MSCI Inc.

Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2022 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 Jisoo Su, Executive Director, Investor Relations. You may begin.

Thank you, Doolin. Good day and welcome to the MSCI first quarter 2022 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, 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 US 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 insights 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 realize over the following 12 months will differ from run rate. We therefore caution you to not 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, Bear Pettit, our president and COO, and Andy 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. And with that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Jesu. Welcome, everyone, and thank you for joining us today. Apologies for my scratchy voice and a little bit of coughing. Before I talk about, yep, can you all hear me? Okay. Thank you, Jisoo. Welcome, everyone, and thank you for joining us today. Apologies for my scratchy voice and a little bit of coughing. Before I talk about MSCI's financial performance, I just want to say, that our hearts go out to the people of Ukraine who are suffering through one of the worst humanitarian tragedies in Europe since 1945. My sincere hope is that the world will ultimately emerge stronger from this crisis with a deeper respect for self-determination, national sovereignty, and human rights, and a clearer sense of purpose among the liberal democracies of the world. The war has certainly put everything else in greater perspective for many of us. In the first quarter, MSCI delivered strong results that highlight both the strong resilience and long-term potential of our all-weather franchise. Not only are our solutions helping clients navigate market volatility and asset rotations, they're also helping them understand major structural changes in the global economy and the financial markets. Those changes include the fallout from Russia's invasion of Ukraine, rising interest rates, elevated inflation, and the needed transition to a low-carbon economy. During a period of historic geopolitical and economic turmoil, MSCI solutions have become increasingly more valuable to clients across the whole global investment industry. To put our first quarter results in perspective, we posted our best first quarter on record for both new and net new recurring subscription sales. We achieved organic subscription run rate growth of about 14 percent and nearly a 96 percent retention rate. Our adjusted EPS topped 21 percent, and we repurchased almost $800 million worth of MSCI shares. Of course, the biggest global event of the quarter was Russia's unprovoked and unjustified invasion of Ukraine. MSCI responded immediately, providing essential support to our colleagues in the region and donating to key relief organizations. We made necessary adjustments to our existing products and business ties, including swift changes to our indices, while also developing new products, services, and insightful research to capture the new global landscape. All of this demonstrated, once again, how fast and nimble MSCI can adapt to an unexpected global crisis. Our resilience and momentum have allowed us to continue driving growth despite the uncertain environment. Indeed, we are finding innovative ways to grow both inside and outside our traditional client base. For example, our traditional client base of asset managers and asset owners collectively deliver subscription run rate growth of 11% in the first quarter. excluding acquisitions. So far this year, we have already seen more than $2 billion worth of incremental AUM from new mandate benchmark to the MSCI climate Paris aligned indices by asset owners in APAC and in EMEA. We're also driving a strategic benchmark wins with asset managers who are licensing custom indices they have designed using MSCI's new Index Builder application. We have onboarded about 18 clients onto the Index Builder platform already. At the same time, we keep adding new layers of growth in areas such as fixed income, ESG and climate, and private assets. This quarter, our ESG and climate retention rate hit an all-time high of 98.7%. We also recorded our second best quarter ever for new ESG and climate subscription sales. These data points tell us two things. ESG continues to become increasingly embedded in the global investing process. Second, our clients recognize the value that MSCI's ESG and climate offering can provide. We continue to work to position MSCI as a leading provider of climate solutions and a standard setter. As of the first quarter, we've calculated implied temperature rise metrics for more than 10,000 issuers and nearly 134,000 funds. The implied temperature rise metric computes how the carbon emissions of companies and portfolios align or do not align with different global temperature pathways. such as 1.5 or 2 degrees Celsius increases. Like all of our solutions, MSCI climate products run on data. To give our clients a truly comprehensive and transparent view of the investment opportunities, we are transforming the way we collect, clean, and build data across product lines and asset classes. As I mentioned back in January, MSCI has always been a data processing factory. Now we're also becoming a data building machine. During moments of global uncertainty and disruptions, high quality data becomes even more valuable as investors try to understand the present and imagine the future. MSCI also continuously looks to the future to reinvent itself, including with respect to our organizational structure and agility. As previously announced, we made a number of senior leadership changes at the start of the year to support our ever evolving business needs. These changes position us well for increased growth in the years to come. Likewise, our first quarter performance reflects the long-term investments we have made to build a durable, diversified, all-weather franchise. While external conditions may get more difficult, our fundamentals remain very strong. As we have proven, MSCI can deliver impressive results in every type of operating environment. This is what we mean by an all-weather franchise. And with that, let me turn the call over to Bear. Bear?

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 clients run through our analytics products. Additionally, we closed out our de minimis financial exposure to clients in Russia, which is less than $1 million of run rate. We are well positioned to succeed in a 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 muted 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 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 incomes, including ETFs, 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're also leaning 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 use cases, and we're encouraged by a recent large multi-year client win in the Americas. In private assets, we also expect climate data to be a commercial enabler, including for cross sales. We recently completed a product release of our climate value at risk due diligence reports for RCA's large commercial real estate property database. 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 time limit. Our previously announced launch of MSCI Data Explorer places over 250 datasets 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're watching economic activity across regions closely and the effects on our clients, which we recognize may be 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.

Thanks, Bear, and hi, everyone. I want to drill into a few highlights of our all-weather financial model. We drove 14% organic subscription run rate growth during the quarter. To put that in perspective, this is an acceleration from 7% growth in the same period of 2017 and from 10% growth just a year ago. This acceleration of growth is a direct result of the increased investments we've been making into key growth areas over the last few years with your support. Our strong performance reinforces our long-term target of driving low double-digit subscription growth across MSCI. In index, we delivered 12% subscription run rate growth, aligned with our long-term targets and our 33rd consecutive quarter of double-digit subscription run rate growth. Asset-based fees, which are approximately one-fourth of MSCI's run rate, demonstrated remarkable resilience in the face of volatile global markets. During the quarter, equity ETFs linked to MSCI indexes drew net cash inflows of more than $27 billion, ending the quarter with AUM of $1.39 trillion on March 31st. These inflows partially offset market declines of close to $90 billion since year end. More broadly, since 2007 and through the end of last year, we've observed positive annual cash inflows into ETFs linked to MSCI indexes for all years except one, Finally, fees from listed futures and options linked to MSCI indexes, which are roughly 10% of asset-based fees, are based on traded volumes and are not linked to AUM. And volumes in these products historically have tended to pick up in periods of market volatility, including this quarter, where we saw traded volumes up 19% and run rate up 11%. Our continual advancements in index innovation, which are centered on client demand, have enabled our AVF franchise to be both durable and diversified for the long term. Since 2012, run rate for asset-based fees has grown at a CAGR of 15%. For the quarter, in analytics, we drove 15% growth in new recurring subscription sales, which offset cancels primarily from client events. We continue to see good opportunities in front office equity and fixed income portfolio management. In ESG and climate, we're driving a higher volume of larger ticket new sales with a pipeline that includes an encouraging set of large strategic deals across regions. As Bear mentioned, the firm-wide sales pipeline remains healthy. We're watching the macro backdrop very closely, and while it may cause some variance in sales or cancels here or there, we're encouraged by the overall forward momentum. Across the firm, the product and client experience enhancements we're investing in are enabling cross-sell and pricing opportunities, while supporting continued strong retention as well as the ability to win new clients. Let me now turn to our full year 2022 outlook. Our guidance across all categories is unchanged and assumes that global markets gradually improve from the current levels throughout the year. If AUM levels remain flat or deteriorate further, we will likely begin to implement elements of our downturn playbook and adjust our pace of investing on a very measured basis. Our full year tax rate guidance of 15.5% to 18.5% remains unchanged. Our low tax rate this quarter was consistent with our expectations of having a seasonally lower tax rate from the vesting of equity awards. We would expect a higher average tax rate for each of the remaining quarters in 2022. For the full year, we expect to drive continued high 50% margins on a consolidated basis, which is in line with our long-term target. As a reminder, the margin also reflects the integration of RCA, which is a lower margin business. On the capital front, our proactive actions provide another lever of value in volatile environments. Year-to-date through yesterday, April 25th, we've repurchased $795 million of our stock, or over 1.5 million shares. We ended the quarter with a cash balance of $679 million, of which approximately $200 million is readily available. We continue to have board authorization for potential financing, and will continue to monitor the markets for attractive windows, although we have no urgency to access the markets if they are not conducive. We have plenty of dry powder remaining to support strategic bolt-on MP&A deals. We can also support highly opportunistic repurchases, although at a more measured pace given current cash balances. In conclusion, that we are presented with an unpredictable operating environment. We remain laser-focused on executing on our growth agenda and remaining highly nimble and proactive against this backdrop. And with that, operator, please open the line for questions.

Thank you. As a reminder, to ask a question, you would need to press star 1 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. I assure our first question comes from the line of Manav Petnaik from Barclays. Please go ahead.

Thank you. Good morning. I just wanted to focus on the chart you showed around the resilient AUM growth over the last decade or more. Just curious how you guys think about flexing your downturn playbook per se to the extent the AU, the market depreciation continues to happen. Like at what level do you guys start looking to approach that playbook to try and offset some of those declines?

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 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 remains healthy. As Bear commented earlier, 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 of the market volatility. And so, you know, 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 1231 through 331. 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's 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 overall. 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 in 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. It's something we're monitoring very closely, and as I said, we're calibrating on a day-to-day basis.

Okay, got it. That's super helpful. And then just as my second question, you know, Henry, Obear, you know, there's obviously a lot more regulatory announcements around climate disclosures and, you know, the efforts there. Some of it was expected, but just curious if this is a catalyst enough for your efforts or seeing more revenue accelerate because of this? And also, I apologize if I missed it, but what was the climate-specific run rate this quarter?

While that number is coming out, I'll answer your first question. So look, we view this as really a fundamentally positive thing. 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've 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 You know, central to investors' agenda and central to corporations' agenda is a very positive thing for us. We're clearly also in, you know, often we're asked for our views on these topics by regulators in a variety of jurisdictions 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, you know, that direction as being, you know, a positive for what we're trying to achieve.

And then, Manav, just on the run rate, the climate run rate was $50 million at the end of the first quarter, which is up over 100% year over year. I would say, just to provide additional detail on it, $18 million of that $50 is from indexes.

Thank you.

Thank you. I show our next question. It comes from the line of Alex Cram from UBS. Please go ahead.

Good morning, everyone. First one on the index sales, and this may be super nitpicky, but obviously it continues to be fairly strong. But if I look back over the last few years, on a percentage basis, it's actually the lowest that I've seen in years. So again, very high numbers, maybe nitpicky here, but Just wondering if there's anything you would point out, why maybe from a sales perspective it wasn't as good as some of us may have thought, in particular given the inflationary environment and so forth.

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 in index, and so we're not too focused on either sales or cancels in one quarter in index. I think we continue to be pleased by the progress and trajectory on the index subscription franchise.

Fair enough. I said I wasn't that picky. Secondly, and this may be a follow-up to Mano's question, and I think there you answered it specifically on regulation, but Zooming out a little bit more on ESG and climate, your long-term or medium-term targets here are, I think, mid to high 20s, if I remember correctly, for run rate growth here. You're just at 50. And if you look at the last few years, that number has been accelerating despite the numbers getting larger and larger. So I guess just to ask more specifically, if you look at the environment currently, You know, do you think that acceleration can actually continue, even despite those big numbers, given all the pipeline that you have in front of you? Or, you know, should we be, you know, bracing for, you know, getting back to that mid-20s number in the not-too-distant future here? Thanks.

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 and wealth and corporate and the like, and as we increase the number of use cases for ESG, we are finding more and more demand. You know, 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 has 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're going to change the target at this point. But we continue to be optimistic that that high growth rate will continue. Now, on top of that, we are still in the very early days of climate. 50 million, you know, run rate on climate across all products of MSCI is a smaller number, a smallish number, but it's 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, given the existential threat to the world and the various, numerous use cases and client segments, including the corporates and the corporate advisors and the like that we're serving. So we're very positive and optimistic If you thought that we were pretty bullish on this product line two, three years ago, we're even more bullish today.

Very good. Thanks for the color.

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, in data, in analytical tools, in indices, and all of that stuff. I hope that everyone understands that a meaningful part of our investment in the firm is to capitalize on 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.

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

Thanks so much. I wanted to ask about labor inflation, how that's impacting you. Do you expect that to impact margins this year? Maybe you're able to offset it by either some sort of efficiencies or just flow through from growth, but just talk about the cost environment right now. Thanks.

Yeah, and 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's 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 mention that roughly, in a typical year, we'd 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, while we have seen some pickup 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 expenses is really the pace of investment, and that's what we're primarily focused on.

That's great. Also, you mentioned a couple times the pipeline being strong. Maybe you can zoom in on analytics for a second, just because that usually tends to be the most impacted during sort of periods of uncertainty, partially because of the bigger ticket sales there. Sure. Just wanted to understand how you feel like the analytics environment's going. And given the incredibly strong growth rates in the other segments, I guess, are you happy with 5% organic? Or do you sort of strive for better than that? Thanks.

Well, Toni, 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. So, 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're alluded to in equity analytics or equity portfolio management analytics. That's another area that we've been pushing pretty hard, again, from a smaller run rate base. And I think the central issue remains the central risk analytics platform which is sold to cost centers in our client base as opposed to profit centers. And that is 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 Lab Enterprise is an example of a product line in that category. So sales remain fairly robust when you look at the operating metrics. The challenge remains the lumpiness of the cancels at the time of renewals. because of the mature nature of the product line, the cost cutting that typically affects cost centers, especially central risk cost centers and all of that. So hopefully over time, we can outgrow the mature part of the book of the run rate, and the newer part, the front office, equity analytics, fixing from analytics, and the new use cases such as climate risk, can continue to grow faster and therefore get the overall run rate, you know, to grow in the high single beach and eventually the low double beach.

Thanks a lot.

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

Hi, thanks. Good morning. There's certainly an elevated degree of market and macro uncertainty in the external environment. Can you describe customer sentiment and how their budgets are shaping up, as well as perhaps what you're seeing with the pace of client cross-sell and up-sell across the business?

Sure, 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, You know, everything is what we would expect it to be at this stage in the quarter, looking at the pipeline, et cetera. So, you know, 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 buyer behavior, or anything of that kind.

Got it. That's helpful. You have a partial hedge in asset-linked fees from futures and options volatility-related revenues. Can you discuss how volatility is helping to offset AUM declines that we're seeing due to date?

Yeah, no, it's a great point. I would highlight that the volumes we saw in this quarter were the highest volumes that we've seen since the first quarter of 2020, with close to 30 million contracts traded. So given the scale of the futures and options franchise, it is creating a very nice hedge to some of those AUM levels. We saw strong volumes in contracts based on our EM indexes, our IFA indexes, clearly strong volumes in the China A50 products. We also had a record single-day trading of close to 3 million contracts on March 14th. I think you made an excellent point, and hopefully as we continue to grow that franchise, it's going to provide some additional stability with strong secular trends that will drive long-term growth in the franchise that we have. The other point that I would highlight, which doesn't show up in ABF, it shows up on the index subscription side, but is related, is the over-the-counter derivatives opportunity for us. And so given broader macro dynamics, there are opportunities for us to continue to drive strong growth in the over-the-counter index link derivative opportunity set for us. So that's another area we're focused on and another driver of stability and growth on the subscription side.

Very helpful. Thank you.

Thank you. I show our next question comes from the line of Ashish Sabhadra from RBC Capital Markets. Please go ahead.

Thanks for taking my question. I was wondering if you could provide some color on the progress of integrating the RCA acquisition, if you could talk about the progress in enhancing the transaction data, as well as initial feedback from customer and any initial color on cross-sell opportunities there. Thanks.

Sure. So I think we're really pleased with the progress so far. Clearly, the technology infrastructure work takes time. but we're on schedule as far as what we'd hope to do. I think the most immediate progress we're seeing is on the client front, as you mentioned, with the integration of the client coverage teams and them working together as one unit, both across the world, in the Americas, in EMEA, and building out what we do in Asia. And, you know, we had a good quarter. So we had a good quarter as a combined team. The client feedback is very positive. And we're, you know, as I mentioned, we're starting to build out, you know, some product innovations, notably bringing some of the climate capabilities onto the RCA database, et cetera. All of that will take a bit more time. But I think, you know, most importantly, we have, you know, a significantly greater footprint now with real estate investors. And I think that that's showing in the numbers and hopefully will, you know, build our reputation as being serious in this space.

That's great. And then maybe just a quick question on a large asset manager cut the management fees on their passive ETF. How should we think about how does that influence the index fees going forward? Any color will be helpful. Thanks.

Yes, I'm not quite certain what you're alluding to, but my point would be that, you know, we've been pretty consistent on saying that the, you know, over time, the fees in this area have been compressing and those numbers have shown themselves over many quarters and years. I don't think we have noticed any sort of notable changes in the last quarter since we spoke to you in our interactions. Clearly, if the market environment continues to be more challenging, that could change, but I'm not aware of anything very material that we've seen since we last spoke to you.

That's very helpful, Kurt. Thank you.

Thank you. I see our next question comes from the line of Owen Lau from Oppenheimer. Please go ahead.

Good morning, and thank you for taking my question. So you previously expected the adjusted EBITDA margin for the all-order segment will be closer to mid-teens in 2022, and I think you had around 26% in the first quarter. I'm just wondering the pace of the investment in this segment is versus your original expectation in the first quarter? And how should we think about the potential upside to your margin guidance for 2022 for this segment? Thank you.

Yeah, yeah, sure. So I would point out and make sure you keep in mind that there is some seasonality on the legacy real estate business where some revenues are recognized based on deliveries of service, which tend to be heavier weighted in Q1 and Q2. So if you look in the past, you will tend to see margins being slightly higher in those quarters. And so there's some continuing contribution from that. Granted, it's smaller in the absolute basis because of RCA being in there. To your point, there are a number of moving pieces on the integration, which will cause the expenses to be nonlinear. At this point, we're still working towards that mid-teens EBITDA margin for the year. although there are a number of variables that could cause it to be slightly higher, potentially slightly lower, not only related to integration, but also the pace of capitalization. So there are certain expenses that we're finding we can capitalize a bit more, but I'd say it's too early in the year for us to change that mid-teens figure, although it could have some variability around it.

Got it. That's helpful. And then going back to the point you make about, I think, the insurance firm, the $77 million run rate or 19% growth year-over-year in this segment, maybe could you please add a little bit more color on the growth driver there and the potential kind of more product launches and the client sentiment there? Thank you.

Yeah, you know, I would generalize it across segments. all of our products that insurance is a exciting client opportunity for us in a segment where we've historically been, um, less significant. And so it cuts across many of our product areas on the analytic side, um, given the investments we've made and enhancements we've made to our fixed income analytics. Um, we have a much more compelling solution to insurance companies, um, within ESG and climate. Um, you know, we, we, um, have some, as you know, very differentiated insights and content that are extremely relevant to insurers who are trying to assess not only the impact of ESG and climate within their investment portfolios, but also the general accounts at the organizations. And for obvious reasons, climate is something that is very relevant to insurers. And there's potential regulations around PCAF that could drive strong demand for some of our solutions there. And then on the index side, especially around some of our investment thesis indexes, particularly those with ESG and climate angles, are very compelling across a number of insurance use cases, including index-linked variable annuities. And so it's a segment that we're very focused on. We've got a clear opportunity, and it's a matter of just executing against it.

Got it. Thank you very much. Thank you. I show our next question. It comes from the line of Craig Huber from Huber Research Partners. Please go ahead.

Yes, I wanted to ask on the analytics division, your long-term goal there of high single-digit revenue growth, what sort of changes should we expect you guys to make there in the product or the service to help accelerate the growth? I know it's not a huge part of your story, but just update us there, if you would, please.

Barry, you want to take that one?

Sure. So look, one thing that we're working on now, and we'll have some announcements coming up in the next quarter, is really moving away from our kind of legacy divisions of functionality and being able to deliver all of our capabilities through our ISAS technology platform. And what this really means is being much more flexible in integrating into our client's environment and being able to, you know, basically in clients to pick and choose the functionality and capabilities that they want and integrate that into their workflow. The next element, which Henry referenced earlier, is the focus on the front office. So while, you know, some of those numbers are lower to start with, we're very pleased with the growth, for example, that we have in fixed income portfolio management. where it's an area where we have, you know, increasing credibility and are growing, you know, as the numbers show, close to 50% year on year. And then the last one, big driver, is ESG and climate, and notably climate integration with a lot of both the risk capabilities and reporting capabilities, where because we have both the enormous data processing and risk, you know, capacities, and leveraging our new intellectual property on top of that, all of those things, you know, should be driving the growth rate up. And, you know, in order to do that, we also have to then keep our retention rates of the existing book of business solid. So if we can combine those, if you like, three growth drivers and also can maintain strong retention rates, You know, those will be things that can get us onto that higher path.

And then also a similar question on the futures and options side. We've talked about this in the past. What's new going on there in the investments that you guys are doing there to help further make that division a lot larger over time, accelerate growth there significantly over time? Where's the innovation going on there, please?

Yeah, so we're very excited about the work that we're doing there in two fronts. The listed futures and options opportunity continues to expand as we have been showing in the last few quarters. And the use cases, the licensing of new use cases is also expanded. So most of the listed futures and options that we have are on market cap indices. So we are now looking with our partners, the exchange partners, to do a whole generation of climate and ESG-aligned indices for listed options and futures. And I think that will put another layer of growth in this area, in addition to the continued expansion of the market cap indices for listed futures and options. The second category, which is what Andy alluded to, which is reported in the index subscription line or area, is the structured products, over-the-counter options, swaps, and all of that. That area is growing significantly for us not only on the market cap indices, but especially on new investment thesis indices, ESG, climate being in that category, but also thematic indices. And therefore, that is an area that we're putting a lot of effort, you know, and that normally translates into sometimes, you know, one-time fees, but these are recurring one-time fees that show up in index. and the index subscription, they don't show up in the asset-based fees at this point, so we're very excited about that, and that is a major area of expansion that we see in the next few years. Great, great, thank you.

Thank you. Our next question comes from the line of Greg Simpson from BNP Paribas. Please go ahead.

Hi, good morning. So in Europe, at least, it seems ESG and climate is becoming really mainstream and the loss of mutual funds, Article 8 and 9 and so on. So I'm wondering if you could share any color about what you see in terms of usage of your ESG and climate products over time by, say, asset managers. Do clients start with, say, more standard ratings products and then demand more bespoke data and content over time to try and differentiate? I'm just trying to think about how revenue per client retention rates are to develop over time, it just doesn't look great.

Sure. So, look, you know, for sure your observations about Europe are, you know, are correct. And, you know, I would say that the landscape in Europe generally, whether it's a mutual fund business or in the institutional, still looks somewhat different than in the U.S. or in Asia. And, you know, you can say that Europe is leading in this regard. It's actually quite difficult to generalize across the variety of use cases, you know, that we have, you know, across different client types, et cetera. Clearly, the, you know, as you rightly point out, the retention rate is extremely impressive at present. So we're, you know, in addition to 50%, of our new business coming from new clients, I think what that retention rate signals is that while this is, you could say, getting established in Europe, it is still very much in a growth phase. This is not, by any stretch of the imagination, a mature business. You know, clients are hungry for data, I think really depending on what they're trying to achieve. So some of them want to build, you know, rules-based index products. Some of them want to use the ratings in active management processes. Some of them are less interested in the ratings themselves, but the data underneath the ratings that we collect on companies and the manner that we organize it and they can use parse that data for their active management process. So I think precisely the element that is most exciting here is the variety of different types of investors and the number of different use cases that we're serving that make it hard to generalize about a particular path. So as long as we can continue to invest in the product line, to ensure that our coverage is, you know, extremely broad, that we're innovating around new areas of concern and focus for investors, and, you know, that in addition to our leadership in ESG, we continue to invest in our leadership in climate. You know, I think those are all the things we're doing, and, you know, and it is creating both enormous demand and a lot of work for us hands. So, you know, for the foreseeable future, we're going to be, you know, continuing to invest in this area and serving quite a broad range of use cases.

Very helpful. Thanks. And then just a follow-up question on whether you're seeing the current market, weaker market backdrop is creating more opportunities for investors. Bolton M&A is maybe seller expectations are falling for high-quality assets. Are there any areas you're particularly keen to add scale in or instead just focus on organic? Thank you.

I will say that we don't necessarily wish for and welcome difficult market conditions and difficult operating environment. But having said that, This is what we do our best at MSCI. These are the environments in which we tend to capitalize big time and create further leadership in a lot of what we do and out-distance competition because we remain very focused on client centricity. We innovate a great deal in markets like this. And we take full advantage of dislocations and valuations, such as certain types of bolt-on acquisitions and the like. You haven't seen us make a lot of bolt-on acquisitions because the valuations are being elevated, given the bullishness of market conditions. If we have a prolonged period of disruption here, it will definitely be a great environment to pick up data sets or technology or people or whatever at a lot lower, you know, valuations. That hasn't happened yet because there's usually a long lag associated with strategic valuations. But, you know, we could become more active. But it's way too early to tell at this point. But I think my underlying position here is to say, you know, Watch for the performance of MSCI in difficult market conditions because this is where we do our best. This is where franchises develop further as opposed to when you have very bullish conditions in which the tide rises all boats.

Thank you.

Thank you. I show our last question. It comes from the line of Keith Husson from North Coast Research. Please go ahead.

Great, thanks. Good morning, guys. Just looking at the R&D expenditures for the quarter, it looks like those grew, I guess, the least of all the expense categories, and it was down a sequentially from the fourth quarter. So maybe I'm reading too much into this, but was there a pullback in the spending, or were you guys starting to execute your downturn playbook already? Or perhaps just walk me through, I guess, the pullback from the R&D spending or lower growth than what the other expense categories would have been.

Yeah, nothing to read into there. I would highlight that expenses and individuals' time allocations can move between R&D and cost of revenue just based on the nature of the work. And so you will see quarters where cost of revenue growth looks higher and R&D growth looks lower. Those tend to be the two areas where you do see our investments going. And so you saw cost of revenue showing a higher growth rate. in the quarter, and that's on the back of investments in our product teams, technology and data, and our researchers. Sometimes those individuals' time will be allocated to projects that are more R&D in nature, and sometimes they're more cost of revenue in nature. And so I would say it's not any indication that we're pulling back on R&D-type activities. It's more just a classification of where they show up. And then I think the selling and marketing growth is a little bit more straightforward. There is some degree of investment spending there, but there's also just a degree of continuing to flex up on our go-to-market where the expenses there are related to our selling effort, our investments into new feet on the ground and client services as well as tools to enable our sales force. Okay, that's helpful.

And then you guys talk about, you know, kind of having a natural hedge with the incentive compensation coming down if there was a downturn in the business. Can you just remind us or provide the color in terms of how much of the income statement would be allocated for incentive confidence, like a normal period?

Yeah. Yeah. So I think what we've said is, and I think we had a slide on this that we put out during the last quarter where you can see the exact amounts, but just rough orders of magnitude of I think we said a 10% pullback would lead to about $15 million down flex or conversely up flex on the bonus expense on an annualized basis. So kind of 10% moves on asset-based fees can lead to a $15 million up or down flex. Behind that, things like non-comp and pacing of selected hiring, some things that are a little bit less related to growth investments. We've got a number of levers that we can flex up and down to the tune of about $20 million. And so we've got some pretty meaningful degrees of freedom. All of it depends on, as I said in my first comments, all of it depends on our outlook and what's going on. We don't want to go to these things, but we are prepared to, to the extent the environment persists or deteriorates further.

Great. I appreciate it.

Thank you. Thank you. That concludes the Q&A session. I would now like to turn the floor back to Henry Fernandez, Chairman and CEO, for closing remarks.

Thank you all for joining us today and your interest in MSCI. We look forward to continuing to speak and meet with all of you, including at various investor events. that are either sponsored by you, our analysts, or some of them, you know, in our own. As you can see from what you hear in the commentary, we benefit from an all-weather franchise at MSCI in good times and bad times. So clearly very important to underscore that. what the messages that we're giving you as to where we stand in that part of the cycle and what is benefiting our business, what is affecting our business. And at the moment, as I said, as Bear said a few times, we haven't seen any significant or meaningful change to our operating environment. Thank you all. Thank you. This concludes today's conference call.

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