Q2 2022 MSCI Inc Earnings Call
Yeah.
Good day and welcome to the EM Sci second quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal the country, especially by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on attached on phone to withdraw. Your question. Please press Star then two please limit yourselves to one question and one follow up.
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I would now like to turn the conference over to Jeremy.
Investor Relations can trend Krishna. Please go ahead.
Thank you good day and welcome to the MSCI second quarter 2022 earnings Conference call earlier. This morning, we issued a press release announcing our results for the second quarter 2022. This press release, along with an earnings presentation. We will reference on this fall as well as the <unk>.
<unk> 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 adjust.
That 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.
A reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.
We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months subject to a variety of adjustments and exclusions that we detailed in our SEC filings as a result of those adjustments and exclusions the actual amount of recurring revenues.
We'll realize over the following 12 months will differ from run rate. We therefore caution you not to place undue reliance on run rate estimate or forecast revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are 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 Baer Pettit Behr.
Hey, Jeremy Thank you.
Welcome everyone and thank you for joining us today.
Just wanted to say Henry is fine. He just woke up this morning and was feeling a bit under the weather. So he won't be joining us on the call today.
Well go forward as normal.
Before I talk about MSCI financial performance I'd like to formally introduce Jeremy as our new head of Investor Relations and Treasurer.
Since joining MSCI 12 years ago. He has held a variety of roles supporting our growth strategy M&A and partnerships.
Building out our planning and forecasting processes. We're excited to have him in this role his experience and institutional knowledge will help investors better understand our strategy and opportunities.
Looking back on the second quarter MSCI delivered strong results in a difficult external environment.
Among our headline achievements, we posted record levels of second quarter total new recurring subscription sales and net new recurring sales.
This helped us drive, 14% organic subscription run rate growth up.
Up from 11% a year ago.
It also contributed to adjusted EPS growth of 13, 5%.
Meanwhile, MSCI achieved a 95, 5% retention rate up from 94, 4% in the second quarter of 2021.
On the capital front, we repurchased another $277 million worth of shares.
At an average price of $404 per share, bringing our total for the year to nearly $1 1 billion.
We also raised $350 million term loan, giving us greater flexibility in the months ahead as the bolt on acquisitions and opportunistic share buybacks.
We did all of this against the backdrop of historic inflation rapidly rising interest rates and market volatility.
As we always say MSCI prides itself on being an all weather franchise.
Any company can appear successful during a bull market.
Oh yeah.
Moments like this show, which companies are truly resilient.
Time, and again MSCI has met the challenge.
Periods of instability, our data and research to become even more relevant.
Today, we are well positioned to capitalize on repriced assets and help investors navigate financial turbulence.
We're also well positioned to make small bolt on acquisitions, if the right opportunities emerge.
MSCI is focused on strategic accelerators, and our team is monitoring the market for possibilities.
Even as we continue investing in long term growth, we will remain vigilant about protecting our profit margins. Despite the macro environment, we have not seen a slowdown in demand for our solutions. In fact, we see continued strength across most segments and geographies.
To help us become even more client centric, we recently hired Kristina bundled last week as our new Chief marketing Officer.
Kristina brings decades of experience from World class brands, such as Hewlett Packard and Coca Cola.
Our work at MSCI will deepen our relationships with stakeholders across the board.
Looking ahead, we recognize the challenges posed by global market trends.
Said earlier these are the moments when MSCI thrives.
I would now like to drill down into a few areas in greater depth, including climate analytics in fixed income.
Before I do so in view of the external environment I thought it was important to lead with what <unk> seen from our clients.
All the market turmoil, we continue to have strong growth across client segments. Our pipeline remains robust and we have no evidence that it is smaller.
During this period of economic and financial turbulence, our clients understand that MSCI solution can play a critical role in helping them adapt and manage their investments.
Our second quarter performance confirms the strength of our diversified and durable franchise.
Let me spotlight some of the segments and geographies, where MSCI recorded especially strong growth.
In our index business, we posted double digit subscription run rate growth in all regions, along with custom index subscription run rate growth 23%.
In ESG and climate, we delivered organic subscription run rate growth of 47%.
Net new sales growth of 26% and our second best quarter ever for recurring sales.
Meanwhile, total assets under management in ETF linked to our ESG indexes increased by 15%.
Among banks hedge funds and wealth managers, we posted total subscription run rate growth of 17% excluding RCM.
In terms of specific products and services, we delivered robust analytics growth with net new sales increasing by 68%.
This growth was driven by sales in equity factor models and risk management solutions as well as a 17% reduction in cancer.
We also posted a strong retention rate for analytics of 94% and recurring sales growth of 15%.
In addition, our listed futures and options trading volume increased by 37% with strong growth from world Euro and keep our contracts.
There's no question that appointment represents one of the fastest growing parts of our franchise.
Let me discuss a few concrete milestones from the second quarter.
Just last month, MSCI and launched our new total portfolio footprint tool, which helps a growing range of financial institutions measure carbon emissions across our lending and investment portfolio.
With this tool we have extended our climate analysis to municipal bonds, and securitized products, and we will be better able to provide modeling for loans infrastructure and private assets.
And the C. I also completed an agreement with a prominent general partner to provide fine that analytics on a portfolio of private companies.
In addition, we completed our first climate lab enterprise deal with a major asset manager that cuts across analytics, ESG and climate and.
In private assets the larger pipeline for climate like enterprise continues to gain momentum.
We're also pleased that one of the most innovative climate tools. We launched in 2021 are implied temperature rise metric was named ESG assessment tool of the year for investment decisions and insights by environmental finance.
Besides one final second quarter milestone MSCI released the latest iteration of our net zero cracker.
Which illustrates how listed companies align with different temperature rise scenario.
Climate is now driving growth across the company, including in our analytics business.
In the second quarter MSCI launched a series of new equity factor models, including the first models to offer sustainability crowding in machine learning.
The sustainability factor includes both ESG and carbon efficiency component.
This is a significant model update aligned with our strong index franchise.
We will make these models available through several distribution channels, including snowflakes data using snowflake will help us dramatically accelerate client onboarding process.
We're also developing capabilities to create an even better user experience by combining analytical results from risk manager and borrow one.
This will greatly enrich our content and capabilities. We are further enhancing the user experience in analytics, where our investment solutions as a service application.
ISS is clients greater flexibility and how they interact with our analytics, while reducing MSCI is time to market for new products and services.
It represents a pivot away from our legacy applications. All of this reflects our broader focus on client centricity.
As part of that focus.
Continue to make progress in expanding our direct indexing capability.
We want to help clients to be able to personalize their investment strategies and scale through client designed index.
As I mentioned earlier MSCI delivered constant index subscription run rate growth of 23% in the second quarter.
And we're seeing growing traction of custom indexes as the basis of index linked products within our asset based fee revenue.
We're also building momentum in fixed income in fact during the second quarter, our fixed income franchise posted 35% growth run rate growth.
MSCI will continue investing in fixed income to help our franchise reached the next level.
With that in mind, we were delighted to team up with market access holdings, an innovative portfolio analytics solutions and co branded fixed income index.
Through this partnership Msci's portfolio analytics, and fixed income indexes will integrate the all to all pricing developed by market access, including their trade ability and liquidity scores. Meanwhile, investors will use market access and our ESG ratings help create more liquid.
Unsustainable fixed income portfolios.
Closing I would just like to reiterate that during this period of volatility in financial markets. We continue to see strong demand for our solutions and with that I will turn the call over to Andy Andy.
Good morning, everyone.
As Barry highlighted the solid performance during the quarter underscores our strong momentum and the power of our all weather franchise.
In addition to the 14% organic subscription run rate growth, we recorded the highest second quarter ever for recurring subscription sales and net new recurring sales, increasing 15% and 26% year over year, respectively. Excluding the acquisition of RCA and we experienced double digit subscription run rate growth, excluding RCA across all regions with <unk>.
Healthy growth across nearly all client segments.
In index, we delivered 12% subscription run rate growth, which represents our 34th consecutive quarter of double digit subscription run rate growth.
This growth was fueled by 19% subscription run rate growth from broker dealers hedge funds and wealth managers on top of 10% growth from asset managers and asset owners.
Asset based fee revenue experienced declines in the quarter with ETF and non ETF passive fees impacted by declines in market levels offset by continued growth in our futures and options franchise E.
E T F linked to MSCI indexes drew more modest net cash inflows of $7 $5 billion in the quarter with flows coming from developed markets ex U S and emerging market exposure funds and within those flows into funds linked to our ESG and climate indexes.
So worth highlighting that mix shift helped to drive a modest increase sequentially in the period and average basis point fees to 2.52.
As we've mentioned previously our non ETF passive revenues are recognized on the latest AUM levels reported to us by clients, which typically occurs on a one quarter lag when we receive updated AUM balances from clients, we true up or true down the revenue accrued in the period reported by the client and use the new balance to accrue.
Revenue in the current period based on that then effective pricing as clients began reporting lower AUM balances for prior periods. During this quarter our revenue in this quarter reflects some true downs on revenue accrued in prior periods as well as lower accrual levels for the current period. Despite.
Despite the headwinds from lower reported AUM balances, we continue to see very strong client demand and new product launches in this area as well as strong resilience in fees.
It's a nice offset to the AUM declines revenue from listed futures and options linked to MSCI indexes recorded its highest quarter ever with traded volumes at contracts linked to our indexes up 37% year over year.
Outside of the asset based fees and index, we saw tremendous strength across most areas in analytics, we drove 15% growth in new recurring subscription sales, while also experiencing a 17% decline in cancels driving net new recurring subscription growth of 68% and organic subscription run rate growth of seven 4% we continue to see.
Many opportunities and strong momentum in front office equity and fixed income portfolio management, alongside our ESG and climate risk solutions.
And ESG and climate, we delivered another quarter of exceptional organic growth of close to 50% as Barry mentioned roughly half of new recurring subscription sales were generated from emerging client segments, including wealth managers insurance companies hedge funds broker dealers in corporates and our climate run rate reached $55 million, which is an increase of 88% from a year.
Go.
Excluding the impact of RCA real assets revenues were down year over year as a result of foreign exchange impacts and some impact from the timing of revenue recognition.
<unk> organic subscription run rate growth was 9% and our legacy real estate business.
Across the firm, it's also worth highlighting the very healthy retention rate of 95, 5% with strength across all segments.
Our adjusted EPS growth highlights the power of our all weather franchise, we flexed our expense base to mitigate the impacts of the AUM based headwinds.
And the headwinds of an appreciating U S. Dollar on our revenues, which were approximately $8 million when compared to Q2 of 2021 were more than offset by FX benefits on our expenses of approximately $9 million.
Furthermore, our proactive capital actions provided another lever of support year to date through yesterday, we've repurchased over $1 billion of stock or approximately $2 2 million shares.
More broadly we remain nimble and proactive on the capital allocation front Msci's Board approved a 20% increase to our quarterly dividend to $1 25 per share further illustrating our commitment to return capital to our shareholders.
In the beginning of June we Opportunistically raised $350 million through term loan borrowings with these proceeds we ended the quarter with a cash balance of $842 million of which approximately $600 million is readily available.
We remain well positioned to continue to capitalize on share repurchases and bolt on M&A opportunities that may arise against this volatile market backdrop.
Before we open the call for Q&A I would like to discuss our outlook for the year.
We published our updated guidance earlier, this morning, which reflects a cautious but constructive view on the balance of the year.
We expect some continued volatility we expect generally flat to gradually improving market levels from current levels throughout the balance of the year.
As mentioned earlier, we have begun to activate our downturn playbook with a focus on flexing certain less critical expenses and moderating our pace of hiring in selected areas.
We utilized these times of uncertainty to re prioritize our resources and push ourselves to be more efficient across the business in order to free up incremental investment dollars.
Our decreased operating expense and adjusted EBITDA expense guidance reflects these actions against our current expectation of relatively flat market levels for the balance of the year.
It is worth noting that the pace of spend may fluctuate up and down based on the trajectory of our asset based fees. The performance of the business more broadly and the global operating environment outlook.
We've modestly increased our range for capitalized expenses as well as depreciation as well as depreciation and amortization expense, mainly reflecting a higher level of capitalized software development cost across products.
We increased our interest expense guidance to reflect the variable interest rate payments on the term loan borrowings drawn in June .
And lastly, we've lowered our net cash provided by operating activities and free cash flow guidance is worse as a result of the declines in asset based fees and higher interest expense, partially offset by lower operating expenses.
Our tax guidance for the year remains unchanged.
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.
Across the business, we continue to see strong levels of demand for our products and we have conviction in the secular growth opportunities in front of US we remain focused on executing on our strategic growth opportunities, but we will continue to protect the financial model of our all weather franchise and with that operator. Please open the line for questions.
Thank you we will now begin the question and answer a question to ask a question you May Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the key.
Probably need Dan. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
John Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble that often.
Our first question comes from Manav Patnaik.
Please go ahead.
Andy I was hoping to just your comments on activating the downturn playbook.
I was just hoping you could give us some specific examples of perhaps.
Are you starting to see some of this weakness and which segments is it the banks. When you are starting to heal like Lille chatter or it was just hoping you could flesh that out a bit and I understand why you're doing it but just was hoping for some color on which areas, perhaps you're seeing some of this weakness right now.
Manav, it's fair here, maybe before I turn it over to Andy I, just wanted to make a clarifying point the downturn playbook relate more to a series of financial actions.
In order to be prudent and to ensure that we don't provide any negative surprises to our shareholders. So it doesn't it's not conducive necessarily and as Rick said to us seeing any sort of negative in our pipeline or what's happening. It's just that in view.
Clearly the market beta effects and how that affects our ABF revenues and that can be seen in all of you can measure that but I think more broadly we're not seeing anything, particularly negative I hope that was.
Black.
Our prepared remarks, but I'll just also turn it over to Andy to speak a little bit more specific about those measures, we're taking to be financially prudent.
To Barry's point. This was the actions that we're taking are related to the the pullback in ABF revenues, we mentioned last quarter that if AUM stayed at current levels at the time or deteriorated further we would likely go to our downturn playbook from the end of Q1 to the end of Q2, we saw a AUM levels dropped about 200 billion.
<unk> or 14%.
And as I mentioned, our guidance at the time assume markets remained fairly flat and so as a result, we're turning to our downturn playbook just to give you some color on some of the levers that we've been we've been flexing here.
We are moderating the pace of head count growth.
On a very targeted basis and so we are prioritizing our key investment areas to continue investing in but other areas. We are slowing down the pace of growth.
So identifying efficiencies and less critical areas.
We're selectively flexing down some of our discretionary non comp areas.
Around areas like professional fees.
Obviously, youre aware, we are getting some meaningful FX benefits, which feed into the lower expenses as well.
And then it is worth noting we are projecting a slightly lower comp accrual relative to our original forecast.
But to Barry's point I do want to highlight that our business remains healthy client buying behavior remains generally healthy despite the lower ETF AUM levels.
And it's important to keep in mind that we have a global diversified all weather franchise with a very strong subscription growth and retention rate year.
Okay got it that's helpful. And then maybe can you just talk about.
A strong balance sheet.
<unk>.
Accelerating maybe some N P. Any that you guys typically do like.
Other valuations down enough from the private market as well.
Yeah. So I mean part of the rationale for raising the term loan the additional $350 million was to give us dry powder, we want to continue to be nimble on the share repurchase front.
We think there are opportunities to get our shares at attractive values, but we also want to have some dry powder for bolt on M. P N a.
And so we've started to see see some repricing in private companies.
I would say generally, especially in the spaces, we operate they haven't adjusted to the levels of public companies and so we do think there could be some continued compression in private company values. There is also a degree of.
Time related to private company owners adjusting to the new norm before they decide to sell.
So we do think if this market volatility persist in the market the public company valuations remain low.
In the coming quarters, there could be some opportunities that we want to be poised to capitalize on and as always we're focused on strategic accelerators as Baer said focused on our core investment areas.
Like ESG in private assets and fixed income in the areas of unique content.
It will enhance our existing franchise.
Got it thank you very much.
The next question comes from Alex Kramm with UBS. Please go ahead.
Yeah, Hey, guys.
Yes, a strong strong sales during the quarter and I think the pipeline.
Commentary also pretty constructive just wondering given that this quarter. That's two Q was basically deteriorated throughout let's just wondering if how the progression was on the sales side did you see any differences as the quarter went down or was it all fairly consistent and then maybe any other any particular color by.
By customer sets as again this quarter was maybe a tale of many stories.
Yeah, Hey, Alex good morning.
Look honestly, we really haven't seen any sort of mark changed from the beginning to the end of the quarter. We actually had a very strong ended the quarter in terms of closing business.
We have started the present quarter as we would hope to do so as far as we can see at present.
We have no information to suggest things are turning into a negative direction.
Look, it's a choppy environment and things can change, but as of today, we have no empirical evidence that things are trending in a worst direct.
Alright, great fair enough.
Second question, then and I think I asked us either one or two quarters ago.
But I think it remains relevant which is on the ESG noise. That's out there if somebody said to me the other day not a day goes by without a negative article on ESG and it seems like in an election year. This is even turning into a partisan issue. So just just wondering what this has done to your client conversations do you.
Sales pipelines I mean this is this having an impact or is this just noise set us on the outside maybe are getting wrapped up in <unk>, but it really doesn't matter to the to the end clients and then demand.
Sure. So so Alex first of all as you well know we're a global franchise. So I think the debate you're referring to is primarily in the United States and is not really happening to the same degree in other geographies and then I think the second point, which is much more important is unique.
Need facts and information to engage in that debate right. So I think the point that I also have made repeatedly on this topic in the past is what people cannot afford to do is ignore the topics.
There may be certain parties, who I think are in a minority of them are a small minority depending on where you are and feel that this is important is not a good use of their time, but even they need they need data and information to to make their case on and I think that the key part of this franchise is that all <unk>.
Arts of the debate need information to make judgments and I think that that benefits us across the board.
Alright, Thank you very much.
The next question comes from Toni Kaplan with Morgan Stanley . Please go ahead.
Perfect.
You wanted to start on that custom index side, I think Mary you mentioned that you've seen sort of an acceleration in this area.
What are you guys able to size that for US right now and is this an acceleration in growth because it's off of a smaller base or is this a structural.
Long term growth driver for the index business.
Custom indexes have been a structural long term growth driver for the index or some time in <unk>.
I hope I'm not speaking out of school, but.
This data is pretty clear in my head.
The growth rate has always been pretty healthy.
But the healthy growth rates such as the one that we had in the past quarter by definition is timing always off a higher base right. So so so it's it is a long term story is still a very strong trend.
And we are seeing.
First of all that.
The demand for complexity with different types of content.
Different asset classes, which we hope to do more ores has increased so that that plays to our strengths, but also we're seeing that this demand which was the.
Going back in time Chiesi institutional.
Is spreading increasingly to wealth management.
And notably.
We're investing in direct index thing as I mentioned in my comments. So we think that the combination of.
Institutional demand general financial products demand and the rising demand for direct indexing and well we'll continue to provide.
A lot of momentum to this area for us.
Perfect.
Hoping you could give us an update on regulation, both within the index space and ESG parts of your business as well are you seeing.
More of a pick up in regularly.
Regulation or or regulators scrutiny I'm just.
Wanted to get an update there, yes sure I'm happy to take that so just as a reminder, we are regulated.
<unk>.
In the EU under the EU BMR actually currently with the FCA in the UK.
So thats something of some standing so we're familiar with that.
So just continuing on index regulation, there have been greater interest in this topic from regulators in the United States.
And I won't speculate on where that will end up or the direction of it but clearly the interest of regulators in the United States.
Bob.
But I'm confident that in whatever direction that goes the manner that we operate the quality and the transparency.
The separation of powers between an editorial in commercial all of those things I think we're very well prepared for it.
And ESG also.
As a reminder, we are a registered investment adviser in the U S and we're not in the LLC that own ESG ratings.
Tony has been an area that has not been heavily regulated for us historically it may be further regulated in the future and there is also a lot of initiatives Europe related to ESG regulation.
And I'd make the same observation.
Well, we are we always work on the assumption that someone may common regulators and so the quality of what we do the transparency of what we do is foremost in our mind.
That's how we're operating in our ESG ratings and were confident if we do so we continue to invest and ensure the highest quality that if regulation.
We may we will we may well benefit from it because of the high standards we have.
Perfect. Thanks, a lot.
Thank you Tony.
The next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
AUM dropped about 14% between <unk> and <unk> and I believe you mentioned your guidance assumes flat market levels over the balance of the year can you elaborate on your thinking there and what your guidance assumes for AUM levels on a full year basis.
Yeah, I don't want to be more prescriptive in the commentary that I made and you alluded to but in our our trajectory of spending we make assumptions about the market and as I alluded to.
We've assumed that the market levels remain relatively flat to where they are today to slightly improve and so that's kind of the environment that we based our spending assumptions are then feed into our EBITDA expense and operating expense guidance.
Right and then a full year basis that assumes what AUM levels.
<unk> flows.
Yes, you can you can do a little bit of the math yourself.
Just seeing what's happened for the first six months of the year and average AUM balances there.
With that color that I, just provided I don't want to provide more specific assumptions around AUM flows or fees or any of those factors, which we typically don't comment on.
Got it Okay, and then as a follow up.
You're exercising your downturn playbook with expense reductions what is your downturn playbook imply for margins are you committing to hold margins at a certain level for this year.
Yeah, we're not committing to margins I did make the comment in my prepared remarks that we are targeting.
Or are we believe our margin for the year will be in the high Fifty's.
<unk>, which is aligned with our long term targets.
The margin can fluctuate quite a bit based on a number of factors, including big moves in a U M pay.
Hey.
<unk> rate fluctuations.
Are there one off items, so it's not a guidance or target, but we are looking at the margin being in the high <unk> for the year.
Which is worth noting.
And if you look at the expense guidance. It does imply that our expenses are picking up slightly in Q3 and Q4 relative to what we saw in Q2.
Got it thank you.
The next question comes from Russell clutch with <unk>. Please go ahead.
Thanks, guys.
So I just want to go back to the ESG and climate business on the back of all it can say.
And I noted the new subscription sales growth was really strong again this quarter wondering if you could talk to what's driving this is it the opposite of new products or is it new customer penetration sort of leveraging additional products and also sort of how sustainable is the current level do you think the speed off the mark.
Margin expansion in this business was slow.
Long term margin target for this business might be.
So look I'll make a few observations and then turn it over to Andy if he wants to comment on the margin or not.
So look as regards the main question I think it's all of the above and more of the same right I think it's the same as last quarter in a positive sense.
50% of our sales in the quarter were from new clients new clients to this product line and then how many new clients. The firm. So I think you know in terms of both.
The range of what we are selling the client types the number of new clients.
Everything looks really healthy so rather than speculate as to what rate.
Will you know how long it will go on.
The way I would say it is we have no suggestion that what this does what occurred this quarter that will have any any no lack splitter quarter next quarter as we had done in the previous quarter. So I just feel like we're in a we're in a strong.
We're in a strong position with this product line.
And.
If that were to no longer be the case, you would communicate it but were.
We're really doing well now and you don't know if you want to comment on the margin at all or yeah. Obviously, we don't give margin targets by segment, but I would say that within ESG and climate. Our focus is really on driving top line growth margin expansion and so we're not targeting for the margin to expand.
From current levels.
We're really trying to invest to continue to fuel that growth that you were asking about across so many different dimensions. So the client segment dimensions, the asset class dimensions that solutions dimensions, and then really really accelerating our growth and climate.
Which we think is going to be a massive opportunity.
And so our goal right now is leadership in growth that's not on not on margin expansion within within the segment I would highlight that longer term the nature of what we do in ESG and climate is similar to what we do across.
Many other product areas, which as we develop IP and we sell it many different meant to many different clients for.
For many different use cases across many different applications and so it inherently does have attractive operating leverage, but we're really reinvesting that operating leverage and growth and investment.
Okay good stuff.
Sorry, just as a follow up.
The analytics business the run rate.
I wondered if you could talk in a bit of detail about.
What's being done to improve that yeah.
Actually sorry, you broke up a little bit do you mind repeating the question.
Yes, sorry, I'm just in the analytics business the run rate still growing at around about 5%, maybe we'll pick up in the run rate right. So I just wanted to know what's being dumped in pizza hut.
Yeah, Yeah. So.
You know we're focused as much on the run rate growth, which was seven 4%, which is still not quite where we want it to be we do believe this is a high single digit growth segment for us, but definitely higher than the revenue growth there tends to be some noise around revenue growth related to timing of implementations revenue recognition around.
Contracts just consistent with what we've discussed in the past there is lumpiness I would say the encouraging thing for us on analytics is the strength in the quarter was aligned with our strategic areas of focus within analytics. So we saw a strong equity portfolio management growth of high single digits.
Continue to see elevated growth within our fixed income portfolio management tools.
And we continue to get worse.
Started to get some traction around ERP, which is the area that's had lower growth in the past. So we got a nice boost from.
Our 18 F reporting solution to support a new regulation going into effect in August we got traction as we highlighted with climate lab enterprise sales, which are booked within our analytics segment or partially booked within our analytics segment.
And we also are getting traction with our partnership approach, which is accelerated by some of the investments and advancements we've made on the ISR front.
And so it's not where we want it to be but we do think we've got the right strategy and hope to continue the momentum.
Although I would say it will be it will be lumpy.
It's also worth highlighting that in addition to the strategic benefits that analytics gives to the rest of the organization.
Analytics has also been a nice source of operating leverage which you can see from the results this quarter, which is really helping to fund investment and in other parts of the company.
Okay, great stuff.
Got it.
Our next question comes from Craig Huber with Huber Research partners. Please go ahead.
Yeah.
Yeah.
Can you maybe remind me of it.
Yeah.
Can hear you Greg.
Maybe we can move to the next caller and then come back to Craig is having a technical problem.
Okay.
Alright, so let's move onto the next question, which comes from Patrick O'shaughnessy with Raymond James. Please go ahead.
Hey, good morning, how are you guys thinking about pricing power right now obviously, it's an inflationary environment, but at the same time.
Asset management clients are seeing their AUM under pressure.
Yeah, So look I would say that our our philosophy on pricing.
Consistent.
Which is that we always try to be as firm as we can without giving our clients the impression that we're being too aggressive.
So.
I think that we.
We've managed to put in sort of.
A slightly above average increase and our.
Index.
Sort of a regular price increase but it's not.
Not notably different.
We're we're very focused right now on ensuring as we have been for a number of years that we have.
We're getting the right value out of analytics and that could be reflected in some of the numbers here and you know and in terms of truly the big growth drivers and ESG and climate does are there any.
Young products as it were so it's mostly coming from new clients and new products, rather than price increases, but I would say that.
The general observation.
<unk>.
Linked to your observation about the state of our clients were not hearing negative noise about that.
And but we are conscious that we work in a competitive environment.
That we we always have as I said at the outset of philosophy in balancing.
Economic strength with not pushing our clients too far.
Got it thank you.
And then Andy can you quantify the magnitude of the true down that you spoke about in the non ETF passive asset based fees.
Yeah, It's I know, it's an area that.
Probably a lot of folks missed are underestimated.
I would say it it can be on the order of magnitude of a few million dollars.
Depending on how significant the market moves are I would mentioned that.
Depending on what happens with the markets, we could see this dynamic at play in our revenue in Q3 as well with similar adjustments as we start to receive the Q2 AUM balances from from our clients.
Great. Thank you.
Our next question comes from Gregory Simpson with Don can I pay it back. Please go ahead.
Hi, yes, good morning.
Just wanted to ask if you have any color on the revenue contribution from private markets beyond legacy real estate piece and then.
And it sounds like there's quite a lot of work on the product side.
Building out relationships with GPS.
Are we at the stage that we're at kind of private equity clients all remote materials segment.
How things are kind of going there and then the relationship with Douglas.
Yeah.
Yeah. So.
Maybe I can comment on the real estate performance and then bear if you want to make any comments around Burgess.
Specifically, which which we don't obviously consolidate burgess.
We're a minority investor in them, but we continue to work on the product development front, but within real estate before I touch on on RCA I do want to highlight.
Provide some color around the performance of the segment I know there was a lot of noise around it I would say the revenue growth is more reflection of accounting and FX then business health I think operating metrics are fine and organic subscription run rate growth within our legacy real estate business with 99.
Per cent and for RCA to your question, we continue to see double digit run rate growth within RCA and you can see the retention rate is quite strong at.
At 96%.
Within the segment and so we continue to execute to make progress.
Our ambitions around RCA and we are really starting to see the.
Not only the operational synergies, but the strategic center synergies of cross selling to our clients new product development continuing to expand the suite of indexes and content as well as climate solutions that we had planned to do when we acquired the company.
So I don't know Barry do you want to make any comments around Burgess.
Look I'll be very brief I think where we're working with them on a number of areas.
Clearly you had.
I alluded some of the climate work that we're doing that's been a big focus of ours.
Because this demand is coming through.
Or increasingly.
From from private asset clients so.
There is also general work going on between our private asset data teams in order to figure out how we can create greater benefits in combined products going beyond some of the ESG and climate work that we're doing so.
I hope as we get into the second half of the year, we will be able to expand on that a bit more.
Yeah.
Great and as a follow up can I check on how the product relationship with the Hong Kong exchange is doing well.
Volumes in the in the China 50 contract, maybe still a little bit on the low side, but.
The big opportunity longer term in other words, you kind of lessons from the ever exchanges about how long it takes for volumes to really accelerate some perhaps.
Yes look I think we're very happy with the relationship I've personally been involved in a number of.
Calls with them in the last quarter.
I think that as you as you can see from other aspects of our of our futures franchise. These things are a virtuous circle that kind of volume and liquidity in open interest to get one another I think we're we're happy with where we are we've got some other things that we're discussing.
So I think I think we're in a good place and where we believe that looking at Cros are.
The broader numbers in our future and options franchise, which you saw this quarter.
There's still a lot of.
<unk> side across the board with all of our exchange partners, including Hong Kong.
Okay. Thank you.
Our next question comes from Craig Huber with Huber Research partners. Please go ahead.
I apologize.
Can you size for us if you would your fixed income run rate revenues now and maybe also your wealth management run rate.
Yeah, Craig I don't think we've provided those metrics Ah recently I would say that there are.
There are.
A couple of ways to think about our fixed income business. We've got the direct fixed income solutions.
Solutions that we provide for the fixed income investment process and there was cut across index.
With our fixed income indexes, which is largely on the heels of our partnerships that we have with with many of the other major index providers fixed income index providers, our ESG solutions, which are increasingly being incorporated into the fixed income investment process and then our analytics.
Solutions, which I.
Which I alluded to earlier, it's been a nice area of growth for us and in analytics.
It is worth noting we also have a meaningful fixed income capability that serves multi asset class you use cases.
As part of our multi asset class tools, and our enterprise risk and performance, obviously, a big part of our client portfolio is as is their enterprise wide portfolios is fixed income and so we have capabilities. There that are critical to supporting the growth and the positioning.
In those businesses as well and so it cuts across a number of dimensions, but it is especially the one the part surveying the front office in that fixed income investment process, we are seeing very strong growth.
And I'd just make an additional observation on top of what Andy said.
This cross product line team two observations. This is how we're operating more and more across MSCI using the phrase MSC one MSCI we've used in the past and in particular in fixed income the expertise we have across the firm is really coalescing that that team had.
Across all products and functions that are oxide literally in the last week. So I think theres a lot of momentum behind what we're doing and it's sometimes tricky reporting as a public company across different product lines that will continue.
Ill try to provide you guys with as much transparency as we can there.
And then my follow up question guys Youre private asset.
Obviously organic ex FX was down about five 5% you talked about some one time issues. There could you just talk a little bit about your outlook there and if you normalize for that what was sort of the underlying growth rate.
Yeah. So let me actually provide a little bit more color. There. So yes, you alluded to I mentioned, there was some noise on the revenue side.
Where our revenue in real assets, Firstly has a relatively large exposure to non USD currencies. So the strong dollar.
Relative to the pound generated some revenue headwinds from an FX standpoint. Additionally, within our legacy real estate business for some of our offerings, we've been transitioning our clients to a service model, where we recognize revenue evenly throughout the year versus if you remember in the past we had a good chunk of revenue where we.
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Our revenue upon delivery of a service and a good chunk of the revenue would be recognized in the second quarter, which is when we would do with a number of the deliveries and so from a year over year comparison standpoint, as we've migrated many clients to the even subscription model through the year.
You see some headwinds and in the growth.
But more generally I think we're committed to the long term targets that we've put out there at the high teens level and we continue to be bullish about the prospects across our legacy business Darcy RCA business as well as the combined combined organization.
Right. Thank you.
Yeah.
Last question comes from.
Not that I.
I can keep track of America. Please go ahead.
Thanks for taking my question I just wanted to go to the slide 28, where you provide the ETF AUM and ETF linked to.
ESG and climate equity indices.
Martin your database and even sequentially there was a moderation I just wanted to see how much you'll say it's related to just market performance and what are you seeing in terms of new ETF launches, a new product launches based on the ESG and climate equity indices.
Yeah. So.
So look as Andy mentioned before we are loath to speculate or to be about the exact direction of what will happen with markets and products, particularly in this environment.
We.
As I mentioned in my comments the growth in ESG and climate category of index has been very attractive.
Even in this tough market.
We continue to be in conversations with.
Many key clients about launching new products. So so I think we are the direction of travel continues to be what it has been.
And we have nothing to suggest so are that there is a lack of interest in these type of products.
I don't know if Andy if you have anything to add to that in terms of the numbers are.
No no I think you hit the key themes. There I think that's right. We continue to see momentum and strong appetite is bare site related across the category. There are cyclical dynamics feeding into some of the flows particularly within Etfs.
And so it's something that we're not too concerned about looking out longer term.
That's very helpful color and maybe just as my follow up I was going to.
Ask about the appointment of Christina as the new Chief marketing officer, and the focus on a more client centric approach I was just wondering as we think about the marketing strategy should we expect any change to the marketing strategy, there or even on the execution front. If you could provide some color on some of the new initiatives that might get planned for the rest of the year.
Going into 2022.
Sure Great question.
So first of all I am delighted that Kristina has joined us and and I think where we're at an inflection point or we were probably passed an inflection point, where MSCI needs to reach out to our clients and the broader markets.
Moving beyond our traditional strengths.
What I would call direct sales and client service and Christina has an outstanding background to help us in that regard.
And I'm very confident that you will put her leadership footprint on this area and we will be happy to talk about that in the quarters ahead.
That's very helpful. Thank you.
Okay.
I believe that was the final question, yes, sorry.
Okay. This concludes our question and answer session I would like to turn the conference back over to Barry.
Uh-huh.
So thank you all for joining us on the call today and your continued interest in MSCI as you heard it's times like these that really underscore the resilience of MSCI is all weather franchise, we not only continue to see strong demand for our solutions, but we also have tremendous opportunities in front of us.
We remain excited about the momentum we are building and the investments, we're making and we look forward to seeing engaging with all of you in the coming months.
Very much.
The conference has now concluded thank you for attending today's presentation.
Yeah.