Operator:

Good day, ladies and gentlemen. And welcome to the MSCI Second Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded [Operator Instructions]. I would like to now turn the call over to Jeremy Ulan, Head of Investors Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the second quarter, MSCI achieved strong results, thanks to our all-weather franchise, our blue-chip client base, our wide range of mission critical solutions and our intense focus on execution. We delivered adjusted earnings per share growth of 12%, organic revenue growth of 10% with asset based fee revenue growth of 18%, driven by record AUM balances in both ETFs and nonlisted products linked to MSCI indices, free cash flow growth of 21%. In our operating metrics, we delivered subscription run rate growth of 14%, including organic growth of 9%, our highest second quarter on record for new recurring subscription sales of $83 million, up 22% year-over-year and a retention rate of almost 95% across MSCI. Through yesterday, we repurchased $290 million worth of MSCI shares at an average price of $484 per share. We have now bought back more than 50 million MSCI shares since 2012 at an average price of $122 per share for a total consideration of roughly $6.1 billion. Our combined repurchases represent almost 40% of the total outstanding shares of MSCI. These actions are consistent with our own change and relentless focus on capital allocation. Year in and year out, we are obsessively focused on creating value for our shareholders. Value creation starts with strategy, and our strategy has not changed. We are determined to capture the long term secular trend disrupting the investment industry, such as rising demand for high quality data driven models and insights, increase transparency across asset classes and a more outcome oriented investment solutions. MSCI is commercializing these trends by providing indexed and rules based solutions, establishing standards in private assets, delivering comprehensive climate and sustainability tools, transforming risk and portfolio management and enabling personalized wealth management at scale. The evidence of our progress can be seen not only in MSCI's financial results but also in our high levels of client engagement. Over the past few months, Baer and I have met with clients across the United States, Europe and Asia. Everywhere we traveled, our clients and prospects were eager to talk about new areas of collaboration with MSCI. Our recent announcements and product launches highlight our strategy in action. For example, our strategic partnership with Moody's meaningfully expand the reach of our sustainability content among banks, insurance companies and corporates. It would also help us broaden our private company ESG coverage and expand our capabilities within private credit. Likewise, our recently launched MSCI private capital closed end fund indices will complement our real asset fund and property indices to deliver a wider view of private markets. This can also help us achieve our goal of becoming the global leader in private market indices. Meanwhile, MSCI AI Portfolio Insights combines generative artificial intelligence with advanced analytical tools and modeling capabilities to make it easier for clients to pinpoint the most important factors shaping investment risk and performance. We see tremendous potential across our newer client segments, such as wealth managers, general partners, insurance companies, corporates and corporate advisers. Wealth managers, in particular, have been excited to learn about our new technology platform acquired from Fabric earlier this year, which has dramatically increased our ability to support personalization at scale. This enabled us to close a large deal for these solutions during the second quarter. Meanwhile, our wealth subscription run rate across product lines grew by 12%, reaching $107 million. We had a strong quarter with asset owners and hedge funds as well, posting organic subscription run rate growth of 12% and 15%, respectively. All of this illustrates a key part of our strategy. We want to expand our footprint among large and rapidly growing client segment while strengthening our position among our more mature and traditional client segments, such as asset managers. To maximize that strategy, MSCI will continue developing mission critical solutions powered by advanced models, data and technology, including generative AI. All of this enables us to drive compounding growth and profitability for shareholders. And with that, let me turn the call over to Baer. Baer?

Andy Wiechmann:

Thanks, Baer, and hi, everyone. In the second quarter, we delivered 10% organic revenue growth, 14% adjusted EBITDA growth and 21% free cash flow growth. We are encouraged by the results, which reflect our unrelenting dedication to execution even in the face of market headwinds, which may persist in the short term. We are encouraged by the rebound in retention rates from the first quarter, which we did expect and we have not seen any deterioration in conditions. Although, we expect cancels to remain elevated in Q3 compared to last year and we expect somewhat longer sales cycles to persist in the short term. I also want to note that Q3 tends to be a seasonally softer quarter for us on the sales front. Within index, we grew our subscription run rate among asset managers and asset owners at 8% and 12% respectively. These segments collectively represent 68% of our index subscription run rate. Meanwhile, our index subscription run rate with wealth managers and hedge funds grew 11% and 24% respectively. Across index subscription modules, we saw another strong quarter from custom and special packages, growing 17%. ABF revenues were up 18% year-over-year, benefiting from $28 billion of cash inflows and about $21 billion of market appreciation and ETFs linked to MSCI equity indexes during the second quarter. ETFs linked to our indexes continue to attract flows in non-U.S. exposures, particularly in developed markets outside the U.S. and in emerging markets, as we have seen a pickup in flows into ETFs with exposures outside the U.S. Fixed income ETFs AUM linked to MSCI and Bloomberg partnership indexes is now at $64 billion with year-to-date inflows of over $6 billion. Given strong recent equity market performance, non-ETF revenue in this quarter included the impact of true-ups related to higher reported client AUM and newly reported product launches. We reached a significant milestone in the quarter with AUM and ETFs and non-ETF passive products tracking MSCI indexes now surpassing $5 trillion. In Analytics, organic subscription run rate growth was 7% and revenue growth was 11%. The difference is largely attributable, once again, to the impact of recent client implementations, which continued from the last couple of quarters. As we've noted in the past, Analytics revenue growth can be lumpy because of items such as these implementations and we expect revenue growth rates to more closely align with run rate growth in Q3. In our ESG and climate reportable segment, organic run rate growth was 13%, which excludes the impact of FX and about $5 million of run rate from Trove. Q2 new recurring subscription sales for the segment included a significant contribution from the Moody's partnership. Regionally, the subscription run rate growth for the segment was 17% within Europe, 20% in Asia and 9% in the Americas. In Private Capital Solutions, year-over-year run rate growth was 17% and we continue to gain traction in key markets. New recurring sales in Europe reached a record and we also saw solid traction in sales with our GP client base. The Private Capital Solutions retention rate was approximately 93% and we recorded almost $27 million of revenue in the quarter. In Real Assets, run rate growth was roughly 3% with a retention rate slightly above 90%. We continue to have solid momentum in our Index Intel and our income and climate insights offerings, while we continue to see industry pressure impacting our transaction data offerings, including our RCA and property intel products, which we expect to continue to face headwinds in the near term. Our rigorous approach to capital allocation remains unchanged. Through yesterday, we have repurchased over $290 million or roughly 600,000 shares since late April. Our cash balance remains over $450 million, including readily available cash in the U.S. of more than $200 million. Turning to our 2024 guidance. We've increased our guidance for depreciation and amortization expense and operating expenses by $5 million, reflecting in part the impact of acquired intangible amortization expense from the Foxberry acquisition, which closed in April. I would note that our guidance assumes that ETF’s AUM levels increased slightly from June 30th levels through the end of the year. To the extent AUM levels track higher than this, we would expect to be towards the higher end of our expense guidance ranges. As of right now, we expect the quarterly effective tax rate in both Q3 and Q4 to be in the range of 20% to 22% before any additional discrete items. Before we open it up for questions, I want to underscore that we see tremendous opportunities with compelling secular trends. We see strong client engagement and tangible opportunities to drive growth. We see near term headwinds and client pressures but we continue to execute and drive leadership in these large addressable markets that will drive long term growth for us. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions.

Alex Kramm:

Just wanted to maybe unpack the strong sales growth in the quarter a little bit more. I mean last quarter, obviously, fairly soft and I think the tone even look forward still fairly somber. So maybe you could just help us what happens across the different segments. I mean did you gain more pricing, was it just timing that a lot of these maybe longer sales cycle deals closed or was the sales force really engaged after what happened last quarter? Just trying to understand the really strong results here after what's been a challenging environment.

Operator:

The next question comes from the line of Manav Patnaik from Barclays.

Baer Pettit:

So look, simply put, the deal is -- so first of all, maybe on a higher level, we've stated repeatedly here in the call and in various meetings with many of you that we're constantly on the lookout for partnerships. And I think this is a critical thing, which we hope will have a positive impact across our business in a variety of ways. So we started exploring with Moody's on a variety of fronts. And in essence, what we've come up with here is Moody's felt that we're being -- that us being a leader in ESG that they could use us significantly across a variety of their products, their services to their clients. And in turn, Moody's has an extraordinary private company database with a product they now call Orbis. And that's an area where we at MSCI have been really focused on trying to get better data and information for a variety of use cases, but notably for -- in ESG and Climate where that sort of company information can be very hard to get hold of. So that's kind of the two part -- the two sides, if you like, of the deal. We're very pleased with it mostly because -- well, overall, we think it's a great deal for both parties. But specifically, we were able to put this together very quickly in just a number of months with a true spirit of partnership with Moody's. So we see a lot of upside from this in the future.

Operator:

The next question comes from the line of Toni Kaplan from Morgan Stanley.

Henry Fernandez:

There are three big buckets in the global investment industry. There are the barbells on both sides. One is rules based systematic index investing, which continues to grow unabated. And on the other hand is very active, concentrated management, which obviously, the ultimate expression of that is private asset class management, private equity, private credit, private real estate, et cetera. But it does include concentrated portfolios, very thematic portfolios and things like that. And in the middle is the largest segment, the more traditional active management diversified widely -- a large number of shares, active management. That segment will continue to grow but at a slower pace than the two other ones and it will go through ups and downs. It will go through challenges and all of that. And we're going through a challenge with that segment right now. And we clearly have been relying on that segment for about 50-plus percent of our subscription revenues but rapidly increasing our penetration on index -- systematic rules based index management, which includes quantitative investing and index investing and all that and on the other hand, very active management, including our foray into private assets. So as we look into the future, I don't see us slowing down in our growth rate because we will definitely penetrate the traditional active management more and more, they're going to rely on us more and more in what they do even though it's an industry that is going through some difficulties right now cyclically. And we will increase our growth significantly in the other two sides, which is systematic rules based investing and private asset class investing.

Ashish Sabadra:

Andy, I just wanted to drill down further on the Index front and particularly, look, the slowdown in subscription growth, that is understood. But as we think about marching back into the low double digit growth over the midterm, I was wondering if you could help us parse how do you think about the market cap versus custom and direct indexing versus factor and thematic indices and how do you think about those growth profile? And thanks for flagging some of those wins for Fabric as well as the AUM for direct indexing. How should we think about the direct indexing? Right now, these direct custom indices are only 15% of Index subscription revenue. But how do we think about that over the next three to five years?

Operator:

The next question comes from the line of Alexander Hess from JPMorgan.

Henry Fernandez:

So thanks for that question, because we're very excited about what we're doing in private assets, in private capital and real assets as we look at the differences between the two of them. So as you know, we announced yesterday the launch of 130 private capital indices, private equity, private debt, private credit, private infrastructure, et cetera. And we already have about 80 or so real property or real asset indices, both at the fund level and at the asset level. So we're very excited about that launch. The technical challenges and opportunities first [come] with the data, access to the data. So MSCI now has access to about $15 trillion worth of underlying data across all private assets. And that is the highest quality data that exists in the plane, because it comes directly from the GP at the request of the LP. So we have that enormous amount of data. So the private capital indices that we announced yesterday are built on about $11 trillion of that $15 trillion and the other $3 trillion, $4 trillion, say, is what the other real asset indices are built upon. So it starts with that. Then secondly is the -- your understanding of the investment process and the methodologies that you need to do to create the indices. And we've written the book about index construction and index methodologies throughout the last 50 or so years. So there is no question that we're an expert on that. And the third technical challenge is, do you have the distribution associated with that in terms of the asset owners and the asset managers, the allocators and the managers of assets. And we have 1,200 people at MSCI calling on pretty much every one of those clients around the world. So that is important. I think a key part of this thing is obviously as well independent, people want to see their indices and other tools come from an independent source. And obviously, MSCI has excelled in that in terms of quality and in terms of independence and in terms of a robust and transparent methodology, et cetera. So we feel pretty confident that we will be the leader in all aspects of private assets from the data to the tools. And the tools include the benchmark indices, the performance attribution, the risk models, liquidity, evaluated prices, portfolio construction, asset allocation, et cetera, et cetera. And that's what we're setting out to do with the completion of the Burgiss acquisition on top of the RCA acquisition and on top of our position in Real Assets before that, we feel pretty good about where we are.

Owen Lau:

So the broader market was quite strong in the first half and probably better than the initial market assumption. And I'm just wondering what else you would like to see so that you can [raise] your full year free cash flow guidance?

Operator:

The next question comes from the line of Heather Balsky from Bank of America.

Andy Wiechmann:

So Heather, I would say we are not focused on and we don't target a specific margin expansion or margin level. What we are continually doing is balancing investing for the long term while driving attractive profitability and free cash flow growth. And so that is the calibration that we are continually focused on and driving. I would highlight the comments that I made in the prepared remarks here where as you alluded to, AUM levels have been running higher than what underlied our guidance in previous quarters. And we've assumed for the current guidance that AUM levels increased slightly from the 6/30 balances. And if AUMs track above that, we will likely be at the high end of our expense guidance ranges. We would use the higher growth to invest in key areas in the business as we have in the past and those key areas tend to cut across the big growth frontiers that we're talking about. And so from a solutions standpoint, very focused on the custom index front and that's a broad topic involving everything from technology to researchers to go to market. We do have investments in the climate front. There are a number of opportunities across private assets and private capital that we are investing in. And so we are laser focused on continuing to drive these long term growth drivers while at the same time continuing to squeeze to run the business expenses and identify efficiencies in the business. But it's a [constant] calibration for us and we are calibrating based on not only AUM levels but overall business performance, outlook and financial dynamics more generally and we'll keep you posted on that.

Faiza Alwy:

So I wanted to follow up on the environment that you're seeing out there, specifically in ESG and Climate, because it sounds like there was a pretty significant increase in new recurring subscription sales growth. And I know you alluded to the Moody's partnership that may have driven a chunk of that growth. But then I also heard you talk about sort of new products around CSRD. So give us a bit more around what you're expecting for ESG and if the underlying environment is any different or has improved.

Operator:

The next question comes from the line of George Tong from Goldman Sachs.

Andy Wiechmann:

So I would say -- and you've noticed this in the results of the last several quarters, we've seen some good momentum. So we're seeing strong client engagement across many different parts of our analytical tools. There's probably some benefit from the environment driving an intense focus on investment risk and credit risk and liquidity risk and we are a leader on all fronts, and so that definitely has been helpful to us in certain areas. The performance is also driven in part by the enhancements and innovations that we've continued to deliver. So we've been seeing traction with our Insights offering, which delivers our risk analytics through a modern data architecture with enhanced visualization. And as you know, we've now integrated AI capabilities into that and that's an area where we do see strong client engagement, and we've seen some traction in enabling new sales for us. We've seen solid sales within our fixed income offering and see opportunities -- continue to see opportunities there. And we continue to see strong momentum with our equity analytics business or equity risk models, which is something we've highlighted in recent quarters. So a lot of the same drivers we've talked about in the past that has been encouraging. We continue to see opportunities. Although, I will say that it's likely to be lumpy, and some of the pressures that have impacted the broader company are likely to impact Analytics as well.

Scott Wurtzel:

I wanted to stay on the Analytics segment and maybe talk about the margin that you were seeing there. Obviously, it's pretty notable expansion, both sequentially and on a year-over-year basis. So just wondering if you can maybe walk us through and maybe drill down into the drivers of that notable margin expansion in Analytics?

Operator:

Next question comes from the line of Craig Huber from Huber Research Partners.

Baer Pettit:

So look, both of those areas are really critical and we're engaging on both fronts quite dramatically. So first of all, in terms -- and I would say that within the efficiency, the cost efficiency, there's also even what you could call like a quality efficiency story, notably in our whole data environment. So we're doing tremendous amounts of work across the board in data, data calculations, production, extraction, whether that’d be in private markets, in ESG and Climate across the board, notably in areas that can be difficult to find hard data in such as controversies. So we're moving ahead in all those areas. And we have been -- we've had a really special focus on this, both internally and with certain members of our Board of Directors who happily have some expertise in this area. So the efficiency area is one where we're starting to see some pretty attractive numbers. As Andy mentioned, this is a continuous effort. And as we typically go into the end of the year here and start setting budgets for next year, we're starting to see that AI efficiencies o probably for the first year, next year will be a nontrivial part of our budgeting exercise and the efficiencies we can make. In terms of new product development, this is also very much across the board. We clearly have two examples which we brought out today, which are sort of live, if you like, which is the work on GeoSpatial data where really we wouldn't have been able to do that without the use of AI and the recent launch as part of our future of risk. By the way, you may want to just Google future of risk MSCI, there's a very interesting paper on our Web site, which goes into the whole use of AI in the future of risk and you can download it for free. So in Analytics, in ESG and Climate and pretty much in private market. So there's no part of the business where we're not using AI. And I think both in terms of a new product development and an efficiency story, we hope to be able to give you -- increasing the specific information in the quarters ahead and going into next year.

Russell Quelch:

Congratulations on a strong Q2 result. I wanted to focus on private asset benchmarks, if I can. I wondered if you could size the current addressable market you see there and the rate at which you think that market is growing. And also if you could talk to the competitive dynamics, is this mainly white space for you guys or is there others that you'll be looking to displace as you grow? And finally, do you have all the data assets you need to grow now or are you looking further to sort of inorganic growth opportunities, particularly around data in this area?

Operator:

The next question comes from the line of Gregory Simpson from BNP Paribas.

Andy Wiechmann:

So I would say across the company, the contribution of price increases was slightly smaller than last year, so very consistent with what we said last quarter. We have been slightly moderating our price increases in many places, given the pricing and economic environment, which is very much in line with what we said last quarter. I'd say importantly and I want to underscore this, we are focused on aligning price increase with the value that we are delivering. And so we do factor in the overall pricing environment and client health but we also are focused on ensuring that we're capturing the value for the enhancements that we make to our solutions and our service, and balancing that as well with the long term relationship with our clients. So most of our growth is going to come from existing clients. And so we are very focused on being a strong long term partner to our clients. And that means adding value, that means selling more to them, providing enhanced services to them and that will translate through to enhanced price increases but also translates through to additional services that we can deliver to them. And so we're continually balancing that value with price increases.

Alex Kramm:

Just a quick follow-up on the sales environment as I asked about earlier. When you think about the second half, and I know it's maybe a little bit too specific. But if you compare to last year's, maybe sales in dollars, are you still comfortable or are you comfortable that you can do more sales this year in the second half or anything specific to 3Q or 4Q?

Operator:

And that does conclude the question-and-answer session. I would like to turn the floor back over to Henry Fernandez, Chairman and CEO, for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good day, ladies and gentlemen and welcome to the MSCI First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investors Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Good day, everyone and thank you for joining us. In the first quarter, MSCI delivered solid financial results that demonstrate the resilience of our business and our ability to maintain profitable growth supported by durable secular trends. Our operating metrics included some key product and segment milestones. But new recurring sales were flat from last year’s levels and reflect the lagging effect of market pressures on client budgets and cancels were meaningfully elevated in some concentrated areas. On the financial side, MSCI achieved organic revenue growth of 10%, adjusted earnings per share growth of 12%, and free cash flow growth of 14%. Meanwhile, our ABF revenue grew by 13%, powered by record AUM balances in both ETFs and non-listed products linked to MSCI indices. We consider AUM levels in MSCI index-linked products as a leading indicator of improving client conditions. Operationally, we delivered our highest Q1 recurring sales in analytics in a decade at $14 million, our best ever Q1 of recurring sales among hedge funds at nearly $11 million and another quarter of double-digit subscription run-rate growth of 11% among asset owners, driven by index and analytics. Non-recurring sales of $18 million were up 16%. At the same time, our first quarter results show the lingering impact of market volatility, changes in interest rate expectations and pressures on investment and financial firms, especially active equity managers. Notably, MSCI witnessed elevated cancels which reflected a concentration of unusual client events. Roughly $7 million worth of cancels came from a single client event, a historic merger of two major global banks in Europe that affected us across index, ESG and analytics. While some client pressures may continue, we do not expect this high level of cancels to continue. In fact, we remain greatly encouraged by our high levels of engagement across all client segments and all geographies. Despite the tough Q1 operating environment for us, we delivered double-digit organic subscription run-rate growth among asset owners, hedge funds, wealth managers and corporates. Among asset managers, redemption, outflow and fee pressures continue to weigh on some managers, but we were able to deliver 7% organic subscription run-rate growth with that segment. In addition, we achieved 39% climate run-rate growth across our product lines, driven by APAC and EMEA regions. Likewise, APAC and EMEA helped stabilize our ESG run-rate growth at 12%, amid continued headwinds in the Americas. Meanwhile, amid a strong U.S. dollar, the benefits of our non-dollar expenses helped offset FX-related revenue headwinds. MSCI’s all-weather franchise supports our financial resilience. Our diverse mix of clients, products and geographies helped stabilize our performance in difficult environments as we experienced in the first quarter. Looking ahead to the extent equity markets and high AUM balances and liquidity levels remain supportive that should mitigate certain pressures that have weighed on client spending on MSCI products. We remain keenly focused on capitalizing on the biggest secular trends reshaping our industry such as portfolio customization and indexation, the growth of an increasing allocations to private assets, and the global sustainability revolution. Just last week, we closed our acquisition of the London-based index provider Foxberry. This will give us a new technology platform to accelerate custom index production while providing simulation and back testing capabilities for the creation of indices for institutional investors and intermediaries. Turning to our other recent acquisitions, combining the Fabric platform with MSCI factor risk models, ESG and climate data and indices, has dramatically enhanced our capabilities and solutions for the wealth segment. Finally, the MSCI carbon markets team, formerly Trove Research has expanded our climate solutions and deepened our engagement with existing and prospective clients beyond institutional investors, such as corporates, trading desks and banks. Considering the lagging effect of market volatility that our clients and MSCI are faced, we expect our all-weather franchise to continue to withstand external challenges such as the client events we saw in Q1. This makes us confident that MSCI can maintain high levels of revenue growth and profitability in 2024 and beyond. And with that, let me turn the call over to Baer. Baer?

Andy Wiechmann:

Thanks, Baer, and hi, everyone. In the first quarter, we delivered double-digit organic revenue growth, a 11% adjusted EBITDA growth and 12% adjusted EPS growth. We delivered 10% organic revenue growth as well as record asset-based fee revenue driven by record AUM balances in ETF and non-ETF products linked to MSCI indexes. The solid financial performance highlights the resilience of our business model, even in the face of headwinds reflected in our operating metrics. As we have mentioned previously, we are seeing the impacts of a slow-moving business cycle as the prolonged period of muted flows into active equity strategies have resulted in a lengthening of sales cycles. And in this quarter, a concentration of client events on top of what is typically a seasonally softer quarter for us. To provide a bit more color, if we compare our cancels to the first quarter of 2023, the two product segments with the biggest increases were index and ESG and climate. Within index, nearly the entirety of the increase or roughly $7 million of the increase related to a higher contribution from corporate events. From a client segment index, $5.2 million of the year-over-year increase in cancels came within the broker-dealer and hedge fund client segments, including roughly $4 million from the previously mentioned large global bank merger. Similarly, within ESG and climate, nearly $4 million or 80% of the increase in cancels came from a higher level of corporate events, including $2.5 million from the large global bank merger event. The large majority of cancels related to this global bank merger occurred in Q1, although there could be some smaller items that come through in future quarters as the integration is completed. Across all product segments, the retention rate with asset owners and asset managers was a 95% and 97%, respectively. While we do expect some elevated levels of client events to continue in the near-term, we do not expect to see cancels continue at this level in the coming quarters, and we expect retention rates to rebound through the year. Additionally, we have a solid pipeline of new sales opportunities. In Index, we had 8% subscription run rate growth in our market cap weighted modules and 19% growth in custom indexes and special packages. As a reminder, in Q2 of last year, we had a large non-recurring revenue item related to unlicensed usage of our indexes, which drove an unusually large level of non-recurring revenue. ABF revenues were up 13% year-over-year, benefiting from about $21 billion of cash inflows and about $93 billion of market appreciation so far in 2024 with an ETFs linked to MSCI equity indexes. Most of the MSCI-linked ETF flows were in developed markets outside the U.S. and emerging markets products, which together were over $22 billion. In Analytics, organic subscription run rate growth was 7%, which reflects the benefits from the investments we’ve made in the innovations such as our next-gen models and our Insights offering. These have helped us to drive strong sales and enterprise risk and multi-asset class models across client segments. We also had several client wins in fixed income analytics. Analytics revenue this quarter included a large contribution from catch-up revenue items, much of which related to large client implementations. In our ESG and Climate reportable segment, organic run rate growth was 13%, which excludes about $4.8 million of run rate from Trove and the impact of FX and run rate growth for the reportable ESG and Climate segment was nearly 18% within Europe and close to 22% in Asia, while the Americas growth was 9%. In real assets, run rate growth was about 4% with subdued net new subscription sales continuing to reflect lower transaction activity and other commercial real estate pressures. We continue to be pleased with our progress on the integration of Burgiss, which, as a reminder, is referred to as the Private Capital Solutions operating segment within our all other private assets reportable segment. Retention was strong at nearly 96% and contributed over $24 million of revenue for the quarter. We continue to have a vigilant focus on disciplined capital allocation and our cash balance at the end of March was over $500 million, including readily available cash in the U.S. of over $200 million. Last week, we closed on the acquisition of Foxberry for approximately $22 million of upfront consideration. The transaction also has the potential for additional performance-related payments tied to the achievement of key milestones. Our 2024 guidance across all categories remains unchanged and assumes that AUM declines slightly in Q2 and rebounds gradually in the second half of the year. I would note that our first quarter effective tax rate of 13.5% benefited from favorable discrete items and higher excess tax benefits recognized on stock-based comp vested in the period. For the remainder of the year, we expect the quarterly effective tax rate of 21% to 22% each quarter before any discrete items. Overall, our client centricity and multiyear investments position us well to drive growth throughout 2024, and we look forward to keeping you posted on our progress. With that, operator, please open the line for questions.

Toni Kaplan:

Sure. You bet. I wanted to talk about the closures. Thank you for giving the segment breakout for the large client event. Just it sounds to me like that is now in the numbers, but I wanted to just confirm that there isn’t going to be more. And just more in general around the non-UBS event, like it sounded like maybe there were more closures of asset managers that you saw in the quarter. So do you expect that to improve throughout the year? Thanks.

Operator:

Your next question comes from the line of Alex Kramm with UBS.

Andy Wiechmann:

Sure. Yes. And so as we’ve mentioned before, Alex, budgets were set for this year last year when it was a tough environment. And so we are seeing the impacts of tighter budgets on sales cycles, buying decisions and the overall selling environment on top of what is typically a seasonally soft quarter for us in Q1. As we’ve alluded to, we are seeing strong engagement among asset managers, and we are focused on helping them where we can, which means selling more to them. And so we continue to view them as a key opportunity for us in a key area where we see attractive growth as they reposition their business models for the future, and you can see that in the elevated growth in areas like our custom and special packages, and so we continue to have the steady growth of 8% with asset managers. And when you look at across the module types, we’ve got the outsized growth in some of these key areas that asset managers are moving towards. So we would expect, as you alluded to, sustained momentum in equity markets to be a positive factor and be something that continues to be constructive to buying behavior. But this has been a slow moving cycle, and I think it will take some time to work through. But I would also highlight that we see large and growing demand across other segments. And we see that with new solutions and existing solutions, and we hope that will continue to build as well.

Manav Patnaik:

Thank you. Good morning. I guess my question is broadly on visibility. So maybe just a two-parter. First, all these elevated cancellations that occurred in the first quarter, when, I guess, did you guys know that was going to happen. Like how much in advance do they typically give you notice? And then similarly, like looking ahead, you talked about a lot of client engagement, selling them new business, but then you also talked about lengthening sales cycles. So maybe just your thoughts on when we could see these engagements convert to bookings and show a pickup in the numbers.

Operator:

Your next question comes from the line of Alexander Hess with JPMorgan.

Andy Wiechmann:

Sure. Sure. Hey, Alex. So on the pricing front, I would highlight that we, and we’ve alluded to this in the past, that we had a lower contribution on a dollar amount and on a percentage level from price increases within new subscription sales. It’s important to underscore that we continue to be very measured with our increases. It is an important lever for us, and we do want to make sure we’re capturing the value that we are delivering to clients, but we do factor in the overall pricing environment as well as client health. And so the contribution from price increase was a little bit more modest relative to what we saw last year. The balance of new subscription sales was largely related to what we would call cross-selling or upselling, so delivering more solutions to existing clients that is the bulk of sales in the quarter, and we believe a key to our growth going forward. And so that strong engagement with clients is encouraging because we do believe we can continue to sell more to them. As we’ve alluded to, when you break down the components of growth here, we saw 8% growth within our market cap modules. We saw 19% growth in custom and special packages. And we saw across client segments outsized growth, continue to see outsized growth with asset owners and wealth managers and very strong growth despite this bunching of some hedge fund events despite that bunching, we continue to see strong growth among hedge funds as well. So the growth is multifaceted, and I think many of the drivers of long-term opportunity.

Ashish Sabadra:

Thanks for taking our question. I just wanted to drill down further on the ESG and Climate segment. I was wondering if you could talk about how some of the new regulations in Europe, particularly CSRD could potentially help influence the demand for the products going forward. But also, have you seen any incremental headwinds of politicization of ESG in the U.S.? And lastly, on the climate side, how should we think about the growth momentum there. Thanks.

[34:44]Ashish[indiscernible]:

So those are my observations, both related to regulation and the way that we want to bring our ESG focus back to financial materiality where it started.

Owen Lau:

Good morning and thank you for taking my question. So, going back to Slide 9 and thank you for putting together this slide, it mentioned that 85% of subscription run rate subscribing to multiple product lines. Could you please talk about the historical pattern for this percentage? Has it been going up or down or relatively flat. Also, what does it take to increase the engagement with your clients to increase the product line from one product to, let’s say, more than one? Thanks.

Operator:

Your next question comes from the line of Kelsey Zhu with Autonomous Research.

Baer Pettit:

Yes. I don’t have an exact number for total addressable market in front of me right now. But what I would say is that the range of use cases for customization is very broad. It ranges from asset owners of various different descriptions who require customized benchmarks for their portfolios. And in turn, those could be very different depending on the client type, whether it’s an insurance company or a pension fund or an endowment. It then, of course, links to asset managers both for those institutional mandates and for mutual funds. There is a very large market for structured products which in turn is linked to our Wealth segment strategy. So, it’s really the structured products where the investment banks are building products for wealth distribution. And so when we look across the entire sort of ecosystem this demand for customization is driven by different client types, different use cases, but also by different underlying ingredients. And so as we have more components, different asset classes, different types of content, such as ESG and climate and different types of strategies, there is a very large upside here. So, we are very excited by this and our relatively modest-sized acquisition of Foxberry, which we think will be a great addition is going to help us accelerate that by building on our sort of our great industry quality and reputation with a nimble new software interface, which will help us bring product to market even faster.

George Tong:

Hi. Thanks. Good morning. This question is for Henry. Henry, can you discuss how you are strategically balancing reinvestments to support long-term growth initiatives with near-term margin performance, specifically, to what extent do you believe MSCI will be entering a new investment cycle that could fuel strong pursuit of new growth initiatives at the potential expense of near-term margins?

Operator:

Your next question comes from the line of Heather Balsky with Bank of America.

Henry Fernandez:

So, there are a number of areas. I mean pretty much everything that we do at MSCI has a tail in this back and long-term – incredible long-term potential. We are very fortunate about that. Now, some things materialize faster in the short-term and some things are going to take a few quarters, maybe a few years to materialize in a big way. The first thing that we always focus on is the continued growth of our index franchis, because despite what some people think about indexation, whether it’s benchmarking, this is all to active managers, active equity managers or the pace of growth of passive investing. We see enormous possibilities of derivative products, both listed, options, futures and structured products with the enormous potential for non-market capital indices in ESG, in thematic, in climate, in factors and all of that. And now we have a new wave of growth coming from direct index in wealth management, which is an ability to basically customize an individual portfolio in a way that is scalable with indices rather than active management. So – and on top of that, that’s the equity part. And on top of that, we see a lot of potential in fixed income indexation. So, this is all part of the barbell in the investment world. On one hand, is high levels of systematic investing in which index investing is part of that and the other part is very high levels of active management, which obviously private asset management is the most important one, but also concentrated portfolios and things like that. So, that’s where we are positioned in the company. So, we start with definitely index. Then we look at the next level, which is sustainability and within sustainability ESG, obviously, but climate, we think ESG will continue to grow. ESG is not a political philosophy, it is not – is the investment risk and investment opportunity. No matter what people say, what people politicizes or whatever is part of the fabric of investing as to how you are going to manage the portfolio with respect to all these factors in addition to financial factors and other market factors. So, that we are in obviously down cycle on that given the political situation in the U.S., given the reset of regulations in Europe, but we are beginning to see significant growth of that in Asia. So that’s a second component. The third component, which we are now positioning ourselves enormously is our ability to be a large provider of transparency and performance and risk tools and benchmark indices and asset allocation, etcetera, in the private assets. The biggest revolution going on in the world right now is private credit. It’s going from balance sheet driven things, on the balance sheet of banks and balance sheet of insurance companies to a fund structure. So, if that revolution in private credit into a fund structure has an investor in it, whether it’s an institutional or wealth management individual investor, they are going to need transparency tools. They are going to have to understand performance and risk and all of that, which will be a lot different than on the balance sheet of a bank or an insurance company, and this is where we come in. Those are three big areas that we are focused on. There are other areas that, obviously, our role in fixed income portfolio management is a big one, our role in providing even more tools to the – on analytics, insights, for example in some portfolios and climate risk within analytics. So, those are basically the broad areas that we are focusing on, on the product side. And of course, all of that has a huge corollary of the areas that we are expanding into the client side beyond active managers. As it was said before, you will hear quite often the balance sheet of bank, the hedge funds, the corporates, the asset owners, and so on and so forth. So, that is an area – those are on the client side, we see enormous growth opportunities in the non-asset management segment. So, that’s a little bit of an overview.

Scott Wurtzel:

Hi. Good morning and thanks for taking my question here. I just wanted to touch on the basis point fees within the Index segment and kind of seeing that steadily decline over the last few quarters. Are there any mix dynamics there we should be aware of as it relates to the current market environment? And how should we be thinking about that basis point fee going forward? Thanks.

Operator:

Your next question comes from the line of Craig Huber with Huber Research Partners.

Baer Pettit:

Sure. I will make a few observations on that. So, I will start with the first point, which is about efficiencies. So, I think we prefer to see it as efficiencies rather than cost-cutting per se because a lot of our goal is to try to get things done faster and to reinvest a lot of that in these growth opportunities that we are talking about. But we are very focused on that aspect of things across a variety of projects that we have going on. So, in turn, we are also working to apply AI in a variety of product areas. We have some – actually, a launch coming up during the course of this quarter on analytic insights where we, in essence, take an enormous amount of complex data for clients, which they normally would have to parse through in rather in efficient ways and bring the direct insights using AI. So, I think that will just be the beginning of that. We have to really be focused on thinking about this in a competitive environment. And so as we go forward, I think the real benefit of AI for us is that we are a very data-rich environment. And our clients are always trying to get greater insights out of all of those capabilities that we deliver to them. And so in terms of new product development, that’s where we will definitely be keeping you have more news during the rest of this year as we bring out, as I said, both in this quarter and quarters ahead, capabilities about bringing our clients greater insight and faster and differentiated calculations using AI.

Faiza Alwy:

Yes. Hi. Good morning. Thank you. I wanted to touch on capital allocation, just given what the stock has been doing over the last year and more recently, I am curious if your views on capital allocation have evolved and how you would prioritize share buybacks versus potential M&A opportunities and other things? Thank you.

Operator:

Your next question comes from the line of Russell Quelch with Redburn Atlantic. Russell, I think you are on mute. Your next question comes from the line of Greg Simpson with BNP Paribas.

Andy Wiechmann:

Sure. Yes. So, as Baer alluded to, we saw a 17% run rate growth in private capital solutions. I would say generally, our integration is largely on track from both a go-to-market and a technology and data infrastructure standpoint. We have seen encouraging signs in the areas where we think we can add value. So, we have seen outsized growth in EMEA and getting good traction in Asia. So, areas where I think MSCI can help on the go-to-market. I would say more generally, we continue to be optimistic about the long-term opportunity across private capital solutions and continue to see big long-term opportunities there.

Henry Fernandez:

Thank you for joining us today and for those very insightful questions that you asked. As we have said in the past, our operating structure at MSCI is to continue to be a long-term compounder of our earnings and our share price and our revenues and all of that. And there is absolutely no change in our objectives to achieve that. Despite the operating environment challenges that we have had in the last few quarters, we remain conscious in this secular tailwinds and opportunities that we see ahead and that will continue to power our business. The elevated cancels we experienced in the first quarter were as a result of a concentration of client events that we do not expect to continue at these levels in quarters to come. And as we have said, our level of engagement with clients is on parallel [ph], is at a record high, the level of things that they want us to do, solutions that they want us to come up with is totally unparalleled, and it is increasing pretty much every day, every week, every quarter. And therefore, we are very committed in helping them achieve those objectives, whether it’s capitalizing on opportunities or dealing with problems in their portfolios. Therefore, our all-weather franchise is pretty resilient, and it supports the business through good times and bad times. And we would like to thank you again for joining us this morning, and we look forward to speaking with you in the next few days and weeks.

Operator:

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, where participants are requested to ask one question at a time then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the fourth quarter, MSCI delivered impressive results to close out the year. On our financial metrics, we achieved adjusted earnings per share growth of nearly 30%, organic revenue growth of 15% and free cash flow growth of 24%. On our operating metrics, we posted organic subscription run rate growth of 10% while completing our 10th consecutive year of double-digit subscription run rate growth in Index at 10.8%. We delivered a retention rate of nearly 94%, including our highest ever full year retention rate in Analytics at 94.4%. Assets under management in equity ETF products linked to MSCI Indices reached an all-time record of $1.47 trillion at year-end. Along with near-record AUM balances of nearly $3.2 trillion in non-listed products linked to MSCI Indices, such as separately managed accounts and other institutional and retail fund wrappers. And we also achieved a record level of nonrecurring sales both for the quarter and for the full year. While 96% of MSCI's revenue are from subscription-based or other recurring revenue sources, we also see strong demand for products that are often sold as nonrecurring, which form about 4% of our revenue. The latter group includes Float Data, a recent product innovation, index licenses for OTC derivatives and structured products, history data products and other unique datasets. These products offer entry points for future subscription sales while deepening client relationships. And they represent an important part of our strategy. Despite the global bull market and the signaling of lower rates by the Fed, our clients remained cautious, which has led to tighter budgets and longer sales cycles. Yet even with those headwinds, we achieved strong fourth quarter results, demonstrating once again that MSCI has an all-weather franchise and a team that can deliver in any environment. On capital allocation, our approach has not changed. We remain committed to making organic investments and bolt-on acquisitions that add value while returning excess capital to our owners in the form of share buybacks and dividend payments. Over the past 11 years, MSCI has repurchased more than 40% of our shares outstanding, worth a combined $5.8 billion at an average price of about $117 per share, creating enormous value for our shareholders. MSCI's client-centricity underlies our consistent execution. 90% of MSCI's run rate in 2023 was comprised of clients purchasing from more than one of our product lines, whether in Index, Analytics, Private Assets or ESG and Climate. More than 60% of MSCI's run rate was comprised of clients purchasing from more than three of our product lines. This underscores the value we provide to many of the world's largest financial institutions and also the unique and vital role of MSCI in the capital markets. The standards we set and the tools we provide helps connect the providers of capital with the users of capital. We want to capitalize on important secular trends that are reshaping the global investment landscape. For example, in the index industry, we see rising demand for customization of portfolios. In response, we have expanded our custom index capabilities while maintaining our strength in traditional market cap businesses. Our client-designed indexing tools on MSCI ONE allow investors to personalize indices for highly specific investment objectives. The secular trend of portfolio customization has also driven demand for specialized analytics tools, especially among wealth managers, who represent one of our fastest-growing segments. Earlier this month, MSCI completed the acquisition of Fabric, a wealth technology platform that provides portfolio design, customization and analytics. Adding their capabilities to our total portfolio toolkit will give us more ways than ever to serve the wealth segment. Speaking of total portfolio solutions, we now have an industry-leading platform, thanks to our acquisition of Burgiss. We also have the world's largest, most comprehensive and highest quality private asset class database, covering $15 trillion in holdings across private equity, real estate, debt, infrastructure and natural resources plus another $45 trillion in real estate transactions and portfolio assets. As private allocations continue to grow, MSCI is well positioned to benefit from it. Our data will help us build standard-setting tools for private assets, including benchmark indices and models for evaluating risk performance and portfolio construction. We can then combine our private and public asset class tools to deliver a total portfolio view of risks and opportunities. All of this will help deepen our relationships with multi-asset class allocators of capital. In a larger sense, it will strengthen our entire ecosystem of product lines and capabilities. One notable example is climate because we build our carbon emissions estimates around granular disclosed data. MSCI already provides climate data on about 73,000 companies and issuers under subsidiaries, including more than 55,000 private companies, along with more than 7,000 private equity and private debt funds. We also provide location data on about 1 million asset locations through MSCI GeoSpatial. We assess physical risk on nearly 80% of those locations, leveraging our Climate Value-at-Risk models. Our client strategy can help us grow MSCI's presence among corporate issuers and their advisers. With our recent acquisition of Trove Research, we are now a leading provider of global intelligence on carbon credit. Trove currently analyzes around 15,000 carbon credit projects around the world and supplies that research to corporates, investors and exchanges. They also provide key climate data on more than 3,000 companies, showing both the quantity and the quality of carbon credits used by those companies and also how these credits are shaping their broader net-zero transition plan. There is simply no credible path to reach net-zero emissions without a significant expansion of the voluntary carbon markets. Looking ahead, we still have a long runway to create compounding shareholder value. As always, MSCI will balance our long-term strategic investments, including bolt-on acquisitions, with our commitment to rigorous financial management and short-term execution. And with that, let me now turn the call over to my partner in this great business, Baer Pettit. Baer?

Andy Wiechmann:

Thanks, Baer and hi, everyone. As you can see from our results, we have a highly resilient business that continues to generate consistently strong performance across product areas and client segments, despite cyclical pressures. In index, we had nearly 11% subscription run rate growth, including 9% run rate growth in our market cap-weighted modules and 20% growth in custom indexes and special packages. Factor and ESG modules grew 11%, a slower rate than last year as clients are favoring more customized approaches and we saw fewer clients launching new active factor strategies. We have a demonstrated track record of growing with our existing client base in index, helping them unlock value through a wide range of use cases across a broad range of content. Half of our index client base subscribes to at least two or more modules, with 20% of clients licensing as many as five or more different modules. Our growing set of modules across market cap, factor, ESG, climate, thematic, fixed income and custom dimensions enable us to continue to bring additional value to our clients and we maintain solid momentum and asset-based fees with revenues up 16% year-over-year, benefiting from over $48 billion of cash inflows and about $198 billion of market appreciation throughout 2023 within ETFs linked to MSCI equity indexes. During Q4 cash inflows of $16 billion into equity ETFs linked to MSCI indexes were mostly driven by developed markets ex-U.S. and emerging markets products. From a product perspective, we saw inflows of about $6 billion into equity ETFs linked to MSCI ESG and climate indexes, which represented the majority of industry flows into ESG and climate products. Within fixed income ETFs, AUM and products linked to MSCI and Bloomberg joint fixed income indexes reached $60 billion, growing more than 30% year-over-year. We had another very strong quarter for non-recurring revenues. Roughly $16 million of the non-recurring sales and revenues in index were related to client fees for unlicensed usage of our content in historical periods. We also earned non-recurring revenues from other common use cases, including licenses to create structured products and OTC derivatives and index history sales, where a client requires decades of historical data to backtest strategies and conduct research. In analytics, we saw continued momentum across key areas with subscription run rate growth of 7% supported by strong net new recurring sales growth of 68%. Analytics revenue also benefited from a large number of implementations that were completed in the quarter, which resulted in both elevated non-recurring revenue and the release of recurring subscription revenue that was on hold during the respective implementation periods. In our ESG and Climate Reportable segment, organic run rate growth was 16%, which excludes about $4.5 million of run rate from Trove and the impact of FX. Run rate growth was approximately 15% in ESG research and 31% in climate, excluding the impact of Trove and run rate growth was 25% within Europe and close to 20% in Asia for our ESG and Climate segment. We continue to see strong engagement across client types, with a retention rate of 94.7% for the quarter and 95.9% for the full year, although we did see an increase in cancels from smaller clients in large part related to an elevated level of client events. Within real assets run rate growth was 6% as we continue to see the impact of muted property values and lower transaction volumes. The retention rate of 89% for the quarter was impacted by pickup and cancels from small clients, namely brokers, developers and lenders, who are most acutely feeling these cyclical pressures, although, once again our larger clients tended to have higher retention rates. Almost 80% of clients that subscribed to our RCA product offerings spent over $50,000 per year on average and the retention rate of that cohort is 96% for the full year of 2023. Also, it is worth highlighting that about 95% of client contracts for RCA products have an auto renew provision or multiyear contracts. Our integration of Burgiss, which we now refer to as our Private Capital Solutions operating segment, is going well. We recorded approximately $25 million of revenue for the quarter, which came in at the high end of our initial expectations, although we did benefit from revenue catch-ups resulting from the completion of implementations on our total plan product offering. Private Capital Solutions expenses included about $4 million of allocations from centralized and shared costs. We continue to expect about $4 million to $5 million per quarter of these allocations to the segment. These costs are reallocated from other segments and as a result will not impact firm-wide EBITDA. Our approach to capital allocation remains unchanged. We will continue to invest in the business to drive strong top line growth over the long-term, while continuing to deliver attractive free cash flow and EPS growth. We will continue to optimize our capital structure, return excess cash to shareholders through regular dividends that grow with adjusted EPS and opportunistically pursue share buybacks and value generative bolt-on M&A that accelerates our strategy in key growth areas. In the spirit of continually optimizing our capital structure, last week we completed the refinancing of our credit where we replaced our term loan A and existing revolver with a new revolver that provides us with more capacity at $1.25 billion in total size, slightly lower costs than the now retired term loan a and an extended tenor, and our capital position remains solid overall. As of today, we currently have approximately $600 million of cash on hand, well above our minimum global cash balance range. Although cash balances are still down from last year's levels, which will continue to translate through to lower interest income. Lastly, we continue to execute bolt-on acquisitions that accelerate our long-term strategy. Total purchase consideration for Trove and Fabric was approximately $48 million with the potential for additional performance-related payments tied to the achievement of top-line growth targets, although the majority of those payments will be treated as compensation expense. Turning to our 2024 guidance, which we published earlier this morning. Our guidance assumes that AUM levels remain relatively flat to year-end levels through the first half of 2024 with a modest upturn in the second half of the year. Our expenses reflect the ongoing investments in our business as well as the impact of our acquisitions of Burgiss, Trove and Fabric. Our CapEx guidance reflects continued software development to build or enhance our offerings across all of our segments, including Private Capital Solutions as well as slightly higher hardware purchases related to our hybrid data center strategy. Our interest expense guidance reflects the refinancing of our credit facilities and assumes the existing balance of approximately $340 million remains outstanding for the year. Our tax rate guidance reflects the impact of the OECD global minimum tax, which goes into effect this year, statutory rate increases we are subject to in certain jurisdictions and a slightly smaller projected impact from windfall benefits. I would like to highlight that our effective rate in the fourth quarter included a discrete benefit related to a favorable outcome on a tax position received late in the quarter. And lastly, free cash flow guidance reflects the expectation of slightly higher cash taxes. Overall, we remain well positioned to drive growth. Our client-centricity and multiyear investments position us for strength to start 2024, and we look forward to keeping you posted on our progress. With that, operator, please open the line for questions.

Toni Kaplan:

Thank you so much. I was hoping you could give some additional color on the market environment, maybe particularly with regard to Index. I know you’ve called out some market headwinds recently. And so just looking into 2024, do you see those persisting? And how should we think about new sales within Index for next year? Thank you so much.

Operator:

Our next question comes from the line of Alex Kramm with UBS. Please go ahead.

Andy Wiechmann:

Sure, sure. Thanks, Alex. So, I’d say the most encouraging thing for us has been the strong level of engagement we’re seeing from our clients around ESG and very significantly around Climate. So despite the slowdown, we are still seeing a healthy level of dialogue with our clients on this front. Consistent with what we’ve seen in recent quarters and throughout 2023, as you alluded to growth has been slower for us. Just to put a finer point on that, in the ESG and Climate segment, growth in the Americas was about 9%. That compares to 25% in Europe and close to 20% in Asia. I’d say the themes are consistent, where clients are taking a more measured approach to how they integrate ESG. They’re continuing to think about how and where they integrate it, and that’s causing longer sales cycles and more deliberate purchasing decisions, which is probably compounded by, I think, cyclical pressures that are hitting many of our clients. But given the wide range of use cases, I think we continue to be quite encouraged about the outlook here. We see regulation will create some delays in purchases, continues to be a big opportunity for us. As you alluded to, Climate continues to be a big opportunity for us. And we continue to innovate heavily across Climate with plans to release things like nature and biodiversity data sets, additional insights into private assets, geospatial data, which Baer alluded to, physical and hazard risk enhancements. And that’s on top of continuing to broaden our coverage across ESG, enhance the quality of our offering and our service. And so I think we’ve got a rich pipeline of opportunities and solutions where we can continue to deliver value to clients. But I think we would expect some of these dynamics that we’re seeing the more measured purchasing decisions and some of the cyclical pressures probably to persist for at least next couple of quarters here.

Manav Patnaik:

Thank you. Maybe we’ll just go down the segments here. Can we just talk about the Analytics business? Obviously, it sounds like things have gotten bad there through the year. It sounds like it’s the equity asset class. But just is there – are you just – is there some share gains? Is it just an uptake in the models? Like maybe just some of the trends that you’re seeing there perhaps that can help you sustain this high single-digit rate?

Operator:

Our next question comes from the line of Alexander Hess with JPMorgan. Please go ahead.

Baer Pettit:

Sure. So look, the Climate opportunity is an enormous one, which will affect all aspects of the economy and industries, right? So, I think it’s natural that there will be aspects of it which at the outset we were not present in and where we’re broadening and deepening our capabilities, right? So I think that's a general observation which could be both from our actions organically and inorganic. So in this instance, we're very excited with what we've done here, not merely because there's clearly demand from this, but it's also an area where we're able to apply a lot of interesting work in data science and AI. So there's client demand, it plays to our strengths in this growth category, and I think we've got a really good chance of continuing to innovate. Just in terms of the business model, it's the same as usual, right? So it's a subscription business model. It's integrated with the normal way that we sell and it's just enriching our capabilities across the board.

Owen Lau:

Hey, good morning. Thank you for taking my question. So your non-recurring revenue was up quite a bit in both Index and Analytics. And I think you recognize some fees for unlicensed usage of the content, like in the past, in slower periods in the Index business. I think for Analytics you had some large number of implementation and some on-time [ph] deals. Could you please elaborate a little bit more on what they actually are and what that means for recurring revenue going forward? Thank you.

Operator:

Our next question comes from the line of Seth Weber with Wells Fargo. Please go ahead.

Baer Pettit:

Sure. So happy to take that question. We're very pleased with how the integration is going. I think there was clearly a benefit that we were a minority shareholder of Burgiss for a number of years, so got to know the business very well. We had one of our senior executives, Jay McNamara, there working for a number of years and really helped to revitalize their client activity and go-to-market and all the commercial side. So he is now a Co-Head of the business with Charissa Smith. So I think both from an operational point of view, we're very pleased with the integration and we've got a team of client coverage people there that were already, if you like, trained the MSCI way under Jay, and the – and now those teams can work seamlessly with the MSCI client coverage team. So we're delighted with the way things have gone so far and I think we've got a big opportunity globally to expand significantly the footprint in private capital solutions. So, so far so good. Good end to the year and we hope to keep delivering some strong numbers during the course of 2024.

Kelsey Zhu:

Hi, good morning. Thanks for taking my question. On your expenses guidance, I was just wondering if you can walk us through kind of the puts and takes of that expense guidance range? What would take it to the higher end versus the lower end of that guidance? Thanks.

Operator:

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Andy Wiechmann:

Yes, sure. So listen, it's important to underscore that we will continue to be very measured on our price increases and ensure that we are linking them to the value that we are delivering to our clients in terms of enhanced solutions, enhanced services and broader usage of our tools. As we mentioned in prior quarters, during 2023, price increases were higher than they've been in recent years and contributed a larger percentage of new recurring sales relative to recent years. I would say in Index that contribution is similar where the contribution from price increases within Index was above 40% for the year, which I think is consistent with what we've mentioned before. And it's important to underscore that there are numerous factors that feed into our price increases, including most notably, the value that we're delivering to clients. But the broader environment and client health are all things we think about. And so to the extent that inflation continues to moderate. We will likely moderate price increases in certain areas, all else equal. But we'll continue to monitor all those factors, including the enhancements in value that we deliver to clients and calibrate price increases accordingly going forward.

George Tong:

All right. Thanks. Good morning. Going back to the topic of ESG, you mentioned regulations are causing some delays in client purchases. Can you elaborate on which regulations you're watching as well as how different outcomes of the U.S. election cycle could potentially impact ESG demand?

Operator:

Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please go ahead.

Andy Wiechmann:

Yes, yes. So it’s an area that we spend a huge amount of time on. And we are continually focused on driving efficiencies, enhancing productivity across organizations so that we can invest more in the business. And even though it’s been a tougher environment, we’ve been able to continue to enhance and increase the amount of money we put into investment areas. To your point, we would love to invest more. We have very attractive opportunities across all the areas we’ve talked about in terms of new solutions, new client segments, technology-enabled capabilities. Those are all areas that we have the upturn ready to go. But we will be measured and ensure that we see sustained improvements in the market and business performance before we take up the level of investment materially. But it’s something that we are laser-focused on and want to continue to maintain our Triple-Crown discipline and ensure that we are putting those investment dollars into those areas that are going to generate attractive near-term returns for us. And so it’s something that we are on top of and continually monitoring. And that’s something that, to the extent the market performance and business performance fluctuates, we’ll look for opportunities to put more investment to work.

Operator:

Our next question comes from the line of Heather Balsky with Bank of America. Please go ahead.

Baer Pettit:

Yes. Thanks for the question. Well, look, we clearly have pretty transparent statistics on that in the ETF market, which we discussed, and those have been fairly stable. It’s quite difficult to judge this in a lot of the subscription market. There’s not really transparent data that shows us exactly what’s happening. So the key thing that we try to focus on is ensuring that we are continuing to maintain our growth rates in some of our key segments, as you can see from the numbers that we put out quarter-after-quarter, but more importantly, is trying to be innovative about some of the opportunities that have been central to our growth that have been a big theme throughout our comments today. The customization area is dramatic in all client types, and we’re investing in that both organically and through these – some of these acquisitions that we’re looking at, even if they’re bolt-on ones. So I think as we get – our big driver is to be innovative in new segments with customization. And if we do that, I think we can continue to have the leading position in the industry that we have. And then I think the other one that I would say is a key focus is global geographic diversification. This is an enormous strength of our franchise, and we’ve seen that in the numbers. As we continue to grow in all geographies in Index, notwithstanding the fact that in many of those geographies over the last number of quarters, equity markets have been in the doldrums more than they’ve been in the U.S. But we still continue to put in strong performances in subscription growth. So I think overall, we kind of look at how we’re innovating. We – I could say things anecdotally about competition, but I don’t think they’re going to be helpful. So it’s mostly focusing on what we do well and serving clients and innovating. And if we keep doing that, I’m confident that we can maintain our growth trajectory.

Craig Huber:

Great. Thank you. I wanted to hear your thoughts on your sales force. Your sales force has obviously been very effective, very efficient over many, many years. You guys highlighted part of that today with all the cross-selling that they’ve been doing and stuff. And I’m just curious, your plans for internal investment spending this year, does it include any extra spending level that you – above and beyond what you normally would do on the sales force throughout your organization for this upcoming year? I’m just trying to get a sense on that because it seems like a pretty good opportunity you guys to lean further into that. I’m just curious what your thought is on that. Thank you.

Henry Fernandez:

Let me add something else here that the area – MSCI has progressed significantly in many, many areas. The one area that I feel the most proud of – or proudest, I guess, of is the incredible level of reach and dialogue that we have with clients all over the world. It’s not only at the user level. Traditionally, in the past, MSCI is sold by a subject matter expert to – of MSCI selling directly into a user at the client organization. What we now have done in addition to that is build very deep and very wide relationship with the CEOs and the CIOs and all that because we’re conscious that we’re increasing our wallet share or mind share with a lot of these clients. And we need a lot of support from the top-down in understanding what we’re doing and how we can add value and partner up with our client organizations. The client coverage organization, Alvise Munari is I think 1,200 professionals by now, so significant expansion because of some of the acquisitions that we have made, which have added a lot of salespeople. And the key focus there is industrial scale, is trying to figure out how to continue to grow that client coverage organization in a manner that it is tightening up the organizational structure, the organizational design, the roles, the responsibilities. We’re putting a lot of technology and a lot of data in understanding how the – what the clients buying, how are they buying, managing the pipeline and so on and so forth. So I think we have a lot of runway to benefit from in reaching out to more clients. This is going to become especially important because we’re scaling up significantly to new areas. Wealth management, it’s a lot of wealth management organizations around the world. Corporates, there are thousands and thousands of corporate entities around the world, right? Insurance companies, the general partners of equity – private equity firm, private credit firm, private infrastructure, private debt firms and the like. So really, really exciting, a lot of what we’re doing.

Henry Fernandez:

So thank you, everyone for joining us today. Our fourth quarter and full year performance, as you can see, was a direct result of our focus on clients and pricing [ph] and our all-weather franchise. We remain very excited about the tremendous opportunities that we have in front of us and the investments that we’re making to capitalize on them. And we will execute flawlessly on that growth agenda. One of – I think that it’s always more to keep an company. We welcome anybody who wants to have a dialogue with us at any point at any time. And we will be more than happy to answer your questions or any other questions that people may have. Thank you again and have a great day.

Operator:

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. At this time, all participants are in a listen -only mode. Later, we will conduct a question-and-answer session, where we will limit participants to one question at a time. We will have further instructions for you later on. I'd now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the third quarter, MSCI delivered impressive results in an uncertain environment. Among other highlights, we achieved adjusted EPS growth of over 21%, total revenue growth of 12%, recurring subscription run rate growth of 12% and a retention rate of 95.4%. Amid turmoil in global markets, rising geopolitical tensions and a challenging operating environment are highly diversified by all weather franchise continues to drive strong financial performance. We recognize that in this uncertain environment, our capital allocation decisions are more important than ever. In the first nine months of this year, we returned $459 million to the owners of MSCI in the form of share repurchases and more than $329 million in the form of dividends. This signals our confidence in MSCI's long-term prospects and our commitment to be a compounder for shareholders. We're also committed to prioritizing high growth and high potential investments while maintaining high levels of profitability. We recently capitalized on two opportunistic strategic acquisitions. With the completed acquisition of Burgiss, MSCI can now provide additional clarity and transparency, highly needed by investors across private and public assets in their portfolios. Over the past 36 years, Burgiss has created greater private asset transparency while serving institutional investors such as special funds, endowments, foundations and family offices. Combined with our private real estate franchise, MSCI now has the world's largest highest quality private asset class database, covering more than $60 trillion of assets. We believe, we now have a unique and a strong foundation of data and analytics to build standards such as benchmark indices, performance, risk, liquidity, pricing and asset allocation models and other tools. In effect, our goal is to develop the MSCI of private assets. As for MSCI's announced acquisition of Trove Research, Trove is a world-renowned source of intelligence on the voluntary carbon market. We believe this market will play a significant role in helping institutional investors and companies reduce climate risk. All markets drive on reliable, uniform standards and robust transparency. As the world pushes for net zero emissions, investors need to understand whether companies are making real progress and how they are using carbon credits. Likewise, companies need to understand the value of the credits they are buying and selling. By integrating the data, analytics and capabilities of Trove with our own comprehensive climate solutions, MSCI will have a robust suite of tools to promote clarity and consistency in the voluntary carbon market. Both of these acquisitions, Burgiss and Trove, advanced MSCI's larger business strategy and mission of providing tools for the investment world to systemically understand and measure performance and risk, which leads to more optimal asset allocation and portfolio construction. We aim to capture major trends across the investment landscape, including the continued allocations to private assets and the growing incorporation of climate as a material driver in the repricing of securities and the reallocation of capital. Our product lines are increasingly interconnected, which means our work in private assets reinforces our work in climate and vice versa. For example, together with Burgiss, we previously developed a tool that offers climate data on around 50,000 private companies and more than 6,000 private equity and private debt funds. In summary, MSCI continues to benefit from our resilient business model underpinned by rigorous financial management and a strong secular tailwinds. From our recurring revenue business model to our mission critical solutions, we believe MSCI remains well-positioned in any operating environment. And with that, let me turn the call over to Baer.

Andrew Wiechmann:

Thanks, Baer, and hi, everyone. Our attractive financial model enabled us to deliver double-digit growth in the quarter across revenue, recurring subscription run rate and adjusted EPS. In Index subscription, we drove 9% run rate growth in our market cap weighted modules, high-teens growth in custom indexes and mid-teens growth in our ESG and factor modules. We saw strong subscription run rate growth from hedge funds, wealth managers and broker-dealers of 26%, 19% and 15%, respectively, all of which continue to support steady double-digit index subscription run rate growth. Asset-based fee revenues were up more than 12% year-over-year, benefiting from $55 billion of cash inflows and $186 billion of market appreciation over the last 12 months within equity ETFs linked to MSCI indexes. During the third quarter, cash inflows into ETFs linked to MSCI equity indexes were driven also entirely by ETFs with US and other developed market exposures. These cash inflows were supported by roughly $3 billion of flows into equity ETFs linked to our ESG and Climate indexes. And we continue to gain traction in fixed income with AUM and ETFs linked to MSCI and Bloomberg joint fixed income indexes reaching nearly $52 billion, growing more than 40% year-over-year. In analytics, subscription run rate growth was 7%, with continued strength in our factor models and our risk tools more broadly. Our investments in enhancing our content, our capabilities and the client experience, including through Climate Lab Enterprise insights and ESG and climate reporting services are driving new commercial opportunities across analytics. In our ESG and Climate reportable segment, the run rate growth was 25%, with 21% growth in ESG research and 44% growth in Climate. Relative to a year-ago, we saw lower new recurring sales in the Americas, which continue to reflect more measured purchasing decisions among US investors. However, new recurring sales in both Europe and APAC were essentially unchanged year-over-year. The retention rate in ESG and Climate segment remained healthy at 96%, although we did see slightly higher cancels resulting from client events at smaller institutions. Within Real Assets, run rate growth was 10%. We see momentum in our real estate index intel and portfolio offerings. Although, we continue to see the impact of industry pressures on our transaction data, most notably in client segments such as real estate brokers and lenders. While we expect the pressures to continue, we are encouraged by the long-term opportunity and the momentum we see in many of the market data, climate and portfolio offerings we are providing. We are also expanding our commercial real estate transaction database to include deals below $2.5 million and our data universe to include properties that have never transacted. As a reminder, beginning in the fourth quarter, we will report financial results for Burgiss in our all other private assets segment. To provide an update on the financial impact of Burgiss, we expect Burgiss to generate slightly above $90 million of rev for full year 2023, with revenues of $22 million to $24 million expected in the fourth quarter. The standalone Burgiss adjusted EBITDA margin is expected to be around 15% for full year 2023. However, we currently expect about $4 million to $5 million per quarter of allocations to Burgiss from centralized and shared costs on top of the standalone adjusted EBITDA. It is worth noting that these allocations are reallocated from other segments and will not impact firm-wide EBITDA. Given these allocations, we expect contributions from Burgiss to the adjusted EBITDA for all other segment to be minimal in Q4, although we expect some margin expansion from Burgiss next year. Meanwhile, as we've done in previous acquisitions, we will exclude certain integration-related expenses from our adjusted non-GAAP figures. More broadly on the capital allocation front, we continue to be opportunistic and capitalize on attractive opportunities as highlighted by our announced acquisition of Trove. We expect Trove, which has a few million dollars of run rate and which will be included in our ESG and Climate segment to be immaterial to our results in the near term. Turning to our guidance. I would highlight that our ranges incorporate the impact of Burgiss and assume that AUM levels remain relatively stable through the balance of the year. Expense ranges now reflect both the slightly elevated pace of spend as well as a full quarter of expenses from Burgiss, including a small amount of integration expenses that will not be from adjusted metrics. Our free cash flow guidance remains unchanged. Although we have slightly increased our CapEx guidance which continues to reflect a higher level of software capitalization and some elevated hardware purchases related to our hybrid infrastructure approach, which includes maintaining a presence in select on-prem data centers is to leveraging our public cloud partnerships. Our D&A guidance captures the additional intangible from purchase accounting adjustments related to the acquisitions. We've slightly lowered and narrowed our effective tax rate guidance, reflecting the impact of a nontaxable gain on our investment in Burgiss of approximately $140 million in the fourth quarter, which will be excluded from our adjusted metrics. Excluding the impact of this onetime item, we would expect an adjusted tax rate range for the full year that is about 1% higher than the effective tax rate range or 17.5% to 19%. Lastly, our interest expense guidance reflects our intention to draw a small amount on the revolver to provide some additional liquidity. Additionally, I would highlight that we expect lower interest income on our cash balances as a result of funding Burgiss. As of today, we currently have more than $300 million of cash on hand, which is in line with our minimum global cash balance range. Overall, we remain well positioned to drive growth. While we continue to see some budget pressures from clients in a slightly elevated level of client events, we continue to see healthy engagement from our clients in a strong pipeline to finish out 2023. We look forward to keeping you posted on our progress. And with that Operator, please open the line for questions.

Q – Alex Kramm:

Hey, good morning, everyone. I would like to talk about the index sales during the quarter. I think flat year-over-year. I think it was a tough comp and 3Q is generally a little bit lower seasonally. But just wondering if there's anything in particular you would highlight there both as -- in terms of the third quarter, but also as we think about the fourth quarter. And then maybe specifically on index sales, it looks like the custom index run rate was just marginally higher in the third quarter, quarter-over-quarter. So just wondering if that was a big and maybe why? Thanks.

Alex Kramm:

All right. Thanks very much guys.

Alexander Hess:

Hi, guys. Maybe stepping back to some comments from last quarter about accelerating product development within ESG and Climate, I want to know maybe where you stand as far as that goes, how the Google partnership fits into that, how the Trove acquisition fits into that and any other considerations we should keep in mind as far as when that might show up in net new?

Alexander Hess:

Thank you, Baer. And if I could quickly get a follow-up in. Can you maybe comment on how one of your competitors shedding headcount through a large layoff program might impact their competitive positioning vis-à-vis you guys?

Alexander Hess:

Thank you.

Toni Kaplan:

Thanks so much. I was hoping you could provide a little bit of extra color on ESG. It sounded from the prepared remarks like Europe maybe was somewhat flattish with America still under pressure. Just wanted to get a sense of if there are any catalysts coming up, if you're seeing more stability there that could help drives accelerated growth in upcoming quarters? Thanks.

Toni Kaplan:

Terrific. Thank you.

Manav Patnaik:

Thank you. Baer, in terms of the pipeline, the strong pipeline that you talked about, I was hoping you could just contextualize that a bit for us? I mean just if you look at the net new sales numbers, the first three quarters, it hasn't been that strong. So just perhaps what that looks like in Q4 and maybe how that -- how you see that heading into 2024? And then just a quick follow-up for Andy, just in terms of the margins that you gave us, for the fourth quarter. Maybe just some color, you increased the expense guidance, and it looks like Burgiss will be a drag for a bit next year. So just how should we think about if next year margins will just be constrained because of those dynamics?

Manav Patnaik:

Yes, that’s correct.

Andrew Wiechmann:

Sure. Yes. So maybe I can provide some color on the broader expense guidance, and then I can touch on Burgiss, specifically and the potential impact to the broader margin on the company. If you remember last quarter, we commented that if AUM levels remain flat or increase for the balance of the year, we'd likely be towards the high end of our expense guidance range. AUM was largely flat during the third quarter. And so our organic expense growth was picking up a little bit as we were picking up the pace of spend and importantly, picking up the pace of investment a little bit. And so we are tracking towards the higher end of the range. That combined with -- and this is probably the bigger impact, Burgiss expenses, which will be coming in in the fourth quarter. So we will have a full quarter of adjust expenses in Q4 here are leading to the higher overall expense guidance here. I would underscore that, that range assumes AUM levels remain roughly flat through the balance of the year. But to your point about the impact on the overall firm margin, Burgiss is a lower margin business. As we commented on a standalone basis, the margin is in the mid-teens on Burgiss. And so just bringing that in will bring the overall firm margin down. And so as we start to have Burgiss results in our overall financial results during 2024, the margin will likely be lower compared to the prior year. Having said that, we do, as I commented, believe that there is nice operating leverage, positive operating leverage in Burgiss, given what they do, very similar to most of the things MSCI does is they generate IP-based products and solutions that have very attractive margin dynamics. And so if we continue to drive the growth that we hope in Burgiss, that should drive some margin expansion within Burgiss, but just looking on an apples-to-apples basis, the Burgiss expense base will bring the overall firm margin down.

Kelsey Zhu:

Thanks for taking my question. I have a quick one on ESG and Climate. The run rate growth looks much stronger for Climate compared to ESG. I was wondering if you can tell us a little bit more about the key drivers behind the divergence between the performances between those two segments? And as you think about the long-term growth target for the second overall in the mid- to high 20s range, does that work similar across ESG and Climate? And lastly, just what net new subscription sales growth looks like for Climate and ESG separately in Q3? Thanks.

Kelsey Zhu:

Thanks so much.

Ashish Sabadra:

Thanks for taking my question. I wanted to focus on pricing. Pricing was a significant deal went to net new this year. I was wondering, a lot of companies are talking about normalizing pricing as we get into next year. I was just wondering, if you could comment on how do you think about the pricing trend as we get into 2024? And have you seen any pushback on pricing, particularly for netting tax?

Ashish Sabadra:

That's very helpful, sir. Thank you.

Owen Lau:

Hey. Good morning. Thank you for taking my question. I want to go back to expense guidance and ask the question a bit differently. So you raised the full year OpEx guidance by about $40 million and based on my math, Burgiss $20 million per quarter this year. And I think you mentioned $4 million to $5 million of acquisition-related expense. My question is, how about the rest of the expense increase? And how much of that incremental expense would be recurring in 2024? Thank you.

Owen Lau:

All right. That's fantastic. And I just want to add one quick question on ESG and Climate seasonality. So over the past few years, I think for net new recurring subscription sales of ESG and Climate was quite strong in the fourth quarter. Should we expect similar seasonality to continue this year? Thank you.

Owen Lau:

Sounds great. Thanks a lot.

George Tong:

Hi. Thanks. Good morning. In ESG and Climate, you mentioned growth slowed in the Americas to 15%, while growth in EMEA was healthy at 35%. Can you elaborate on what you're seeing in the Americas and when you would expect to see catalysts for improved growth?

Operator:

The next question is from Faiza Alwy with Deutsche Bank. Your line is open.

Baer Pettit:

Sure. Thank you for the question. Baer here. So what I would frame it is to say we've got three key areas of focus. The front office, both in equities and fixed income, and you saw we had very nice numbers in equities. More content, which includes insights, better coverage of private assets, doing better and being more competitive in fixed income and structured products and climate risk. So those are the key areas we're focused on and I think that we're pleased with, well, I would say we're definitely not happy with the growth number. We think we'd look to continue to be ambitious to see it go up. The retention rate of 95% is also a sign that our clients continue to use our tools in these environments. So we've been very consistent in the story here. I think we continue to have structural improvements in how we deliver the products through better technology, greater integration of our content across different types of analytics. And in keeping with the theme that we've repeated here, our client engagement is excellent, and we have a wide variety of use cases that clients are asking us to solve from going across very large firm use cases to very specific structured products, front office use cases, equity portfolio construction. So it's just a category where with the combination of our investments in content, better technology and better delivery and the expertise that we bring to clients, we hope to continue to have a good directional growth. The only thing I would add just as a slight note of caution is it is an uncertain and amicable environment and client events can occur, but those are often things that we don't control ourselves.

Seth Weber:

Hey, good morning guys. Thank you. I know it's early days, but with the Burgiss acquisition, when you announced it, you talked about good opportunities for joint product development and cross-selling. I'm just wondering if you could talk to any early traction that you're seeing there. Thank you.

Operator:

The next question is from Heather Balsky with Bank of America. Your line is open.

Henry Fernandez:

Yes. So to look on -- in your first question about capital allocation, needless to say, we've talked a great deal about this in the past. We are always obsessed with asset allocation at MSCI. We believe that capital allocation is what gives you long-term compounding growth of a business, and it is the day-to-day capital allocation decisions that you make that ultimately aggregate to a great financial model and a great compounder over time. So that's an area that we're very focused on. And it is in two respects. One is the internal capital allocation of where we put our money with respect to organic investments, and we follow what we call the triple crown methodology, which we've talked about in the past. And then there is the "external" asset allocation, which is what do we do with dividends, with buybacks and with inorganic investments that we pursue. So with respect to the latter category, the "external part", in periods of very bullish environment asset prices are very rich. Investment or inorganic investments are very rich. Acquisitions are in options, people are tripping over each other. They bid up the properties, and you end up significantly overpaying. So in periods like that, we tend to stay -- we stay out. We have done the RCA acquisition was in the middle of our average period. But we -- in general, we are very financially disciplined about that. So we end up generating a lot of excess cash, and therefore, most of that excess cash flows back to buy back shares. In periods of high uncertainty and high unpredictability, people retrench, people hide, Board of Directors are risk averse and the like and those are periods in which we believe we can make very nice financially disciplined acquisitions and that's what we've seen in the last few months, the Burgiss acquisition, the Trove acquisition and the like. And so we'll continue to see – we'll continue to pursue a small -- relatively small bolt-on acquisitions that will use up a lot of our cash. So therefore -- and the last piece of this thing is financing. Right now, the financing environment is very expensive. We are delevering. We're at 3.1 times, 3.2 times leverage right now in leverage, maybe less. And therefore, we don't have a keen interest in increasing our debt -- our leverage at this point. So therefore, when you combine all of that, it means that we're going to have very limited cash, excess capital for buybacks in the next few quarters. And we will continue to pursue a small bolt-on acquisitions, because the market is attractive for that. And we -- unless we see some in bigger, we're likely not going to lever up at this point given this financing rates. So that's a little bit of our financial strategy overall in capital allocation at this time.

Operator:

The next question is from Russell Quelch with Redburn Atlantic. Your line is open.

Henry Fernandez:

We've always been extremely financially disciplined. And that clearly continues to be more -- we definitely have an ability to take out more cost. That's what we call the downturn playbook that we can put into effect in order to protect profitability in the company. If there is a big downdraft of obviously, equity values and slowdown in subscriptions, our desire, not our ability, but our desire to cut severely the new investments in the company may not be commensurate with the decline in -- with the slowdown in revenues. So we'll have to analyze that trade-off at that point. But for sure, we are committed to high levels of profitability and high levels of impact for investment in good times and in bad times.

Craig Huber:

Yes. Hi. Thank you. Andy, my first question, your costs in all four segments look to us like they were down sequentially. Can you just touch on that and also in light of your overall cost guidance for the year, which just interesting me that the costs were down in the third quarter. Why is that? That's my first question.

Operator:

Our final question is from Greg Simpson with BNP Paribas. Your line is open.

Andrew Wiechmann:

Yeah, nothing to read into there and no changes in generally the plans or outlook investing in ESG and Climate. It's one that we are continually calibrating as we calibrate across all segments based on the opportunities in front of us and the overall financial objectives. An ESG and Climate continues to be an attractive growth area with big opportunities. So we do plan to continue to invest in that area. The margin will -- related to the last question, expenses, expense growth and margin will fluctuate period-to-period based on a whole host of things. When you start to look at product segments, you can see some noise based on allocations moving, you can see some noise based on capitalization of software development costs. And you can see some other expense movement related to, as I alluded to perform kind of nonrecurring non-comp-type expenses or other accrual adjustments that we have. But I wouldn't focus too much on the margin in ESG and Climate this segment and as I alluded to earlier, no change to our long-term targets.

Henry Fernandez:

So thank you, everyone, for joining us today. And despite the more uncertain and more predictable environment, economically, financially, geopolitically, we continue to benefit from a great all-weather franchise. Our desire is to be a compounder in good times and in bad times. And we're very excited about all the opportunities that we see ahead of us in all of our product lines from index, to analytics, to ESG and climate and now obviously private assets and the opportunities we can unlock with Burgiss and with Trove. We didn't talk much about the voluntary capital markets and the opportunities there, but those will be very significant. So we look forward to updating you in future calls about all of our plans and our progress in all of this. And again, thanks for joining.

Operator:

Good day, ladies and gentlemen and welcome to the MSCI Second Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Good morning, everyone, and thank you for joining us today. During the second quarter, MSCI delivered another solid performance against a fluid market environment. We achieved adjusted EPS growth of 17%, organic revenue growth of 13% and organic subscription run rate growth of 11%. We also maintain our laser focus on profitability, demonstrating rigorous financial and capital management. Our capital allocation framework has not changed. We will opportunistically buy back shares, support our dividend policy and accelerate our strategy through bolt-on acquisitions. Most notably, our share repurchases since the beginning of the second quarter have totaled nearly $468 million. MSCI has repurchased close to 50 million shares or nearly 40% of our total shares outstanding from the end of 2012, and we intend to keep the same focus and discipline. All of this confirms the strength and durability of our business. One of our consistent differentiators is that MSCI can be nimble and flexible in significantly adjusting expenses up and down, depending on the operating environment. This helped stabilize our profitability through periods of market turmoil. More broadly, MSCI continues to benefit from our globally diversified and integrated franchise. In the second quarter, we delivered our 28th consecutive quarter of double-digit subscription run rate growth in index. We also had a strong quarter in Analytics, posting our highest second quarter retention rate ever of over 95% and recurring net new sales growth of 46% in equity portfolio management. In addition, we delivered 70% climate run rate growth across our product lines, along with a climate retention rate of over 97%. Our ESG run rate growth firmwide grew 18%, and the retention rate from our ESG and Climate product segment remain resilient at 97%. This shows that despite tightening budgets, our clients continue to make ESG and Climate a top priority. During my recent client trips to Asia, the Middle East, Western Europe and parts of the U.S., ESG was the most popular topic clients wanted to discuss. For that matter, when the IBM Institute for Business Value recently surveyed corporate executives across 22 industries, 76% of them said ESG is now central to their business strategy. This reinforces our belief that ESG risks and opportunities are investment risks and opportunities. With all of that in mind, MSCI is working to accelerate our ESG and Climate product launches. Our climate solutions continue to drive growth across the company, and they have helped us build momentum across client segments. This gets to a larger point. The integration and interoperability of our product line, what we call our one MSCI ecosystem, can dramatically increase value and efficiency for our clients. We further amplify those benefits through our open architecture for clients and other outside parties and through MSCI's role as a standard setter, industry connector and innovation hub. All of this represents our greatest competitive advantage as a company. It highlights our unique position in the industry, our unique mix of capabilities and our unique range of client segments. Indeed, MSCI is now well placed to capitalize on major trends in shaping the industry. Those trends include the acceleration and of the adoption of index investing; the continued shift to algorithm-oriented, rules-based technology-driven portfolio construction; the rise in demand for sustainable investments and climate solutions; the growing role of regulation; and the increased allocations to private assets. As our strategy evolves to capture new opportunities, which will require new investments, MSCI will stay firmly committed to financial discipline and high profitability. Those commitments have always anchored our strategy in the past, and they will continue anchoring our strategy in the future. And with that, let me turn the call over to Baer.

Andrew Wiechmann:

Thanks, Baer, and hi, everyone. During the quarter, it was encouraging to see the breadth of opportunities and diversity of revenue streams driving our solid top line growth. This included very strong nonrecurring revenue, which more than offset some of the lingering cyclical impacts we saw in parts of our asset-based fees. And we delivered solid double-digit subscription run rate growth with a remarkably stable retention rate despite some of the market pressures. In Index, client demand was broad-based with double-digit subscription run rate growth for all of our subproduct areas, including market cap modules, ESG and Climate modules, factor modules and custom index offerings. Our run rate growth with asset managers and asset owners was 10% and 12%, respectively. Collectively, these client segments represent about 70% of our index subscription run rate. Asset-based fees have swung to positive growth driven by a rebound in AUM-linked revenues, which were supported by both market appreciation and strong inflows. Since the end of March, we've seen $18.7 billion of inflows into MSCI-linked equity ETFs, which combined with a gradual rebound in market levels has driven AUM balances to increase by over $67 billion. There were net inflows of $15.6 billion into MSCI-linked ETFs with geographic exposures to developed markets outside the U.S. and $3.1 billion of inflows into MSCI-linked ETFs with emerging market exposures. From a product lens, there were $5.2 billion of inflows into ETFs linked to MSCI ESG and Climate indexes, while $2.5 billion of inflows went to ETFs linked to MSCI factor indexes fueled by strong flows into the quality factor. In fact, the AUM balance of equity ETFs linked to MSCI indexes was greater than $1.4 trillion as of July 20th. Volumes from listed futures and options linked to MSCI indexes were lower year-over-year relative to the high volatility environment we saw a year ago. This is consistent with what we would expect to see when AUM balances rebound. In Analytics, subscription run rate growth was 7%. We had another quarter of very strong equity factor model sales as clients continue to turn to us to help understand risk and market factors in this dynamic environment. And our strong retention rate underscores the mission-critical nature of our tools, particularly in these challenging times. In June, we delivered roughly 47,000 liquidity analytics reports per day for our clients, which is up 15% from our average daily levels in December. We now process over 850 million security holdings daily on behalf of our clients in Analytics, a testament to the scale at which investors rely on us for their most important portfolio decisions. And the capabilities across Analytics are incredibly strategic for the firm, helping to fuel growth across product areas. Although, as we've mentioned before, we continue to expect new sales and cancels to be lumpy quarter-to-quarter in Analytics. In our ESG and Climate reportable segment, our run rate grew 26% with 22% growth in ESG and 50% growth in Climate. The volume of large ticket deals has improved from last quarter, although still down from last year's levels. Net new recurring sales improved 20% since the first quarter but were down meaningfully from a record second quarter last year, reflecting more measured purchasing decisions and longer sales cycles from our clients. We continue to have conviction in our long-term targets of mid-to high-20% growth given the numerous layers of opportunities and the powerful secular drivers. As Henry and Baer mentioned, our long-term opportunities remain durable and attractive for both ESG and Climate. In Real Assets, we drove 9% organic run rate growth. As Baer indicated, our benchmarking and market and portfolio insights offerings remain strong with double-digit organic growth, while sales and retention of our transaction data products were more muted as they are cyclically correlated with the reduced volume of commercial real estate transactions. We continue to execute on our real asset product road map, and we are seeing early and encouraging demand for products like our mortgage debt intel offering. These solid operating results across the business helped drive 17% growth in adjusted EPS in the second quarter. Helping to fuel the growth, we had very strong nonrecurring revenue in the quarter, benefiting from strong sales of our index free float product. While these nonrecurring revenues will fluctuate meaningfully quarter-to-quarter, we continue to see healthy growth in the underlying demand for many of the products that are often sold as nonrecurring, such as index licenses for OTC derivatives, history data products and other unique data sets as well as analytics implementations. Importantly, these sales often open the door for broader conversations and can convert into recurring subscriptions. Share repurchases drove $0.06 of the year-over-year increase as our consistent approach allowed us to continue to capitalize on attractive opportunities. It's worth noting that our free cash flow conversion and collections were reasonably strong in the quarter although we continue to remain somewhat cautious on collection activity for the balance of the year. We ended June with a cash balance of nearly $800 million, enabling us to remain positioned for strength. Finally, I would like to provide some color on our 2023 guidance, which remains mostly unchanged and assumes market levels remain relatively flat for the balance of the year. We have left our expense guidance ranges unchanged. Although if market levels remain stable at current levels or increase further, we could be towards the top half of our expense ranges. On CapEx, we have modestly increased our guidance range, mainly reflecting our increased pace of capitalized software development costs. We remain excited and encouraged by the strong client engagement we are seeing across numerous growth opportunities, and we continue to be closely aligned with employees to capitalize on the long-term trends transforming the investment industry. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions.

Toni Kaplan:

Thank you so much. I wanted to ask about the recent ESG regulatory proposal in Europe. I guess as it reads now, how do you see it impacting your business? And are there structural changes needed? Or are you operating already in a way that would comply with the new rules?

Toni Kaplan:

Great. Wanted to also ask about on the index side of the business, you had very strong success over a long period of time. I guess, first, could we see the ESG slowdown start to impact the index business at all just given ESG indices revenue is embedded in there? And maybe also when you think about sustainability of growth within indices itself, do you see any changes in the environment going forward or just still structurally similar to what we've seen over the last number of quarters and years?

Operator:

We'll take our next question from Alex Kramm with UBS Financial.

Henry Fernandez:

So, Manav, the reality is we feel exactly the same a quarter ago that we feel today. Maybe in the call, we go into political issues or this or that, and therefore, it can mess up the message. And that's a problem that we blame it on us. In terms of communicating the overriding message is, and therefore, we feel fundamentally the same. And by the way, look, we're not [inaudible], we're not philosophers, we're not idealogue. We are grounded business people, and we see what our clients are going through in the investment process. And we talk to them extensively. We review that among us and all of that, and there is no alternative path but to believe that ESG will continue to be central to the investment process. It was a client of ours who said to me one time, look, Henry, this is very simple. The 70 years of fundamental analysis of security is focused on market, products, competition and all that. They never focus on the internal workings of the company. And what ESG partly is about the internal workings of the company. What are the motivations? What are the governance issues? What are the social issues of, how do they view the environmental issues and all of that, and that should be part of the investment process. So therefore, I think in my view, look, and this is not just me speaking, I was just on the road for six months talking to clients all over the world. And the answer was that, Alex, is that honestly, everyone wants to talk about this because when I incorporate it in what they do every single day. Look, we can argue all day long. We can look, talk at the political picture, the big picture and all of that. But from the ground up, we do not know anybody in the world that doesn't want to take ESG considerations into account in the creation of the investment process. One last thing that I would say is that even in those states in the U.S. where there is a lot of political pressure on the pension plan to abandon looking at, I think, from the ESG perspective, the people -- the investment teams of those places are telling us that they cannot do that because the rest of the world is going to take them into account. And if they do, it's going to lead to repricing of securities. And they don't want to get caught holding the bag. So look, that is the bottom-up, on-the-ground description on what happens. And we can talk about it all day long as to whether, trying but what I'm telling you is the reality is that it is investment risk, it is investment opportunity, it is fundamental to the investment process. And people are going to have to continue to take it into account for decades and generations to come.

Andrew Wiechmann:

Sure. Yes. Alex, it's Andy. So maybe just more broadly touching on price increases. We continue to get traction rolling out higher increases than we have in recent years. The contribution to overall recurring sales, new recurring sales continues to be relatively consistent across the company with what we've seen in the last couple of quarters, which is mid-30% contribution to overall new sales. Analytics, as you alluded to, we have been rolling out, like the rest of the company, higher price increases. Although, I'd say we are being more measured and more strategic. We focus heavily on the use of our product, the health of the client, the value that we are adding. And that's probably the most important point, the continued value that we're adding to the product and the service that we're delivering as well as the clients' overall usage of our tools. I think it is an important lever for us, and I think it's something we'll continue to focus on here. Obviously, we do monitor the overall pricing environment. But I think the broader considerations around the value that we're adding in client usage are probably more important on the Analytics side.

Manav Patnaik :

Yes, hi. If I could just follow up on the ESG segment. Just looking out into the second half, I guess, it's a little bit hard to figure out some kind of seasonality in that net new business number over the last couple of years. If you could just help us with what you expect in the second half, especially in the context of, I think, Henry, you mentioned an acceleration of new products in the ESG and Climate. Is that going to start impacting second half already?

Manav Patnaik :

Got it. Okay. And then last quarter, you talked about M&A pretty proactively. And I guess with the stock pullback, you went into the buyback -- into the stock buyback market, which made sense. So just any updates on that M&A pipeline?

Operator:

We'll take our next question from Alexander Hess with JPMorgan.

Baer Pettit :

Well, look, to be honest, I don't have the exact Investor Day presentation in my head, but I have a pretty good sense of what we said. So overall, I think we're very much in line with the broad direction of what we indicated there. I think the element that has to a degree changed is that the distinction between ESG and Climate has become greater than we thought at that time. And the climate agenda has its own specific topics, needs, regulatory framework, et cetera, distinct from ESG. So I would say that increasingly, while there remains, of course, significant overlap between the two, we are, in some regards, viewing them as distinct opportunity. And as we look forward to the next year, I would say that the range of climate solutions is doubtless larger in terms of regulatory needs, whether it be for banks, for asset managers, private company coverage on a kind of on-demand basis. And that doesn't mean in any way that the ESG product pipeline isn't also growing and being enhanced. It's just that I think the role of climate has become even more significant than we expected at that time.

Andrew Wiechmann:

Sure. Yes. So listen, the areas where M&A is most strategic for us in areas where we probably spend most of our time are the areas where we can get access to unique data sets, we can get access to unique capabilities or unique distribution, and so areas like ESG and Climate where data and capabilities are critical differentiators as well as areas like Private Assets are the areas where we spend most of our time. And there are many small players that have developed capabilities or access to datapoints that we believe could be differentiators. And there's a long tail of those players, both on the Private Asset side and on the ESG and Climate side. I'd say the recent regulation is not something that is catalyzing more activity at this stage. To your point, I would say, over time, it will lend market dynamics to probably be a little bit more consolidated and tougher for smaller players to compete. And that potentially creates opportunities. But right now, our focus is on really accelerating our strategic road map. And we think M&A can be an accelerant there, although it doesn't need to be. And we have, as Baer was alluding to, a very rich pipeline of organic initiatives and new product launches on the horizon. M&A can just enhance that, but we're confident even without it.

Owen Lau:

Good morning. And thank you for taking my questions. So I think your market assumption earlier this year was down in the first half and then recover in the second half. But now the market is up quite a bit in the first half. I'm just wondering how much conservatism do you have baked into your full year free cash flow guidance or there's any change in your investment plan for the second half? Any more color would be helpful. Thanks.

Owen Lau:

Got it. And then could you please add more color on the growth driver of your index subscription run rate in the second quarter? And also, it will be great if you can also remind us the growth map of your index subscription run rate, which is how much of it is driven by pricing, new logos and also further penetration. Thanks.

Operator:

We'll take our next question from Ashish Sabadra with RBC Capital Markets.

Baer Pettit :

Look, I think the context is one where there are numerous and significant regulatory changes ongoing for ESG. And we view them as significantly positive. So I don't think that there is this particular change that is material. It's the sum of all the changes that are occurring. And certainly, the likelihood that those will continue, including us being regulated which was mentioned earlier, which is a sign of how important regulators consider this topic to be. So going back to the distinction between the Americas and Europe, I think we should discard the political noise and just make the simple statement that, that regulation has not come to the U.S. yet. And so that is more what I would put an emphasis on at the distinction rather than any other topic. So overall, it is the continued regulation, not merely in ESG but also in Climate and across all client types, which is a very significant growth engine for our business.

Baer Pettit :

Sure. So just maybe a few observations on this topic. As we alluded to before, and this was particularly at the beginning of the year, and there have been changes in the regulatory environment regarding the classification of fund types 8 and 9. That is not over, but it's, I would say the largest element is likely over. And we're very involved in those discussions both with clients and regulators. So that's what I would call a temporary administrative blip, but again, just to reiterate, in the context of a very positive regulatory environment for us, right? So I think that and then in terms of your observation regarding fund launches, there has been a steady trend for ESG funds to also include a more obvious climate component. And I think we'll continue to see a wide variety of those type of fund launches depending on the client type, the geography, et cetera, and the investment goals of the clients. So I think it's a pretty broad and diversified landscape.

Operator:

We'll take our next question from George Tong with Goldman Sachs.

Andrew Wiechmann:

Sure. Yes, I'd say the dynamics are reasonably consistent with what we saw last quarter. We're seeing similar dynamics there. I would say the growth continues to be slower in the Americas relative to EMEA. And in the U.S., we alluded to this earlier, many investors continue to take a more measured pace on how they are integrating ESG, and that is driving some of the longer sales cycles. I'd say U.S. investors and managers are really thinking about how ESG impacts their overall investment objective, how they differentiate themselves relative to competitors, how they market and position themselves externally. And so there is a maturation taking place. And so we continue to see longer sales cycles, most notably in the Americas on the ESG front. But as Henry alluded to, we continue to have a very rich dialogue with them. And the encouraging thing is we have the tools and the services that can help them on that maturation and on that journey.

Kelsey Zhu:

Hey, thanks for taking question. So BlackRock has recently talked a lot about the growth opportunities in fixed income ETFs during its Investor Day. I was wondering if you can tell us a little bit more about your investments there and kind of the revenue potential in the fixed income space.

Kelsey Zhu:

Appreciate that. And then maybe just one more question on ESG. What needs to happen for that new subscription sales growth to reaccelerate again? Is it the macro conditions need to improve? Is it rate cost? Is it the political dynamic needs to stabilize in the U.S.? Just curious to hear your view on this.

Operator:

We'll take our next question from Faiza Alwy with Deutsche Bank.

Andrew Wiechmann:

Sure. Yes. I would say I would not overly focus on the margins in any given segment in any period. And more generally, we are not focused heavily on segment margins or the company margin overall. Our primary focus is on driving strong EPS growth. The margin is an input into that, and our pace of spend is an input into that. But overall, we're really focused on driving that attractive EPS growth over time. I would say segment margins are by product of investment opportunities that we have. And so our primary focus is on directing spend to those opportunities, which are going to be the fastest payback, the highest return for us and the most valuable, most strategic for us. And the margin is a byproduct of that. The other factor that feeds into segment margins period-to-period which can cause some fluctuations are allocations. And so we do have a chunk of centralized costs that get allocated to our segments as well as FX. And so for all those reasons, the quarter-to-quarter margins are not something I would focus too much on.

Seth Weber:

Very good morning. I appreciate the color on AI and generative AI. Maybe can you just touch on whether you see any risks there, disintermediation risks or anything like that? Or do you see this as more of an opportunity for the company? Thank you.

Operator:

We'll take our next question from Heather Balsky of Bank of America.

Andrew Wiechmann:

Sure. Yes. And maybe I can just broaden it to touch on the nonrecurring revenues, which were quite high in the quarter. I would say we benefited from a very large contribution from onetime license fees related to prior periods. Specific to your question, we did also have a healthy contribution from onetime purchases of our free float data set. Oftentimes, that can broaden the conversation with a client to help them appreciate why some of that data and other unique data sets that we have are going to be integral to their ongoing strategy. And so oftentimes, we will see an initial sale of a data set is a onetime sale and then they want to broaden the use of it, get updated data over time, and that converts into a subscription sale. So it's a helpful feeder for us. I would say nonrecurring revenue is, by its nature quite lumpy, which you've probably seen. We would expect it to revert to levels seen in recent quarters. But we do have a number of areas where there are kind of strong long-term demand dynamics, most notably in areas like over-the-counter derivatives and structured products as well, where we believe there could be healthy demand over time. And those are things that lead to repeat sales and another area where sometimes there can be a switch from more of a nonrecurring type license to a recurring license over time if they become a frequent user for these over-the-counter instruments of our index content. And just along those lines, what we call this, a nonrecurring line, many components of it reflect products and use cases that clients will use repeatedly, which hopefully will create more stability quarter-to-quarter.

Craig Huber:

Thank you. Obviously, your numbers speak for themselves in a very positive way. But I'm curious, given all your various discussions with clients in Europe and the U.S., has the tone of business with clients from a budget standpoint, from their budget standpoint, do you feel like it's loosening up some here? I mean, obviously, your numbers, your data, your analytical tools are mission-critical, as you talked about earlier and stuff, but are you feeling that budget constraints out there sort of loosening up versus maybe how you were thinking 3 or 6 months ago?

Operator:

We'll take our last question from Russell Quelch with Redburn.

Henry Fernandez:

We will always consider an acquisition in the areas that we want to expand at the right price that creates shareholder value. And unfortunately, a lot of other people in our space buy assets, maybe for different reasons. We only buy assets to create shareholder value in the short, medium and long term. So we're very financially disciplined even in areas that are very strategic to us. So we will always consider it at the right prices. We have looked at everything and obviously, there's not a lot out there. So what we have purposely chosen is a path of organic growth in areas that we have significant competitive advantages. So for example, there are a lot of market cap businesses, issuance-weighted indices in the lingo of fixed income, issuance-weighted indices in the world. So we're not going to add a lot of value by deploying our capital to go out and launch of all family of issuance within indices. The area that we're experts on is ESG and is in climate and is in factors. And therefore, we are pushing our capital investment into those areas that we believe we have significant competitive advantages. I believe that, by the way, that fixed income will be one of the early places of most significant repricing of assets and recosting of capital and reallocation of capital with respect to climate, probably more than equities and probably more than other asset classes. And the reason is that the largest players in the fixed income space, the banks and the insurance companies, are going to be under significant regulatory pressure to lower their climate risk in their corporate bond portfolios, in their mortgage portfolios, in their corporate loan portfolios and the like. And they're going to have to add soon and fast, and that's going to lead to a big repricing. So therefore, one of the areas that we're really targeting strongly is the intersection of fixed income and climate, whether it's analytics or whether it's fixed income on climate and indices and the like. So that's an example of places where we see competitive advantage on our part to create value.

Henry Fernandez:

Well, thank you very much for your time, for your questions. We're available to answer any of your other questions at any time, so reach out to us. We'll be more than happy to share our perspective. Enjoy the rest of the day. Thank you.

Operator:

Good day, ladies and gentlemen and welcome to the MSCI First Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Henry Fernandez:

Thank you, Jeremy. Welcome, everyone, and thank you for joining us today. MSCI delivered solid first quarter results in a challenging external environment, confirming the underlying strength of our franchise and our proactive financial management. We have not been immune to the market turmoil, but our resilience continues to stand out as seen in the headline numbers from the quarter, which include adjusted EPS growth of over 5%, organic subscription run rate growth of 12% and a retention rate of over 95%. On a segment level, we posted our 37th consecutive quarter of double-digit run-rate growth in index recurring subscriptions. We also maintain our momentum in equity portfolio analytics, achieving run rate growth of over 10%. Meanwhile, climate continued to drive a wide range of growth opportunities, including with many emerging client segments, such as banks, wealth managers and insurance companies. MSCI delivered 68% climate run rate growth across our product lines and a climate retention rate of over 96%. The difficult environment has certainly affected buying behavior of our clients. In some areas, client budgets have tightened and sales cycles have lengthened, especially for larger purchases. ESG sales have also been affected by regulatory uncertainty in Europe and by a slowdown among wealth managers and retail investors in the United States, although institutional investor demand remains healthy and steady. As we have noted in recent quarters, our AUM-linked revenue tends to be an early mover in market cycles, while our subscription revenue tends to see a lagging effect. Still, our client engagement levels remains very healthy, and we continue to find a steady demand for our products and services. Even in tough environment, MSCI’s unique competitive advantages endure. Clients need our data, models, analytics and research to navigate a rapidly changing investment landscape. With that in mind, we continue prioritizing core investments in areas we believe we can fuel growth while maintaining very rigorous overall expense discipline. We also recognize the periods of turmoil can spur opportunistic M&A at more attractive valuations than we have seen in prior years, especially as this market cycle persists. We’re actively exploring potential bolt-on acquisitions that could accelerate our strategy. Looking ahead, a key driver of that strategy will be the network effects produced by our One MSCI ecosystem. Our content and IP across product lines are already highly interoperable throughout the investment process. For example, clients can use MSCI tools to design an index-based portfolio, implement ESG or climate overlays on that portfolio and then run analytics on it. All companies at times face short-term wins, yet we continue to see powerful secular tailwinds for MSCI. This is true across product lines, asset classes and client segments. In a bull market, a rising tide can lift all boats. In a bear market, companies like MSCI differentiate themselves. MSCI remains confident that we can use this opportunity, this market cycle to strengthen our client relationships and/or increase our competitive advantages. With that, let me turn the call over to Baer.

Andy Wiechmann:

Thanks, Baer and hi everyone. The financial results in the quarter showcase the attractiveness of our financial model and the effectiveness of our actions. Subscription revenue, which is 75% of total revenue, remained steady with 13% organic growth while we continue to feel the pressure from year-over-year declines in AUM-related revenue with ABF revenue down 8%. While the first quarter tends to be seasonally lower for new sales. Our results in the quarter were softer than last year, reflecting several factors. Relative to a year ago, we saw some lengthening of sales cycles and fewer larger ticket deals. These dynamics were particularly pronounced in the Americas and within our ESG and climate segment. In ESG and climate, the impact of macro pressures and constrained client budgets had a more pronounced impact where the details of pending or recently released regulations have not been fully clarified or interpreted and where there is likely a higher level of more discretionary purchases in certain use cases. Additionally, in some areas of the firm, we saw a modest decline in retention, most notably coming from smaller hedge funds, broker dealers and real estate brokers and developers, although importantly, firm-wide retention rates remain fairly strong overall and in line with historical averages. While the longer term demand and pipeline remain steady, we expect some of these cyclical ESG dynamics to persist in the short-term. But overall, we continue to operate from a position of strength with strong momentum and healthy client engagement across our subscription base. In index, subscription run rate growth was 12% in the quarter. Client demand for active and passive index strategies remained healthy. We again saw notable strength within our market cap modules as clients continue to integrate indexes more heavily into their investment processes, and we continue to benefit from a growing trading ecosystem. Since the end of December, AUM balances and MSCI-linked ETFs have rebounded by over $82 billion, including over $7 billion of cash inflows, which helped asset-based fees improved by 6% since year-end. We saw strong flows into both developed markets outside the U.S. and emerging market funds, both areas where ETFs based on MSCI indexes had strong market share capture. Recently, one of our clients completed the largest ETF launch in history based on AUM, which is linked to MSCI’s Climate Action indexes. Traded volumes of listed futures and options linked to MSCI indexes remained slightly elevated but saw some normalization relative to the high market volatility environment last year. Within those cyclical dynamics, we continue to see the secular build of volumes resulting from the growing liquidity and trading ecosystem around financial products linked to our indexes, and the growing volumes of listed futures and options have helped drive growth in the broader index derivatives franchise. We continue to see healthy client appetite for structured products and OTC derivatives linked to MSCI indexes as well as strong demand from trading firms and hedge funds for our index data. These areas help to support both recurring and onetime sales volumes. In Analytics, subscription run rate growth was 6%, excluding FX. We continue to see strong demand from the buy side for our equity risk models and our broader equity portfolio management tools. Despite some of the previously mentioned pressures, the mission-critical nature of our analytics tools in these environments continues to provide a path of steady growth. In our ESG and climate segment, we saw overall organic subscription run rate growth of 30% with growth in EMEA at 34%, while growth in the Americas slowed to 24%. Coinciding with the slowdown in new ESG fund launches in the region and some slowdown in client buying decisions related to the previously mentioned factors. In climate, we continue to see good momentum and very engaging discussions across client segments, although some of the factors impacting ESG sales did, to a smaller degree, also impact climate sales. Our climate subscription run rate growth across all products was 68%, which was roughly the same as the Climate ABF growth rate. In real assets, we continued to deliver double-digit organic subscription run rate growth of 10%. We see strong engagement from our clients as they look for insights into the highly dynamic market, including around climate and income risk, although we did see some pickup in cancels from smaller clients in the quarter. I’ll now go over the puts and takes of our 5% growth in adjusted EPS in the first quarter. While asset-based fees were lower than last year, growth in subscription revenues was a significant driver of the $0.16 adjusted EPS expansion year-on-year. The lower share count drove $0.07 of the year-over-year increase, benefiting from the significant level of opportunistic share repurchases we executed last year. I would note that our Q1 adjusted EBITDA expenses of $247 million included about $22 million of seasonally higher compensation and benefits-related expenses that we had anticipated and indicated to you previously, although we did have some comp-related accruals and non-comp items that were slightly more favorable than expected. We remain well capitalized and ended March with a cash balance of nearly $1.1 billion. On client collections, we continue to see slightly longer payment cycles consistent with our prior comments due in part, we believe, to the opportunity cost of a high-rate environment. There were no share repurchases during the quarter, although we continue to be poised for and actively focused on attractive repurchase and potentially compelling bolt-on M&A opportunities. We continue to believe this environment could result in some repricing and/or unlocking of previously unavailable acquisition opportunities. Lastly, I would like to turn to our 2023 guidance. Our guidance ranges across all categories remain unchanged. It is important to note that we have based our guidance on the assumption that ETF AUM balances declined slightly from current levels in the second quarter and gradually rebound in the second half of the year. While the environment may result in some caution from clients in the next quarter or two, we have the financial model and the proactive management levers to drive investment in the very compelling long-term growth opportunities while delivering very attractive financial performance. We remain encouraged by the strong client engagement across numerous growth opportunities, and we continue to be closely aligned with the long-term trends transforming the investment industry. We look forward to keeping you all posted on our progress. And with that, operator, please open the line for questions.

Manav Patnaik:

Thank you. Good morning. I just wanted to just talk about the ESG slowdown specifically, I mean, is the comments around the regulatory delay, is that just people waiting. I just want to understand why that would impact whether they needed the data that you guys have or not. And then just hoping you could just break out the strong growth rates in ESG, like how much of that is new sales versus cross-selling or upselling and pricing, just to help understand which part of that dynamic is being impacted the most?

Andy Wiechmann:

And Manav, just very quickly on the composition of new recurring sales to your question, the strong majority of new recurring sales continue to come from the new clients and new services or upselling our existing clients. I’d say, the breakdown between those is roughly even. So roughly even contribution from new clients and new services. I would highlight price is contributing a slightly higher percentage than what we’ve seen in the past to new sales?

Henry Fernandez:

So as we said, Manav, these are all smaller bolt-on acquisitions. There is nothing sizable or transformational that we can see on the horizon that obviously can change at any point, but we don’t see that happening. So we have been – as you have seen, as we’ve been relatively muted in our acquisition past in the last few years because we’re very disciplined buyers. Even if an asset is very strategic, it has to have financial underpinning stores. It has to make sense financially. We saw a lot of our competitors bidding up assets to levels that we would not want to participate in, in the past. So we’re waiting to see if this environment brings down those valuations that make a lot more sense and obviously only in the strategic areas that we’re interested in. So that’s why we wanted to emphasize that and especially in the context of the lack of repurchases because we don’t have a huge amount of cash, and we have wanted to preserve cash for these opportunities when and if they come.

Operator:

The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Henry Fernandez:

Thank you for that, Toni. First of all, let me just reiterate that our ESG franchise is very diversified – ESG and climate franchise is very diversified across regions, across types of customers that – what we call client segments, whether it’s an institution – an institutional investor manager managing institution of money versus a manager managing individual or wealth money across banks and across, as I said, regions of the world, and use cases. So this is very varied and the like. So what I want to make sure we all recognize is that the U.S. marketplace is a clearly important one. But within the U.S. marketplace, you’ve got to break it down into what is going on with the – with managers who are managing retail money versus people who are managing institutional money versus the banks who have a different driver versus the hedge funds and all of that. So therefore, it’s a lot of different areas that we need to look at. My sense – our sense at MSCI is that the area of the market that it is asset managers managing mutual fund money or ETF money or wealth money is going to stay subdued and for a couple of reasons. One, the client segment, half of them are blue and half of them are red and some of them are going to have different views as to what this product line should be. Secondly, a lot of asset managers are trying to stay below the radar screen of a lot of these political wins. They don’t want to be attacked, so they don’t want to be making a lot of fanfare about new products, they are launches – launching, etcetera. So in the U.S., it’s going to stay a little bit subdued on that segment of the market, but it will not be on the institutional market, and it will not be on climate for banks, for example, climate risk for banks and others. In EMEA, I think this process of reclassifying funds and reordering things, it’s going to – still may take a few months, a few quarters, and then the demand will pick up again in the context, obviously, of a total operating environment. And when we’re beginning to see a lot of traction in Asia in all client segments and that is virgin territory for us.

Baer Pettit:

Hi, Toni, Baer here. So look, maybe just using a slightly different tone, I can’t control myself. Look, ESG and climate still grew 30% in this quarter, right? That’s a very attractive growth rate, and for sure, if we can sustain that sort of growth rate on the run rate we have, that remains a very significant opportunity and adding the – that amount in dollars in run rate every quarter, for sure, will continue to require a lot of investment. And as Henry has pointed out, we have continuous demand across a variety of client segments, geographies, etcetera. So there certainly isn’t anything between this quarter and the last which changes our view that this is a structurally important opportunity, right? So we have to balance it with the environment. And Henry alluded to certain strains, if you want to call it that. But certainly, from our perspective, this is a growth opportunity. It is structurally so and we have a lot of client demand for continued data and improvements in the product line.

Toni Kaplan:

Makes sense. Thank you.

Alex Kramm:

Yes. Hey, good morning, everyone. Just wanted to talk about the sales environment in particular, what happened in the first quarter. Clearly, the second half of March got very volatile with some of the bank issues. So knowing salespeople, I know sometimes those sales can happen right at the end of the quarter. So just wondering if that was a big headwind at the time, if you actually think some of the 1Q opportunities got pushed into the second quarter or if somewhat you just saw at the end of the first quarter, actually, is just a look at what may be to come and things actually get worse from here near-term on the sales side.

Alex Kramm:

Okay. Great. And then secondarily, you made some comments about still very focused on profitability and growing profitability. I think over the last few months, I’ve heard you speak a little bit more when it comes to profitability in terms of EPS, earnings per share, and not as much on margins or EBITDA margin. So just curious, when it comes to EBITDA margin, which a lot of us care about, are you still very committed when you talk about profitability on growing core margins? Or are you thinking more holistically? Or what’s your latest thinking about profitability?

Alex Kramm:

Thank you. Thanks for clarifying me.

Ashish Sabadra:

Thanks for taking my question. Baer, in your prepared remarks, I believe you mentioned there are some promising larger deals that the teams are currently working on to close in the second quarter. I was wondering if you could just provide some more color on those deals, which are the uncertain end markets. Is it focused more on index analytics or ESG? Any color on those fronts? Thanks.

Ashish Sabadra:

That’s very helpful color. And maybe just a quick follow-up. As we think about the sales slowdown on the subscription growth, obviously, subscription growth has been really robust 12% despite the macro challenges, but how should we think about some of these sales slowdown headwind on subscription growth. But on the other side, we also have ABF improving as the AUM fund flows improve. So any puts and takes on the top line as we think about going forward? Thanks.

Ashish Sabadra:

Very helpful color. Thanks, Andy.

Alexander Hess:

Hi, good morning, all. I just want to touch again on the retention rate briefly, 95.2%. I believe that was up somewhat from 4Q. Can you comment maybe how much of that sequential quarter-on-quarter improvement was driven by any sort of improvements or changes in the client environment? Or was that just seasonal factors there?

Alexander Hess:

Thanks, Andy. And maybe as a follow-up, you briefly mentioned real assets. Just wanted to maybe get an update on anything that’s gone on there with the Burgiss group with RCA. We’re a couple of years out now from some pretty large spend on those areas. It would just be nice to get an update on traction in the market and anything else you can maybe provide us with on those businesses.

Alexander Hess:

Thanks, guys.

Owen Lau:

Yes. Thank you for taking my questions. So broadly speaking, how does the reopening of China and the comeback of some Chinese stocks impact AUM and the flow of MSCI-linked index in the Asia Pacific region? And then, maybe could you also please talk about or give us an update on the opportunity in the Asia Pacific region and how MSCI would approach these opportunities? Thank you.

Andy Wiechmann:

And just to put a finer point on the ETF flows. We did see pretty healthy flows into international markets, both developed markets outside the U.S., but to Henry’s point, also into EM exposure. And those are two areas where we had nice market share capture. On the EM flows, we actually captured about 60% of new flows into emerging market ETF. And clearly, China is a big component of that.

Andy Wiechmann:

Sure. I would say, overall we continue to have a cautious outlook in the near-term, which you can see by the ETF AUM assumption that’s underlying our guidance. Just to reiterate what you alluded to, we are assuming the markets’ decline from the current levels during the second quarter here and then rebound gradually in the second half of the year. Just to your question about what it would take for us to dial up or dial down, I would say it’s a constant calibration. It’s something we are actively focused on. Although the markets performed better during the first quarter than the assumption we had outlined in our original guidance at the beginning of the year, we still continue to have a cautious outlook in the near-term. And so, we are being cautious on expenses and the pace of hiring where we are being a little bit more measured. And we continue to be disciplined on the non-comp expense front to ensure we are able to invest in those critical growth areas and attractive long-term opportunities. We do have, I would say, further levers on the downside if we need to, and we can further slow or even stop headcount growth, and we can further tighten non-comp on the downside. But importantly, to your question, if we do see a sustained improvement in the markets, we are ready to accelerate investment and spend. And so, it would be really a calibration and a determination that we see that sustained momentum in the markets and confidence that we are recovering here. And if we see that, then I think you could see us dial up the pace of spend. And I don’t want to comment specifically on what that would mean for free cash flow. There is a lot of puts and takes there, but I would say all the guidance is a reflection of the outlook that we have, and we have currently got a cautious outlook.

Operator:

The next question comes from George Tong with Goldman Sachs. Please go ahead.

Andy Wiechmann:

Yes, sure. So, listen, the way it manifests itself, and I am just underscoring points that we have made because I am trying to stick to what we are seeing here, which is fewer large ticket deals, lengthening of sales cycles and elevated cancels, particularly among smaller clients and particularly in just ESG and real estate. Those impacts are most pronounced in those two segments where I think there are some segment-specific factors. Henry outlined some of the factors impacting ESG, and Baer talked about some of the factors impacting real estate. I do want to underscore that index and analytics see some of those dynamics to a small degree, but are generally holding up okay. And there continue to be a number of large and key areas, not only in index and analytics, but also in ESG and real estate, where we continue to see strong momentum. And many of those are the core aspects of those parts of the business. Geographically, the dynamics were most notable in the Americas, but I would say that was heavily driven by the impact in ESG and climate. But overall, pipeline is steady, as Baer said, and we do expect some of these dynamics to continue in the short-term. But I think we see the indications that the engagement with clients on these big secular trends continues to be quite healthy.

Baer Pettit:

Yes. So, look, I don’t think there is a dramatic change. We had a few large deals that didn’t quite make it this quarter. We didn’t do quite as well as we would have liked in fixed income this quarter. But actually, we have got a really good pipeline there and that business is going from strength-to-strength and so it’s a little bit of a mixed bag. So, I don’t think we don’t see anything dramatic. We would like to do a little better than we did this quarter for sure. We have got a decent pipeline, including some of the larger deals that I alluded to in my earlier comments to Owen, I think it was. So, I think overall, we are working the pipeline. We would like to see the growth a bit higher than it is here, but we don’t expect anything dramatic from where we are right now.

Operator:

The next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Andy Wiechmann:

No, nothing too significantly. As I said, we did a roll forward of the ETF AUM assumptions that underlie our guidance at the beginning of the year to where we are now. Clearly, the markets performed a bit better in the first quarter than we had baked into the original guidance, but we continue to have this cautious outlook and assume that the markets will pull back a little bit here in the short-term and then rebound in the back half of the year. And so, I would say, the overall view on expenses and pace of spend is generally consistent with where we started the year. I would say we continue to have that degree of caution here, and we have moderated the pace of headcount growth, although you probably saw we continue to grow, and that’s in the key areas, the key growth areas for the firm.

Faiza Alwy:

Understood. Thank you for that. And then just a follow-up on the climate side, you mentioned obviously slowing new sales on the ESG and climate segment, then you mentioned the political environment in the U.S. and some regulatory uncertainty in Europe. It sounded to me – my takeaway is that that’s more on the ESG side as opposed to the climate side. But curious if that’s the right takeaway and any further color you might have on that.

Faiza Alwy:

Great. Thank you.

Craig Huber:

Great. Thank you. On the climate front, can you just tell us quickly, if you would, what data and what analytical tools, you guys think you have in climate that really sets you guys apart from your peers out there? And obviously, you talk about long-term. You think your climate run rate will eventually get larger than the rest of ESG. So, what really makes you stand out from a data standpoint and tools from climate?

Andy Wiechmann:

Yes. And Craig, if you don’t mind, I just want to underscore one point, which I think you know, but it is really an important differentiator for us. That be $4 million [ph] of climate run rate cuts across all product segments for us. And so the ability to offer solutions across almost every part of the investment process really differentiates us from other providers out there. So clearly, index is a big part of it, which I know you are aware, but our leadership in index is more generally. And our leadership in climate caused us to be a leader there. Our ability to provide climate risk insights across analytics where we have the clients’ portfolios, we are helping them with risk already really give us a leg up on anyone else trying to do climate risk at a portfolio or an enterprise level. And then in areas like private assets, just given our capabilities and unique data we have on that front gives us a real leg up. So, the total franchise that we have is a real competitive advantage that I want to make sure people don’t lose sight of.

Henry Fernandez:

Okay. I think we are extremely comfortable with our cost base, our expense base, which we divided up into running the business expenses on what we call change the business expenses, which is the more pure investment plan. We have preserved in the last few quarters the vast majority of our investment plan. And we have done that by squeezing around the business expenses in a variety of ways to free up resources, okay. So, we are very, very comfortable. We believe we have scaled the expense base of the company to the operating environment, to the cautious operating environment that exists today, even with a lower operating environment that exists today. In the event that it dramatically moves down, we have a lot of levers that we can apply. But if anything, we believe that the probability of us triggering an upturn playbook is probably higher than downturn playbook, but we don’t know. I mean obviously, we have to see what happens in the next few quarters. So, we are extremely comfortable. The other thing to remind everyone is that MSCI is a very diversified client base – a diversified franchise. We tend to not focus on that. It’s diversified about client segments from asset owners, to asset managers to – from wealth managers and banks and insurance companies on our corporates and hedge funds and banks, the regions of the world. We are doing well in EMEA right now, relatively well in EMEA, to the Americas, to the Asia-Pacific region. The product lines and public assets, equity and now fixed income and private assets and ESG and climate has overlaid to all of what we do. We have a lot of performance tools. We have a lot of risk tools. We have different forms of pricing whether it’s subscription, whether it’s AUM, whether it’s transaction and then volumes like in futures and options. We have a very diversified employee base. 65% of our employees are spread a lot, half of them [ph] are so big emerging markets of the world, 35% are in developed markets. So, whenever there is an issue of labor tightness or increases in expenses and wages in a particular location, we hire in other locations. We have a lot of hedges between dollar versus non-dollar and the like. So, that’s why we are very comfortable with this expense base because of the nature of the franchise that is diversified and the nature of our cautiousness going into the market.

Operator:

The next question comes from Russell Quelch with Redburn Partners. Please go ahead.

Andy Wiechmann:

Yes. I would – as you know, the subscription base is slow-moving beast. And so even adjustments to the retention rate around the hedges or sales don’t have a meaningful impact in the current year. So, I would say the bigger impact for this year is really around asset-based fees.

Andy Wiechmann:

Sure. Yes. I would say that price increases continue to be at a higher level than they have been in recent years, and they continue to contribute a larger percentage of new recurring sales. We have been successful with capturing price increases with clients. And we actually, in the first quarter, probably even saw a slightly higher contribution to recurring subscription sales than we even saw last quarter. I would say we will continue to be measured on this front and ensure that we are delivering value to our clients in connection with price increases. But where we are delivering value, we will continue to extract price and seem to be getting traction with it.

Operator:

The next question comes from Greg Simpson with BNP Paribas. Please go ahead.

Baer Pettit:

Sure. So look, we are actively – have quite a few projects going in AI across everything from client service, where we think it has great applications in reading our enormous amounts of methodology books and complex formulas and etcetera and giving clear answers. We are working on it – with it in ESG and all of the data applications that can go there. I mean there is a whole list of it, but we are extremely focused on it. And we would love to tell you more clearly in a slightly different context, but we are definitely very focused on the use of AI across the business.

Baer Pettit:

Yes, for sure. So, it’s both a very important part in our analytics story, both on a standalone basis and as part of multi-asset class risk. And we are really doing a lot of innovation in index. We are clearly starting from a tiny base, but we have got some really exciting things going on there related to ESG and climate, relating to liquidity. I am actually seeing a client this evening for dinner related to some credit and fixed income opportunities. So, we think it’s an area where people are very excited to see us bringing things forward, and I think it will be important part of our growth story going forward.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Henry Fernandez for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect.

Operator:

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would like to now turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may now begin.

Henry Fernandez:

Thank you, Jeremy. Welcome, everyone, and thank you for joining us today. In the face of significant global headwinds, MSCI delivered strong fourth quarter results to cap off another successful year. Among our fourth quarter highlights, we posted organic revenue growth of 7%, including organic subscription revenue growth of 16% despite a reduction in our AUM-linked revenue. This growth, combined with our intense focus on expense management, drove adjusted EPS growth of 13%. In terms of capital management, we repurchased more than $70 million worth of MSCI shares. You would also note that our Board of Directors has approved increasing the dividend by 10% to $1.38 per share. For 2022 as a whole, we posted organic revenue growth of 9%, including organic subscription revenue growth of 15%. We also achieved adjusted EPS growth of 15%, and our share repurchases totaled nearly $1.3 billion. We delivered these results despite historic levels of market volatility, which makes us cautiously optimistic about the year ahead. MSCI continues to benefit from our diversified all-weather franchise, which allows us to thrive in all environments. In 2022, over 97% of our revenue came from three recurring revenue streams, including recurring subscription revenue, which was about 74% of the total; recurring AUM-linked revenue, which was 21%; and recurrent listed futures and options transaction-based revenue, which was about 3%. While the external environment created headwinds and more variability for AUM, our subscription and transaction-based derivatives businesses performed well through difficult operating conditions. We have once again demonstrated the balance, adaptability and resilience of our franchise, which has enabled us to continue making critical investments in long-term secular growth areas. These investments are helping MSCI expand and enhance our solutions to meet the needs of an increasingly diversified and diverse client base. Baer will talk about our solutions in greater detail. For now, I would like to explore the strategic backdrop for both our 2022 results and our 2023 priorities. MSCI continues to see enormous growth opportunities across product lines, asset classes and client segments. At times like this, investors become even more reliant on high-quality data, models, analytics and research to help them understand fast-moving market changes. MSCI is constantly monitoring for signs of pressure that our clients could face from reduced budgets and longer sales cycles to increased layoffs and fewer new fund raises. That being said, we are cautiously optimistic on the path forward. Our strategy continues to capture major structural shifts in the investment world. For starters, index investing is increasingly popular across regions, asset classes and investor types. The reason is simple. Index investing gives investors an efficient mechanism to express their investment thesis and preferences and to focus on asset allocation. During periods of financial turmoil, the unique strength of MSCI's Index business become even more salient. We can offer one-stop shop for different types of indices across many layers, including asset classes, exposures, styles and investment teams. I have spoken before about the massive potential of direct indexing in particular. I want to emphasize that MSCI dramatically strengthened our direct indexing market position in 2022. For the full year, we increased our total number of direct indexing clients by 200%. The index investing trend reflects a broader shift toward outcome-oriented investment strategies. ESG investing is a big part of that. As you know, ESG has become a hot button political issue, especially in the United States. However, political noise is different from investment reality. And the reality is that ESG risks are financial risks. That is why even as the parties and the bank gets launder, investors continue to make ESG integration a priority. For example, the Index Industry Association recently surveyed investment fund companies across the U.S., U.K., Germany and France. An overwhelming majority of the respondents said that ESG has become more important to their investment strategy between 2021 and 2022. These findings are reinforced by client demand for MSCI's ESG solutions, which has remained strong. No single issue has done more to elevate ESG than climate change. In 2022, climate risk became increasingly visible as countries around the world suffer from record heat waves, record drought conditions and record flooding. What is true of ESG risk in general is true of climate risks, in particular. There can be material financial risks. Investors understand that. For example, in a recent Deutsche Bank investor survey, more than 3/4 of respondents said that climate change either is already having a severely negative impact on the global economy or will have such an impact over the next 10 years if left unchecked. Investors recognize that climate change is also not only at risk but an opportunity. Consider a recent report from the International Energy Agency on renewable technologies. The IEA now projects that the world will have as much renewable power in the next five years as it did in the past 20. MSCI is determined to become the undisputed leader in climate-related investment tools. To support these ambitions, we continue to make key investments across asset classes and geographies. As a result, MSCI is now well positioned to help all types of clients achieve the net zero pledges. In 2022, we saw especially strong growth in climate sales among nontraditional client segments, especially corporates, banks and traders, wealth managers and hedge funds. We have also developed innovative climate tools for private assets, an area where we continue to see tremendous possibilities for growth. One example is the carbon foot printing of private equity and private debt funds tool that we launched with Burgiss towards the end of 2021. The key enablers for all of this remain our data and technology. MSCI's ongoing tech-driven data transformation is helping us improve the client experience in so many different ways. Last month, we expanded our strategic partnership with Microsoft to support our new MSCI One technology platform, which is built on Microsoft Azure. Just last week, MSCI announced another strategic partnership with Google Cloud to build an investment data acquisition and development platform. This new platform will make it easier for ourselves and our clients to translate world data into actionable insights. As I mentioned earlier, the importance of our data, models, analytics and research only increases during periods of market turmoil. Our solutions play an essential role in helping investors navigate today's volatile landscape and build better portfolios. At the same time, MSCI's resilient, all-weather franchise continues to allow us to invest for the future while maintaining strong profitability growth. Just one final note before I turn the call over to Baer. Earlier this morning, we issued a press release announcing that Baer has been appointed to the MSCI Board of Directors effective immediately. I would like to congratulate him on his well-deserved appointment. As many of you know, Baer and I have been close business partners for 23 years, and he has been instrumental in building MSCI into what it is today. Baer's unique skills, experience and strategic thinking will significantly strengthen the Board's effectiveness and ability to continue to create shareholder value. I would also like to be clear that my role is not changing at all. I have no plans or timetable to retire or step down as CEO or Chairman of the Board. I remain extremely engaged and energized by the company's tremendous growth prospects. If anything, I am more excited today but our significant opportunities that I have been at any time in the 27 years that I've been leading this business. I look forward to continuing to partner very closely with Baer for many more years as CEO and President and now as fellow Board members. Again, congratulations to Baer, whom I now will turn the call over to. Baer?

Andy Wiechmann:

Thanks, Baer, and hi, everyone. As Henry mentioned, we completed 2022 by delivering organic subscription revenue growth nearly 16% for the quarter and 15% for the full year, outperforming our long-term target of low double-digit growth. In the face of market headwinds, our results reflect the durability of our franchise and the benefits of the consistent investments we've made into attractive high-growth areas. In Index, subscription run rate growth was 12% in the quarter, our 36th consecutive quarter of double-digit growth. We've seen tremendous traction and healthy growth within our market cap-weighted modules as our buy-side clients broaden their usage of our indexes. And we continue to see the utility of our index content expand across a wide range of high-growth segments. Across our Index subscription base, asset managers and asset owners together had subscription run rate growth of 10%, while hedge funds, broker-dealers and wealth managers together grew 17%. We also saw continued momentum in our investment thesis index offerings with nonmarket cap index modules collectively achieving a subscription run rate growth of 14%. From the end of September through year-end, market appreciation contributed approximately $119 billion to AUM balances of equity ETFs linked to MSCI indexes, although for the full year, we saw a net decline of $284 billion in AUM balances. Additionally, we were encouraged by the $23 billion of cash inflows into ETFs linked to our equity indexes during the quarter with roughly $15 billion of inflows into emerging market exposures and over $9 billion into developed market exposures. Equity ETFs linked to MSCI ESG and climate indexes experienced inflows of $6.5 billion, representing approximately 70% market share. Flows into ETFs linked to MSCI factor indexes were more muted but still positive with investor appetite more focused on yield and income where we have less presence than on other factors where indexes are more widely used, such as momentum and minimum volatility. During the fourth quarter, the run rate basis points on AUM paid to us by ETF clients was flat year-over-year supported by a mix shift out of lower fee products. Despite the steady levels over the last year, we continue to believe the average basis points on AUM paid to us by ETF clients will gradually decline over time, although we expect the declines will be more than offset by strong growth in assets. In listed futures and options, we once again saw some of the natural hedges embedded in our asset-based fee revenue line as traded volumes showed healthy growth against the choppy market backdrop. Looking ahead, if market levels continue to rebound and stabilize, we would hope this would be constructive to AUM-linked revenues from ETFs and non-ETF passive. At the same time, futures and options volume and revenues may decline compared to the volatile period a year ago. We continue to believe our opportunity is significant in licensing indexes for both AUM-linked ETF and non-ETF passive products as well as in transaction-based listed derivatives products. In Analytics, subscription run rate growth was nearly 7%, excluding FX. As Bart mentioned, we continue to gain traction in front-office use cases supported by tremendous strength in our factory analytics and our climate tools in recent quarters. Additionally, our growth has been supported by firm-wide enhancements to our interfaces and progress in delivering broader, more flexible access to our content. However, as we have previously noted, we expect some lumpiness in the segment across both sales and cancels given the broad range of clients and use cases that we support. In our ESG and Climate segment, new recurring subscription sales grew 64% from the third quarter as we saw some rebound in large-ticket deals in both ESG research and in Climate and tremendous traction in closing deals in EMEA. Climate remains one of the most attractive growth engines for MSCI. Our firm-wide climate run rate reached $79 million, an increase of 80% from a year ago, reflecting exceptional growth across geographies, product offerings and client segments. Across all of our segments, we continue to see strong secular demand for mission-critical must-have tools, and we continue to see a strong sales pipeline, although we remain cautious given the market backdrop. As we have mentioned previously, in past periods of sustained equity market pullbacks, we can sometimes see slightly elevated levels of cancels and lengthening of sales cycles. In connection with our downturn playbook, we continue to identify efficiencies to aggressively reposition our expense base to drive attractive profitability growth while preserving investments in the most critical growth opportunities. As part of our regular review of our talent and our expense base in the fourth quarter, we took proactive actions to regrade our employee footprint, resulting in a $16 million severance charge, which was roughly $13 million higher than a year ago. These tough actions have allowed us to preserve and even enhance our investment spending in certain key areas. This expense discipline, coupled with our subscription revenue growth, has enabled us to drive strong growth in adjusted EPS even through tough environments. The tremendous growth in our subscription base has been supported by doing more for our clients, continuing to penetrate newer large addressable markets and capturing price increases enabled by the continuous enhancements to our products and client experience. During the fourth quarter, price increases contributed about 35% of our new subscription sales firm-wide across all products and more than 40% within index. We ended the year with a cash balance of $994 million, of which well over $600 million is readily available. Free cash flow came in slightly below the low end of our previous guidance. We saw a small slowdown in client collection cycles as a result of extra approvals within certain clients, which we believe is related to the market backdrop. But we believe overall collections remain healthy, and we see no issues around collectability. Our capital allocation framework, which is focused on maximizing shareholder returns, remained unchanged. We will continue to deploy our investment dollars towards the highest returning organic growth areas, return capital through a steady dividend that increases with adjusted EPS and opportunistically capitalize on share repurchases and pursue value-generative MP&A. As Henry indicated earlier, we have decided to increase our dividend in the first quarter. We are not making any changes to our dividend policy or a broader approach to capital allocation. We have decided to shift our annual dividend increase from the third quarter, where we have historically announced the increase to the first quarter in order to more closely align with our annual planning process. Lastly, I want to underscore that we also continue to actively evaluate and source bolt-on M&A opportunities, particularly in areas of unique content and differentiating capabilities such as private assets, climate and ESG as well as fixed income. Lastly, I would like to turn to our 2023 guidance, which we published earlier this morning. Our guidance ranges reflect the assumption of continued volatility in financial markets with overall equity market levels down slightly from current levels during the first half of the year and gradually recovering in the second half of the year. Our expense guidance range reflects the efficiency actions we have taken in recent months and captures the investments we will continue to make in order to deliver growth. We expect normal seasonality in our expenses with $15 million to $20 million of elevated benefits and compensation-related expenses in the first quarter. I also want to highlight that our CapEx guidance reflects a continued high level of software capitalization as we continue to enhance our platforms and interfaces across product lines. Our tax rate guidance highlights that we expect our effective tax rate to increase slightly year-over-year primarily reflecting that we expect to receive a smaller windfall benefit in the first quarter as a result of where the share price is relative to the price at grant as well as based on the amount of awards vesting. There could be pressure on year-over-year adjusted EPS growth in the first quarter due to the higher tax rate and the significant decline in average ETF AUM levels relative to the average levels during Q1 of last year. Lastly, I want to highlight that our free cash flow guidance reflects the expectation of higher cash tax payments in 2023 as well as a slight degree of caution on client collection cycles based on the environment, consistent with what we saw in the fourth quarter. Overall, we're well positioned for the year ahead, and we're excited to continue to drive growth and differentiation. In periods of volatility and uncertainty, we believe MSCI is uniquely positioned to help our clients capitalize on unique opportunities and drive value creation. These are the times when MSCI thrives. We look forward to keeping you all posted on our progress. And with that, operator, please open the line for questions.

Alex Kramm:

Yes, thank you. Good morning everyone. Starting off maybe on the retention side for a second here, that dropped, I guess, from the 3Q to 4Q pretty decently relative to the last couple of years. I think if I look in history, it's probably more seasonal. But I'm just wondering if there's anything that you saw that gives you any sort of pause into this year. You mentioned the things on the analytics side. But outside of that, anything that gives you a little bit more pause as you think about the sustainability of results?

Alex Kramm:

Okay. And then secondly, and this is somewhat related, but first of all, thanks for clarifying some of the moving pieces on free cash flow. I think some people are trying to read too much into what that means on the revenue side, which is kind of like my question. I know you don't guide revenues, but you highlighted again the long-term targets and history of delivering double-digit, I guess, subscription growth look at the asset side for a minute - as a base side for a minute? Anything that would change your view on that low double-digits as we think about 2023 given some of the starting off points and some of the cautionary comments you've potentially made a little bit just now?

Alex Kramm:

Fair enough, thanks guys.

Toni Kaplan:

Thanks so much. I wanted to take a step back and look at margins within the analytics business, really stepped up a lot this year. I guess, how are you thinking about investment in that business? Are you investing enough there? Just maybe talk about the drivers of the margin expansion and basically investment needs or growth opportunities?

Henry Fernandez:

I would like to add, Toni, if you don't mind, the - clearly, there are parts of analytics that we're putting heavy investments on like Climate Lab Enterprise, fixed income, portfolio analytics, equity portfolio analytics and some of the content. But also for the benefit of everyone in this call, we also run a very, disciplined, very rigorous Triple-Crown investment process in the company, in which each one of the product areas. Each one of the client segment areas and some of the support areas, when they come to - in front of this investment process, they have to demonstrate elements of the Triple-Crown. One is high return, high IRR shorter-term paybacks and in areas of high multiple valuations for the company. So in the case of Analytics, they've been able to rationalize investment in some of the areas that I mentioned, but not in other areas. So they haven't gotten capital from us because of that. Other areas like climate and ESG and custom indices and the like have gotten the capital.

Baer Pettit:

Sure, Toni Baer here. So look, I think the way to think about it is through a few different layers. One is we clearly have a diverse range of calculation engines, which create kind of state-of-the-art analytics of various kind and outputs, which are distributed throughout the firm and different asset classes, et cetera. Then we have some traditional platforms and other distribution methods through files, et cetera, that we've had. And then, we have sort of newer content that we're building. So the way to - the best thing - way to think about MSCI on is a combination of those traditional outputs of our - if you like, our calculation factory and sort of industry standard software that allows those to be presented in a more user-friendly way and brought together in a similar type of platform, which in turn improves both the user experience and users' ability to manipulate that data to do - to have greater flexibility in how they present it, et cetera. So for sure, we think we're on a very important path forward here. It's incremental. As we move forward during the course of 2023, we think that the client impact of that will increase. And we hope - definitely hope and intend to continue to give you positive news and update around all of that. So I think there is maybe a - how should I put it, a risk that we're understanding this somewhat. And that's what I try to wanted to make some comments about it today. At the same time, we want to make sure that we are the delivery department and not the promise department in this area. So as the year progresses, we'll make sure that as we bring out new functionality, new capabilities, new ways of integrating and our clients start using those more, we'll keep you abreast of that. But we're certainly very positive about it. And we think that, over time, this will really be a way that our clients start to think of MSCI in a different way as regards the flexibility and the ease of use of - in their day-to-day working with our content.

Operator:

Our next question comes from Manav Patnaik from Barclays. Manav, please go ahead.

Andy Wiechmann:

Sure, sure. Yes. Thanks, Manav. So Baer noted this in his prepared remarks, but the cancels weren't so much reflective of a higher frequency of cancels across the board in the segment but rather a concentration of a few large ones. On those few large ones, there were some competitive dynamics and some client event-related dynamics at play. And as we've mentioned in the past, we do expect some continued lumpiness in both sales and cancels within analytics and potentially some impact from the environment. So more broadly, we are really encouraged by the momentum and improving competitive position. We continue to see in the strategic focus areas that we're focused on in analytics like equity and fixed income portfolio management tools or climate tools or enhancements to content and capabilities. And we are committed to the long-term growth targets that we've got for the segment of high single digits, which, actually, we're quite close to in the fourth quarter, the subscription run rate growth on an organic basis, close to 7%. And the revenue was 9.5%, excluding FX. So it was a quarter that demonstrated some of the lumpiness. But overall, we continue to be encouraged by the momentum we see in the segment.

Henry Fernandez:

Thank you, Manav. So the - first of all, I mean, one of the major impetus and investment in our firm is in our data and technology platforms. MSCI, in the past - in the recent past was a very large data processing company. We took third-party data and run it through risk models, factor models, indices and the like, mix methodologies and the like, where MSCI has become, starting with the ESG business, now with climate and private assets and so on and so forth is a large data building in our company in addition to data processing company. So we are now the original source of a lot of data in addition to sourcing data from third parties. And all of that needs to be distributed to our clients in a very effective way. So we have basically three partnerships that we're trying to work and expand and specialize on. The first one clearly has been the Microsoft partnership in Azure, in which they're helping us with the data processing part, processing large amounts of data, especially in our risk systems and all of that, index systems, et cetera. And the partnership there also will help helping us on their software and how do we use their software to build products like in power behind. Obviously, we announced the MSCI One is a partnership with them. So that is Microsoft, and that continues to deepen and strengthen. The second one that we announced is Google and the Google Cloud. That partnership is about Google helping on build data, collect data, organize data, index data in this data building transformation that we're going through and then run all of that data through their cloud as well. So that is definitely - there's always a component of cloud computing, but the push here is data building. As you know, Google is one of the largest data building and data processing companies in the world. Everyone focuses on the search engine, but there's a search engine won't be as good at all without the - data. And the third partnership is South Lake which is in the distribution of our content, our beta in a very effective way with our clients. So we're trying to strengthen and deepen that in our relationship with now.

Operator:

And now we have a question from Alexander Hess from JPMorgan. Alexander, please go ahead.

Henry Fernandez:

So let me provide some quick comments and then pass it on to Baer. First of all, as I said in my prepared remarks, there is a lot of political football here going on, on ESG. And eventually, we'll get to climate as well. And - but the first point is our ESG business has nothing to do with political ideology of political philosophies. Our ESG business totally grounded on the fact that ESG or nonfinancial risks are material investment risks and material financial risks in a company, things that we're - right now. corporate governance, right? The governance of the company and the auditors and all of that and $60-plus-billion market cap now because nobody tells you that's political and that's not investment risk. Then I don't know what it is investment risk. So that is very clear what we're doing. And therefore, we don't know of any single client in the world that at least we haven't heard of that they're not looking to integrate this nonfinancial risk environment in governance and social issues into their investment processes. And we are the preferred provider of tools to them. Secondly, clearly, there is a lot of regulations around the world, and a lot of our clients are trying to figure out how do they respond to that regulation, especially in Europe by far but also in the U.S. with the SEC proposals. So there is a little bit of a pause by clients and certain purchaser as to - because they're trying to determine what are the right sets of data and tools and risk that they need to do to incorporate into their products. So that's been a little bit of the blip that you see in the sales, much less so the political component. But Baer, anything else on this?

Alexander Hess:

And then as a quick follow-up, maybe can you speak a little bit to the opportunity in Paris Aligned benchmarks and climate transition benchmarks with the index franchise. Is that a meaningful opportunity going forward?

Alexander Hess:

Thank you.

Owen Lau:

Thank you for taking my question. I want to go back to your guidance. Could you please talk about your assumption about the market trend to come up with your free cash flow guidance. Do you expect the market to go up, stay flat or to go lower from here? And then on the expense side, could you please talk about the walk of the adjusted EBITDA expense build from 2022 to 2023? And what does it take to go to the low end of the guidance? And also what does it take to get to the high end of the guidance? Thank you.

Owen Lau:

Got it. That's super helpful. Thank you. And then I want to go back to the Google partnership, the Google Cloud partnership. Henry, could you please talk about maybe the potential incremental revenue and an expense opportunity for this partnership? I mean it would be great if you can even give us some more specific examples so that we can better understand the value creation of this partnership. Thank you.

Owen Lau:

Got it. Thank you very much.

GeorgeTong:

Hi, thanks. Good morning. You mentioned it's possible you'll see higher cancels and longer sales cycles during protracted periods of market volatility. Can you elaborate on where in your subscription businesses you're seeing most sensitivity to the macro environment and, conversely, where you're seeing most resilience?

GeorgeTong:

Got it. That's helpful. You've taken actions to recalibrate head count and expenses as part of your downturn playbook. Can you talk about how much further runway you have for expense reduction, what kind of levers you have remaining? And would you say the majority of your cost rightsizing actions are now behind you?

GeorgeTong:

Very helpful. Thank you.

Faiza Alwy:

Yes, hi. Thank you. Good morning. And so I wanted to talk a little bit more about ESG. Give us a sense of the new subscription sales that you signed on this quarter. How much of that is just a seasonal acceleration from 3Q to 4Q? Or are you seeing sort of sales cycles? And as you alluded to, the last quarter that those had increased a little bit. Are you seeing further increase in those sales cycles? Or are things sort of normalizing from your perspective?

Faiza Alwy:

Understood. Thank you. And then just a follow-up on, I guess, capital allocation. Are you assuming - I think your interest expense guide is a little bit higher than I was anticipating. And I'm curious if you're expecting to maybe incur higher debt to buy back shares. Or sort of what's embedded in your free cash flow guide as it relates to capital allocation?

Faiza Alwy:

Great. Thank you so much.

Craig Huber:

Great, thank you. I wanted to focus first if we could, on the recurring subscription part of your business in indexes. Obviously, the numbers continue to be extremely strong there. But maybe just talk a little further, if you would, about the sales cycles there, your sales pipeline client budgets? I mean, is there anything there that you're feeling a little less positive about stuff, particularly sales cycle?

Craig Huber:

Great. My follow-up question. you talked a lot about the enhancement you guys made in the analytics products. So I'd like to hear further on the fixed income side of things, what you guys are - the investor is spending to do in there, were you really focused on within the fixed income area, please?

Craig Huber:

Great. Thank you.

Russell Quelch:

Yes, thank you gen. Just wanted to come back to the analytic business to start, can you pin down exactly what's driven the heighten growth in the last couple of quarters? I know you've made a few comments to this already, but is it new products? Is it tech enhancements to existing products? Is it pricing? I'm trying to get a bit of a sense as to, is this structural or cyclical growth. And just kind of linked to that, how does it get decided if climate-related product revenues get booked in ESG and climate or analytics? So I just want to check, there's been no shift in the revenue allocation, which is flattering the growth in the analytics segment?

Andy Wiechmann:

And Russell, there's no shifting of run rate from ESG and climate to the analytics segment. There are some climate and ESG focus tools that are analytics tools that are showing up in the segment like our Climate Lab Enterprise and some of our ESG reporting capabilities, but those are not shifting. Those have always been there.

Andy Wiechmann:

Yes, I would say it was impacted by flows out of lower fee products. So there was that mix impact. We saw a very small impact from a positive fee adjustment as well. Despite the steadiness that you've seen over the last year, I do want to underscore that we do expect the average basis points to continue to decline gradually over time. As we've seen over the last, call it, eight to 10 years or so, although we do expect the assets to increase at a faster growth rate and continue to be bullish about the growth in the ETF front. But we do expect fees to gradually come down over time.

Operator:

We have a question from Greg Simpson from BNP Paribas. Greg, please go ahead.

Andy Wiechmann:

Sure yes. I don't want to comment on what our competitors are doing. But I would say that, yes, we are generally increasing prices more than we have in the past. The 35% contribution from pricing to new subscription sales across the subscription base and the 40% plus that we are seeing in Index, the contribution within Index from price increases, those are about five-plus percentage points higher than what we've seen in the recent past. And so yes, price is contributing more than it has in the past. I would just underscore that we are - in our price increases, we are heavily focused on delivering value together with the price increases. And so we're continuing to enhance the content that we deliver to our clients, the capabilities, the functionality and the overall client service that they are getting. We do recognize that our growth is heavily going to come from our existing clients and we want to do it in a constructive fashion. But given the overall pricing environment and cost environment, we are increasing prices more than we have in the past.

Andy Wiechmann:

Yes, I mean its similar message to what we've seen in the past, which is things are progressing well in the segment. I would highlight that our - some of our portfolio services are getting a lot of traction and a lot of interest. Investors, in particular, are focused on understanding what is driving the performance and the risk in their portfolios. And so, we're seeing strong engagement there. On the data side, including the RCA data, we do see some pressure from the backdrop, to your point. There are aspects of the RCA business and the data that we have that are used as part of transactions in the real estate space, and we have seen a slowdown in transaction volumes across the space. But you can see the overall growth rate on an organic basis at 12% is still pretty good, and we think there are some environmental impacts going on given the backdrop in the real estate space, but we continue to be quite encouraged about the long-term opportunity there.

Operator:

And we have a question from Simon Clinch from Atlantic Equities. Simon, please go ahead.

Henry Fernandez:

Yes, so there are three legs of any large and successful Index business, the active management; the fees that we charge to active managers, what we call the subscription business; the fees that we charge to passive managers, both in any proper ETF or institutional passive or owning some mutual funds. And the third leg is the licensing of indices into all sorts of derivative products. Some of them are lifted like futures and options, and some of them are unlisted such as swaps and options and structured products that investment banks make. We are very, very intent and focused on building that third leg. What you see and that we comment on is the listed futures and options, and there's still a lot of runway for us to continue to grow in new products. We have a lot of listed futures. We're now focused on our listed options franchise and are pushing new initiatives in that front, more to come on that. And while you don't hear us often, although there were comments earlier today on this, is the structured products and the other forms of OTC derivatives. And that is - those are growing very nicely, and there's still the ground floor where we can achieve it.

Andy Wiechmann:

Yes, yes. So listen, you know - and you see this on the repurchase front, we are an organization that likes to be contrarian and opportunistic. And so in these environments, there are potentially opportunities to acquire companies that otherwise wouldn't be available. And so, we are seeing some early-stage companies that need growth capital. They're finding that the growth capital is more expensive or tougher to find than it was in the past. And so as a result, they are open to partnerships, investments, even acquisitions in certain instances. And so, we're being very proactive in looking for those opportunities and think they can be instrumental in helping to accelerate those strategic opportunities in our key focus areas that we've talked about in areas like private assets, climate, ESG, fixed income, broader technology and data capabilities. So yes, it's an intense focus for us right now.

Henry Fernandez:

Well, thank you, everyone, for joining. As you can hear in our commentary, we continue to see strong demand for our solutions. We continue to invest significantly in large growth opportunities that are ahead of us and preserve and enhance profitability growth in the company. We're very excited about this momentum, especially in such areas like climate, where we are determined to become the undisputed leader. Thank you, everyone, and we look forward to a continued dialogue with all of you.

Operator:

Good day, ladies and gentlemen. And welcome to the MSCI Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Please go ahead and begin.

Henry Fernandez:

Thank you, Jeremy. Welcome everyone, and thank you for joining us today. In the third quarter, MSCI delivered another strong performance despite significant turmoil and dislocation in financial and commodity markets around the world. We posted organic recurring subscription run rate growth at over 14% and adjusted EPS growth of 12.6%. We achieved our best third quarter ever of net new recurring subscription sales growing at 26%. In addition, our retention rate was 96.4% up by a 188 basis points from a year earlier. In terms of capital management, we repurchased another $225 million worth of MSCI shares through October 24. For the year as a whole, our total share repurchases now stand at approximately $1.3 billion. These performance demonstrate a resilient and adaptability of MSCIs all-weather franchise. There is no question that the global economy stated major headwinds. These headwinds have created challenges for all companies including MSCI. Yet, they have also created a massive opportunity for us to differentiate ourselves and to show to both clients and shareholders the power of our all-weather franchise. And moments of extreme volatility and high uncertainty investors become more reliant in high quality data in type of models and weather and research. They want a clear blueprint for navigating choppy waters, MSCIs tools can help them design one. Indeed, our solutions take on even greater importance during periods of elevated global risk. In other words, they face the time when well we do best matters most and we fully intend to demonstrate it. Our third quarter performance show continuous strength across client segment and product line. In Index, we delivered our highest subscription run rate growth in a decade at 12.6%. And deleted future some options trading volume linked to MSCI indices, increased by 21%. In Analytics, we achieved our highest retention rate ever at 95.9%. We also posted subscription run rate growth excluding foreign exchange of 97% in Climate and 35% in ESG ex Climate. All of this numbers illustrate how MSCI is capturing key market trends. At the index in trend continues beyond market capitalization indices, we are meeting investor demand for tools to support more customize and personalized portfolio construction and highly specialized outcomes. Likewise, as global economic pressures accumulate, we have provided the risk analytical tools investors need to stay ahead of the turmoil. Meanwhile, as ESG becomes increasingly mainstream, we are helping investors measure the full scope of sustainability risks, capitalize on sustainability opportunities and achieve sustainability objectives. For all the political noise and controversy around ESG, the simple fact is that sustainability risks are financial risks and will continue to be so. Investors know this, in fact a recent PwC report found that 81% of institutional investors in the U.S. along with 84% in Europe both plan to increase their allocations to ESG products over the next two years in growth. Recent report projected that ESG related assets under management, we have reached nearly $34 trillion globally by 2026 and 84% increase from 2021. And born to underscore that as our ESG product line becomes more diverse with many different use cases and client types, ESG sales growth will naturally fluctuate based on market shifts, difficult conditions and regulatory development. Right now, the world is simultaneously witnessing global energy and food crisis, the largest European war in almost 80 years, the biggest inflation surge in decades, rapidly rising interest rates and COVID lockdowns in China which continue to affect supply chains. At the same time, MSCI remain bullish on ESG long-term potential. If anything, the main factors driving ESG growth and greater environmental and social awareness to demographic shifts we'll become even more powerful in the years ahead. And for Climate specifically, there is no turning back in the rate to net zero emissions. While the global energy crisis has created new obstacles to decarbonization, policy makers continue to embrace bold green investment plans. Moving to U.S., President Biden recently signed a most aggressive climate law in American history. In Europe, governments in active all proposed a wide range of measure that would speed up a low carbon transition. These include more ambitious decarbonization and clean energy targets, policies to maintain or expand nuclear power, and a US$5.4 billion hydrogen project. For our part, MSCI will continue building a robust and dynamic climate franchise. Two climate wins in the third quarter deserve a special attention because they demonstrate our emergence as a leader in this area. Both the California State Teachers' Retirement System, through CalSTRS approve a plan to cut their portfolio emissions in half by 2030. To help them get there, they proposed the lowest a proposal for 20% of their public equity assets to drive the MSCI ACWI Low Carbon Target Index. This means CalSTRS will now have nearly $27 billion allocated to track-in that index. State-owned, the New Zealand Super Fund announced that he have moved roughly 40% of this total investment portfolio to track the MSCI World Climate Paris-Aligned Index and the MSCI merger market Climate Paris-Aligned Index. That 40% translates into NZ$25 billion or about US$15 billion. Each win represents a milestone on our Climate journey. As I have frequently said, MSCI aspires to be the number one provider of climate solutions to the global finance and investment industries. We recently published a Net Zero guide for asset owners outlining complete steps for decarbonizing portfolios. We also hosted White House National Climate Advisor Ali Zaidi at our New York offices during Climate Week. That same week, we joined with the Glasgow Financial Alliance for Net Zero or GFANZ to help launch a proposed climate data public utility. All of these has helped MSCI generate strong momentum doing the run up to COP27 in Sharm el-Sheikh, Egypt. In Climate, ESG, Analytics, Index and other area MSCI continues to benefit from our mission critical solutions and diversified client base and our commitment to financial discipline. Right now, many companies are retrenching and turning in work, MSCI is doing quite the opposite. In U.S. we reallocate resources, we continue investing in key differentiators using our Triple-Crown investment framework. More than that, we continue to attract talent and show MP&A opportunities also down on client centricity and reinforce our competitive advantages. All of these will help us emerge even stronger when the current market turmoil subside. And with that, let me turn the call over to Baer. Baer?

Andy Wiechmann:

Thanks, Baer. And hi, everyone. The strong secular demand for offerings and resilient nature of our business model fuel impressive results across the business. In addition to the 14.2% organic subscription run rate growth this quarter, we experienced double-digit subscription run rate growth excluding FX across all geographic regions as well as across all major client segments. We recorded the highest third quarter ever for new recurring and net new recurring subscription sales increasing an 8% and 24% year-over-year respectively, excluding the acquisition of RCA. Within Index, on top the strength we see within our non-market cap modules, we continue to see remarkable resilience within our market cap index modules which delivered an 11% subscription run rate growth. This has been fueled in large part by tremendous demand within higher growth client segments. Across the index subscription franchise, we saw an 18% subscription run rate growth from broker dealers, hedge funds and wealth managers on top of 10% growth from asset managers and asset owners. Asset based fee revenues experienced declines in the quarter. With ETFs and non-ETF passive fees impacted by declines in global market levels somewhat offset by continued level of elevated volumes in features and options linked to our indexes. ETF linked to MSCI index has experienced marginal net cash sale outflows in the quarter resulting in outflows in broad-based EM exposure funds in all country products, two areas where the broader ETF market was muted. However, we continue to see inflows and high market share capture flows in the fund linked to our equity ESG and Climate indexes which captured $9.5 billion of the $13 billion of total industry flows. Additionally, fixed income ESG and Climate ETF linked to indexes developed with partners and to our proprietary indexes witnessed nearly $7 billion of inflows during the quarter. Revenue from listed features and options linked to MSCI indexes continue to provide a meaningful offset to AUM declines growing 16% year-over-year. This growth has been fueled by elevated volumes that were in line with the last couple of quarters. In Analytics, the strong demand for our tools in our current environment helped drive 8% growth in subscription run rate excluding FX. We had an 11% growth in recurring subscription sales will also experiencing a 35% decline in cancels and highest retention rate of all time in the segment. Recurring net new was up 73% year-over-year. Within the segment, we continue to see strong momentum in front office equity and fixed income portfolio management tools with strength in hedge funds and then helping it drive the growth. Additionally, Analytics continued to gain traction in our climate solutions including Climate Lab Enterprise. In ESG and Climate, we delivered subscription run rate growth a 42% excluding FX, roughly 1/3rd of recurring subscription sales were generated from our climate solutions and the climate run rate across all segments reached $65 million which is an increase of 89% from a year ago. Within our ESG and Climate segments, merging client areas including wealth managers, hedge funds, broker dealers and corporates collectively have run rate growth of more than 60%. We did see a lower level of new recurring subscription sales in the third quarter. On top of changes in the broader market in economic environment which is likely impacting purchasing decisions in some areas, here many layers of growth in our ESG and Climate franchise across a wide range of solutions and use cases which results in a dynamic growth rate that's impacted by the pace of new regulations, client segment dynamics, asset class shifts and geographic factors. Shifts in these layers of growth will drive variations in overall segment growth rate, however we continue to believe in a significant long-term secular opportunities and continued momentum. With real assets, the organic subscription run rate growth was 12% combining our legacy real-estate business and RCA. Given the all-weather dynamics of our financial model and our ability to proactively manage the expense base, we were able to drive adjusted EPS growth of 12.6%. During the quarter, we continue to utilize our downturn playbook by further flexing our expense base to mitigate the impacts of the AUM based headwinds. We are prioritizing key investment areas to address the most critical needs in this challenging environment while meaningfully moderating the pace of hires in less critical and time sensitive areas. Additionally, we continue to flex certain non-compensation expenses in areas like professional fees and we had a slightly lower bonus accrual. In the quarter, revenue had a $12 million FX headwind from an appreciating US dollar. This was more than offset by a $13 million FX benefit resulting from a global expense footprint. Additionally our proactive capital management contributed $0.15 of the adjusted EPS growth as we've now repurchased approximately $1.3 billion of our shares or approximately 2.7 million shares year-to-date. We ended the quarter with a cash balance of $867 million of which approximately $600 million is readily available. We continue to be well-positioned to opportunistically pursue bolt-on M&A and share repurchases against this volatile market backdrop. Lastly, I would like to turn to our updated guidance which we published earlier this morning. While we expect continue volatility, our guidance assumes generally flat market levels throughout the balance of the year. As mentioned earlier, we have continued to utilize more levers in our downturn playbook with a focus on moderating our pace of expense growth. Our downturn actions are reflected in our decreased operating and adjusted EBITDA expense guidance. It's worth noting that we remain consistent in our approach that the pace of spend may fluctuate up and down based on the trajectory of our asset based fees, the performance of the business more broadly in the global operating environment. We've modestly increased our range for depreciation and amortization expense mainly reflecting a continued higher level of capitalized software development cost across products. Lastly, we have increased our net cash provided by operating activities and free cash flow guidance which reflects the lower than originally projected tax payments and cash expenses in the second half of the year as well as resilient fee in cash collections. We've narrowed our tax guidance which continues to reflect in expectation of the higher rate in Q4 in line with what we saw in Q3. Across the business, we continue to see strong levels of demand for our products which is underscoring the mission critical nature of our tools. We are heavily focused on both driving the attractive runway of long-term growth while protecting the financial model of our all-weather franchise. And with that, operator, please open the line for questions.

Manav Patnaik:

Thank you. Good morning. Can you just talk about ESG first, can you just -- what decline is specific run rate in the quarter? And if you could just talk about the different pieces of ESG, kind of the growth rate in the franchise in there?

Manav Patnaik:

Right. And then Andy, and in terms of obviously our retention rates are high as subscription growth is good. And if we enter in certain environment next year, just historically on what time lag or when do you start seeing the first times of some the pressure on those metrics?

Manav Patnaik:

Got it. Thank you.

Ashish Sabadra:

Thanks for taking the question. We saw some pretty good improvement on the Analytics front as well. And so, I was just wondering if you could talk about what you're seeing from a deal pipeline perspective, have you seen any change there, any elongation in the deal, sale cycle. Any color on the momentum in the business? Thanks.

Ashish Sabadra:

That's very helpful color. And maybe, just a quick follow-up on the private asset side. Again, pretty strong momentum there as well I was wondering if you could talk about the RCA, now that that acquisition has anniversary, what have you seen on that front and what else is in line for private assets? Thanks.

Ashish Sabadra:

And thanks again. And congrats on solid results.

Alex Kramm:

Yes, hey guys, thanks. Sorry, my phone turned off in the middle of the question. Great, anyways, sorry if this is was asked already and that I was off. But on the EST and Climate sales, you obviously proactively addressed that and I understand its can be lumpy and obviously at tough comps too. But can you actually talk around about what areas maybe saw outsized weakness in particular this quarter and why. And I know it was a tough quarter and particularly at the end of the quarter with market selling off. So, I was just wondering if there's anything that in particular slipped that may or may pick up again in the fourth quarter. So, any color there would be helpful. Thanks.

Alex Kramm:

Right, helpful. And then, just a very quick follow-up staying actually on the ESG and Climate topic. But if my math is right, since you're now providing some incremental data here, I think that the Climate and ESG portion Analytics is $7 million this quarter. I think very nice increase there. So, can you just remind us exactly what's getting picked up in Analytics now and a new way to think about that the term for that or how penetrated you are. Again, it's a very small number but clearly you've a pretty diverse Analytics customer base. So, just wondering how we should be thinking about those opportunities in particular on that segment? Thanks.

Alex Kramm:

That's helpful. Thanks, guys.

Toni Kaplan:

Thanks so much. As usual, you guys have done a great job on expenses. And I know you called out maybe using less professional fees or being able to flex the bonus accrual and also sort of the less time sensitive investments. I guess I think of you guys as really efficient lean organization. I know you not going to cut back on the growth investments that are really meaningful. So, I guess how much room is there on the expense side within the downturn playbook I guess.

Baer Pettit:

Let me add to that Toni. If you don’t mind, let me add to that. The in addition to all the things that Andy has said, one of the things that we're obsessed with is protecting as much as we can, the new investment plan. And in on therefore what we're doing is squeezing and viewing time-and-time and again on the Run the Business, the normal Run the Business activities to the lower expenses and protect profitability and protect the investment plan. So, if you look back at -- if you move to look back at our budget from the end of last year to renew investments that we were planning to make in 2022, that total investment plan is only off by a couple of million dollars which is an incredible achievement in the context of this difficult environment that we've been able to protect a vast majority of that investment plan. We surely have made some tweaks about reprioritizing that total investment plan but in general we haven’t got it back. And we believe strongly that in down markets that’s where companies slow down their long-term growth because they caught back easily on their investment plans whether than doing the hard work of cutting back on their Run the usual Run the Business they activate.

Andy Wiechmann:

Yes. I'll talk generally, not specific to any year or point-in-time. But I would say in an environment like this where cost and prices are going up, we are generally increasing prices more than we have in the recent past. Given that our tools are really mission critical to our clients, we do have some pricing power in many parts of the business. Although, as we've mentioned in the past we are very focused on the long-term relationships we have with our clients and recognize that most of our growth is going to come from our existing clients. So, we're heavily focused on adding value in connection with any price increases that we are rolling out. And so, our approach to price increase is more generally is factoring in the value that we're adding to existing services that we're delivering the clients. It does factor in our broader cost structure, the broader cost environment, the broader pricing environment as well as client health and client usage. So, we are being measured and been mindful of the health of our clients but I'd say generally across products, we are rolling out higher price increases than we have in recent years and as a result you're probably seeing some impact of that in the Q3 recurring sales relative to a year ago. And we expect probably similar benefits in the next couple of quarters.

Operator:

The next question is from Owen Lau from Oppenheimer. Please go ahead.

Andy Wiechmann:

Yes. And I don’t want to be too prescriptive here because that really depends on the facts and circumstances. On the bonus point, I would underscore the large majority of the bonus accrual is formulaic. And so it depends on the performance of the business. And so to the extent the business performance increases, in particular of asset based fees run up significantly, that will just trickle through how we accrue our bonus and our bonuses are paid out which is tied to the key financial metrics of the business. And so, the bonus accrue would likely go up. Across broader levers, listen it depends on the exact situation but non comp areas in particular we can flex those pretty quickly up and down where things like professional fees and other non-comp areas can flex up a little bit in pretty short order. The comp lever does take a little bit more time to trickle through and start having impact, that depends on pace of hiring new hires et cetera. But I'd say the bonus and big portions of the non-comp levers that we have can flex in in pretty short order.

Andy Wiechmann:

And so, the other area that I would highlight and Baer mentioned is Analytics. And so, I think there has been a component of the strength we saw in Analytic sales that's attributable to focus on our risk models and broader risk management tools in these environments which are critical to or helping our clients navigate in market uncertainty, a lot of that asset class, geographic, sector shifts and rotations that are taking place. And so, that would be another area that I would highlight here. I would also highlight that the extreme resilience of our Index subscription franchise as well and I think there is just such a plethora of use cases across many different users in client segments that continues to be strong pockets of demand and in use cases for those products, particularly in areas like over the counter derivatives that can be very useful to our clients in these types of environments.

Operator:

Next question is from Faiza Alwy from Deutsche Bank. Please go ahead.

Henry Fernandez:

Thanks for that question. As we have previously said, climate change is at complete existential threat to the planet. And we're be we're witnessing a huge increase in physical risk and hid ways and floods and fires and hurricanes and all of that. And therefore, this is going to be a clear and present danger for portfolios of all types around the world because, clearly, the portfolios are made up of equity and fixed income and property and infrastructure and all of that. That will be affected by both the physical risk and the transition risks associated with climate change. So, we're in the very, very early stages of the demand or tools for portfolio managers and portfolio allocators to decarbonize their portfolio and protect their assets from repricing of assets, higher cost of capital, and reallocation of capital. So, this -- we think that this $64 million or so across all of our areas will continue to increase pretty rapidly over the years to come. And we're positioning ourselves not only in terms of the underlying climate data, so just the carbon emission estimates for companies and bond issuers and private companies and real estate exposure and all of that, but also the models, the Value-at-Risk models, the implied temperature rise models to try to help people project into the future what the carbonization path of their -- of the assets and their portfolios are. We're very bullish on this Total Portfolio Footprinting process. Basically, what we do is we take the total portfolio of an asset manager or an asset owner and tell them what the current footprint of carbon emissions of the entire portfolio, Scope 1, Scope 2, Scope 3 and what the trajectory of that footprint will be in the next three to five years or five to 10 years. So, this is -- it's going to be in extremely high demand. I think that the Ukraine war, the -- Putin's war in the Ukraine has highlighted even more so energy security and the dependence on the energy from other sources. And even though in a short-term basis have had enormous increases in fossil fuel prices, every country is thinking about their energy dependence, and the easiest way to achieve energy independence is by wind and solar that is in your own land, in your own country and the like. So, I think we're going to see tremendous -- so yes, there is an inflection point that is happening last year with COP26; this year, with COP27 despite the -- clearly, the balancing act between fossil fuels and renewable energy.

Andy Wiechmann:

Yes. I would say, generally, no major changes to our approach. We continue to be highly focused on both repurchases and opportunistic bolt-on MP&A in key strategic growth areas for us. To your point about the change in funding markets and cost of capital, I would say that we are watching the markets closely, being very mindful of what that means for valuation and trying to be quite opportunistic about where we take advantage on the repurchase front and acquisition front. I'd say given where our gross leverage is and where our funding costs are, we're probably not in a rush to raise additional debt. But we do think we've got a good amount of cash, and we'll continue to build cash to continue to be opportunistic here on both fronts. And we think there are opportunities to get either bolt-on MP&A or repurchases at attractive long-term values.

Operator:

The next question will be from Craig Huber from Huber Research Partners. Please go ahead.

Henry Fernandez:

No, great question, Craig. The -- over a 10-year horizon or so, we believe that Climate tools per se, not just Climate in the context of ESG, but I'm talking about Climate tools separately from what's embedded in the ESG offering, will grow at a very large clip and could potentially exceed the run rate of ESG at that time. Obviously, I'm talking about long-term projections here that can vary year-to-year, and it's hard to say where they end up. But the reason we say that is to highlight the Climate tool opportunities, right, the Climate tools, so the Climate solutions by MSCI that's -- because we're paring it against a fairly rapid growth rate on ESG that will continue. And we're saying Climate per se could even exceed that incredible business that we have in ESG. The competitive advantages we have is that, remember, the mission of MSCI is to provide mission-critical tools for the investment and finance industry. So, a lot of our competitors are focused on developing climate data, for example. Some of our competitors are only focused on physical risks. Some other ones are focuses on transition risks. Some of them are only focused on the real estate industry. Some of them are focusing on corporate bonds. What you will find in MSCI is a holistic solution to your entire portfolio from one source, one source of data, one source of models, one source of the total portfolio, whether it's private equities and private credit, which we're doing an incredible amount of work on climate emissions and carbon emissions and things like that. So, I think the benefit -- and you can have that in an index, you could have that in a model, you can have that in individual securities. You can -- and then, as I said, you have across different asset classes and the like. So, I think this is completely in keeping to the way we do on managing MSCI.

Andy Wiechmann:

Sure. So, the -- yes. And it's a good point. Just taking a step back, we have this nice natural P&L hedge related to FX. So on the revenue side, I believe it's around 11% or 12% of the revenue base is in non-USD currencies. It's about 45% of the cost base is in non-USD currencies. And just given the relative sizes of those bases, the revenue base and cost base as well as the mix of currencies within them, they tend to move in parallel. And so we saw in the current quarter, on the expense side, we had a $13 million -- close to a $13 million benefit from the appreciating U.S. dollar relative to a year ago that more than offset the $12 million headwind we had on the revenue side. And so it's a good example, and you've seen that in recent quarters where we do have this natural P&L hedge where any impact from currency fluctuations on the topline tends to be dampened or offset almost completely by movement on the expense line.

Operator:

Thank you. The next question is from George Tong with Goldman Sachs. Please go ahead.

Andy Wiechmann:

So, yes, I'd say we are encouraged -- really encouraged by the performance in our retention rate in Analytics. I think as I alluded to earlier, there's probably been some benefit from a heightened focus on risk and risk tools in this environment, but we're also seeing success in many of the areas where we've had the strategic focus. And so we've strength in front-office equity and fixed income risk models and broader portfolio management tools. We've been benefiting from our strong models, really best-in-class models and content enhancements that we've been making as well as the broader improved functionality and tech-enabled access that we've been investing in. And then we've had success on the enterprise risk side through the partnerships that we've developed just to deliver a broader value proposition to our clients. And as we talked about earlier, while it's still early days, we're seeing some real momentum in the Climate Lab Enterprise offering. And so we're encouraged, although I would say we are cautious, and we're definitely not ready to declare victory. Analytics will likely continue to experience some lumpiness in not only its growth, but I'd say cancellations within Analytics. So, we're cautious but very much encouraged. Analytics is not only a key strategic capability for us as a firm, but it's also a critical financial area for us. And this performance is encouraging. But also you can see in the margin on the profitability growth, it's been a great source of operating leverage that can help fuel investments in other parts of the company as well.

Andy Wiechmann:

Yes, I mentioned this in the prepared remarks, but it's mainly driven by a few factors. We had a larger-than-projected benefit from lower tax payments in the second half of the year. We've also seen, as you know, a decrease in cash expenses. And then we've had some higher yields on cash, and we've also seen some resiliency in collections. All those factors have helped to offset some of the revenue headwinds that have pressured a bit on the collection side. And so that was the real essence behind the increase in the free cash flow guidance. I would say, like our profitability more generally, our downturn actions also help support our free cash flows and free cash flow growth, and free cash flow is a very important metric that we're very focused intensely on.

Operator:

The next question is from Gregory Simpson with BNP Paribas. Please go ahead.

Andy Wiechmann:

Yes, there are several factors that have been driving the margin expansion in Analytics. And I think we've seen similar dynamics in particularly the last quarter. I would note that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our Risk Insights and Climate Lab Enterprise and broader enhancements to our analytic capabilities. I would say that FX has a big impact just given the size of the Analytics cost base. The non-USD expense base that I alluded to in a prior question impacts Analytics heavily. So, the appreciating U.S. dollar has helped drive the Analytics expenses down. And then also our downturn actions have impacted the Analytics expense base. And so the confluence of all those factors has driven this really very modest expense growth in Analytics and a higher margin within the segment.

Andy Wiechmann:

Most of our -- I'd say most of our agreements are not tied to users per se. They tend to be modules that are licensed. And it varies very much on product. They tend to be their modules licensed to office location for use of specific products. There can be max users that are allowed to use that license, but they're not tied to seats per se. We also do have some, as you're alluding to, more enterprise-type licensing arrangements. And so seat count is not something that impacts us necessarily directly. Although as I alluded to in my answer to an earlier question, when you start to have more client actions, including investment firms downsizing, closing funds, closing desks, consolidating, that will generally cause an increase in cancellations and a drop in the retention rate. And we've seen those sorts of impacts as downturns are maintained for several quarters in the past, so we are proceeding cautiously although we haven't seen it to this point.

Operator:

The next question is from Russell Quelch from Redburn. Please go ahead. Russell, your line is open, please proceed with your question.

Operator:

Yes, we can. Thank you.

Andy Wiechmann:

Yes. Maybe if you're asking about the run rate basis points, that were quite resilient. So, actually, the run rate basis points have remained constant at 2.52 bps. I'd say there were just very small mix impacts and fee impacts, which resulted in pretty strong resiliency in the fee, which we've seen in recent quarters. And so it's something that is encouraging to us, but I wouldn't flag anything too notable around it.

Andy Wiechmann:

I see. Yes, yes. Well, listen, we've got a wide range of products out there that are licensed to our indexes under a wide range of agreements with various providers. There was -- to your point, there was some small negative mix impacts on the fee and some very small positive impacts from fee, and those fee impacts were driven by certain products dropping into lower AUM bands where we receive a higher fee. So, there was some embedded impact from that in the fee, but it wasn't significant. I wouldn't overplay that.

Baer Pettit:

Look, I don't think we're seeing increased competition. I think it's been a competitive market. It's hard to judge precisely. But for sure, we feel our competitive edge is rising. We're putting significant investments into it. And I think this is both -- it's on two levels. It's on strategic client relationships of the kind of winners, those sort of big index wins in Climate that Henry alluded to in his prepared remarks. So, it's understanding the clients' investment process. And it's also the methodology and the skill and the investment process. And finally, it's the technology platform behind that. So, I think in all of those areas, on a relative basis, we're building competitive strength, but it's a very competitive market. So -- but I think we're really focused on it and forging ahead.

Operator:

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Henry Fernandez for any closing remarks.

Operator:

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day, and welcome to the MSCI Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, please note, this event is being recorded. I would now like to turn the conference over to Jeremy Ulan, Head of Investor Relations and Treasurer. Please go ahead.

Baer Pettit:

Hey Jeremy, thank you, and welcome, everyone, and thank you for joining us today. I just wanted to say Henry is fine. He just woke up this morning and was feeling a bit under the weather, so he won’t be joining us on the call today, but we’ll go forward as normal. So before I talk about MSCI’s financial performance, I’d like to formally introduce Jeremy as our new Head of Investor Relations and Treasurer. Since joining MSCI 12 years ago, he’s held a variety of roles supporting our growth strategy, M&A and partnerships, while building out our planning and forecasting processes. We’re excited to have him in this role. His experience and institutional knowledge will help investors better understand our strategy and opportunities. Looking back on the second quarter, MSCI delivered strong results in a difficult external environment. Among our headline achievements, we posted record levels of second quarter total new recurring subscription sales and net new recurring sales. This helped us drive 14% organic subscription run rate growth, up from 11% a year ago, and also contributed to adjusted EPS growth of 13.5%. Meanwhile, MSCI achieved a 95.5% retention rate, up from 94.4% in the second quarter of 2021. On the capital front, we repurchased another $277 million worth of shares at an average price of $404 per share, bringing our total for the year to nearly $1.1 billion. We also raised $350 million through a term loan, giving us greater flexibility in the months ahead for bolt-on acquisitions and opportunistic share buybacks. We did all this against the backdrop of historic inflation, rapidly rising interest rates and market volatility. As we always say, MSCI prides itself on being an all-weather franchise. Any company can appear successful during a bull market. Moments like this show which companies are truly resilient. Time and again, MSCI has met the challenge. During periods of instability, our data and research become even more relevant. Today, we are well-positioned to capitalize on re-priced assets and help investors navigate financial turbulence. We are also well-positioned to make small bolt-on acquisitions if the right opportunities emerge. MSCI is focused on strategic accelerators, and our team is monitoring the market for possibilities. Even as we continue investing in long-term growth, we will remain vigilant about protecting our profit margins. Despite the macro environment, we have not seen a slowdown in demand for our solutions. In fact, we see continued strength across most segments and geographies. To help us become even more client-centric, we recently hired Cristina Bondolowski as our new Chief Marketing Officer. Cristina brings decades of experience from world-class brands such as Hewlett-Packard and Coca-Cola. Her work at MSCI will deepen our relationships with stakeholders across the Board. Looking ahead, we recognize the challenges posed by global market trends. But as I said earlier, these are the moments when MSCI thrives. I’d now like to drill down into a few areas in greater depth, including Climate, Analytics and Fixed Income. Before I do so, in view of the external environment, I thought it was important to lead with what MSCI is seeing from our clients. Despite all the market turmoil, we continue to have strong growth across client segments. Our pipeline remains robust, and we have no evidence that it is slowing. During this period of economic and financial turbulence, our clients understand that MSCI solutions can play a critical role in helping them adapt and manage their investments. Our second quarter performance confirms the strength of our diversified and durable franchise. Let me spotlight some of the segments and geographies where MSCI recorded especially strong growth. In our Index business, we posted double-digit subscription run rate growth in all regions, along with custom index subscription run rate growth of 23%. In ESG and Climate, we delivered organic subscription run rate growth of 47%, recurring net new sales growth of 26% and our second best quarter ever for recurring sales. Meanwhile, total assets under management in ETFs linked to our ESG indexes increased by 15%. Among banks, hedge funds and wealth managers, we posted total subscription run rate growth of 17%, excluding RCA. In terms of specific products and services, we delivered robust analytics growth with net new sales increasing by 68%. This growth was driven by sales in equity factor models and risk management solutions as well as a 17% reduction in cancels. We also posted a strong retention rate for Analytics of 94% and recurring sales growth of 15%. In addition, our listed Futures & Options trading volume increased by 37%, with strong growth from World, Euro and EAFE contracts. There’s no question that Climate represents one of the fastest-growing parts of our franchise. Let me discuss a few concrete milestones from the second quarter. Just last month, MSCI launched our new total portfolio foot-printing tool, which helps a growing range of financial institutions measure carbon emissions across their lending and investment portfolios. With this tool, we have extended our climate analysis to municipal bonds and securitized products. And we will be better able to provide modeling for loans, infrastructure and private assets. MSCI also completed an agreement with a prominent general partner to provide climate analytics on the portfolio of private companies. In addition, we completed our first Climate Lab Enterprise deal with a major asset manager that cuts across Analytics, ESG and Climate and private assets. The larger pipeline for Climate Lab Enterprise continues to gain momentum. We’re also pleased that one of the most innovative climate tools we launched in 2021, our implied temperature rise metric was named ESG Assessment Tool of the Year for Investment Decisions and Insights by Environmental Finance. To cite one final second quarter milestone, MSCI released the latest iteration of our Net Zero tracker, which illustrates how listed companies align with different temperature rise scenarios. Climate is now driving growth across the company, including in our Analytics business. In the second quarter, MSCI launched a series of new equity factor models, including the first models to offer sustainability, crowding and machine learning factors. The sustainability factor includes both ESG and carbon efficiency components. This is a significant model update aligned with our strong index franchise. We will make these models available through several distribution channels, including Snowflake’s Data Cloud. Using Snowflake will help us dramatically accelerate the client onboarding process. We’re also developing capabilities to create an even better user experience by combining analytical results from Risk Manager and BarraOne. This will greatly enrich our content and capabilities. We are further enhancing the user experience in Analytics through our Investment solutions-as-a-service applications. iSaaS gives clients greater flexibility in how they interact with our Analytics while reducing MSCI’s time to market for new products and services. It represents a pivot away from our legacy applications. All of this reflects our broader focus on client centricity. As part of that focus, we continue to make progress in expanding our direct indexing capabilities. We want to help clients to be able to personalize their investment strategies at scale through client designed index. As I mentioned earlier, MSCI delivered custom index subscription run rate growth of 23% in the second quarter. We were seeing growing traction of custom indexes as the basis of index-linked products within our asset-based fee revenue. We’re also building momentum in Fixed Income. In fact, during the second quarter, our Fixed Income franchise posted 35% growth – run rate growth. MSCI will continue investing in Fixed Income to help our franchise reach the next level. With that in mind, we were delighted to team up with MarketAxess Holdings on innovative portfolio analytics solutions and co-branded Fixed Income Indexes. Through this partnership, MSCI’s Portfolio Analytics and Fixed Income Indexes will integrate the all-to-all pricing developed by MarketAxess, including their credibility and liquidity scores. Meanwhile, investors will use MarketAxess and our ESG ratings to help create more liquid and sustainable Fixed Income portfolios. In closing, I would just like to reiterate that during this period of volatility in financial markets, we continue to see strong demand for our solutions. And with that, I will turn the call over to Andy. Andy?

Operator:

Thank you. [Operator Instructions] Our first question comes from Manav Patnaik with Barclays. Please go ahead.

Baer Pettit:

Manav, it's Baer here. Maybe before I turn it over to Andy, I just wanted to make a clarifying point. The downturn playbook relates more to a series of financial actions that we take in order to be prudent and to ensure that we don't provide any negative surprises to our shareholders. So it doesn't – it's not conducive necessarily in a strict sense to us seeing any sort of negatives in our pipeline or what's happening. It's just that in view of clearly the market beta effects and how that affects our ABF revenues and that can be seen, and all of you can measure that. But I think more broadly, we're not seeing anything particularly negative. I hope that was reflected in our prepared remarks. But I'll just also turn it over to Andy to speak a little bit more specifically about those measures we're taking to be financially prudent.

Manav Patnaik:

Okay, got it. That's helpful. And then, maybe can you just talk about, you guys have a strong balance sheet, but just your thoughts on accelerating, maybe some MP&A that you guys typically do, like just other valuations down and off in the private market as well?

Manav Patnaik:

Got it. Thank you very much.

Alex Kramm:

Yeah. Hey guys I guess strong sales during the quarter, and I think the pipeline commentary also pretty constructive, just wondering, given that this quarter, the 2Q queue was basically deteriorated throughout. Just wondering if how the progression was on the sales side. Did you see any differences as the quarter went down or was it all fairly consistent and then maybe any other, any particular color by customer sets, as again as the quarter was maybe a tale of many stories?

Alex Kramm:

All right. Great. Fair enough. Second question then, and I think I asked this either one or two quarters ago, but I think it remains relevant, which is on the ESG noise that's out there. Somebody said to me the other day, not a day goes by without a negative article on ESG. And it seems like in election year, this is even turning into a partisan issue. So just wondering what this has done to your client conversations to your sales pipeline. I mean, is this having an impact or is this just noise that us on the outside maybe are getting wrapped up in, but it really doesn't matter to the end clients and then demand?

Alex Kramm:

All right. Thank you very much.

Toni Kaplan:

Terrific. Thank you. Wanted to start on the custom index side. I think Baer, you mentioned that you've seen sort of an acceleration in this area. Are you guys able to size that for us right now? And is this an acceleration in growth because it's off of a smaller base or is this a structural long-term growth driver for the index business?

Toni Kaplan:

Terrific. And I was hoping you could give us an update on regulation, both within the index space and the ESG parts of your business as well. Are you seeing more of a tick-up in regulation or regulator scrutiny, just wanted to get an update there?

Toni Kaplan:

Perfect. Thanks a lot.

Operator:

The next question comes from George Tong with Goldman Sachs. Please go ahead.

Andy Wiechmann:

Yes. I don’t want to be more prescriptive than the commentary that I made and you alluded to. But in our trajectory of spending, we make assumptions about the market. And as I alluded to, we’ve assumed that the market levels remain relatively flat to where they are today to slightly improve. And so that’s kind of the environment that we based our spending assumptions are then feed into our EBITDA expense and operating expense guidance.

Andy Wiechmann:

Yes. You can do a little bit of the math yourself, just seeing what’s happened for the first six months of the year and average AUM balances there, with that color that I just provided. I don’t want to provide more specific assumptions around AUM flows or fees or any of those factors, which we typically don’t comment on.

Andy Wiechmann:

Yes. We’re not committing to margins. I did make the comment in my prepared remarks that we are targeting or we believe our margin for the year will be in the high 50s, which is aligned with our long-term targets. The margin can fluctuate quite a bit based on a number of factors, including big moves in AUM, FX rate fluctuations, other one-off items. So it’s not a guidance or target, but we are looking at the margin being in the high 50s for the year, which is worth noting. And if you look at the expense guidance, it does imply that our expenses are picking up slightly in Q3 and Q4 relative to what we saw in Q2.

Operator:

The next question comes from Russell Quelch with Redburn. Please go ahead.

Baer Pettit:

So look, I’ll make a few observations, and then turn it over to Andy if he wants to comment on the margin or not. So look, as regards to the main question, I think it’s all of the above and more of the same, right? I think it’s the same as last quarter in a positive sense. 50% of our sales in the quarter were from new clients, new clients to this product line and then that’ll be new clients to the firm. So I think in terms of both the range of what we are selling, the client types, the number of new clients, everything looks really healthy. So rather than speculate as to what rate will – how long it will go on, the way I would say it is we have no suggestion that what – that this – that what occurred this quarter that will have any no less good a quarter, next quarter as we had done in the previous quarter. So I just feel like we’re in a strong position with this product line. And if that were to no longer be the case, we would communicate it, but we’re really doing well now. So Andy, I don’t know if you want to comment on the margin at all or...

Russell Quelch:

Okay. Good stuff. And then sorry, just as a follow-up. In respect to the Analytics business, the run rate there is still circa 5% and never a pickup. I wondered if you could talk in a bit of detail about what’s being done to improve that. Thanks.

Baer Pettit:

Yes.

Russell Quelch:

Yes, sorry. Just in the Analytics business, the run rate, it’s still growing at around about 5%. There’s never a pickup in the run rate growth. So I just wanted to know what’s being done to improve that. Thanks.

Russell Quelch:

Okay. Great stuff. Yes. Thanks, Andy.

Baer Pettit:

Craig, you may be muted. Yes. I can’t hear you, Craig. Maybe we can move to the next caller and then come back to Craig. He’s having a technical problem.

Patrick O’Shaughnessy:

Hey, good morning. How are you guys thinking about pricing power right now? Obviously, it’s an inflationary environment, but at the same time, your asset management clients are seeing their AUM under pressure.

Patrick O’Shaughnessy:

Got it. Thank you. And then Andy, can you quantify the magnitude of the true down that you spoke about in the non-ETF passive asset-based fees?

Patrick O’Shaughnessy:

Great. Thank you.

Gregory Simpson:

Hi, good morning. I just wanted to ask if you had any color on the revenue contribution from private markets beyond the more legacy real estate piece and RCA? It sounds like there’s quite a lot of work on the product side and building out relationships with GPs. But are we at the stage yet where kind of private equity clients are a more material segment? Just how things are kind of going there and then the relationship with the Burgiss.

Baer Pettit:

Look, I’ll be very brief. I think we’re working with them on a number of areas. We’ve clearly had alluded to some of the climate work that we’re doing. That’s been a big focus of ours, because this demand is coming through for increasingly from private asset clients. So there’s also general work going on between our private asset data teams in order to figure out how we can create greater benefits in combined products going beyond some of the ESG and climate work that we’re doing. So I hope as we get into the second half of the year, we’ll be able to expand on that a bit more for you.

Baer Pettit:

Yes. Look, I think we’re very happy with the relationship. I’ve personally been involved in a number of calls with them in the last quarter. I think that as you can see from other aspects of our Futures franchise. These things are a virtuous circle that kind of volume and liquidity and open interest to get one another. I think we’re happy with where we are. We’ve got some other things that we’re discussing with them. So I think we’re in a good place. And we believe that looking across our – the broader numbers in our Futures & Options franchise, which you saw this quarter, there’s still a lot of upside across the board with all of our exchange partners, including Hong Kong.

Operator:

Our next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Andy Wiechmann:

Yes. Craig, I don’t think we’ve provided those metrics recently. I would say that there are a couple of ways to think about our Fixed Income business. We’ve got the direct fixed income solutions that we provide for the fixed income investment process, and those cut across Index with our Fixed Income Indexes, which is largely on the heels of our partnerships that we have with many other major index providers, fixed income index providers or ESG solutions, which are increasingly being incorporated into the fixed income investment process. And then our Analytics solutions, which I alluded to earlier has been a nice area of growth for us in Analytics. It is worth noting, we also have a meaningful Fixed Income capability that serves multi-asset class use cases. As part of our multi-asset class tools and our enterprise risk and performance, obviously, a big part of our clients’ portfolio is – their enterprise-wide portfolio is fixed income. And so we have capabilities there that are critical to supporting the growth and the position in those businesses as well. And so it cuts across a number of dimensions, but it is – especially the one – the parts serving the front office and that fixed income investment process, we are seeing very strong growth.

Craig Huber:

And then my follow-up question, guys. Your private asset segment, obviously, organic FX was down about 5.5%. You talked about some onetime issues there. Can you just talk a little bit about your outlook there? And if you normalize for that, what was sort of the underlying growth rate?

Craig Huber:

Great. Thank you.

Ashish Sabadra:

Thanks for taking my question. I just wanted to go to the Slide 28, where you provide the AUMs and ETF linked to ESG and Climate equity indices. The growth moderated there a bit and even sequentially, there was a moderation. I just wanted to see how much of it was related to just market performance. And what are you seeing in terms of new ETF launches or new product launches based on the ESG and Climate equity indices? Thanks.

Andy Wiechmann:

No. No, I think you hit the key themes there. I think that’s right. We continue to see momentum and strong appetite as Baer has highlighted across the category. There are cyclical dynamics feeding into some of the flows, particularly within ETFs. And so it’s something that we’re not too concerned about looking out longer term.

Baer Pettit:

Sure. Great question. So first of all, I’m delighted that Christina has joined us. And I think we’re at an inflection point or we’re probably past an inflection point, where MSCI needs to reach out to our clients in the broader markets, moving beyond our traditional strengths of what I would call direct sales and client service. And Christina has an outstanding background to help us in that regard. And I’m very confident that she will put her leadership footprint on this area, and we’ll be happy to talk about that in the quarters ahead.

Jeremy Ulan:

Okay. I believe that was the final question.

Baer Pettit:

So thank you all for joining us on the call today and your continued interest in MSCI. As you heard, it’s times like these that really underscore the resilience of MSCI’s all-weather franchise. We not only continue to see strong demand for our solutions, but we also have tremendous opportunities in front of us. We remain excited about the momentum we are building and the investments we’re making. And we look forward to seeing and engaging with all of you in the coming months. Thank you very much.

Company Representatives:

Henry Fernandez - Chairman, Chief Executive Officer Baer Pettit - President, Chief Operating Officer Andy Wiechmann - Chief Financial Officer Jisoo Suh - Executive Director, Investor Relations

Jisoo Suh:

Thank you, Dillon. Good day, and welcome to the MSCI First Quarter 2021 Earnings Conference Call. Earlier this morning we issued a press release announcing our results for the first quarter 2022. This press release along with an earnings presentation we will reference on this call, as well as a brief quarterly update are available on our website www.msci.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we'll also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time, the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media maybe on the call this morning in a listen-only mode. And with that, let me now turn the call over to Henry Fernandez. Henry?

Baer Pettit:

Thank you, Henry and greetings everyone! As Henry mentioned, the biggest global event of the quarter was Russia's invasion of Ukraine. I join him in expressing our solidarity with the Ukrainian people. When the war began, MSCI quickly removed Russia from our emerging market indexes and reclassified it as a standalone index. We have also introduced new stress test scenarios specific to the war that client's run though our analytics products. Additionally, we closed out our deminimis financial exposure to clients in Russia, which is lesser than that $1 million of run rate. We are well positioned to succeed in the complex external environment, thanks to our resilient all-weather franchise. Despite the current turmoil, we remain convinced that long term trends benefiting MSCI, including the indexation and globalization of portfolios will endure. In my comments today, I will review the areas of our business where we will continue investing for long term growth as reinforced by strong financial results and a few examples of our actions to manage risks that we can control. I'll start with our continued momentum in scaling our ESG and Climate franchise. Even as we enter a period of surging energy prices and user technology sector valuations, demand for integrating ESG and Climate considerations is resilient as clients continue to position themselves for long term transformation. Our firm wide ESG and Climate run rate is now $369 million, growing 46% year-over-year. In our reportable ESG and Climate ratings and research segment, new client relationships continue to form almost 50% of new subscription sales. Our multi-year investments to build a large and complete data coverage universe are supporting our position as an industry standard setter. In ESG ratings and in our Climate metrics, we now cover more than 9.5 million instruments across equities and fixed income, including ETF’s, corporate and government bonds, bank loans and derivatives. Next, I will discuss our progress in scaling our newer frontier client segments. In the ESG and climate segment, over half of new subscription sales during the quarter were to wealth managers, hedge funds, broker dealers, corporates and insurance firms. These clients have diverse use cases for MSCI Solutions, such as Climate Stress Testing on their loan books, enhancing underwriting processes by better understanding counterparties ESG and carbon profiles, complying with new and emerging regulations and monitoring of net zero commitments. We are also leading into the connectivity across MSCI product lines to drive wins with these newer clients. Our strong first quarter sales included an EMEA insurance firm that launched insurance linked products, benchmarked to our custom indexes with a partner in fixed income. Across MSCI, our total run rate from insurance firms and all-insurance related use cases is $77 million, growing 19% year-over-year. In analytics we're landing strategic mandates with equity and fixed income portfolio managers, seeking to integrate ESG in portfolio construction process. Our run rate in analytics fixed income front office has grown approximately 50% year-over-year. Finally, we continue advancing our data ecosystem to equip our clients with the insights they need to understand the impact of today's macro backdrop on their portfolios. In analytics, we released an enhanced version of Climate Lab enterprise during the quarter, with dedicated dashboards related to carbon intensity. While it's still early days, we see climate data as a sales enabler for various portfolio construction reporting and risk management used case, and we are encourage by a recent large multi-year client win in the Americas. In private assets, we also expect climate data to be a commercial enable, including for cross sales. We recently completed a product release of our Client value-at-risk due-diligence reports to RCA’s large commercial real-estate property data base. In ESG ratings, our investments in our issuer communication portal are enabling a higher velocity of engagement with corporate issuers, which is in turn further supporting data quality and timeliness. Our previously announced launch of MSCI data explorer places over 250 data sets across all MSCI product lines at our clients’ fingertips. This is empowering them to self-service and discover, test and start new subscriptions. Across MSCI our pipelines are healthy. Having said that, we are watching economic activity across regions closely and the effects on our clients, which we recognize maybe uneven. In summary, our resilient franchise continues to benefit from our actions and long term investments to diversify and enrich our platform. Across varying and unpredictable operating environments, we are committed to driving continued growth in the most efficient way possible, prudently for all our stakeholders. Let me now turn the call over to Andy.

Operator:

Thank you. [Operator Instructions]. I show our first question comes from the line of Manav Patnaik from Barclays. Please go ahead.

Andy Wiechmann:

Sure, yeah, thanks Manav. I would say there's not a specific trigger for the upturn or the downturn playbook. As I've mentioned before, we are continually monitoring the environment and calibrating the pace of investment, and it's based not only on the current situation or how much that the market and AUMs have moved up or down historically to this point, but importantly it's based on the outlook. I'd say in this case we're not adjusting our guidance because it's one, early in the year. Two, we don't want to pull back on the very important growth investments that are fueling long term value creation, but I think importantly in this environment, our business remained healthy. As Baer commented, the client buying behavior remains generally robust and the pipeline remains healthy. Even when you look at AUM levels, this year they’ve been quite resilient. It's important to remember that even though specific global markets may have traded off meaningfully on the year, we have a very diversified global ABF franchise that benefits from inflows into ETFs, as well as global market levels. And then we have the added benefit of the growth in the futures and options franchise, which has provided a nice offset to some the market volatility. And so, when you look at – just to put a finer point on that, when you look at AUM year-to-date, AUM is down only 4% from 12/31 through 3/31. So based on what we said back in January, where our guidance for the year was assuming that AUM levels are relatively flat for the year, we are now in a point where AUM levels are slightly below where we were in January, but there is a long way to go for the balance of the year and the environment feels, at least on the operating metrics front feels relatively healthy. And so as I said in my prepared remarks, if the markets deteriorate further or stay flat, we will likely begin to go to the downturn playbook and pull back on expenses, but I'd say it's too early to say that right now. The last point that I would make is a lot of the adjustment and expenses is automatic. So the first things that start to adjust are things like our comp accruals and we do have other levers we can go to without impacting growth investments in the business. But it's something we're monitoring very closely and as I said, we're calibrating on a day-to-day basis.

Baer Pettit :

Well, that number is coming out, I’ll answer your first question. So look, we view this as really a fundamentally positive thing. You know we have leadership in this space. We believe that the manner that we operate is highly professional. So we have extremely high standards as we had in other areas where we've been regulated such as Index. So we believe that any environment that creates greater demands for transparency, for quality, that puts this topic central to investors’ agenda and central to corporations’ agenda is a very positive thing for us. We're clearly also in – often we’re asked for our views on these topics by regulators in a variety of jurisdiction and are in contact with them, which hopefully we can help inform some of their thinking based on our expertise in these matters. So I think overall we definitely view these things as that direction, as being a positive or what we're trying to achieve.

Manav Patnaik:

Thank you.

Andy Wiechmann :

Alex, I wouldn't read into that too much. I would say that as you know the sales can vary a little bit quarter-to-quarter. The run rate growth remains quite robust at north of 12% organic subscription run rate growth and Index and so we're not too focused on either sales or cancels in one quarter and Index. I think we continue to be pleased by the progress and trajectory on the Index subscription franchise.

Henry Fernandez :

Alex, I think that our base case is that the number, the growth rate in ESG and Climate will stay elevated, relative to our targets for a very prolonged period of time. As we expand the ESG franchise to more client segments such as insurance on wealth and corporate and the like, and as we increase the number of used cases for ESG we are fining more and more demand. If you just look anecdotally with investment banks and asset managers and asset owners, you know compared to a year or two ago almost every one of our clients already have a dedicated person for ESG, which is an incredible change over a short period of time. So I think we continue to be fairly optimistic. We are not going to change the target at this point, but we continue to be optimistic that high growth rate will continue. Now, on top of that we are still in the very early days of Climate. $50 million run right on climate across all products of MSCI is a smaller number, a smallish number, but is growing at over 100% per year. I think the potential for our climate solutions over a long period of time could be that it exceeds the run rate of ESG itself, give the exercise and product to work for world and in various numerous, you know use cases and clients segment including the corporates and corporate advisors and the like that we are serving. So we are very positive and optimistic. If you thought that we were pretty bullish on this product line, two, three years ago, we are even more bullish today.

Henry Fernandez:

Yeah, let me add something else just to make sure none of this growth is going to come without a major investment, right, in the product line and data, in analytical tools and indexes and all of that, so. I hope that everyone understands that a meaningful part of our investment in the firm is to capitalize of this ESG and Climate opportunity and continue to be a leader in this space. So our investment plan, especially because of ESG and Climate is going to stay like this and accelerate as revenues accelerate over a very long period of time.

Operator:

I show our next question comes from the line of Toni Kaplan from Morgan Stanley. Please go ahead.

Andy Wiechmann:

Yeah, I’ll touch on the cost, but I first want to give you the holistic picture around inflation for us. I think you know this, but we are a high margin business, where small benefits on the top line can lead to net benefits on the bottom line, even if we have some inflationary pressure on the expense line. And so I do want to point out that we are very thoughtful and focused on pricing appropriately for the value we're delivering. We also factor in what competition is doing and client relationships, but we also do factor in the cost environment and the cost impacts to us and so we shouldn't lose sight of that. Now, on the expense side, I would point out to Henry's last comment. Expense growth has been much more driven by investing, so the expense growth that you're seeing is as a result of the meaningful investments we made last year that carry over from those and our continued investments this year. There's also obviously an impact from RCA coming on board, but behind both of those we do see some impact to wages from inflation and just to dimension out roughly, in a typical year we normally see low single digit to maybe mid-single digit wage increases. This year we're seeing something more like mid to slightly above mid-single digit increases in wages, and so we are seeing some impact there, but in terms of dollar impact it's not significant in the grand scheme of things. And I would point out on the non-comp side, where we have seen some pick up in professional fees, areas like insurance we have seen some increases. The bulk of our non-comp expense base where we have long term vendor agreements that have embedded price within them, we’re pretty well protected against inflation and so while it is a factor to us, the bigger impact on expensive is really the pace of investment and that's what we're primarily focused on.

Henry Fernandez:

Well Toni, you know we remain unhappy with the growth rate of the run rate in analytics. We've done quite a lot of different strategies to change that and a lot of it has worked, but from a small run rate basis – for example, we have been pivoting our analytics product line towards the front office, the portfolio management offices, so that's why you see meaningful, very meaningful double digit increases in the run rate of fixed income portfolio management that they alluded to, in equity analytics or equity portfolio management analytics; that’s another area that we’ve been pushing pretty hard, again from a slower, from a smaller run rate base. I think the central issue remains, the central risk analytics platform which is sold to our cost centers in our client base as opposed to profit centers and that is a – you know very much of a mature product area for us. We're trying to reinvent that and reinvigorate that with climate risk as a driver of risk management in the central office and we have some early successes on that. Clearly the climate large enterprise is an example of our product line in that category. So sales remain really robust when you look at the operating metrics. The challenge remains you know the lumpiness of the cancels at the time of renewals, because of the matured nature of the product line, the cost current that typically affects cost centers, especially central rate cost centers and all of that. So hopefully over time we can outgrow the part, the mature part of the book of the run rate you know and the UFR, the prognosis equity analytics, fixed income analytics and the new use cases such as climate rate can continue to grow faster and therefore get the overall run rate you know to grow in the high single digits and eventually in the lower double digits.

Operator:

Thank you. I show our next question comes from the line of George Tong from Goldman Sachs. Please go ahead.

A - Baer Pettit:

So George, so look, we want to be very numbers driven on this. Clearly we have been in a volatile environment that has got people a little antsy, you know generally. When I say people, I don't mean just our clients, I mean just market sentiment. But when we look at the facts of our pipeline, what's going on in the business day-to-day, we just don't see it yet. Now it may show up in the future, but for now everything is what we would expect it to be at this stage in the quarter, looking at the pipeline, etc. So we will give you new information as soon as we get it, but right now we're not seeing any noticeable change in the pipeline, the bar behavior or anything of that kind.