Q3 2022 MSCI Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the N S. C. I third quarter 2022 earnings conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session, where we will limit participants to one question and one follow up.
With further instructions for you at that time.
This conference call is being recorded.
I would now like to turn the call over to Jeremy you land head of Investor Relations and Treasurer. Please go ahead and begin.
Thank you operator, good day and welcome to the MSCI third quarter 2022 earnings Conference call earlier. This morning, we issued a press release announcing our results for the third quarter of 2022. This press release, along with an earnings presentation. We will reference on this fall as well as a brief quarterly update.
<unk> are available on our website <unk> 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.
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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 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 measure in the earnings Miss.
Cereals, and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months.
Subject to a variety of adjustments and exclusions that we detail in our SEC filings as a result of those adjustments and exclusions. The actual amount of recurring revenues will 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 for.
The 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 Henry Fernandez, our chairman and CEO Baer Pettit, our president and COO and Andy Wichmann, Our Chief Financial Officer.
Finally, I would like to point out that members of the media may be on the call. This morning in a listen only mode.
With that let me now turn the call over to Henry Fernandez Henry.
Thank you Jeremy.
Welcome everyone and thank you for joining us today.
In the third quarter.
MSCI delivered another strong performance.
Despite significant toward memorial and dislocation in financial and commodity markets around the world.
We posted organic recurring subscription run rate growth.
Over 14%.
And adjusted EPS growth of 12, 6%.
We achieved our best third quarter ever.
Net new recurring subscription sales.
Growing at 26%.
In addition, our retention rate was 96, 4%.
By 188 basis points from a year earlier.
In terms of capital management, we repurchased another $235 million worth of <unk> shares through October 24.
For the year as a whole.
Our total share repurchases now stand at approximately $1 $3 billion.
This performance demonstrates the resilience and adaptability over messy is all weather franchise.
There is no question that the global economy faces major headwinds.
These headwinds have created challenges for all companies, including MSCI.
Yes. They have also created a massive opportunity for us to differentiate ourselves and to show to both clients and shareholders.
Our of our all weather franchise.
At moments of extreme volatility and high uncertainty investors become more reliant in high quality data Inc.
Insightful models and relevant research.
They want a clear blueprint for navigating choppy waters.
Msci's tools can help them design one.
And these are solutions take on even greater importance.
During periods of elevated global risk.
In other words.
This is the time when what we do best match.
Matters most.
And we fully intend to demonstrate it.
Our third quarter performance showed continued strength at gross client segment umbrella play.
In index, we delivered our highest subscription run rate growth in a decade.
At 12, 6%.
And the listed futures and options trading volume linked to MSCI indices.
Increased by 21%.
In analytics, we achieved our highest retention rates ever.
At 95, 9%.
We also bolstered subscription run rate growth, excluding foreign exchange of.
Of 97% in climate.
And 35% in ESG <unk> climate.
All of these numbers illustrate how MSCI is capturing key market trends.
As the indexing trend continues beyond market capitalization in this case.
We are meeting investor demand for tools to support more customized and personalized portfolio construction.
And highly specialized outcomes.
Likewise.
As global economic pressures accumulate we are providing the risk analytical tools <unk>.
<unk> needed to stay ahead of the turmoil.
Meanwhile, as ESG becomes increasingly mainstream.
We are helping investors measure the pooled scope of sustainability risks.
Capitalized on sustainability on procurement is.
And achieve sustainability objectives.
For all the political noise.
Controversy around ESG.
The simple fact is that sustainability risks our financial risks.
We will continue to be so.
Investors know this.
In fact, a recent Pwc report found that 81% of institutional investors in the U S.
Along with 84% in Euro.
<unk> plans to increase their allocations to ESG products over the next two years and cool.
The same report projected that ESG related assets under management.
We have reached nearly 34 trillion us dollars globally by 2026.
And 84% increase from 2021.
It is important to underscore that our ESG product line becomes more diverse.
With many different use cases and client types.
Esg's sales growth will naturally fluctuate based on market shifts cyclical conditions.
And regulatory development.
Right now the world is simultaneously witnessing global energy and food crisis.
The largest European war in almost 80 years.
The biggest inflation surge in decades.
Rapidly rising interest rates.
And Covid Lockdowns in China, which continued to affect supply chain.
At the same time.
<unk> remained bullish on ESG long term potential.
If anything the main factors driving ESG growth.
From greater environmental and social awareness to demographic shifts will become even more powerful in the years ahead.
As for climate and specifically there is no turning back in the race to net zero emissions.
Well the global energy crisis has created new obstacles to zika or monetization.
Policymakers continue to embrace Bull Green investment plans.
Here in the U S.
<unk> recently signed the most aggressive climate law in American history.
In Europe .
Government enacted or proposed a wide range of measures that would speed up the low carbon transition.
These include more ambitious de carbonization and clean energy targets.
Policies to maintain or expand nuclear power.
On a five 4 billion U S dollar hydrogen project.
For our part MSCI will continue building, a robust and dynamic climate franchise.
Two climate wins in the third quarter deserve special attention.
Because they demonstrate our emerging as a leader in this area.
First the California state teachers retirement system called <unk>.
Approved a plan to cut their portfolio emissions in half by 2030.
To help them get there.
They propose.
Endorsed a proposal for 20% of their bolek equity assets to drive the MSCI <unk> low carbon target index.
This means <unk> will now have nearly $27 billion allocated to tracking that index.
Second the New Zealand Super Fun announced that he have moved roughly 40%.
I always thought on the investment portfolio.
Dragged the MSCI world.
<unk> berries align index.
The MSCI emerging markets climate Barry's align index.
That 40% translates into 25 billion youll see them donors or about 15 billion U S dollars.
Each win represents a milestone on our climate Germany.
As I have frequently said.
<unk> aspires to be the number one provider of climate solutions to the global finance and investment industries.
We recently published and then zero guy or asset owners outlining concrete steps for Decarbonising portfolios.
We also hosted White house National climate on Bison.
<unk> safety.
At our New York offices during climate week.
That same week, we joined with the Glasgow Financial Alliance for net zero or GE fund to help launch a proposed climate data public utility.
All of this has helped them in Ci generate strong momentum during the roadmap to cop 27 in Sharm El Sheikh Egypt.
In climate.
S G.
Analytics.
Index and all that area.
<unk> continues to benefit from our mission critical solutions.
Our diversified client base.
Our commitment to financial discipline.
Right now many companies are retrenching and turning inward.
MSCI is doing quite the opposite.
Even as we reallocate resources.
We continue investing in key differentiators, using our triple Crown investment framework.
More than that we continue to attract talent.
So MBNA opportunities.
<unk> down on clients and precision and <unk> are competitive advantages.
All of these will help us emerge even stronger when the current market turmoil subsides.
And with that let me turn the call over to bear bear.
Thank you Henry and greetings everyone.
As Henry discussed the World is experiencing historic levels of economic financial and geopolitical turmoil simultaneously.
Against this backdrop, we see not only big market and foreign exchange swings, but also geographic factors sector and asset rotation.
At MSCI are highly diversified product offerings continue to serve us well.
For example, the benefits of our non U S. Dollar expenses have more than offset FX related revenue headwinds.
Likewise, the strong performance of our growing index derivatives franchise has helped offset some of the pressures related to AUM revenues.
As we noted last quarter MSCI has activated our downturn playbook.
Which means we continue investing in key differentiators, while tightening expenses and less time sensitive areas.
This has allowed us to generate attractive financial returns and position ourselves to capitalize on opportunities when they emerge.
All of that represents the central context for understanding both our Q3 performance and our strategic priorities moving forward.
Henri mentioned, a few areas, where MSCI delivered especially strong results, including index analytics and climate.
In my remarks, I would like to explore each of these areas in greater depth.
In index, MSCI posted 12% subscription and recurring revenue growth.
Our highest retention rate in more than three years, and our 35th consecutive quarter of double digit subscription run rate growth.
We also achieved market cap subscription run rate growth of 11%.
A key driver of our third quarter Index performance was custom indexes.
MSCI has focused heavily on custom indexes in response to a broader industry three trends.
More and more investors favor differentiated systematic outcome oriented strategies for which they need to design custom index.
Last week for example, we announced the launch of institutional client designed index.
Which will make it easier for asset owners to design customized indexes underpinning their investment strategies.
Turning now to our analytics business.
In the third quarter analytics posted recurring net new sales growth of 73% with strong numbers across products and client segments.
In particular analytics achieved robust growth with risk and equity models on the product side and with banks and hedge funds on the client side.
At the regional level and 11 index delivered its best run rate growth in the Americas in more than five years.
With analytics as with index.
MSCI solutions help clients distill and interpret a huge amount of complex data quickly and efficiently.
Last month, we launched a new analytics module known as risk insights, which automates. Many previously burdensome task and processes, thereby giving clients more time to focus on their analysis.
Risk insights will make it easier for investors to transform raw data into meaningful usable information with an integrated view of performance and risk we.
We consider it a timely launch given the high levels of market volatility and uncertainty.
Finally, just a few comments about climate and ESG.
As Henry mentioned, we posted subscription run rate growth, excluding FX of 97% in climate.
While also achieving a 97, 6% retention rate.
To put that last number in perspective.
Represented a 456 basis point increase over our climate retention rate a year earlier.
The largest portion of our run rate climate metrics continues to grow at over 60%.
With exceptional growth in newer areas for example, MSCI delivered over a 125% growth from climate value at risk supported by our recently launched total portfolio footprint installation.
In addition.
Our ESG retention rate increased by 66 basis points to reach 97% overall.
In September we launched the Bloomberg MSCI, China ESG index.
Which consists of nine separate ESG index.
Collectively they represent the first ever Bloomberg MSCI index, we should track both the RMB denominated bond market and the U S dollar denominated Chinese bond market, while incorporating ESG and socially responsible investment considerations.
Last month, we expanded our index offerings by launching MSCI fixed income climate transition corporate bond index.
Whose standards exceed the minimum requirements of the European Union's climate transition benchmark.
We continue to see strong growth with our real asset and analytics climate solutions.
Run rate by approximately 250% year over year.
While our climate Index solutions grew approximately 80%.
We hope to drive additional climate progress through our recent minority investment in <unk> Global a British environmental consultancy.
Combining <unk> proprietary software with MSCI climate models and indexes, we will further embed climate risk considerations in the real asset investment process.
There was a common theme that ties together all these various products and partnerships simply.
Simply put.
<unk> is constantly finding new ways to meet the needs and expectations of global investors.
We have proven our ability to adapt innovate and succeed even in the most challenging circumstance.
And with that I'll turn the call over to Andy Andy.
Thanks Bear and hi, everyone.
The strong secular demand for our offerings in the resilient nature of our business model fueled impressive results across the business.
In addition to the 14, 2% organic subscription run rate growth. This quarter, we experienced double digit subscription run rate growth, excluding FX across all geographic regions as well as across all major client segments.
We recorded the highest third quarter ever for new recurring in net new recurring subscription sales, increasing 8% and 24% year over year, respectively. Excluding the acquisition of RCA.
Within index on top of the strength, we see within our non market cap modules. We continue to see a remarkable resilience within our market cap index modules, which delivered 11% subscription run rate growth.
This has been fueled in large part by tremendous demand within higher growth client segments.
Across the index subscription franchise, we saw 18% 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 revenues experienced declines in the quarter with ETF and non ETF passive fees impacted by declines in global market levels somewhat offset by continued level of elevated volumes in futures and options linked to our indexes.
Etfs linked to MSCI indexes has experienced marginal net cash outflows in the quarter.
Bolting from outflows and broad based E M exposure funds in all country products to areas, where the broader ETF market was muted however.
However, we continue to see inflows in high market share capture of flows into funds linked to our equity ESG and climate indexes, which captured $9 5 billion of the $13 billion of total industry flows.
Additionally, fixed income ESG and climate Etfs linked to indexes developed with partners and to our proprietary indexes witness nearly $7 billion of inflows during the quarter.
Revenue from listed futures and options linked to MSCI indexes continued to provide a meaningful offset to AUM declines growing 16% year over year.
This growth has been fueled by elevated volumes that were in line with the last couple of quarters.
And analytics the strong demand for our tools in the current environment helped drive an 8% growth in subscription run rate excluding FX.
We had 11% growth in recurring subscription sales, while also experiencing a 35% decline in cancels and the highest retention rate of all time in this segment.
Recurring net new was up 73% year over year within the segment. We continue to see strong momentum in front office equity and fixed income portfolio management tools with strength in hedge funds and banks, helping to drive that growth. Additionally, analytics continued to gain traction in our climate solutions, including climate Lab enterprise.
In ESG and climate, we delivered subscription run rate growth of 42% excluding FX.
Roughly one third of recurring subscription sales were generated from our climate solutions in the climate run rate across all segments reached $65 million, which is an increase of 89% from a year ago.
Within our ESG and climate segment emerging client areas, including wealth managers hedge funds broker dealers incorporates collectively you had run rate growth of more than 60%.
We did see a lower level of new recurring subscription sales in the third quarter.
On top of changes in the broader market and economic environment, which is likely impacting purchasing decisions in some areas. There are many layers of growth in our ESG and climate franchise across a wide range of solutions and use cases, which results in a dynamic growth rate that's impacted by the pace of new regulations client segment dynamics asset class shifts.
And geographic factors shifts in these layers of growth will drive variations in overall segment growth rate. However, we continue to believe in a significant long term secular opportunities and continued momentum.
Within real assets, the organic subscription run rate growth was 12%, combining our legacy real estate business and RCA.
Given the all weather dynamics of our financial model and our ability to proactively manage the expense base, we were able to drive adjusted EPS growth of 12, 6%.
During the quarter, we continued to utilize our downturn playbook by further flexing our expense base to mitigate the impacts of the AUM based headwinds.
We are prioritizing key investment areas to address the most critical needs in this challenging environment, while meaningfully moderating the pace of hires and less critical and time sensitive areas.
Additionally, we continue to flex certain non compensation expenses in areas like professional fees and we had a slightly lower bonus accrual.
In the quarter revenue had a $12 million FX headwind from an appreciating U S. Dollar this was more than offset by a $13 million FX benefit, resulting from our global expense footprint.
Additionally, our proactive capital management contributed 15 cents of the adjusted EPS growth as we've now repurchased approximately one $3 billion of our shares or approximately $2 7 million shares year to date.
We ended the quarter with a cash balance of $867 million of which approximately 600 million is readily available we continue to be well positioned to opportunistically pursue bolt on M&A and share repurchases against this volatile market backdrop.
Lastly, I would like to turn to our updated guidance, which we published earlier this morning.
While we expect continued volatility our guidance assumes generally flat market levels throughout the balance of the year.
As mentioned earlier, we have continued to utilize more levers in our downturn playbook with a focus on moderating our pace of expense growth.
Our downturn actions are reflected in our decreased operating and adjusted EBITDA expense guidance.
It's worth noting that we remain consistent in our approach 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 in the global operating environment.
We have modestly increased our range for depreciation and amortization expense, mainly reflecting a continued higher level of capitalized software development cost across products.
Lastly, we have increased our net cash provided by operating activities and free cash flow guidance, which reflects the lower than originally projected tax payments and cash expenses in the second half of the year as well as resiliency and cash collections.
We have narrowed our tax guidance, which continues to reflect an expectation of a higher rate in Q4 in line with what we saw in Q3.
Across the business, we continue to see strong levels of demand for our products, which is underscoring the mission critical nature of our tools.
We're heavily focused on both driving the attractive runway of long term growth, while protecting the financial model of our all weather franchise and with that operator. Please open the line for questions.
Thank you we will now begin our question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Ask that you please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble all of us.
And the first question is from Manav Patnaik with Barclays. Please go ahead.
Thank you good morning.
Talk about ESG.
Can you just what was the climate.
Our run rate in the quarter and if you could just talk about the different teams.
So if we assume kind of a go to some of the trends you're seeing there.
Sure sure Hi, Manav, Yeah, we did throw in a number of climate metrics out during the call. So it's probably helpful to summarize them here.
I'll start at the top if we look across MSCI, so across all product lines, we had $65 million of climate run rate.
That was growing at 89% year over year, if we look at just the subscription portion of the climate run rate that was $46 million.
And that was growing at 92% so that excluded.
19 between 19 and $20 million of ABF revenue from our index segment. If we look at the climate component in our ESG and climate segment, that's $37 million and that's growing at 97% ex FX.
Henry and bear alluded to in their prepared remarks.
So climate is becoming a more meaningful component of the overall business.
It's clearly contributing a meaningful amount to our to the overall growth of the segment and the overall company and we continue to be quite bullish on the prospects more broadly.
Cross both climate N D S G.
Got it and then and then Andy in terms of you know obviously, our retention rates are high subscription growth is good.
No.
If we enter an uncertain environment. So just historically, what time lag or when do you start seeing the first signs of some of the pressure on those on those metrics.
Yeah.
I think if you you highlighted and we've seen the retention rates do underscore. The fact that our tools are very mission critical to our clients and they are in the areas of long term secular growth, which is clearly driving some resiliency.
And you can see that then in not only the overall retention rate, but the fact that it's close to record levels across all areas. Although as you pointed out and I've mentioned in the past.
In past downturns, when we've seen a.
A few I'll say to several quarters of sustained market pullbacks, we do tend to see a pick up in client events like fund closures desk closures restructurings mergers so quite events like that tend to pick up and our largest source of cancels is client events and so.
We are proceeding with caution here.
We're definitely excited about the high retention rates, but given past performance of what we've seen in past downturns, we could see a pickup in cancellations if this environment persists.
Got it thank you.
Thank you and the next question will come from Alex Kramm from UBS. Please go ahead.
Sorry about that looks like Alexandria, just disconnected and he was being promoted into the queue. We will move to the next question and that is from Ashish <unk> with RBC capital markets. Please go ahead.
Thanks for taking my question.
We saw some pretty good improvement on the analytic strength frankly, as well and so I was just wondering if you could talk about what youre seeing from a deal pipeline perspective have you seen any change that any elongation in the sales cycle.
Any color on the momentum in the business. Thanks.
Yes. Thanks for the question look I don't think we've seen anything dramatically different to be honest I think this is consistent with the messaging we've had.
For for some time now so I think our level of execution is strong.
As Andy mentioned.
The retention rate shows the criticality of our products. So so I think we're really in a mindset of letting the numbers speak for themselves and continuing to execute with our strategy.
And hopefully we will keep moving things in this direction.
I don't think theres been any really material changes in the outlook. It's more that we're doing a good job, we're enhancing our products for servicing our clients and I think we're getting the results for that.
That's very helpful color and maybe just a quick follow up on the private asset side again pretty strong momentum there as well I was wondering if you could talk about the RCA now that that acquisition has anniversaried what have you seen on that front and what I was sure and for private assets.
Yes, absolutely. So look we are definitely on plan with the integration.
And we're pleased with how that's going and we're we're definitely more convinced of the strategic logic of the acquisition than ever as you say the topline is growing attractively.
Clearly the environment.
Our real estate is going to be interesting in quotes across the world.
And there will be definitely be different types of challenges depending on the segment.
Country et cetera, but I think in that environment.
<unk> in keeping with the comments we've made across the board our tools are very necessary for people to understand risk and performance of what's happening in the market. So I think we're we're in we're in a good situation, we're executing well and the only slight caution there is just the environment, which could.
Get a little bit jittery.
Thanks, again, and congrats on southern business.
Okay.
Thank you and the next question will move back to Alex Kramm with UBS. Please go ahead.
Yeah, Hey, Hey, guys. Thanks, sorry, My my phone turned off in the middle of a question grades anyways sorry. If this was asked already since I was off but ER on the ESG and climate sales you, you're obviously proactively address that and I understand it's a it can be lumpy and obviously you had tough comps too but.
Can you actually talk around about what areas maybe saw outsized weakness in particular this this quarter and why and I know, it's a it was a tough quarter in particular at the end of the quarter with market selling off. So just wondering if there's anything that in particular slips that may may pick up again in the fourth quarter. So any color there would be helpful. Thanks.
Yes, sure let me, let me try to provide some perspective and I'll give a little bit of color on what we saw in the quarter I do want to start by underscoring that we remain very bullish on the long term potential for both climate and ESG.
The factors that have been driving the growth will remain powerful in the years ahead.
As you can tell by the climate growth rates that that were mentioned in the prepared remarks, and I'd I underscored to an earlier question. We continue to see very strong growth from climate and expect climate to be a larger and larger contributor to the overall growth of this segment.
Now within ESG, we did have softer sales in the quarter relative to recent quarters.
Stickley, there probably is some cyclical impact from the environment and the market backdrop.
We saw some deals taking longer to close.
And we did see fewer large deals in the Q3 figures.
We did see slightly higher declines in sales outside the U S and are in EMEA and APAC.
Although the run rate growth continues to be quite high across all regions. I think is as we touched on in the prepared remarks I do want to underscore that there are so many layers and dimensions to growth in ESG and climate, which I know Alex you know, but we've got a wide range of solutions, serving climate objectives, ESG objectives, as well as a wide range of users and.
Use cases, and so the result is going to be that the growth rate will fluctuate up and down.
Based on pace of new regulations client segment dynamics asset class shifts.
Various geographic factors as well as the market and economic environment.
Do you want to underscore that there have not been any impacts from the U S. Political rhetoric, Tom that's gotten a lot of attention recently I think generally the focus on ESG and climate remains front and center to investors globally.
That's helpful. And then just very quick follow up staying actually on the ESG and climate topic, but.
If my math is right since you're not providing some incremental data here I think the climate in ESG portion of analytics of $7 million. This quarter I think a very nice increase that you can you just remind us exactly whats getting picked up an analytics now and.
Any way to think about the Tam.
Tam for that or how penetrated you are again, it's a very small number but clearly you have a pretty diverse analytics customer base. I was just wondering how we should be thinking about those opportunities in particular in that segment. Thanks.
Yeah, Yeah, and I would say like in everything we do our capabilities across segments are symbiotic and synergistic with them with the other segments and so within analytics, we not only benefit from the ESG and climate franchise that we've built but we're also helping to fuel it and so within the SEC.
I meant.
Within climate in particular, the main the main offering that we have is our climate lab enterprise, which we've released very recently I believe it was late last year.
And that has grown.
An attractive growth rate, although off a very small base.
But that is feeding off the broader portfolio and risk management solutions that we offer where when we have a clients portfolio.
We can now provide very granular climate insights to them about the portfolio will help them manage climate risk.
More systematically across the portfolio. We also have within the analytic segment the broader range of reporting solution. So we can help clients with things.
Things like there are T C F D.
Risk sensitivities that they will do as.
As well as help with various other reporting requirements analytics does it have a very powerful.
Reporting function and capability, which we've provided to clients across broader risk.
Insights for for quite some time, we're leveraging that to generate a climate risk reports as well as broader ESG risk reports and broader ESG reports and so those are probably the main areas I would highlight within analytics.
Listen it's still to your point about Tam, we're still very early in that journey, our penetration is relatively small.
Extremely small, but if we extrapolate across.
The entire analytics client base it can be a massive opportunity. The other thing that's exciting is it really opens up some of the client segments and parts of clients that we haven't served.
With existing analytic solution. So it is helping us with insurance companies, it's helping us with banks and bank regulation.
And so there's some big wall with some big markets that we're very excited about on the climate front within analytics.
Super helpful. Thanks, guys.
And the next question will be from Toni Kaplan from Morgan Stanley . Please go ahead.
Thanks, so much.
You guys have done a great job on expenses and I know you called out maybe using less professional fees or.
You know being able to flex our bonus accrual and also sort of the less time since it is investments.
I guess I think of you guys are really efficient lean organization I know, you're not going to cut back on the growth investments that are really meaningful and so like I guess, how much room is there on the expense side within that the downturn playbook that yes.
Yeah, It's a fair question, Tony and it's something that we're spending every day, you're thinking about and proactively managing the business I do want to underscore just to provide some context on the the directional moves on the downturn playbook them. Some of the shifts that have happened since our last quarterly call. So I think during our.
Our Q2 earnings call. We had mentioned that the guidance expense guidance was based on the premise of flat to slightly increasing markets.
During Q3, we had a downward impact from market depreciation of over $100 billion on Etfs AUM.
And so the market has come down below what what we projected or at least what our guidance was based on during the Q2 call.
And as a result, we have begun to take further actions in the downturn playbook.
And it's really mostly in the same areas that we were focused on previously just to a larger degree. So worked further slowing the pace of hires in a broader set of areas in particular, the run the business activities areas like corporate functions.
We are continuing to as you mentioned prioritize hires and and really our key growth areas in triple Crown investment areas like ESG and index custom index capabilities or fixed income content and capabilities.
Key data and technology enhancements.
Particularly in areas like ESG and climate data.
As well as the broader technological infrastructure and on the cloud and then we continue to preserve investments in key areas within our go to market. So our sales and client service organization.
But we are clamping down harder.
And to run the business areas and even in selected areas and in the broader franchise.
You alluded to on the non comp side, we are squeezing further on professional fees areas like teeny and recruiting which actually comes down naturally with with the pace of hiring.
Our comp accrual is lower we.
We do have further levers to go to hopefully we don't have to but clearly based on the comments I. Just made there are areas, where we can stop hiring more dramatically we could cut into the investment portfolio things like the comp accrual naturally adjust with the direction of the business and so there are additional levers out there if we need to go there.
But hopefully we don't don't need to generally we are being cautious on our outlook is cautious which you can tell by by our comments and our guidance here.
Let me add to that.
If you don't mind, let me add to that the <unk> and.
In addition to all the things that Andy said.
One of the things that we're obsessed with it.
Protecting as much as we can.
The new investment plan.
And therefore.
Therefore, what we're doing is squeezing in.
Reviewing.
<unk> comment again on the run the business the normal run the business activities.
The lower expenses.
And protect profitability.
Protect the investment plans. So if you look back at.
Where to look back on our budget.
From the end of last year to the new investments that we were planning to make in 2022.
That total investment plan is only off by a couple million dollars.
Which is an incredible achievement in the context of this difficult environment that we've been able to protect the vast majority of.
That investment plan, we have surely have made some tweaks about re prioritizing that total investment plan, but in general we haven't gone back and we.
We believe strongly that in down markets.
That's where our company has slowed down their long term growth because they cut back easily on their investment plans rather than doing the hard work of cutting back on the wrong.
<unk> run the business.
Davidson.
That makes lot of sense I wanted to ask my follow up on pricing how is it running this year and what are your plans for 'twenty three are you seeing trade up.
Client watching spend really closely just given the environment and I imagine a lot of those conversations.
Place, maybe you know right now so just just wanted to understand the outlook for pricing for next year.
Yeah, Doug I'll talk generally not specific to any year a point in time, but I would say in an environment like this where cost and prices are going up we are generally increasing prices more than we have in the recent past.
Given that our tools are really mission critical to our clients, we do have some pricing power.
In many parts of the business, although as we've mentioned in the past.
We are very focused on the long term relationships, we have with our clients and recognize that most of our growth is going to come from our existing clients. So we are heavily focused on adding value in connection with any price increases that we are rolling out.
And so our approach to price increases more generally is factoring in the value that we're adding to existing services that we're delivering to clients. It does factor in our broader cost structure, the broader cost environment, the broader pricing environment as well as client health and client usage. So we are being measured.
And being mindful of the health of our clients, but I'd say generally across products, we are rolling out higher price increases.
Then we have been in recent years and as a result, you've probably seen some impact of that in the Q3 recurring sales relative to a year ago, and we expect probably similar benefits in the next couple of quarters.
Perfect. Thanks.
The next question is from Owen Lau from Oppenheimer. Please go ahead.
Good morning, and thank you for taking my question.
If the market we call first in the fourth quarter, how do you think about your bonus and other non com expands which you kind of give back some of that boneless back to your employees or you would stick with your downturn playbook, because you try to be more conservative. Thank you.
Yeah, and I don't want to be too prescriptive here, because it really depends on the facts and circumstances on the bonus point I would underscore the large majority of the bonus accrual is formulaic and so it depends on the performance of the business and so to the extent that business performance increases.
In particular, if asset based fees run up significantly that will just trickle through how we accrue our bonus and our bonuses are paid out which is tied to the key financial metrics of the business and so the bonus accrual would likely go up.
Across broader levers I'm listen it depends on the exact situation, but non cap comp areas. In particular, we can flex those pretty quickly up and down.
Where are things like professional fees.
And other non comp areas can flex up a little bit in pretty short order the comp lever. It does take a little bit more time to trickle through.
Start to have an impact and that depends on pace of hiring new hires et cetera, but I'd say, the bonus and and big portions of the non comp levers that we have Ken flex in pretty short order.
Got it that's helpful. So I think all of.
You mentioned climate was strong enough.
In this quarter, and then options and futures trading volume was also a strong could you. Please talk about do you see any other product that you see so a pretty strong demand in the quarter. Thanks.
Yeah. So.
Other area that I would highlight and bear mentioned this is analytics. So I think there's there's been a component of the strength. We saw in analytic sales that's attributable to focus on our risk models and broader risk management tools in these environments.
Which.
Are critical to helping.
Helping our clients navigate the market uncertainty a lot of that asset class geographic sector shifts and rotations that are taking place.
So that would be another area that I would highlight here.
I'd also highlight that the extreme resilience of our index subscription franchise as well and I think there's just such a plethora of use cases across many different users and client segments. There continues to be strong pockets of demand.
And in use cases for those products, particularly in areas like over the counter derivatives.
That can be very useful to our clients in these types of environments.
Got it thank you very much.
The next question is from Phaseout Al Wang from Deutsche Bank. Please go ahead.
Yes, hi, good morning.
I wanted to just drill down a little bit more on climate and wanted to ask if you're envisioneering from here sort of in.
Section in terms of the size of the business given the broad based focus around climate like are there.
It is the regulatory environment, such that you know again, we may see that type of an inflection and media as you answer that talk to us about your specific competitive advantages are within climate I recognize that you have many different areas, but I'm curious where you think you know best.
<unk> positioned.
Thanks, Thanks for that question.
As we have.
Previously said.
Climate change is that complete the existential threat to the planet.
And we'll be we're witnessing the huge increase in physical risks and.
Heat waves and blogs and and.
And fires in Europe , <unk> and all of that.
And therefore this is going to be at.
Clear and present danger for portfolios.
Of all types around the world.
Because clearly the portfolios.
Are made up of of equity.
And fixed income property and infrastructure and all of that will be affected by both the physical risks in the transition risks associated with climate change. So we're in the very very early stages of.
The demand for our tools for portfolio managers on portfolio allocators to.
To decarbonize their portfolio.
Their assets from repricing of assets higher cost of capital and reallocation of capital So.
We think that you know.
This $64 million or so across all of our areas. It.
We will continue to increase rapidly.
Over the years to come and we're positioning ourselves.
Not only in terms of the underlying climate data. So just carbon emission estimates for bond insurers.
Private companies and real estate and oil exposure and all of that but also the models.
Our risk models.
The implied temperature rise models to try to help people projected to the future once the carbonization bathroom there of the assets in their portfolios are.
We are we're very bullish on this total portfolio a footprint in process basically what we do is we take the total portfolio of asset manager of our daughter.
And.
And tell them what the recurring footprint.
Carbon emissions of the entire portfolio of scope, one and scope two and three and what the projectors that footprint will be in the next three to five years for five to 10 years. So this is it's going to be an extremely high demand I think that the claim you know more.
And our book is more in the Ukraine has highlighted even more so.
Energy security and the dependence on energy from other sources and even do a short term basis have had enormous increases in wholesale fuel prices.
Every country is thinking about their energy.
And then on the ECS.
The way to achieve energy independence is by wind and solar that is in your own land in your own country.
And the like so I think we're going to see tremendous so yes. There is an inflection point that is happening last year. We've got 26. This year with 27, despite the clearly the balancing act between fossil fuels and renewable energy.
Great. Thank you so much for that and then just a follow up maybe for Andy on capital allocation you know so far it seems sort of share buybacks have been the priority I'm curious how you think about that in a in a rising rate environment and how much of a focus is is M&A from here.
Yeah.
Yeah, I would say generally no major changes to our approach we continue to be highly focused on.
But with repurchases and opportunistic bolt on M. P N a N and our key strategic growth areas for us.
To your point about the the changing funding markets and cost of capital I would say that we.
Or are watching the markets closely being very mindful of what that means for valuation and trying to be quite opportunistic about where we take advantage on the repurchase front and acquisition front I'd say, given where our gross leverage is and where funding costs are where we're probably not in a rush to raise additional debt.
But we do think we've got a good amount of cash and we'll continue to build cash to continue to be opportunistic here on both fronts and we think there are opportunities to get.
Either bolt on M P N a or repurchases at attractive long term values.
Got it thank you so much.
The next question will be from Craig Huber from Huber Research partners. Please go ahead.
Yes, hi in the past you guys have talk to how you thought your climate run rate over time, but exceed the rest of of ESG a run rate I wanted to ask if you still believe that and that's a prior question I wanted to hear a little bit further.
The mission critical tools and data you have on the climate side that that make you guys standout the competitors do not have the fuel that growth your climate area.
No great question Gregg.
Over a 10 year horizon or so we believe that.
That climate tools per se.
No just climate in the context of ESG, but I'm talking about climate tool separately from what's embedded in the ESG offering.
We will grow at a very large clip on could potentially.
ESG at that time.
<unk> spoken about long term projections here.
That can vary year to year.
And is.
As you know, it's hard to say where were they in that but the reason we say that.
Is to highlight.
The climate tool opportunities when the climate tool the climate solutions.
Hi.
That's because we were bearing it against a fairly rapid growth rate on ESG and that will continue and we are saying.
<unk> per se would even exceed that.
Incredible business and we have an ESG.
<unk> competitive advantages we have is that remember the mission of MSCI is to provide mission critical tools for for the investment and financing.
So a lot of our competitors are focused on developing climate data for example.
While our competitors are our only focus on physical risks. Some other ones are focuses on translation risk. Some of them are only focus on the real estate industry. Some of them are focusing on corporate bonds. What you will find an MSCI is a holistic solution to your entire portfolio from one source.
One source of data one source of models one source of the total portfolio, where there is private equity and private credit, which we're doing an incredible amount of work on climate.
<unk> emissions.
Emissions and things like that so I think the benefit and you can have that in an index you could have that in our model.
You can have that.
Individual securities.
So Ted you phenomenon across different asset classes and the like so I think this is.
Literally in keeping to the way, we do and manage them in Ci.
And then and do you have a quick housekeeping question.
What percent of your costs right now are outside the U S and what percent of those are built in U S dollars and follow up question Real quick is what are you. What is your organic ex currency cost growth in the third quarter year over year. Please. Thank you.
Sure. So the yeah and it's a good point just taking a step back we have this nice natural P&L hedge related to FX. So on the revenue side I believe it's around 11 or 12%.
Of the revenue base is in non USD currencies.
It's about 45% of the cost base is in nine USD currencies.
And just given the relative sizes of those those pieces of the revenue base and our cost base as well as the mix of currencies within them. They tend to move in parallel and so we saw in the current quarter.
On the expense side, we had a 13 million a close to a $13 million benefit from the appreciating U S dollar relative to a year ago that more than offset the $12 million headwind, we had on the revenue side and so it's a good example, and you've seen that in recent quarters, where we do have this natural P&L hedge.
Any impact from.
Currency fluctuations on the top line tends to be dampened or offset almost completely by movement on the expense line.
Great. Thanks, guys.
Thank you. The next question is from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
The analytics business posted a new high in retention rates can you unpack the drivers behind the improvement and discuss how high retention rates can go.
So yeah I'd say we are.
Encouraged really encouraged by the performance in our retention rate in analytics.
I think as I alluded to earlier, there's probably been some benefit from a heightened focus on risk and risk tools in this environment, but we're also seeing success in many of the areas, where we've had a strategic focus and so we've seen strength in our front office equity and fixed income risk models and broader portfolio management tool.
<unk>.
We've been benefiting from our strong models really best in class models and content enhancements that we've been making as well as the broader improved functionality and tech enabled access that we've been investing in.
And then we've had success on the enterprise risk side through the partnerships that we've developed.
Just to deliver a broader value proposition to our clients and as we talked about earlier, while it's still early days, we're seeing some real momentum in the climate lab enterprise offering.
And so we're encouraged although I would say we are cautious and we're definitely not ready to declare victory.
Analytics will likely continue to experience some lumpiness.
In in not only its growth, but I'd say cancellations within analytics, so we're cautious, but but very much encouraged analytics is not only a key strategic capability for us as a firm, but it's also a critical financial area for us and this performance is encouraging but also you can see in the margin.
The profitability growth, it's been a great source of operating leverage that can help fuel investments in other parts of the company as well.
Got it that's helpful.
And then you raised your free cash flow guidance for 2022 can you walk through the moving pieces. There if that's being driven primarily by lower expenses or if theyre also working capital and Capex benefits.
Yeah I mentioned this in the prepared remarks, but it's mainly driven by a.
A few factors, we had a larger than projected.
Benefit from lower tax payments in the second half of the year.
We've also seen as you know a decrease in cash expenses.
And then we've had some higher yields on cash and we've also seen some resiliency and in collections.
Those factors have helped to offset some of the revenue headwinds.
That have pressured a bit on the collection side and so that was the real essence behind the increase in the free cash flow guidance.
I would say like our profitability more generally our downturn actions also help support our free cash flows and free cash flow growth and.
And free cash flow was a very important metric that we are we're very focused intensely on.
Great Thanks for confirming.
Yeah.
The next question is from Gregory Simpson with BNP parable. Please go ahead.
Hi, Good morning. Thank you for taking my questions. The first one is in analytic see EBITDA margin was 47% this quarter and 44% last quarter and it was more in the first he has historically so could you share any colors on the drivers of margin expansion and whether this level of profitability is sustainable in the segment.
Yeah.
Several factors that have been driving the margin expansion in analytics and and I think we've seen similar dynamics and particularly the last quarter.
I would note that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our risk insights and climate lab enterprise and.
Broader enhancements to our to our analytic capabilities.
I would say that FX has a big impact just given the size of the the analytics cost base.
The non USD expense base that I alluded to in a prior question impacts analytics heavily so the.
The appreciating U S. Dollar has helped drive the analytics expenses are down and then also our downturn actions have impacted the analytics expense base and so the confluence of all those factors have driven.
This really very modest.
Spence growth in analytics and in our higher margin within the segment.
Thank you and then just a follow up can you share some thoughts on the potential impacts on MSCI. If we started to see signs of head count reductions across the asset management industry and.
How much of the subscriptions, it's hard to use our numbers.
Two more enterprise deals with we've been talking to them.
Thank you.
Yeah.
Most of our I'd say most of our agreements are not tied to users per se. They tend to be modules that are licensed and it varies very much on product. They they tend to be either modules license to office location for use of specific products.
There can be Max users that are allowed to use that license, but they're not tied to seats per se. We also do have some as youre alluding to more enterprise type licensing arrangements and so seat count is not something that impacts us necessarily directly although as I alluded to in my answer to it earlier question.
When you start to have more client actions, including investment firms downsizing closing funds closing desks consolidating that will generally click caused say a increase in cancellations and a drop in our retention rate than we've seen those.
Those sorts of impacts us is downturns.
Maintained for several quarters in the past so we are proceeding cautiously.
Although we haven't seen it to this point.
Great. Thank you.
The next question is from Russell Quelch from Redburn. Please go ahead.
Yeah.
Your line is open. Please proceed with your question.
Sorry, my headset sort of given up so I'll switch to the phone hopefully you can hear me.
Yeah.
Thanks, very much so given the 10% quarter on quarter fall in average AUM and ETF tracking MSCI indices in the quarter, but just wanted to buy it at the period end basis point fee step up in the quarter I'm, just trying to understand the mechanics there.
Yeah, maybe if you're asking about the run rate basis points that were were quite resilient. So actually the run rate basis points have remained constant at.
2.52, Bips I'd say, there were just very small mix impacts and fee impacts, which resulted in pretty strong resiliency in our fee, which we've seen in recent quarters.
And so it's it's something that is encouraging to us.
But I wouldn't I wouldn't flag anything two notable around it.
Yeah I was just wondering if it should step up when the U N steps down that was more of the question I see yeah, yeah well.
And we've got a wide range of products out there that are licensed to our indexes under a wide range of agreements with various providers.
There was to your point there was some small negative mix impacts on the fee and some very small positive impacts from fee and those fee impacts were driven by certain products dropping into.
Lower bands, where we receive a higher fee. So there was some embedded impact from that in the fee, but it wasn't significant.
I wouldn't overplay that.
Okay. Okay that makes sense and then just as a follow up then.
Are you seeing increased competition in the custom index space and if so does that change your expectations for and for growth and investment in that business area.
Look I don't think we're seeing increased competition I think it's been a competitive market.
It's hard to judge precisely but for sure we feel our competitive edge is rising we're putting significant investments into it and I think this is bose. It's on two levels, it's on strategic client relationships.
Of the kind that witness those sort of big index wins in climate that Henri alluded to in his prepared remarks.
It's understanding the clients' investment process and it's also the methodology and the scale and the investment process and finally, it's the technology platform behind that so I think it's all of those areas on a relative basis, we're building competitive strength, but it's a very competitive market. So.
But I think we're really focused on it.
Yeah.
Okay. Good stuff, thanks very much.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Henry Fernandez for any closing remarks.
Well, thank you for joining us today.
And your continued support.
As you can see from the results this quarter in our prepared remarks, and the answers to your questions.
Our all weather franchise continued to perform well.
Right very significantly difficult operating environment.
We are truly remain excited about the very large opportunities in front of us.
And we will continue to invest significantly in those areas.
Significant and strategic growth.
Having said that given the environment, we do remain cautious.
And but it is in times like this which msci's shines.
We intend to continue to do so.
We look forward to a lot of your questions when they come in days or weeks or months and please don't hesitate to reach out to our team with any thoughts or questions. You have thank you very much have a great day.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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