Q3 2021 MSCI Inc Earnings Call
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 dot com under the Investor Relations tab.
Let me remind you that this call contains forward looking statements you are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer in our most recent Form 10-K and in our other SEC filings.
During today's call. In addition to results presented on the basis of U S. GAAP. We 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.
Youll find a reconciliation to the equivalent GAAP measures in the earnings materials.
And an explanation of why we deem this information to be meaningful as well as how management uses these measures.
In the appendix of the earnings presentation.
We will also discuss run rate.
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 Baer, Pettit, our president and COO and Andy Wichmann, 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 him NCI for the last two years.
Hello, everyone.
Thank you for joining us today.
Our organic revenue growth more than 20%.
Excellent performance more broadly this quarter.
As further evidence of the accelerating demand we are seeing across MSCI.
It also validates the investments that we have already executed on.
Including those we identified at the Investor Day earlier this year.
In my 25 years, leading MSCI.
Cannot remember a time.
When we have seen so much demand for our <unk> solutions.
And has so many attractive opportunities.
As the investment industry continues to fall.
Our clients are turning to MSCI to create standards.
<unk> solutions across market dropped a non market cap indices in both equity and fixed.
Fee income.
Risk management products and services.
Factor models.
ESG ratings and data.
Climate data and analytics.
And the insights and tools for managing private assets.
Yeah.
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 or data.
<unk>.
Rolls and solutions within every asset class.
Every aspect of the investment process.
Ultimately, we want Msci's clam climate offerings.
To be the common language that capital markets participants used to discuss climate.
We wanted to help market participants navigate the largest scale reallocation of capital in history.
As industry.
Global economies begin to Decarbonize.
You will therefore see us to continue to invest heavily in our climate offerings.
You will also see us leading key strategic initiatives in the world, which are focused on impact in the global transition to a net zero economy.
We recently hosted a global asset owners asset managers.
Honestly makers at the MSCI Global investing conference or.
Our flagship client event.
This year, we focus the discussion in that conference on climate.
In the lead up to Msci's involvement at the UN Cop 26 conference in Glasgow next week.
Yeah.
In September MSCI joined Mark Garvey, the U S. The U N representative for climate.
<unk> a pivotal role in establishing the myths zero financial services providers Alliance.
Collectively the alliance members will give us an owners asset managers banks.
Insurance companies companies and other financial institutions, the information they need to pursue the carbonization strategy and helped the world reached net zero by 2050.
MSCI is well positioned to be a key driver of the critical global dialogue regarding climate change.
We don't really have long term deep strategic relationships with global asset owners and managers another 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 ESG ratings.
This includes the entire MSCI equity universe or equities.
Consisting of course of developed and emerging markets included in the MSCI equity indices.
As well as equity derivatives.
Yeah.
It also spans across fixed income.
Basically corporate bonds, but also including munis structured products.
Sovereign bonds.
In addition, do ESG ratings.
We're also enhancing our ESG morals and data architecture.
Provide clients with more granular data.
In addition, due 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.
Broader appreciation on board the impact these considerations can have in creating or destroying shareholder value.
And 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 is in ESG is truly on fire and you will see us continue to invest heavily in this area.
Okay.
Another area, where we see relentless demand for our offering is in custom indices.
We highlighted this area during our February Investor base.
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 paging another correct domestics.
This demand is likely to explode in the area of direct indexing.
MSCI has already made a number of investments with discipline.
And we will increase our base of investment to meet this accelerating demand for custom indices.
Another area of a renewed focus on high demand is are factors franchise.
Which this quarter dropped $300 million and run rate.
More than 11% year over year.
We continue to innovate and content.
And hands are thrown off as 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.
Optimistic despite.
Despite some of the concerns we all hear about inflation rising rates.
Economic slowdown as a result of Covid.
Political and geopolitical issues.
We see that optimism continuum.
And translated into higher demand for our products and services.
We believe that we have never had a more attractive set of opportunities across the sky.
As we see today.
With that I'll turn it over the goal so Baer 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 and totals more than $35 million in this category.
Over double our footprint from last year.
Our range of offerings and capabilities is expanding rapidly.
We believe it is still very early days and what this franchise can ultimately be.
Our recent MSCI global investing conference Investor spoke with us about the need to Holistically measure net zero progress in their portfolios and for individual corporate issuers.
MSCI recently launched climate plan are first in time 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, one and scope two dataset on thousands of issuers, which will now serve as the basis of better understanding the scope three data companies, which comes from their supply chain.
Additionally, MSCI 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 Tcf D and S STR requirements.
Our newly launched implied temperature rise metric.
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 created a common measure of comparison, where alignment to climate goals.
This forward looking estimate allows investors just said decarbonization targets and support engagement on climate risk at both the company and the portfolio level.
IPR is available for nearly 10000 issuers and is aligned with recommendations published by the <unk> portfolio alignment team.
We also just launched carbon footprint in a private equity and debt funds and new service from Virgin and MSCI.
This offering enables private equity Lps and GPS to measure and monitor the greenhouse gas initiatives of their portfolio.
Based on data estimates for over 15000 companies and more than 4000 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.
And as you can see from the numbers our ESG business continues to grow at an extremely attractive rate driven.
Griffin by heavy client demand as we rapidly expand the universe of data sets, we can offer as well as modernize the data consumption interfaces for our clients.
Yes.
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 and 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 would 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 factors as well as in new categories such as thematic.
We think of our non market cap indexes collectively as investment thesis index.
As the traditional barriers between active management and index investing breakdown.
We're seeing large demand for innovation and investment thesis indexes of all time.
One manifestation of this is in our custom index business, where invest where investors of all types are in search of solutions. They view is matching the market opportunities they see.
MSCI has established a standard in defining the investment opportunity set based on our robust investment framework and rules based methodology.
But clients wanted to tailor this opportunity set to create and manage portfolios combining their investment pieces with MSCI has expertise in analyzing markets ended index construction.
As at the end of the third quarter subscription run rate growth for our custom and special index solutions have grown 18% year over year.
This is an area. We believe we will continue to have strong demand and where you will see us continuing to invest.
We will soon be launching a beta version of MSCI index.
Web based application that allows users to design test and subscribe to custom indexes directly from this site.
Index builder will deliver greater speed and control to our clients.
As well as further modernize their experience with MSCI index.
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 instruments coverage in order to enhance our portfolio management analytics offering.
We're 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 and 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 million 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 is 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 is rich transaction and pricing data, we see a wealth of use cases that we can integrate into cash flow models liquidity models.
That 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're making today.
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 companywide 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 nonrecurring sales following strong performance in nonrecurring sales in both Q1 and Q2.
This strength has been driven by wins in index from sale of associated with license and usage fees related to prior periods derivatives licenses and our data packages.
I'd highlight that these sales tend to be somewhat lumpy by nature, and we would expect nonrecurring sales in Q4 to be lower.
Across client segments, where we saw a strong organic growth with sales from both established and newer clients segments as well as resilient or improved retention rates.
Yes.
Asset managers and asset owners, which now together comprised nearly $1 billion 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 continued 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 30 <unk> 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 the 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 risks in our reporting offerings.
The ESG and climate segment had another tremendous quarter growing 53% in revenue and 46% on a run rate as.
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 and 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 that segment.
And 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 through cash inflows of nearly $18 billion during the quarter.
To capture the majority of market share in global ESG and climate equity ETF flows.
The period end basis points were $2 $5 seven basis points as we saw support from these strong flows into higher fee products based on our investment thesis indexes.
Okay.
Solid operating performance and notably strong revenue growth drove nearly all of the adjusted EPS growth in the quarter.
This topline 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 billion 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 a 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 M&A and share repurchases with an eye towards maximizing returns to shareholders.
Yeah.
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 purchase acquisition of <unk>, which is strategic both for Burgess MSCI and we have made and may continue to make very small bolt on acquisitions and investments.
Additionally, I would note the 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're 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 and perhaps what we previously expected to make the majority of which will occur in the fourth quarter. We.
We currently expect these accelerated tax payments to reduce future tax payments.
Importantly, our collections remained quite strong as does the underlying performance of the business.
In summary, as both Henry and Bear have noted, we're seeing very strong levels of demand for our offerings across the company.
We have a great operating environment to finish 2021 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 salary for her enormous contributions to MSCI.
This will be her last earnings call as part of MSCI and a final date will be November 19th.
After which <unk> 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 in so many initiatives over the last few years were 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 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 standby, while we compile the Q&A roster.
Our first question comes from the line of Alex Kramm with UBS. Your line is now open.
Yeah, Hey, good morning, everyone.
Just wanted to dig further into the.
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 that what drove the sales during the quarter or is it still a lot of the core products or are you actually seeing some sales already on climate model for corporate so any more color in terms of where the.
All the sales kind of broke down would be would be helpful. But you have to find the place.
Sure Yeah, good morning, Alex.
And clearly this is an area, where we're spending a lot of time.
I would I would say the successes 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 it's in addition to the core ESG ratings and.
In research, we're seeing success on the climate side.
We're seeing that success across asset classes.
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 been 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 seen 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 of these frontiers deaths.
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 analytic side.
Henry mentioned in general that the operating environment has been great across the board, but on the analytics. It seems like I would've 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.
Comparable businesses are doing really well and it does seem like an analytics did not were not doing as well, but I understand this is a smaller focus what you just just curious if you if you have any additional comments here.
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 and what we're seeing right now.
But it is.
Little bit.
Areas, where we are having strong success in areas, where the growth is and 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.
We're largely serving that front office and tends to be quite complementary to a lot of what we do across the business.
Very strong growth very healthy growth, it's on the <unk>.
Multi asset class front and in particular, the enterprise wide solutions, where the growth has been.
It'll 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 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 that 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.
No.
But also going forward in areas like ESG and climate. The some of the risks and reporting capabilities that we have in analytics are underscoring.
Underlying some of those solutions.
We're seeing strong growth in.
Fair enough. Thank you very much.
Our next question comes from the line of Manny Patnaik with Barclays. Your line is open.
Yes.
If your line is on mute please on mute your line.
Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Thank you so much and.
Wanted to talk more about the intersection of climate and ESG with P/e.
And the debt funds you mentioned the carbon printing in the update.
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 its bear here.
So for sure we think that what we've brought to market here is.
Look it's always tough to say unique.
We live in a competitive world, but were not aware of a lot of competitors in this space.
This stage.
So I think we're pretty pleased that we've come out with this initial product working with Burgess.
We also have <unk>.
Land to expand.
A lot of our current rating infrastructure for ESG into private markets and.
We're 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 our differentiated and we hope will continue to be differentiated in the market ahead equally.
We are never complacent.
And when you look at both the areas of private market analytics, generally and climate and ESG. Those are clearly 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.
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.
I did want to ask about <unk>.
Estimates versus margins.
You talked about EBITDA margins for all other next year being closer to mid teens.
But on the other hand.
Feel like you're at a point, where you're seeing the most significant opportunity that you've seen them I think are sort of the the way I and piracy.
Paraphrasing, our you know what.
You've said on the call. So so tell me about how you think about the right level of investment when there is such strong opportunity ahead.
She gave me invest anymore. Thanks.
Sure, Yes, Toni it's it's an important question for us.
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 upturn 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.
So when you look at the areas, where we are investing and we'll continue to invest it's the areas that are the <unk>.
Key growth drivers for us in 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.
These are key growth drivers of both revenue and profits for the firm.
When you look at where we're investing across functional lines, that's heavily into data and technology.
Research and the product teams, but there can be product teams supporting ESG and index and then across investment areas. It's the index platform.
New index platform that we're developing it.
The ESG platform that the 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 into the future on the all other line.
A lot of noise in there so given the integration that's taking place given some of the.
Transaction related expenses.
Margin is a little the margin comment that I made it 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 our organic standpoint, it 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 do you see the EBITDA expense growth, it's across ESG and climate indexes primarily.
Let me add to that.
I know it.
As you May remember in the lead up to our Investor base.
<unk>.
We obviously had analyzed that extensively the tremendous opportunities that we see on the demand that we see for our boats and services, which has actually accelerated quite significantly since then.
But we wanted to be one of a sanity check we wanted to make sure that the owners of this company and 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.
Vote of confidence in the opportunities they sold in the same way they added a few more like that.
They encourage was extensively on an ESG data, which we have.
Work hard on since then.
And.
It would be a remiss you will be.
Almost irresponsible not to invest.
It will heavily in those big growth areas.
That we see coming so so that was a very strong indication.
Bye.
Strong vote of confidence on a speaking.
Part of the.
The vast majority of our shareholders. So so clearly we need to balance.
All of those wishes hours and our shareholders with continued financial discipline.
Bob of earnings growth and profitability year in year out and the ones that would begin to move that that's always a problem.
And therefore, that's why we came up with the concept of very modest.
In our margin expansion over the next few years.
100%, Thanks, and good luck Sally.
Our next question comes from the line of men have Patnaik with Barclays. Your line is open.
Thank you can you hear me now.
Yep.
Okay Perfect and then just first just on some of the moving pieces.
So next year it sounds like on the cash flow. It said, it's a one time impact. This year I think you mentioned, it's a benefit going forward. If you can just help us with that and I just wanted to clarify that mid teens EBITDA number you gave for all other was that for 2022 as well.
Yes, so manav.
The tax and free and primarily as it relates to free cash flow because.
Because that's where it shows up most notably.
We.
I think like 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 its 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 the $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 as strong and as you know.
Revenue in business growth continued to be very strong and so really the only change on the free cash flow side has to reflect those accelerated tax payments.
We made a little bit in Q3, and mostly expecting in Q4 here.
On the.
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.
The transaction related expenses, which will trickle into next year.
And then the combination of the two businesses are our core real estate business, combining with RCA and so on an annualized basis next year, we're anticipating that our 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 and I think you had mentioned.
Inorganic focus from the private asset class, a and you've obviously done a few deals but I was just hoping to get just a flavor of what that pipeline of landscape looks like.
In terms of the opportunities there.
Yes.
<unk>.
Yes, let me, 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.
Our acquisition of <unk>.
Which we were heavily involved in throughout the year. We have made a couple of small investments in highly strategic partners. We've also made one very small acquisition in the private asset data space.
That debt.
<unk> closed very recently.
And so in the case 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 in combining to unlock and create value.
And so those are the types of things that we're going to continue to do we're going to be very active in and as we've talked about in the past for N P N a space.
But we will continue to be very disciplined and focused on areas that are strategically critical for us in areas, where we're confident that we can create.
Growth and ultimately value and so not surprisingly the areas, where we are heavily focused on areas like ESG and climate.
Areas like private assets. These are areas, where having unique datasets and access to unique datasets are key competitive advantages and speed. The market are very important for us and so we will continue to focus on N PNA around 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 grew about 6% this last quarter acceleration from <unk>.
Recent years, obviously your long term goals high single digits. What do you have left to do on your analytics business here to help accelerate the growth or what products or services <unk> enhanced in order to get that growth will be faster.
Yes, So I think the first thing to always remember that the.
Thanks Ronald Klein.
Is really.
A grouping of a number of other sub segments.
And which we define them into four categories.
Each one of those into even further category or categories or equity analytics.
Our equity portfolio management analytics fixed.
Fixed income portfolio management analytics.
Multi asset class.
Thrown in portfolio management, and then what we call internally enterprise with a performance which is the same.
Central to our enterprise risk.
Many asset owners and managers.
So in those four categories.
Clearly the NIM.
The majority of the run rate is in the last one would just be.
Enterprise risk and performance.
And what we're trying to do it.
In addition to continuing to serve the needs in multi asset class risk management needs of our clients and the central risk function with clients to be about our strategy towards the portfolio management side in equities and fixed income multi asset class.
And so far the strategy is working.
The fixed income part.
Though from a small base grew 80% in the last quarter.
On the equity.
Our portfolio management analytics part grew double digits as well.
And so the multi asset class, but from from largely the sales that were gone prior quarter. So so that's so the dealer base is in addition to selling more.
Multi asset class risk solutions.
Cost centers, which are basically the risk management offices in central risk manager.
We want to sell portfolio management solutions to the profit centers that are indeed in the front end of our clients.
The latter is especially good for us because that's where a lot of our ESG and climate and a little of our index activities.
Right.
Revolve around so that's the that's the process that we're trying to do in this concept.
Great. Thank you and sell you 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 815 connect index futures, how should investors think about the opportunity there and then if there is any other potential partnership opportunities with the Hong Kong stock exchange to launch new.
New products or any more color would be helpful. Thank you.
Well.
As many of you know.
The Hong Kong exchanges launched.
The MSCI.
The.
<unk> future is gone.
But last Monday.
The Monday of last week, so it has been seven.
Seven or so trading days.
Or so and so far it has been the most successful futures contract launched an MSCI history on.
Thinking Hong Kong exchanges is three <unk>.
Trading volume over that.
Seven day period has been one $5 billion.
Trading volume on the open interest is approaching $400 million.
So it.
It bodes well for the future success.
That contract in addition to that.
Round, the same time or asset managers in mainland China launch Etfs on the.
On the 850 <unk> index.
And.
As of last night.
The total assets.
All four of them have got there.
In their launches has been in excess of $4 billion. So those are also bear is very successful ETF launches.
We.
No.
The airplane.
And therefore, what we're trying to do is build an ecosystem.
Inside.
Hong Kong and inside mainland China between the futures.
On the.
The EPS and the structure products. So we're now working.
Higher in and getting clients to the licensee index for EPS in Hong Kong and also develop in the structured product market around around this.
So so far so good.
No.
We do have a few other ibs.
That we're working on and we constantly do so to see what else can we have been launching not only in Asia, but in Europe or in the U S. With our partners you obviously saw the announcement that we've made with the CBOE.
Chicago about the expansion of the relationship on an MSCI index options.
Another family of indices being launched there. So that we are 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 modeling question for RCA, how should we think about the purchase price adjustment and deferred revenue how should we model it that over the next few quarters. Thank you.
Yes 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 were following we are finalizing the exact impact there and we'll update you as appropriate but as of right now.
You should assume no no material impact on upfront.
Maybe it would helpful. If I just take a step back in and underscores some of the moving pieces on RCA more broadly.
I know I've 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.
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 is a few million dollars 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.
Small amount of that was in the third quarter.
The large majority of that is the intangible amortization associated with the purchase accounting.
And then the last category is in Opex and there is 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 expense adjusted EBITDA expense.
Guidance up by about $20 million, which which mirrors the $19 million of EBITDA expenses I just mentioned and then if you layer on top of that $19 million $10 million of of DNA and then the $7 million of excluded transaction expenses that gets you to the affinity of of $35 million, which is what the increase to opex guidance.
<unk> was and so the shifts and expense guidance were wholly related to RCA.
And as I underscored.
There is going to continue to be a number of moving pieces. Some ongoing integration expenses and so when you put the combined businesses together.
Looking at our 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 <unk> 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 that.
Yes on that Frank, particularly in the data management solutions as well as the investment analytics and the shift away from beyond towards more of a modular analytic solution. So on both those fronts.
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 what those platforms.
So we mentioned climate lab earlier and that is being built out.
On that infrastructure.
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 can.
We 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.
Pretty much all new solutions will be built on this common infrastructure.
And.
Doesn't mean that we won't be there entirely overnight.
But I think that it both means an.
The improvement in user experience and the coming years.
And also efficiencies because we're not duplicating.
The separate.
Application development that historically, so I think we're on a good path.
We will continue to bring out things as we did this quarter and the quarters ahead, and we will keep you apprised of what I think will continue to be positive developments in that area.
That's very helpful color. 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 our proximity to send some of the MSCI offerings into the RCA customer base. Thanks.
Yes 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 appliance and shows our commitment to investing in real estate.
From I would say from an operational point of view.
Would there have been no surprises in a positive sense. So we've 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 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 was been with RCA and now has come back to MSCI.
This route so we were 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 color. Thanks.
Our next question comes from the line of Keith <unk> with Northcoast Research. Your line is open.
Good morning, guys I was hoping to unpack Leah custom indexes, just a little bit more on the opportunity there.
You can kind of talk about perhaps the pricing opportunity in terms of the custom indexes and how it aligns with their compares to the rest of the portfolio and then do these tend to have a stickier ability to be maintained within the client and then I guess the bear client retention.
Yes. So look I think this is an area, which has developed for many years. So 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 so, whereas historically, we had relatively straightforward.
Utilization requests, which might be to exclude a sector or a country or what have you know we have.
An enormous variety of requests including optimizations.
Different asset classes combined going beyond even securities were clearly looking at some crypto categories. As we've mentioned before so so so there is an enormous amount of demand there is increasing complexity, which is a good thing, but we need to.
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 we have great retention in across index.
The case and I don't think the retention and custom indexes is dramatically different.
The real upside is in 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 acid on earth are asset managers.
The demand is coming from all of those client types and so we're very excited about the opportunity and we have to make sure that we have the infrastructure to deliver on.
Great Bear I appreciate it and then Andy just a.
Follow 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 is some lumpiness there always is.
So any business was pulled forward from the fourth quarter at all and it has occurred.
Our current numbers.
No no. This is this was purely.
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 this most recent quarter the third quarter was our highest ever.
And so there is just a little bit of based on the pipeline, we see right now.
Tenants, we're expecting a little bit of a drop off in Q4 here are likely to be more in line with the average levels. We've seen over the last couple of years.
Great. Thanks, guys I appreciate it.
Thank you our last question will come from the line of Alex Kramm with UBS. Your line is now open.
Yeah, Hey, Hello, again, just a very quick follow up on RCA on the on the modeling side Andy.
Can you just maybe this was.
<unk> talked about already but.
In terms of how revenue flows into the income statement is there anything that I should be thinking about between run rate, which I think at the end of that $74 million and going forward are there any any seasonality any onetime sales or is one way to a pretty good predictor of the of the following quarter yes.
For the RCA business run rate is.
Probably a pretty good indicator of the revenue coming from 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 thats 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.
Subscription model until run rate's, probably a decent indicator of the revenue that we're expecting from it.
Fantastic. Thanks again.
Yeah.
There are no further questions I will now turn the call back to Henry Fernandez, Chairman and CEO for closing remarks.
Thank you for joining us today as you can see in her from the numbers the commentary.
We continue to have enormous opportunities in front of laws that MSCI.
And we will continue our triple Crown investment philosophy.
So it means that demand for my clients and maintain our leadership.
Well, thank you for your attention and your support.
So we'll be able to take questions.
During the quarter on overseas.
Paul.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Yes.
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