that have asset management subsidiaries are really one thing to see that vendors like ourselves have airtight procedures in that. So we've been working on putting all of that in place.
And therefore with the limited investment plan on this product line, 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. So largely, but not totally, we're finding ourselves selling just an upgrade of what we have been selling a couple of years ago. And therefore, a meaningful part of the process here is to refocus the investment or the operating expenses if you want to 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 going to be good to grow. That's what we did obviously on the Equin Analytics product line. We tightened 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 upgraded we finished the upgrade on BPM and the completion of that and Bigo, you start selling a lot more. So it's not very complex. It's not very difficult. We just got to 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 Continental Europe, for example, are going through difficult times because of the economy and the investment markets there. And they may be less expansive in investing, but we have a lot of clients in Asia, a lot of clients Americas and in other parts of the world that are waiting for us to give them better products and enhanced capabilities.
Great. And 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 and also like very big increase? So just wanted to know any of your thoughts on the drivers behind the increase? Thanks.
Not comparable, Tony. This is Bob. We had significantly reduced inflows. We had positive inflows. But recall in the 4th significant portion of inflows flowed into the U.
S. You saw it in S and P and you saw in the Q1 a lot of them flowed out. Total flows into ETFs were $53,000,000,000 We captured $32,000,000,000 of it, which is 60%. So you can see some of the tone in there, which was interesting, continued inflows into factors, which is $4,000,000,000 But the interesting piece was we saw currency hedged ETFs become popular in the Q1 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. So not comparable back to your first question, but The methodology is comparable. The methodology.
Yes. The methodology is comparable. It's just that the where the money flows is different, right, Paul? Correct. Yes.
So the I think in a nutshell, when we're strongest around the world, developed markets, emerging markets and the like. So when you see major flows of assets going to a lot of markets around the world developed emerging and the like, we benefit significantly. When you see a lot of flows coming into the U. S, we do have a lot of U. S.
Products. So we see inflows in those U. S. Products. But relative to some of our own competitors and relative to the strength that we have around the world, you don't see as large amount of inflows.
And the second part is that we're benefiting from factory indices, obviously a lot of money going into there. And as Bob indicated, we're benefiting from the strong dollar and people wanting investment products that are hedged against the dollar, right? So that's what's happening, right? Now look, this can reverse, right? If you see a huge amount of money flowing back to the U.
S. At some point, We'll continue to get a major and meaningful share of the flows because this is a category that is growing, but it may not be 60%, right? 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, just curious to get some more details on 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 bringing together our product lines in the risk management analytics area and that had been going on internally. So the accounting convention to that is capitalizing internally software internally developed software cost. $2,900,000 of that was compensation, dollars 500,000 was non compensation. As Henry pointed out, we reached a point where, yes, we could still continue to achieve sales.
There's probably better 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. So again, it was an accounting charge, previously deferred costs that were related to an analytics technical project.
But 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.
Yes. No, let me try that. The challenge that we're facing as a 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? So if you think about we have the risk manager platform that came with the risk metrics acquisition and that supports a large number of use cases and significant amount of run rate. And then you have the BaraOne technology platform that also has a lot of risk multi asset class risk portfolio management capabilities and some equity portfolio management capabilities.
And you have Bara Portfolio Manager platform, which has a lot of equity portfolio management capabilities and is built on top of the BaraOne platform. So 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 management function into 1 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 at the think about it at the operational level and then provide a much more integrated approach to the client. So 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. So 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.
And given that 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. So deferred capitalizations are not occurring because we haven't reached that point. So as Henry pointed out, we're still going through the review process.
But the goal is still the same. And 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 and 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 an even a much better integrated service to our client that unites all these processes in an efficient and fast way. And I think this new thing that we're looking at that is still in obviously developmental stage is very promising. But again, we'll have to report more on that in the future, right?
So there is 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. And so we're in that path right now. Okay.
Thanks for the detail. And then just
one more, Bob, on the guidance, which I recognize on the adjusted imply, I guess, in dollars on a constant currency basis?
There's really the growth would be as I related to if you take the Q1 and analyze it is more inflationary base related to compensation. We had a little bit higher turnover in the Q1. We'll be backfilling some of that. And we've got some other charges out there that maybe that we see in the future coming through. But I would hesitate to call it growth other than normal business as usual, Chris.
So I mean, as I looked at Bob, I mean, at the midpoint of $630,000,000 it was I believe somewhere in the low $40,000,000 range is what the year over year increase implies, but FX is maybe helping that number by, let's call it $15,000,000 to $20,000,000 And then you also have the $15,000,000 $15,000,000 to $20,000,000 that you called out last quarter of investment spend. So kind of fair ex that investment spend and ex currency or in that low $40,000,000 sort of ballpark for the at the midpoint constant currency?
I think the message is that constant currency, we're in the mid we're looking now at the lower end of $620,000,000 to $640,000,000 probably benchmark somewhere at the lower half on a constant currency. Obviously, FX seems to be volatile. Look what's happened in this Q1. In the Q2, Sterling has climbed back up, euros climbed back up. That's why I said the impact has been on FX given our exposure.
Yes, it's been there, but that could be a reversal as we proceed through the year, which we focus on the constant currency. And again, a piece of that growth is really, I call it growth, but it's carryover that I mentioned in the Q1. That will 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 KeyBanc with KeyBanc
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Hey, good morning guys. Good morning. So just thinking about it, it looks like you guys are getting more comfortable your margin growth. Just curious, I mean, how quickly do you think you can get margins back up into kind of the mid-forty ranges? And how dependent is that on the improvements from the analytics business?
When we look at our forecasting and as we take a look at it, we feel I mean, our run rate is giving you a very good indication, top line and what's happening out there. And we're managing our expenses to what we told you would be a midpoint. And as Henry pointed out, pulling forward the timing of when our margin expansion would occur year over year to the Q1. So we'll continue to see that steadily increase, and we'll measure our costs forward as we move forward progressing and expanding the margin over the course of the year.
But I guess in terms of thinking about your business lines, is I guess is the analytics business enough of a headwind to slow that down? Or could you just actually grow the margin meaningfully enough through the performance line?
No, I think, look, we look at this 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, but then again, that's a significant piece of our revenue.
Very promising top line growth on both ESG. And 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 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. And as Henry pointed out, the constant currency run rate was about 5.5%. So we're not all dependent on RMA. It does have a piece. If it does taper off, it does have some headwinds, but that's focusing in on the run rate on there.
So we still look at we haven't as of the end of the Q1, we feel confident of continued margin expansion over the course of the year based on our analysis.
Yes. I would also add that everything that I said about the better leverage and better profitability of analytics including RMA is not factored in all the communication that we have given you about margin expansion in the course of this year, right? So if that were to happen faster, it will be better. But obviously, it's hard to tell at this point, clearly how fast we can turn growth around to a faster level and higher profitability. So that would be if we do it and happens or this year or next year that will be on top of the of what we're thinking in terms of margin expansion.
Yes. Henry's point is we're proactively managing our costs. We're constantly looking for efficiencies. We've demonstrated that in the Q1. We will continue to demonstrate that and make trade offs going forward for the rest of the year with an eye on profitability.
Great. And then just on the CapEx side, I know you said there was some timing and that was a little bit lower, clearly lower than the sort of run rate would imply for the full year based on guidance. But just from a cash flow perspective, is there any sort of significant CapEx charge you're expecting in the coming quarters? Should we just think about it as sort of a $16,000,000 per quarter run rate through the end of the year?
It's kind of chunky. I mean, Joel, I would look at it because as Henry talked to, you got timing related to certain projects that go on. So hesitant to make it a straight line. We're trying to give you guidance on where we come in for the full year, 55%, 65%. For the full year, obviously, it was a little bit lower in, so anticipated 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.
So 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? Or is there something in your methodology and your mechanisms that differentiates you from the other index providers?
Well, I mean, through the equity analytics product line, we have been the leader in factor investing since 1975. So when you think about the content that goes into the analytics product, I remember there is a lot of content that they get enabled by an application like VPN. So 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. So the entire DNA of our Equity Analytics organization is about understanding market factors that are driving risk and return in portfolios.
So when you combine that expertise with the significant expertise that we have in building equity indices, you end up with Sourcing 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 backtesting those portfolios and so on and so forth.
Okay, great. And then for my follow-up, I know it's only been a couple of months, but can you characterize the contribution that you've gotten from your 3 new board members?
Well, we've had by now 2 board meetings with them and there was a fairly extensive onboarding process. Wendy Lane, which is one of our new directors is sitting here in the room with us. So welcome Wendy to the to our first quarterly call here. And it has been a significant amount of contribution because they went through a rigorous onboarding process. They are looking at the business with fresh eyes and that's always good including people like me looking at it for a long time.
So it's good to see people looking at it from a fresh perspective. And they are very, very good directors importantly, because we are in the next few months, we have our usual annual strategy discussion with the Board in the summer and 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.
Our next question comes from the line of Keith Housum with Northcoast Research. Your line is open.
Thanks, guys. I appreciate opportunity to ask the question. Looking at your employee count sequentially, it actually went down I think by 37 employees. Was this an intentional decrease in the headcount? Or is this a factor of hiring some signings that go on in traditional day to day work?
Well, remember investments for us is largely, largely people, right? So when we said we are we invested as much as we wanted to by now and now it's more of a consolidation of that investment plan and squeeze a lot of return out of that investment plan and therefore come back to more normalized levels of investment in the company and an expense growth in the company, you're likely to see that tapering of the growth of headcount. So since we have expanded quite a lot in the last 18 months, there was a meaningful deceleration in growth in the Q1. Not clear that that is what's going to continue for the next few quarters because it was one of those things in which we felt we had enough and we took a pause. But that's the rationale for it.
But I will not read too much into it on the quarter to quarter change at this point. And we're not really managing to a headcount. We're managing to an expense base, right?
1st quarter has always got a higher turnover.
Yes.
Okay. Then for my follow-up if I may. Yes, 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 Mazzella discipline for the rest of the year?
The only item I mean there is obviously is going to be seasonality to some of it. I mean you can look at the non cash charge of 500,000 dollars that I referred to in my comments. You recall, $3,400,000 noncash, dollars 2,900,000 if it was related to compensation. The other half was reversed in non compensation. There's going to be some other seasonal charges in there.
Obviously, CapEx was low. You can correlate some of the non compensation cost to CapEx as we get equipment up and running and get licenses. So there will be some correlation there. But we're really effectively managing the costs on a discretionary basis as tight as we can as well as we can with good corporate governance.
Got you. 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.