MSCI Inc.

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2021 Earnings Conference Call. 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 and one follow-up. We will have further instructions for you at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sally Schwartz, Head of Investor Relations and Treasurer.

You may begin. Thank you, operator. Good day and welcome to the MSCI third quarter 2021 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter 2021. 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, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. Your caution not to place undue reliance on forward-looking statements, which speak only as of the day 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 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 gap 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 this morning are Henry Fernandez, our Chairman and CEO, Bear Pettit, our President and COO, and Annie Wishman, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Sally. And thank you also for everything you have done for MSCI for the last two years. Hello, everyone, and thank you for joining us today. Our organic revenue growth of more than 20% and excellent performance more broadly this quarter is further evidence of the accelerating demand we are seeing across MSCI. It also validates the investment that we have already executed on, including those we identified at Investor Day earlier this year. In my 25 years leading MSCI, I cannot remember a time when we have seen so much demand for our products and solutions and had so many attractive opportunities. As the investment industry continues to transform, our clients are turning to MSCI to create standards and offer solutions across market cap and non-market cap indices in both equity and fixed income, risk management products and services, factor models, ESG ratings and data, climate data and analytics, and insights and tools for managing private assets. Let me just give you a few examples where demand for our solutions is off the charts. In climate, we see interest exploding across our client base for data, tools, models, and solutions within every asset class and across every aspect of the investment process. Ultimately, we want MSCI's climate offerings to be the common language that capital markets participants use to discuss climate. We want to help market participants navigate the largest scale reallocation of capital in history as industries, and global economies begin to decarbonize. You will therefore see us to continue to invest heavily in our climate offering. You would also see us leading key strategic initiatives in the world, which are focused on impacting the global transition to a net zero economy. We recently hosted global asset owners asset managers, and policymakers at the MSCI Global Investing Conference, our flagship client event. This year, we focused the discussion in that conference on climate in the lead up to MSCI's involvement at the UN COP26 conference in Glasgow next week. In September, MSCI joined Mark Carney, the UN representative for climate, in playing a pivotal role in establishing the net zero financial services providers alliance. Collectively, the alliance members will give asset owners, asset managers, banks, insurance companies, companies, and other financial institutions the information they need to pursue decarbonization strategies and help the world reach net zero by 2050. MSCI is well positioned to be a key driver of the critical global dialogue regarding climate change. We already have long-term deep strategic relationships with global asset owners, asset managers, and other key market participants, and we have a well-established and growing leadership within ESG. To that end, I'd like to talk about ESG separately from climate. We continue to invest in comprehensive securities coverage for MSCI's ESG ratings. This includes the entire MSCI AQUI universe for equities, consisting, of course, of developed and emerging markets included in the MSCI equity indexes, as well as equity derivatives. It also spans across fixed income, especially corporate bonds, but also including munis, structured products, and sovereign bonds. In addition to ESG rating, we're also enhancing our ESG models and data architecture. to provide clients with more granular data. In addition to carbon emissions and governance metrics, we hear strong interest in having more data on social factors. Perhaps not surprisingly, given ongoing social justice issues and broader appreciation for the impact these considerations can have in creating or destroying shareholder value. In ESG, we're also investing in our sales and client service organization in order to serve a variety of needs across every part of the investment process, including from corporates and their advisors. Demand in ESG is truly on fire, and you will see us continue to invest heavily in this area. Another area where we see relentless demand for our offering is in custom indices. We highlighted this area during our February investor day, and interest from our clients has been accelerating even since then. Investors are increasingly looking for custom-built indices where they can choose their own universe, weightings, screening, hedging, and other characteristics. This demand is likely to explode in the area of direct indexing. MSCI has already made a number of investments to this end, and we will increase our base of investments to meet this accelerating demand for custom indices. Another area of renewed focus on high demand is our factors franchise. which this quarter topped $300 million in run rate, up more than 11% year over year. We continue to innovate in content, enhance our front office workflows, and expand our distribution through partners and newer software applications. I will now provide a quick note on the wider operating environment for us. Our clients are engaged. They're feeling optimistic despite some of the concerns we all hear about inflation, rising rates, potential economic slowdown as a result of COVID, and even political and geopolitical issues. We see that optimism continuing and translated into higher demand for our products and services. We believe that we have never had a more attractive set of opportunities across MSCI as we see today. With that, I'll turn over the call to Bear Pettit, my partner in this business for more than 21 years. Bear?

Thank you, Henry, and greetings, everyone. In my comments today, I'd like to unpack the enormous opportunities that Henry described. as well as some of the associated Triple Crown investing actions that have continued to fuel our strong growth. Our pace of new product and technology development is faster than it has ever been as we race to meet client demand. First, related to our products and services on climate change, we now have a run rate that totals more than $35 million in this category. well over double our footprint from last year. Our range of offerings and capabilities is expanding rapidly. We believe it is still very early days in what this franchise can ultimately be. At our recent MSCI Global Investing Conference, investors spoke with us about the need to holistically measure net zero progress in their portfolios and for individual corporate issuers. MSCI recently launched Climate Lab, a first-in-kind visualization dashboard that combines our climate data with MSCI's analytical risk and portfolio management capabilities. We have made a series of investments to build comprehensive Scope 1 and Scope 2 datasets on thousands of issuers, which will now serve as the basis of better understanding the Scope 3 data of companies which comes from their supply chain. Additionally, MSCI's analytics platforms are powering Climate Lab portfolio analysis capabilities, offering the first at-scale portfolio reporting in the market. This is critical for our clients to meet TCFD and SFDR requirements. Our newly launched implied temperature rise metric is another way that we are bringing transparency to net zero alignment goals. The implied temperature rise is derived from a given company's existing activities and their specific future pledges, from which we create a common measure of comparison or alignment to climate goals. This forward-looking estimate allows investors to set decarbonization targets and support engagement on climate risk at both the company and the portfolio level. ITR is available for nearly 10,000 issuers and is aligned with recommendations published by the TCFD portfolio alignment team. We also just launched carbon footprinting of private equity and debt funds, the new service from Burgess and MSCI. This offering enables private equity LPs and GPs to measure and monitor the greenhouse gas emissions of their portfolios. based on data estimates for over 15,000 companies in more than 4,000 active private equity and debt funds. Next, I'd like to speak about our ESG franchise, which remains a distinct enormous opportunity that enables our success in climate. As you can see from the numbers, our ESG business continues to grow at an extremely attractive rate, driven by heavy client demand as we rapidly expand the universe of datasets we can offer, as well as modernize the data consumption interfaces for our clients. With 63% year-on-year run rate growth in our firm-wide ESG and climate franchise, which now totals $312 million, it is critical that we keep ahead of client demand with investments in this complex and ever-evolving category. Besides the need to cover an increasing universe of securities and issuers and the demand for sales and service across numerous client segments globally, we also have increasing demand for such categories as corporate governance factors and quantitative diversity metrics and various other qualitative indicators. I'd now like to address index, which continues to be a huge growth engine for MSCI. Besides the resilience of our market cap franchise, we continue to see strong growth across ESG and climate in factors, as well as in new categories such as thematics. We think of our non-market cap indexes collectively as investment thesis indexes. As the traditional barriers between active management and indexed investing break down, we're seeing large demand for innovation in investment thesis indexes of all kinds. One manifestation of this is in our custom index business, where investors of all types are in search of solutions they view as matching the market opportunities they see. MSEI has established the standard in defining the investment opportunity set based on our robust investment frameworks and rules-based methodologies. But clients want to tailor this opportunity set to create and manage portfolios combining their investment pieces with MSEI's expertise in analyzing markets and in index construction. As of the end of the third quarter, subscription run rate growth for our custom and special index solutions had grown 18% year over year. This is an area we believe will continue to have strong demand and where you will thus see us continue to invest. We will soon be launching a beta version of MSCI Index Builder, a web-based application that allows users to design, test, and subscribe to custom indexes directly from the site. IndexBuilder will deliver greater speed and control to our clients, as well as further modernize their experience with MSCI indexes. I also wanted to make a few brief comments related to our fixed income franchise. We have made meaningful investments to bolster our data single security analytics and range of fixed income instrument coverage in order to enhance our portfolio management analytics offering. We are seeing very attractive growth, albeit from a small base year over year. With regard to our fixed income index franchise, we have licensed a number of important clients for product creation during the third quarter. And in keeping with our strength in ESG, the AUM in fixed income ETFs linked to MSCI Bloomberg Barclays indexes totaled nearly $27 billion, up 122% year over year. Before I turn the call over to Andy, I'd like to provide an update on our acquisition of Real Capital Analytics, or RCA, which we recently closed. As you may recall from our announcement of the transaction in August, We view RCA as meaningfully accelerating MSCI's private asset strategy. Commercial real estate property values have already been an important component of MSCI's real estate product offerings. Now with RCA's rich transaction and pricing data, we see a wealth of use cases that we can integrate into cash flow models, liquidity models, asset allocation tools, and many other solutions. Early client feedback has been quite positive as MSCI has also meaningfully extended key front office capabilities such as due diligence, deal sourcing, and transaction data. The RCA acquisition has also significantly bolstered our real estate research capabilities. Looking ahead, I'm confident the investments we are making today will well position us to capture even greater opportunities in the future. We are capitalizing on the volume and velocity of client demand for our offerings, and we will continue to make investments in the context of our rigorous Triple Crown framework. Let me now turn the call over to Andy.

Andy? Thanks, Bear, and hi, everyone. The results for the quarter reflect the enormous demand that Henry and Bear spoke about, which is translating into strength across most parts of our business. We had the best third quarter on record for both company-wide recurring net new sales and for total recurring subscription sales in both our index and ESG and climate segments. We also saw a record quarter in firm-wide non-recurring sales, following strong performance in non-recurring sales in both Q1 and Q2. This strength has been driven by wins in index from sales associated with license and usage fees related to prior periods, derivatives licenses, and our data packages. I would highlight that these sales tend to be somewhat lumpy by nature, and we would expect non-recurring sales in Q4 to be lower. Across client segments, we saw a strong organic growth with sales from both established and newer client segments, as well as resilient or improved retention rates. Asset managers and asset owners, which now together comprise nearly a billion dollars of our subscription run rate, collectively grew approximately 11% organically. And looking forward, our sales pipeline across products and regions and intensity of client engagement continue to be quite healthy. From a firm-wide perspective, the 12% organic subscription run rate growth benefited from strength across segments. Index subscription run rate growth was more than 11% year-over-year, our 31st consecutive quarter of achieving double-digit growth. This continued momentum is fueled by outsized growth in our investment thesis index modules, particularly in areas like ESG and climate, which witnessed 44% year-over-year run rate growth, as well as within higher growth client segments like wealth management and hedge funds, which experienced index subscription run rate growth of 17% and 28%, respectively. Analytics recorded more than 6% revenue growth, and approximately 5% run rate growth, with particular strength in equity portfolio management tools and fixed income portfolio management tools. It's also important to underscore that our analytics capabilities are helping to fuel growth in key areas across the company, such as our factor indexes and many of our climate risk and reporting offerings. The ESG and climate segment had another tremendous quarter, growing 53% in revenue and 46% in run rate, as we continue to see enormous demand across solutions, across asset classes, and across client segments. Within all other private assets, we're particularly excited about the larger opportunities in front of us with the addition of RCA, which added $74 million in run rate. Given these opportunities, we expect to be making investments in the near term to integrate the business. When combined with the existing real estate business, these investments, together with some employee retention expenses that are not excluded from adjusted EBITDA, as well as the reallocation of certain internal costs to the segment, will result in annualized adjusted EBITDA margin for the all-other segment likely closer to the mid-teens next year. Within asset-based fees, we continue to see healthy cash inflows into equity ETFs linked to MSCI indexes, which offset lower market levels over the quarter. We saw particularly strong flows into ETFs linked to our U.S. and developed markets ex-U.S. indexes. And from a product standpoint, ETFs linked to MSCI ESG and climate equity indexes drew cash inflows of nearly $18 billion during the quarter, continuing to capture the majority of market share in global ESG and climate equity ETF flows. The period end basis points were 2.57 basis points as we saw support from these strong flows into higher fee products based on our investment thesis indexes. Solid operating performance and notably strong revenue growth drove nearly all of the adjusted EPS growth in the quarter. This top line growth was offset by a higher tax rate this quarter versus last year's third quarter, as well as higher interest expense year over year. Turning to our balance sheet, we ended the quarter with a cash balance of approximately $1.3 billion after funding the RCA acquisition, executing a $700 million notes offering, and redeeming $500 million in higher coupon notes. With this strong capital position, we remain focused on reinvesting in our business as a first priority. This will continue to be in areas you have been hearing about from Henry and Bear, including custom, ESG and climate, and other investment thesis indexes, and in private assets. It will also be in data and technology infrastructure that underpins our ability to meet clients' evolving needs, as well as in the coverage organization that allows us to continue tapping into newer client segments and geographies in addition to better serving our existing clients. We will also continue to selectively pursue opportunistic MP&A and share repurchases with an eye towards maximizing returns to shareholders. We have been actively pursuing both partnerships and potential acquisitions in key strategic growth areas at a faster pace than in the recent past. In addition to acquiring RCA, we recently partnered in the Burgess acquisition of Caissa, which is strategic both for Burgess and MSCI, and we have made and may continue to make very small bolt-on acquisitions and investments. Additionally, I would note that cash currently available for repurchases is about half the total cash balance. given both global minimum operating cash balances and the timing and cost of accessing excess overseas cash balances. Turning now to our updated guidance, which we published earlier this morning, our increased adjusted EBITDA expense guidance range primarily reflects an estimated $19 million of incremental expenses associated with RCA for full year 2021, which includes $3.6 million incurred in Q3. This also includes a few million dollars of transaction-related expenses that we will not exclude from adjusted EBITDA expenses. The increased guidance for operating expenses includes the $19 million of incremental adjusted EBITDA expenses associated with RCA, in addition to an estimated $7 million of transaction-related expenses and nearly $10 million of intangible amortization, both excluded from our adjusted metrics. Our narrowed tax rate range takes into account our latest view on the number of discrete items and the fact that we are currently expecting a higher effective tax rate in the fourth quarter than in the prior two quarters.

Our lower free cash flow range is nearly all attributable to approximately $110 million in cash tax payments incremental to what we previously expected to make, the majority of which will occur in the fourth quarter.

We currently expect these accelerated tax payments to reduce future tax payments. Importantly, our collections remain quite strong, as does the underlying performance of the business. In summary, as both Henry and Baird noted, we're seeing very strong levels of demand for our offerings across the company. We have a great operating environment to finish 2021 and are excited for the tremendous opportunities we see ahead of us in 2022 and beyond. Before we open it up for questions, I wanted to thank Sally for her enormous contributions to MSCI. This will be her last earnings call as part of MSCI, and her final day will be November 19th, after which Jisoo will be our point person for any investor-related inquiries and questions. We will miss Sally greatly, as she's been a key leader for us on so many initiatives over the last few years. We're very sad to see her leave, but I look forward to watching her many successes in the future. And with that, operator, please open the line for questions.

Thank you. To ask a question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alex Cram with UBS. Your line is now open.

Yeah, hey, good morning, everyone. Just wanted to dig further into the uh strong sales you saw on the esg and climate side obviously you gave a lot of color already but can you maybe give us a little bit more detail what's what's driving what drove the sales during the quarter is it is it still a lot of the the core products or are you actually seeing some sales already on you know climate models for corporate so any any more color in terms of where the say how the sales kind of broke down would be would be helpful on the esg climate side thanks

Sure. Yeah, good morning, Alex. And clearly this is an area where we're spending a lot of time. I would say the success is across the board, so it's tough to nail it down to one thing here. But we're seeing success, as we've talked about in the past, across products, where it's in addition to the core ESG ratings and research, we're seeing success on the climate side. We're seeing that success across asset classes as So in addition to the success we've seen on the solutions for equity investing, we're continuing to see strong traction across fixed income investing and then across client segments. So we continue to have very strong success selling into both established client segments like asset owners and asset managers, where we've seen growth north of 30% in run rate. That's being accelerated by the very strong growth we've seen in segments like well, broker-dealers, hedge funds, And then geographically, the success is really across the board. We are seeing strong success in the U.S., but we are, as we've talked about in the past, seeing outsized growth in areas like EMEA and Asia in particular. So it's really continued success, and I think it underscores the importance of continuing to invest to drive growth across all these frontiers. That's really what's going to continue to fuel both the growth and leadership on this front.

Okay, fair enough. And then maybe just a quick follow-up. On the analytics side, Henry mentioned in general that the operating environment has been great across the board, but on analytics, it seems like I would have expected a little bit more on the sales side, and I know this can be lumpy, but just wondering if there's anything to highlight there, because some of your peers in some comparable businesses are doing really well, and it does seem like on analytics, You're not doing as well, but I understand this is a smaller focus for you. Just curious if you have any additional comments here.

Yeah, and just based on the growth, you can tell we're below our long-term target, and this is an area where we continue to focus to drive faster growth than what we're seeing right now. But it is a little bit – areas where we're having strong success and areas where the growth isn't where we want it to be. So on the portfolio management tools, both on the equity portfolio management tools and on fixed income portfolio management tools, where we're largely serving that front office and tends to be quite complementary to a lot of what we do across the business, we're seeing very strong growth, very healthy growth. It's on the multi-asset class front and, in particular, the enterprise-wide solutions where the growth has been a little slower. And as we've talked about in the past, there tends to be some lumpiness there, although we are having traction in some components of it, namely areas that are driven by some of our strong partnerships and continued traction in some of the broader solutions that we have. I would underscore, and this is important to note, and it doesn't show up in the analytics numbers, that analytics continues to be a key strategic driver and growth driver for other parts of the business, namely in our factor indexes, as you know, but also going forward in areas like ESG and climate. Some of the risk and reporting capabilities that we have in analytics are underscoring and underlying some of those solutions that we're seeing strong growth in.

Fair enough. Thank you very much.

Our next question comes from the line of Manav Patnaik with Barclays. Your line is open. If your line is on mute, please unmute your line. Our next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open. Thank you so much.

I wanted to talk more about the intersection of climate and ESG with PE and the debt funds. You mentioned the carbon footprinting in the update. I just wanted to understand if you think that this is a really significant near-term opportunity and what else is being offered in the market? Is this sort of a unique solution or are there other competitive solutions in the market right now?

Hey, Tony, it's Bear here. So for sure, we think that what we've brought to market here is, you know, look, it's always tough to say unique because we live in a competitive world, but we're not aware of a lot of competitors in this space at this stage. So I think we're pretty pleased that we've come out with this initial product working with Burgess. We also have plans to expand a lot of our current rating infrastructure for ESG into private markets and are looking forward to making progress in that area in the year ahead. So I think we have a lot of components here that I would say are differentiated, and we hope will continue to be differentiated in the market ahead. Equally, you know, we're never complacent. And when you look at both the areas of private markets analytics generally and climate and ESG, those are clearly, you know, areas where competition is growing dramatically. And so it's our intention to both invest in order to stay ahead, and we're confident we can do so. But, you know, we'll have to see how that market develops because it's very early days, and we're just committed to investing to make sure we maintain leadership.

That's great. And I did want to ask about investments versus margins. you talked about EBITDA margins for all other next year being closer to mid-teens. But on the other hand, I feel like you're at a point where you're seeing the most significant opportunity that you've seen, I think are sort of the way I'm paraphrasing what you've said on the call. So tell me about how you think about the right level of investment when there is such strong opportunity ahead? Should you be investing more? Thanks.

Sure. Yeah, Tony, it's an important question for us. And as we've talked about in the past, we're in a mode of continuing to invest in the business to drive growth. And we've gone to our upturned playbook this year, as you know, given the strong performance and importantly, also the strong operating environment that you see. And so that's something that we will continue to do as we see the opportunities and the enormous demand that Henry and Bear talked about in their prepared remarks today. And so when you look at the areas where we are investing and will continue to invest, it's the areas that are the key growth drivers for us and key strategic areas. So by product segment. You can see outsized growth in the ESG and climate EBITDA expenses. You see it in index EBITDA expenses. As you know, these are key growth drivers of both revenue and profits for the firm. When you look at where we're investing across functional lines, it's heavily into data and technology research and the product teams, particularly product teams supporting ESG and index. And then across investment areas, it's the index platform, the new index platform that we're developing. It's The ESG platform that Bear alluded to, our investment thesis indexes, ESG technology and data. And more broadly, we are continuing to lay the foundation for continued growth and supporting opportunities in the future. On the all other line, there's a lot of noise in there. So given the integration that's taking place, given some of the transaction-related expenses, the margin comment that I made is a little bit not necessarily a good reflection of what to expect going forward. That's just a reflection of all the moving pieces we expect next year. And clearly private assets, particularly from an inorganic standpoint, is a focus area for us and a big investment area. But for us as a firm, it continues to be, and this is where you see the EBITDA expense growth. It's across ESG and climate and indexes primarily.

Let me add to that, if you don't mind. As you may remember, in the lead up to Investor Day, we obviously had analyzed extensively the tremendous opportunities that we had. and the demand that we see for our products and services, which has actually accelerated quite significantly since then. But we wanted to have a sanity check. We wanted to make sure that the owners of this company, the shareholders, gave us their perspective on what they thought we should be doing, given what we saw in the marketplace. And the answer was a resounding yes. vote of confidence in the opportunities. They saw them the same way. They added a few more. They encouraged us extensively on ESG data, which we have worked very hard on since then. And that it would be a remiss. It would be almost irresponsible not to invest heavily in those big growth areas that we see coming. So that was a very strong indication and by a strong vote of confidence and speaking on the part of the vast majority of our shareholders. So clearly we need to balance all of those wishes, ours and our shareholders, with continued financial discipline. of earnings growth and profitability year in and year out. Once you begin to lose that, that's always a problem. And therefore, that's why we came up with the concept of very modest at best margin expansion over the next few years.

Thanks, and good luck, Sally.

Our next question comes from the line of Maniv Pednick with Barclays. Your line is open. Thank you. Can you hear me now?

Yep.

Oh, yeah, perfect. Andy, just first, just to, you know, on some of the moving pieces for next year, it sounds like on the cash flow, it's a one-time impact this year. I think you mentioned it's a benefit going forward, if you could just help us with that. And I just wanted to clarify that mid-teen EBITDA number you gave for all other, was that for 2022 as well?

Yeah. So, Manav, on the tax and primarily as it relates to free cash flow, because that's where it shows up most notably, I think like a lot of companies right now and like many in the industry, we're monitoring the very dynamic environment for tax regime and tax policies. And as you know, there are potential changes on the horizon globally. And so as we continue to do that, we are trying to optimize our tax footprint and ensure it's aligned with the operations of the company and importantly against that dynamic tax environment. And in this case, some of the actions that we've taken are accelerating income and tax payments into Q3 and Q4 of this year that are higher than we anticipated originally. And so we've got $110 million or so of elevated tax payments coming in this year. And expectation is that will lead to lower tax payments in future years. And so the place that shows up this year is really in the free cash flow line. And that's the only reason why our free cash flow guidance has come down. Actually, collections remain very strong across the business. DSO is strong. And as you know, revenue and business growth continue to be very strong. And so really the only change on the free cash flow side is to reflect those accelerated tax payments that we made a little bit in Q3 and mostly expecting in Q4 here. On the margin comment for RCA, that is related to 2022. So we wanted to provide a little bit more color to you given all the moving pieces related to the integration Some of the transaction-related expenses, which will trickle into next year, and then the combination of the two businesses, our core real estate business combining with RCA. And so on an annualized basis next year, we're anticipating a margin in the mid-teens type range. That's not the case for the fourth quarter of this year, just to be clear.

Understood. And then just one follow-up, you know, I think you had mentioned, uh, you know, inorganic focus on the private asset class area, and you've obviously done a few deals, but I was just hoping to get just the flavor of, you know, what that pipeline or landscape looks like, uh, you know, in terms of the opportunities there.

Yep.

So, um, Yeah, let me give you some color, a little bit more color on the activity beyond what we've announced and what we mentioned, and I can try to provide a bit more color on the areas that we're focused on. So in addition to the RCA transaction and supporting Burgess on their acquisition of CAISA, which we were heavily involved in, throughout the year we have made a couple small investments in highly strategic partners. We've also made one very small acquisition in the private asset data space that closed very recently. And so in the case of the investments, these are companies where we do have partnerships and who have important either commercial relationships for us or have unique data sets that we're using and combining to unlock and create value there. And so those are the types of things that we're going to continue to do. We're going to be very active. And as we've talked about in the past, the MP&A space. But we will continue to be very disciplined and focused on areas that are strategically critical for us and areas where we're confident that we can create growth and ultimately value. And so not surprisingly, the areas where we are heavily focused are areas like ESG and climate, areas like private assets. These are areas where having unique data sets and access to unique data sets are key competitive advantages, and speed to market are very important for us. And so we'll continue to focus on MP&A around those areas.

Got it. Thank you.

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

Yes, thank you. My first question on analytics, obviously you grew about 6% this last quarter in acceleration from recent years. Obviously your long-term goal is high single digits. What do you have left to do in your analytics business here to help accelerate the growth? What products or services there do you have to enhance in order to get that growth a little bit faster?

Yeah, so I think the first thing to always remember that the analytics product line is really a grouping of a number of other sub-segments in which we define them into four categories, and each one of those into even further categories. The four categories are equity analytics or equity portfolio management analytics, fixed income portfolio management analytics, multi-asset class, front end portfolio management, and then what we call internally enterprise risk and performance, which is the central sort of enterprise risk of many asset owners and asset managers. So in those four categories, clearly the majority of the run rate is in the last one, which is the enterprise risk and performance category. And what we're trying to do is, in addition to continuing to serve the needs, the multi-asset class risk management needs of our clients in the central risk function, we're trying to pivot our strategy towards the portfolio management side in equities, in fixed income, and in multi-asset class. And so far, the strategy is working. The fixed income part although from a small base, grew 80% in the last quarter. And the equity, you know, portfolio management analytics part grew double digits, you know, as well. You know, and so did the multi-asset class, but from largely, you know, the sales that were done prior to the quarter. So that's, you know, so the pivoting is, in addition to selling multi-asset class risk, solutions to cost centers, which are basically the risk management offices, the central risk management offices. We want to sell portfolio management solutions to the profit centers that are in the front end of our clients. And the latter is especially good for us because that's where a lot of our ESG and climate and a lot of our index activities revolve around. So that's the process that we're trying to do in this concept.

Great. Thank you. And Sally, all the best to you.

Our next question comes from the line of Owen Lau with Oppenheimer. Your line is now open.

Good morning, and thank you for taking my question. Could you please talk about the traction of the China A50 Connect Index futures? How should investors think about the opportunity there? And then if there's any other potential partnership opportunities with Hong Kong Stock Exchange to launch more new products, any more color would be helpful. Thank you.

Well, as many of you know, the Hong Kong exchanges launched the A50 the MSCI 850 Connect futures contract last Monday, the Monday of last week. So it's been, I don't know, seven or so trading days or so. And so far it has been the most successful futures contract launch in MSCI history. And I think in Hong Kong exchanges history, the trading volume over that period seven-day period has been $1.5 billion of trading volume, and the open interest is approaching $400 million. So it bodes well for the future success of that contract. In addition to that, around the same time, four asset managers in mainland China launched ETFs on the... you know, on the A50 index. And, you know, as of last night, the total assets that all four of them have gathered in their launches has been in excess of $4 billion. So those are also very, very successful ETF launches that our clients have done. And therefore, what we're trying to do is build an ecosystem in Hong Kong and inside mainland China between futures and the ETFs and the structured products. So we're now working hard in getting clients to license the index for ETFs in Hong Kong and also developing the structured product market around this product of the 850. So, so far, so good. Now, we do have a few other ideas that we're working on, and we constantly do so to see what else can we be launching, not only in Asia, but in Europe or in the U.S. with our partners. You obviously saw the announcement that we made with the CDOE in Chicago about the expansion of the relationship on MSCI index options and another family of indices being launched there. So we're putting a lot of faith that that will also continue the development of this area for us.

Got it. That's very helpful. And then one more question for RCA. How should we think about the purchase price adjustment and defer revenue? How should we model that over the next few quarters? Thank you.

Yeah, sure. So as of right now, we really don't expect it to have a material impact, and that's based on the anticipated standard setting activities that we're following. We are finalizing the exact impact there, and we'll update you as appropriate. But as of right now, you should assume no material impact on that front. Maybe it's helpful if I just take a step back and underscore some of the moving pieces on RCA more broadly. I know I mentioned a number of these in the prepared remarks, but I'll provide a little bit more color here just so everyone's on the same page. On the revenue side, we added $74 million of run rate as of September 30th. There was about $3.4 million of revenue from RCA in the third quarter. On the expense side, I'll break it down into three pieces, and I think this is a good way to think about it. On the adjusted EBITDA expense front, we're adding about $19 million of expenses this year. About $3.6 million of that was incurred in the third quarter. And I would also highlight that within that $19 million, there's a few million of transaction-related expenses, mainly in areas like retention. The second category on the expense side is on DNA, where we're adding about $10 million of intangible amortization to this year. And a small amount of that was in the third quarter. And the large majority of that is the intangible amortization associated with the purchase accounting. And then the last category is in OPEX, and there's about another $7 million of transaction-related expenses that we have excluded from adjusted EBITDA. And these are in areas like deal fees, professional fees, severance. And about $5.5 million of that $7 million was in the third quarter. And so when you look at the shifts in guidance for the year, you can see we took adjusted EBITDA expense guidance up by about $20 million, which mirrors the $19 million of EBITDA expenses I just mentioned. And then if you layer on top of that $19 million, the $10 million of DNA, and then the $7 million of excluded transaction expenses, it gets you to the vicinity of $35 million, which is what the increase to OPEX guidance was. And so the shifts in expense guidance were wholly related to RCA. And as I underscored, there's going to continue to be a number of moving pieces, some ongoing integration expenses. And so when you put the combined businesses together, we're looking at a margin on an annualized basis closer to the mid-teens for next year.

Thank you, Andy.

Our next question comes from the line of Ashish Savudra with RBC Capital Markets. Your line is now open.

Thanks for taking my question. So just wanted to focus more on the investment solution as a service. I was wondering if you could provide perspective the progress on that front, particularly in the data management solutions, as well as the investment analytics and the shift away from beyond towards more of a modular analytics solution. So on both those fronts, thanks.

Hi, Ashish. So look, we're going through our operating plan now for the coming year. And for sure, the delivery, the pivot in our delivery is very much toward those platforms. So we mentioned Climate Lab earlier, and that is being built out on that infrastructure, as well as some of our existing analytics portfolio aggregation capabilities, and all the new index capabilities are also being built out in that way. So, and as we've, you know, as we've previously mentioned, The data distribution solutions that we're putting on the web are also in this common infrastructure. So the way that I would say it is, you know, pretty much all new solutions will be built on this common infrastructure. And, you know, that doesn't mean that we will be there entirely overnight. But I think that it both means an improvement in user experience in the coming years. and also efficiencies because we're not duplicating the separate application developments that we did historically. So I think we're on a good path. We'll continue to bring out things, you know, as we did this quarter and the quarters ahead. And, you know, we'll keep you apprised of what I think will continue to be positive developments in that area.

That's very helpful, Cutter. Thanks for that. And maybe just a quick question on the RCA. It's been just over a month since you closed that acquisition. I was wondering any initial feedback that you've received from customers? And also, as you have had a chance to look at that business much more closely, how do you think about the cross-sell opportunity, even opportunity to sell some of the MSCI offerings into the RCA customer base? Thanks.

Yeah, look, so we're very positive on all those fronts. So first of all, the client response has been extremely positive, both from MSCI and RCA clients, and shows our commitment to investing in real estate. I would say from an operational point of view, there have been no surprises in a positive sense. So I think we're going to be on a pretty strong path of integration. There's a lot of common understanding related to the data and across both the MSCI real estate and RCA. So that is making progress. And then for sure, we have a lot of... A lot of interesting opportunities to create new products. I mean, clearly it's early days, but our new head of real estate research was a former IPD person who then went to RCA and now has come back to MSCI via this route. So we're really excited by the common capabilities that we can build. and I'm sure we will be showing new things of that in the coming year.

That's very helpful, Connor. Thanks.

Our next question comes from the line of Keith Hoosom with North Coast Research. Your line is open.

Good morning, guys. I was hoping to unpack the custom indexes just a little bit more on the opportunity there. Can you guys talk about perhaps the pricing opportunity in terms of custom indexes and how it aligns with or compares to the rest of the portfolio. And do these tend to have a stickier ability to be maintained within the client, I guess, client retention?

Yeah, so look, I think this is an area which has developed for many years. So it's not a new area for us, but the demand and the complexity of the demand has increased, and that is a huge opportunity for us. So whereas historically we had relatively straightforward customization requests, which might be to exclude a sector or a country or what have you, now we have an enormous variety of requests, including optimizations, different asset classes combined, going beyond even securities. We're clearly looking at some crypto assets. categories, as we've mentioned before. So there's an enormous amount of demand. There's increasing complexity, which is a good thing. But we need to invest to ensure that we can deliver for that. And look, I would say that the retention is not really the issue in the sense that You know, we have great retention in across index in any case. And I don't think the retention in custom index is dramatically different. The real upside is in the top line growth. And so that's what we're investing for. And it goes across all client types, whether it be on the sell side, whether it be for asset owners or asset managers. You know, the demand is coming from all those client types, and so we're very excited about the opportunities, and we have to make sure that we have the infrastructure to deliver on.

Great, Barry. I appreciate it. And then, Andy, just following up a little bit on the comment you made regarding sales, obviously a great quarter in terms of sales for you guys. And I know you referenced that there's some lumpiness there, as there always is. Is there a sense that any business was pulled forward from the fourth quarter at all and has helped your third quarter numbers?

No, no, this was this was purely the comments purely related to the lumpiness of one time sales in nature where we've had a few quarters now of pretty strong one time sales and and this most recent quarter, the third quarter was our highest ever. And so, you know, there's just a little bit of, based on the pipeline we see right now, we're expecting a little bit of a drop-off in Q4 here, likely to be more in line with the average levels we've seen over the last couple years. Great. Thanks, Andy. Appreciate it.

Thank you. Our last question will come from the line of Alex Cram with UBS. Your line is now open.

Yeah, hey, hello again. Just a very quick follow-up on RCA, on the modeling side. Andy, can you just, and maybe this was talked about already, but in terms of how revenues flows into the income statement, is there anything that I should be thinking about between run rate, which I think ended at $74 million, and going forward, is there any seasonality, any one-time sales, or is run rate a pretty good predictor of the following quarter?

Thanks. Yeah, for the RCA business, run rate is probably a pretty good indicator of the revenue coming from RCA. As you know, in our core real estate business, there tends to be the seasonality where we do have a good chunk of the business that's tied to deliveries. And so we do get some seasonality in that side of the business. But for RCA... it's much more traditional subscription model, and so run rate's probably a decent indicator of the revenue that we're expecting from it.

Fantastic. Thanks again.

There are no further questions. I will now turn the call back to Henry Hernandez, Chairman and CEO, for closing remarks.

Thank you for joining us today. As you can see and hear from the numbers and the commentary, We continue to have enormous opportunities in front of us at MSCI, and we will continue our triple crown investment philosophy to meet that demand from our clients and maintain our leadership. So thank you for your attention and your support, and we'll be able to take questions during the quarter, and obviously I'll see you next call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.