Q1 2022 MSCI Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the M. S. C O I 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 fun.
Instructions for you at that time as a reminder, this conference call is being recorded I would now.
I'd like to turn the call over to G. Susu Executive director of Investor Relations you may begin.
Thank you Julien 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 dot com under the Investor Relations tab.
We 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 will also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates.
Adjusted EBITDA adjusted EBITDA expenses, adjusted EPS and free cash flow.
We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance, you'll find a reconciliation to the equivalent GAAP measures 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.
Value of the recurring revenues under our client agreements for the next 12 months subject to a variety of adjustment and exclusions that we detail in our SEC filings.
As a result of those adjustments and exclusion.
Actual amount of recurring revenues to be realized 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.
Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are Henry Fernandez, our chairman and CEO Baer, Pettit, our president and COO and Andy 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 and with that let me now turn the call over to Henry Fernandez Henry.
Henry.
Thank you Joseph.
Welcome everyone.
And thank you for joining us today.
Apologies for my Scratchy voice, a little bit of golfing.
Before I talk about.
Okay.
Yeah can you all hear me okay. Thank you Jason welcome everyone and thank you for joining us today.
Apologies for my Scratchy voice on a little bit of a coffee.
Before I talk about <unk> financial performance.
Want to say that our hearts go out to the people of your brain.
We're suffering through one of the worst humanitarian tragedy in Europe .
$19 45.
My sincere hope is that the world will ultimately emerge stronger from this crisis.
With a deeper respect for self determination.
National sovereignty.
Human rights.
And a clearer sense of purpose.
On the Liberal democracies of the world.
The war has certainly put everything else in greater perspective or menu awash.
In the first quarter MSCI deliver 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 are also helping them understand major structural changes in the global economy and financial markets.
Those changes include the fallout from Russia simulation of Ukraine.
Rising interest rates.
Elevated inflation.
And the need to transition to a low carbon economy.
During a period of historic geopolitical and economic turmoil.
<unk> solutions have become increasingly more valuable to plans.
The whole global investment industry.
To put our first quarter results in perspective, when 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%.
And nearly a 96% retention rate.
Our adjusted EPS.
1%.
And we repurchased almost $800 million worth of MSCI share.
Of course, the biggest global event of the quarter was Russia is unprovoked.
Justify invasion of your brain.
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.
On business side.
Including with changes to our indices.
While also developing new products.
Services and insightful research to capture the new global landscape.
Yes.
All of these demonstrated once again.
Fast and nimble MSCI can adapt to an unexpected global crisis.
Our resilience and momentum have allow us to continue driving growth.
By deal 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 mandates benchmarked to the MSCI.
Climate, Paris aligned indices.
By asset owners in APAC.
In EMEA.
We're also driving a strategic benchmark wins with asset managers.
Our licensing cost per member says they have design using MSCI as new <unk> builds their application.
We have on boarded.
About 18 clients.
The index build their platform already.
At the same time, we keep adding new layers of growth in areas such as fixed income.
ESG and climate.
<unk> assets.
This quarter, our ESG and climate retention rate reached an all time high of 98, 7%.
We also recorded our second best quarter ever.
Or new ESG and climate subscription sales.
This data point still is two things.
First.
ESG continues to become increasingly embedded in the global investment process.
Second.
Our clients recognize the value that MSCI ESG and climate offerings can provide.
We continue to work to position MSCI.
As a leading provider of climate solutions.
On a stand our center.
And so as of the first quarter, we've calculated implied temperature rise metrics for more than 10000 issuers.
Nearly 134000 funds.
The implied temperature rise metric compute how the carbon emissions of companies and portfolios.
Nine.
Or do not align with different global temperature pathways.
Just one five or two degrees Celsius in places.
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.
Claims.
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 data building machine.
During moments of global uncertainty and disruptions.
Quality data becomes even more valuable.
As investors try to understand the presence.
Imagine the future.
MSCI also continuously looks to the future to reinvent itself.
Including with respect to our organizational structure.
<unk>.
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 joined him in expressing our solidarity with the Ukrainian people.
When the war began MSCI quickly remove 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 the clients runs where our analytics products and Additionally, we closed out our de Minimis financial exposure declines 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.
And my comments today.
We'll 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 and demand for integrating ESG and climate considerations is resilient as clients continue to position themselves for long term grants formation.
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 continued to form almost 50% of new subscription sales.
Our multi year investments to build a large incomplete data coverage universe are supporting our position as an industry standard center.
In ESG ratings and in our climate metrics, we now cover more than nine point.
5 million instruments across equities, and fixed income, including Etfs, corporate and government bonds bank loans and derivatives.
Next I will discuss our progress in scaling our newer frontier client segments.
And the ESG and climate segment or.
Over half of new subscription sales during the quarter were two wealth managers hedge funds broker dealers corporates and insurance firms.
These clients have diverse use cases for MSCI solution.
Such as climate stress testing on their loan books.
Enhancing underwriting processes by better understanding counterparties ESG and carbon profile.
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 in EMEA insurance firm at launched insurance linked products benchmark to our customer indexes with a partner in fixed income.
Across MSCI, our total run rate from insurance firms in all insurance related used cases to $77 million growing 19% year over year.
In analytics, we are 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 to date macro back drop 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 the sales enabler for various portfolio construction reporting and risk management use cases, and we're encouraged by our recent large multiyear client win in the Americas.
And 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 and our issuer communication portal are enabling a higher velocity of engagement with corporate issuers.
Which is in turn further supporting data quality and timeliness.
Our previously announced launch of MSCI data explore places over 250 datasets across all MSCI product lines at our clients' fingertips. This is empowering them to self service to discover test and start new subscriptions.
Across MSCI, our pipelines are healthy.
<unk> said that were 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.
Yeah.
Thanks, Baer and hi, everyone.
I wanted 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 30 <unk> 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 grew net cash inflows of more than $27 billion.
Ending the quarter with AUM of 1009 trillion dollars.
March 31.
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 base fees.
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 continued advancements in index innovation, which are centered on client demand and have enabled our ABF franchise to be both durable and diversified for the long term.
Since 2012 run rate from asset based fees has grown at a CAGR of 15%.
For the quarter and 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.
And 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.
<unk> 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.
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, five 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 RCI, which is a lower margin business.
On the capital front, our proactive actions provide another lever of value and volatile environment year to date through yesterday April 25th we've repurchased $795 million of our stock or over one 5 million shares.
We ended the quarter with a cash balance of $679 million of which approximately $200 million thats readily available.
We continue to have board authorization for a potential financing and we'll 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 M&A deals.
We can also support highly opportunistic repurchases, although at a more measured pace given current cash balances.
In conclusion.
So 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.
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 one on your telephone to which are 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.
I show. Our first question comes from the line of Manav Patnaik from Barclays. Please go ahead.
Thank you good morning.
I just wanted to focus on the chart you showed around the resilience AUM growth.
Over the last decade or more just curious how you guys.
Think about flexing.
Downturn playbook proceed to the extent the.
The EU market depreciation continues to happen like at what level do you guys start looking to approach that playbook to try and offset some of this decline.
Sure Yeah. Thanks Manav.
I would say, there's not a specific trigger for the upturn of where the downturn playbook as I've mentioned before we are continually monitoring the environment and calibrating the pace of investment and it is based not only on the current situation or how much the market.
<unk> 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 its 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 Barry commented.
The client buying behavior remains.
Generally robust and the pipeline remains healthy healthy even when you look at AUM levels.
This year they have 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 <unk>.
Future and options franchise, which has provided a nice offset to some of the market volatility.
And so when you look at just to put a finer point on that when you look at AUM.
To date.
AUM is down only 4% from 12 to 31 through $3 31.
So based on what we said back in January .
We're our guidance for the year was assuming that AUM levels are relatively flat for the year.
We are now at a point, where a AUM levels are slightly below where we were in January .
But there is a long way to go for the balance of the year and the environment feels at least on the operating metrics front fuel's relatively healthy.
And so as I said in my prepared remarks, if the markets deteriorate.
<unk> further or stay flat, we will likely begin to go to the.
The downturn playbook and pull back on expenses, but I would say, it's too early to say that right now.
The last point that I would make a lot of the adjustment in expenses is automatic so the first things that start to adjust our things like our comp accruals and we do have other levers we can go to without impacting growth investments in the business, but it's something we're monitoring very closely and as I said, we're calibrating on a day to day basis.
Okay got it that's Super helpful. And then just as my second question Henry.
Obviously.
Lot more regulatory announcements around climate disclosure.
And the ethics.
Some of it was expected, but just curious if this is a catalyst enough for your efforts too.
<unk> seen more revenue accelerate because of this.
And also I apologize if I missed it but what was the climate specific run rate this quarter.
Well 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 in.
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.
Central to investors agenda.
And central to corporations agenda.
As a very positive thing for us.
Clearly also.
Often.
We're asked for our views on these topics by regulators in a variety of jurisdictions.
And are in contact with.
Which hopefully we can help inform some of their thinking based on our expertise in these matters. So I think overall.
We definitely view these things as that direction as being a positive 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 at $18 million of that 50 is from indexes.
Thank you.
Thank you.
I show. Our next question comes from the line of Alex Kramm from UBS. Please go ahead.
Yes, Hey, good morning, everyone.
First one on the index sales and this may be Super Nitpicky, but.
<unk> continues to be fairly strong, but if I look back over the last few years on a percentage basis is actually the lowest that <unk> seen in years. So again very high numbers, maybe nitpicky here, but just wondering if theres anything youll put point out why maybe from a sales perspective. It wasn't as good as some of US may have may have thoughts in particular.
Given the inflationary environment and so forth.
Yes, Alex so 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 canceled in one quarter and index I think we continue to.
Be pleased by the progress and trajectory on the index subscription franchise.
Fair enough I said it wasn't a picky.
Lee and just maybe a follow up to minus <unk> question and then I'll.
I think you answered it specifically on regulation, but zooming out a little bit more on ESG and climate.
Your long term our medium term target CR I think mid to high <unk>, if I remember correctly for a run rate growth are you just at 50 and if I look at the last few years that number has been accelerating despite the numbers getting larger and larger so I guess just to to ask more specific.
If you look at the environment. Currently 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 bracing for getting back to that mid <unk> number and then not too distant future here. Thanks.
Okay.
I think that.
Our base case is that the.
The number the growth rate.
In ESG and climate.
We will stay elevated relative to our targets.
Or a very prolonged period of time.
As we expand the ESG franchise.
So more more client segments, such as insurance and wealth and corporate and the like and as we as we increase the number of used cases.
Or.
We are finding more and more demand.
If you just look anecdotally.
With investment banks and asset managers and asset owners.
Compared to a year or two ago almost every one of our clients already has a dedicated person. Please G.
Which is an incredible change over a short period of time. So I think we continue to be fairly optimistic what are going to change the target at this point.
But we continue to be optimistic.
Hi.
Our growth rate will continue now on top of that we are still in the very early day climate.
$50 million run rate on climate across all products on the Ci.
It's a smaller number a smallish number but it is drawing on over 100% per year.
I think the potential for our climate solutions.
Over a prolonged over a long period of time could be that it exceeds the run rate of ESG itself.
The existential threat to the world and the Barrios Nomura.
Use cases and client segments, including the corporates on appropriate advisors on the light.
We're serving so we're very positive and optimistic.
The thought that we were pretty bullish on this umbrella line two or three years ago, we're even more bullish today.
Very good thanks for that color.
Yes, let me add something else just to make sure. None of this growth is going to come without a major investment in the power plant and data analytical tools and indices and all of that so I hope that everyone understand that meaning.
Meaningful part of our investment in the firm is to capitalize on this ESG and climate opportunity and continue to be a leader.
In the state so so our investment plan, especially because of ESG and climate.
It's going to stay like this.
<unk> as revenues accelerate over a very long period of time.
Thank you.
I show. Our next question comes from the line of Toni Kaplan from Morgan Stanley . Please go ahead.
Thanks, So much I wanted to ask about <unk>.
Labor inflation and how Thats impacting you do you expect that to impact margins. This year may be you are able to offset it.
Either or some sort of efficiencies or just flow through from growth, but just.
Just talk about that the cost environment right now thanks.
Yeah, and I'll touch on the costs, but I first wanted to give you the holistic picture around inflation for US I think you know this but but we are a high margin business.
We're 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 and we also factor in what competition is doing and client relationships, but we also do factor in the cost environment and the cost impacts to us.
And so we shouldnt lose sight of that now on the expense side.
I would I would point out to Henry's last comment expense growth has been much more driven by investing so the expense growth that youre seeing is as a result of the meaningful investments. We made last year that carryover 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 too to wages from inflation.
Just a dimension 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, what we have seen some pickup in professional fees areas.
Areas like insurance, we have seen some increases there.
Bulk of our non comp expense base, where.
Where we have long term vendor agreements that have embedded price within them, we're pretty well protected against the inflation and so.
Well 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 of times the pipeline being strong maybe you can human on analytics for a second just because that usually tends to be the.
Most impacted during periods of uncertainty.
Because of the bigger ticket sales there so.
Just wanted to understand how you feel like the analytics environment going in.
Given the incredibly strong growth rates in the other segments like you know I guess are you happy with 5% organic.
Or do you sort of strive for better than that.
Well Tony.
<unk> remain unhappy with the growth rate.
The run rate.
In analytics.
We've done quite a lot of different.
This strategy is to you.
To change that then.
A lot of it has worked.
From a small run rate basis. So for example, we have been able thing.
Analytics product line towards the front office portfolio management offices. So thats why you see meaningful there are meaningful double digit increases in their run rate fixed income portfolio management that there.
In equity analytics or equity portfolio management analytics.
That's another area that we've been pushing pretty hard again from a slower from a smaller run rate base.
I think the central issue will remain.
The central risks.
Analytics platform, which is sold to cost centers in our client base as opposed to profit centers.
And they've done very much of a mature Apollo era.
Yes Ross.
We are trying to reinvent and reinvigorate that climate risk.
Fiber of risk management, and the Central office and we have some early success on that.
I'm alive Enterprise with one example, blah blah blah.
Ori.
So sales.
<unk> remained really robust fairly robust when you when you look at the operating metrics the challenges remain.
The lumpiness of the cancels.
At the time of renewals.
Because of the mature nature of the product line the cost cutting that typically our fixed cost.
Centres and specialists interim rate constant.
And all of that so hopefully over time, we can outgrow.
The mature part of the book of the run rate.
On the newer bar the protocol space equity analytics 16 from analytics.
On the new use cases, such as climate with Ken can continue to grow faster and therefore get the overall run rate.
And the <unk>.
Obviously, it will be on the national and the multiple groups.
Thanks, a lot.
Thank you.
Our next question comes from the line of George Tong from Goldman Sachs. Please go ahead.
Alright, thanks, good morning.
There is 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 are little antsy 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 today.
Don't see it yet now it may show up in the future, but for now everything is what we would expect it to be at this stage in the quarter looking at the pipeline et cetera. So we will 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 car.
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 the declines that we're seeing year to date.
Yes, 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 and contracts based on our indexes are you Fei index is clear.
Really strong volumes in the China 850.
Products. We also had a record single day trading of close to $3 million contract contracts on March 14th.
And so I think you made an excellent point and hopefully as we continue to grow that franchise. It is 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 he is related is.
He 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.
Index linked derivatives 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 <unk> 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 Ics 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.
Currently the the the technology infrastructure work takes time, but we're 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.
Then working together.
As one unit both across the world in the Americas and EMEA.
And building out what we do in Asia and.
We had a good quarter. So we had a good quarter as a combined team.
The client feedback is very positive.
And we are as I mentioned, we're starting to build out 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 most importantly, we have.
A significantly greater footprint now with the real estate investors and I think that thats showing in the numbers and hopefully we will build a reputation as being serious in this space.
That's great.
And then maybe just a quick question on.
Large asset manager management fees on the passive ETF, how should we think about how does that influence the index fees going forward any color would be helpful. Thanks.
Yes.
I'm not quite certain what youre alluding to.
But the my point would be that we've been pretty consistent on saying that the overtime.
Fees in this area has 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 if market if the market environment continues to be more challenging that could that could change, but I'm not aware of any being very material that we've seen since we last spoke to you.
That's very helpful. Thank you.
Thank you.
And 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 EBIT margin for the auto 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 versus your original expectation in the first quarter and how should we think about the potential upside to your margin guidance for 2022 for the segment. Thank you.
Yeah, Yeah sure. So I would point out to 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 is some continuing contribution from that.
Granted it's smaller than 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 non linear.
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 or 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 that mid teens figure.
Although it could could have some variability around it.
Got it that's helpful and then going back to the point you make about I think the influence from the $77 million run rate or 19% growth year over year in this segment.
Maybe could you please.
At a little bit more color on the growth drivers, there and the potential kind of more product launches and the client sentiment there. Thank you.
Yes.
I would generalize it.
Across all of our products that insurance is a exciting.
Client opportunity for us in a segment, where we've historically been.
Less significant and so it cuts across many of our product areas on the analytic side given the investments we've made and enhancements we've made to our fixed income analytics.
We have a much more compelling solution to insurance companies.
Within ESG and climate.
We.
We have some 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 that the organizations and for obvious reasons climate is something that is very relevant to insurers and there is theirs.
Potential regulations around peak out.
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.
Our next question comes from the line of Craig Huber from Huber Research Partners. Please go ahead.
So yes, I wanted to ask on the analytics Division your long term goal there of high single digit revenue growth.
It's sort of changes should we expect you guys to make in the product or the service to help accelerate the growth I know, it's not a huge part of your stores or just update us there if you would please.
Barry you want to take that one or so look one 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 ISN technology platform and what this really means is being much more flexible in integrating into our client's environment.
And being able to basically and clients to pick and choose the functionality and capabilities that they won and integrate that into their workflows.
The next element, which Henry referenced earlier is the focus on the front office so while.
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.
It's an area, where we haven't increasing credibility and are growing.
The number is close to 50% year on year.
And then the last one.
Big driver is is the 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.
<unk> and leveraging our new intellectual property on top of that all of those things.
Should be driving the growth rate up and 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 and maintain strong retention rates.
This will be things that can get us onto that higher path.
And then also similar question on the futures and options side, we've talked about this in the past.
Whats new going on there the investments that you guys are doing there to help them further.
Make that division a lot larger over time and accelerate growth there significantly over time and what was the innovation going on there. Please.
Yes, so we're very excited about the work that we're doing there.
In two fronts.
List.
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, it's also expanded so most of the listed futures and options that we have are on market cap indices. So we are now looking to do with our partners. The exchange partners to do a whole generation of climate and.
<unk>.
Align indices or listed options and futures and I think that will go down another layer of growth in this in this area. In addition to the continued expansion of the market cap indices or or listed futures and options.
<unk> category, which is what Scott.
Alluded to which is reported in the.
And the index subscription line.
Or 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 climb.
<unk> been in that category, but also their miotic indices.
<unk>.
And therefore that is an area that we're putting a lot of effort.
Normally translate into sometimes one time fees, but these are recurring onetime fees.
That show up in index.
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.
Major area of expansion.
We were seeing in the next few years.
Great great. Thank you.
Thank you.
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 issues, becoming really mainstream and then lots of mutual funds escalates in London. 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 SaaS matches do.
Start, we'd say well standard ratings products and then demand.
<unk> content.
So I'm just trying to differentiate.
Trying to think about how revenue per client retention rates.
At the time.
Great.
Yes.
Sure So look.
For sure your observations about Europe are.
Correct.
And.
I would say that the landscape in Europe generally whether it's a mutual fund business.
In the institutional still look somewhat different than in the U S or in Asia.
And you can say that Europe is leading in this regard, it's actually quite difficult to generalize across the variety of use cases.
That we have.
Cross different client types et cetera.
Clearly the as you rightly point out the retention rate is extremely impressive at present. So were in addition to 50%.
<unk>.
Of our.
<unk> of our business, 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 it is still very much in a growth phase. This is not this is not by any stretch of imagination, a mature business.
Clients are hungry for data.
I think really depending on what they're trying to achieve so some of them want to build.
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 rating that we collect on companies in the manner that we organize it and they can parse that data for their active.
Management process.
Thank precisely the element that is most exciting here is the is the variety of different types of investors and a number of different use cases for serving that make it hard to generalize about a particular path. So as long as we can continue to invest in the <unk>.
<unk> line to ensure that our coverage is extremely broad that we're innovating around new areas of concern and focus for investors and that in addition to our leadership in ESG, we continue to invest in our leadership in climate.
I think those are those are all the things we're doing.
And.
And it is creating both enormous demand and a lot of work for us.
So for the foreseeable future we're going to be.
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 Youre seeing the current market.
The market backdrop is creating more opportunistic opportunistic opportunity assumption peaceful.
So M&A is maybe set expectations.
Falling so it's all high quality assets. So is there any kind of areas, you're particularly keen to add scale in or was that just took some okay. Thank you.
Okay.
I will say that.
We don't necessarily.
Four.
Welcome.
Nickel market conditions and difficult operating environment.
But having said that.
This is what we do our best at MSCI.
Environment in which we tend to capitalize.
Big time.
And create further leadership in a lot of what we do and our best guidance competition.
Because we remain very focused on unplanned simplicity, we innovate a great deal in markets like this and we take full advantage of dislocations in valuations such as.
Certain types of bolt on acquisitions in the light.
You haven't seamless baked a lot of bolt on acquisitions, because the valuations have been elevated.
Given the.
The bullishness of market conditions, if they have a prolonged period of disruption here it will definitely be a great environment to pick up.
Datasets or technology or people or whatever.
And a lot lower valuation that hasnt happened, yet because there is usually a long lag associated with us for digit valuations, but.
We could become more active but it is way too early to tell at this point, but I think my underlying in my other mining position here is to say.
<unk>.
Watch for the performance of MSCI and difficult market conditions. Because this is where we do our best this is where this is where Brian sizes develop burger 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 comes from the line of Keith <unk> from Northcoast Research. Please go ahead.
Great. Thanks, Good morning, guys.
The.
R&D expenditures for the quarter. It looks like those grew I guess, the least of all of the expense categories and it was down sequentially from the fourth quarter. So.
Even too much into this but was there a <unk>.
Pullback on the spending.
To execute your downturn playbook already or perhaps just walk me through I guess pull back on the R&D spending or lower growth than what we are expense categories would have been.
Yes, nothing to read into there I would highlight that expenses and individual's time allocations can move between R&D and cost of revenue.
Based on the nature of the work and so you will see quarters, where cost of revenue looks height growth looks higher in R&D growth look slower.
Those tend to be the two areas, where you do see our investments going in so you saw our cost of revenue is showing a higher 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 is not any indication that we're pulling back on the R&D type activities. It's more just a classification of 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 the degree of continuing to flex up on our go to market.
The expenses there related to our selling efforts our investments into new feet on the ground in client services as well as tools to enable our sales force.
That's helpful.
Talk about kind of having a natural hedge with the incentive compensation coming down if there is a downturn in the business can you just remind us or provide color in terms of how much of the income statement would be allocated for like incentive comp 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 I think we said a 10.
<unk>.
Pull back.
Would lead to about $15 million down flex or Conversely up flex on the.
Our bonus expense on an annualized basis, so kind of 10% moves on naphtha base fees can lead to.
A 15% to $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 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 persist 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.
So thank you all for joining us today and your interest.
And MSCI.
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 or some of them are on.
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.
The messages that we're giving you as to where we stand in that part of the cycle.
What is.
What is benefitting our business what is affecting our business.
And at the moment as I said, it's a bare 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. Thank you for participating you may now disconnect.
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