Q4 2022 MSCI Inc Earnings Call
Good day, ladies and gentlemen.
Welcome to the MSCI fourth quarter 2022 earnings conference call.
As a reminder, this call is being recorded at.
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.
Well will have further instructions for you at that time on how to July .
I would like to know I'm, sorry, I would like to now turn the call over to Jeremy you Lange head of Investor Relations and Treasurer.
You may now begin.
Thank you operator, good day and welcome to the MSCI fourth quarter 2022 earnings Conference call earlier. This morning, we issued a press release announcing our results for the fourth quarter of 2022. This press release, along with an earnings presentation will be referenced on this fall.
As well as a brief quarterly update are available on our website MSCI dot com under the Investor Relations tab.
We remind you that this call contains forward looking statements you are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties. Please see the risk factors 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 pro.
<unk> insight into our core operating performance, you'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.
We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our R&D team in 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 exclusion the actual amount of recurring revenues, we will realize over the following 12 months to defer from run rate. We therefore caution you not to place undue reliance on run rate estimate or forecast recurring 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 CFO 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.
Yeah.
Thank you Jeremy.
Welcome everyone.
And thank you for joining us today.
In the face of significant global headwinds.
MSCI delivered strong fourth quarter results to cap off another successful year.
I'm on our fourth quarter highlights.
We posted organic revenue growth of 7%.
Including organic subscription revenue growth of 16%.
Despite a reduction in our a U M link rabbit.
This growth.
Bind with our intense focus on expense management.
Management.
Rob I, just did EPS growth of 30%.
In terms of capital management, we repurchased more than $70 billion worth of shares.
You'll also note that our board of directors has approved increasing the dividend by 10% to $1.38 per share.
For 2022 as a whole.
We posted organic revenue growth of 9%.
Including organic subscription revenue growth of 15%.
We also achieved adjusted EPS growth of 15%.
And our share repurchases totaled nearly $1.3 billion.
We delivered these results despite historic levels of market volatility.
Which makes us cautiously optimistic about the year ahead.
M. A C I called Daniels to benefit from our diversity by all weather franchise.
Which allows us to thrive in all and Barb.
In 2020 to over 97% of our revenue came from three recurring revenue streams.
Including recurring subscription.
Which was about 74% of the total.
Recurring a U M link rabbit.
Which was 21%.
And recurrent listed futures and options grants actual base right.
Which was about 3%.
While the external environment created.
And more variability for a U N.
Our subscription and transaction based the room, but its business yes.
Perform well through difficult operating conditions.
We have once again.
It was great in the balance.
Adaptability and resilience of our franchise.
Which has enabled us to part D, new making critical investments in.
Long term secular growth areas.
These investments are helping M. S G I.
<unk> and.
And our solution to meet the needs of any.
Recently, diversify and diverse client base.
Daryl will talk about our solutions in greater detail.
For now I would like to explore the strategic backdrop for both our 'twenty to 'twenty two results.
Our 'twenty to 'twenty three priorities.
M. A C I continue to see ignore most growth opportunity.
Our gross profit decline.
Asset classes.
And client segments.
At times like this investors become even more relying on high quality data.
Models.
Analytics.
And research to help them understand fast moving market changes.
M. A C is constantly monitoring for signs of pressure that our clients will face.
From reduced budgets and longer sales cycles to increase lay off.
And fewer new fundraising.
That being said we are cautiously optimistic on the path forward.
Our strategy continues to capture major structural shifts in the investment world.
For starters in.
Index investing is increasingly popular across regions asset classes and investor types.
The reason is simple.
Index investing give investors and if they should make them use them to express their investment thesis preferences.
And to focus on asset allocation.
During periods of financial turmoil.
<unk> unique grants of MSCI index business.
Even more salient.
We can offer one stop shop.
For different types of business.
Our gross mainly layers, including asset classes exposure, the styles and investment needs.
I have spoken before about the massive potential of direct indexing in particular.
I want to emphasize that it missed the IDE robotically spreads they are direct indexing market position in 2022.
For the full year, we increased our total number of direct indexing clients by 200%.
The indexed investing trends reflect a broader shift.
Alcohol or we enter.
<unk> investment strategies.
ESG investing is a big part of that.
As you know ESG has become a hot button political issue.
Specially in the United States.
However.
Political noise is different from investment reality.
And the reality is that you used your risks are financial.
That is why even as the parties have debate gets louder <unk>.
Investors continue to make ESG integration a priority.
For example, the.
The Index Industry Association recently survey investment pump companies across the U S U K.
Germany and France.
I know very well the majority of the respondents said that ESG has become more important to their investment strategy between 'twenty to 'twenty, one 'twenty to 'twenty two.
These findings are reinforced by client demand for Msci's ESG solution, which has remained strong.
No single issue has done more to elevate ESG and climate change.
In 'twenty to 'twenty, two climate risks became increasingly visible as countries around the world suffer from record heat waves record.
A record drought conditions and break or loading.
What is true of BSG risky general is dual climate risks in particular.
They can be material financial risks.
Investors understand that.
For example in a recent Deutsche Bank Investor Survey.
More than three quarters of respondents said that climate change.
There is already having a severely negative impact on the global economy.
We'll have an impact over the next 10 years if left unchecked.
Investors recognize that climate change is also not only address.
Or an opportunity.
A recent report from the International Energy agency on renewable technologies.
The a now projects that the world will.
Yes.
Well.
As much renewable power in the next five years as it did in the past 'twenty endpoint.
M. A C is determined.
To become the undisputed leader in climate related investment tools.
To support these ambitions, we continued to make key investments across asset classes and geographies.
As a result, MSCI is now well positioned to help all types of clients achieve their net zero pledge it.
In 'twenty to 'twenty, two we saw especially strong growth in climate sales among non traditional client segments, especially corporates.
Langton traders wealth managers and hedge funds.
We have also developed innovative climate tools for private assets.
An area, where we continue to see tremendous possibilities for growth.
One example is the carbon footprint of private equity and private debt funds tool that would launch with Burgess.
Toward the end of 2021.
The key enablers for all of these remain our data and technology.
M. A C is oh boy that Rubin data transformation is helping us improve the client experience in so many different ways.
Last month, we expanded our strategic partnership with Microsoft to support our view MSCI, one technology platform, which is built on.
Microsoft Azure.
Just last week MSCI announced another strategic partnership with Google Cloud to.
Bill and investment data acquisition and development platform.
This new platform will make it easier for ourselves and our clients to translate raw data into actionable insights.
As I mentioned earlier, the importance of our data models analytics and research all the increases during periods of market turmoil.
Our solutions play and its zanesville role in helping investors navigate today's volatile landscape and build better portfolios.
At the same time Msci's resilience all weather franchise continues to allow us to invest for the future while maintaining strong profitability growth.
Just one final note before I turn the call over to bear.
Earlier. This morning, we issued a press release announcing that they're being appointed to the MSCI board of directors effective immediately.
I would like to congratulate him on his well deserved appointment.
As many of you know bear a nice clothes business partners or 23 years and he has been instrumental in building I mean ci into what it is today.
Bear unique skills experience and strategic thinking will significantly strengthen the board effectiveness and the ability to continue to create shareholder value.
I would also like to be clear that my.
I have no plan or timetable to retire or step down.
See you all or chairman of the board.
I remain extremely engaged and energized by the company is tremendous.
Prospects.
If any.
I am more excited today.
About our significant opportunities.
Data that I have been at any time in the 27 years that I've been leading this business.
I look forward to continuing to partner very closely with bear for maybe four years.
CEO and president.
And now I.
Board members.
Again, congratulations to bear.
Goodbye now will turn the call over to bear.
Bear.
Thank you Henry I'm excited to join the board and serve our shareholders in this very important role.
MSC is in the midst of many strategic transformations.
As President and Chief operating Officer, I've developed the operational insights and strategic vision that I believe will bring a new dimension to the board to help MSCI drive shareholder value and deliver on our growth initiatives.
Now I will turn to my comments on our quarterly performance.
I'll begin by going over some of the highlights for the quarter. The steps that we took to manage in the current environment.
Some of our priorities for 2023.
MSC is continued ability to deliver strong organic growth and resilient retention during the quarter is directly linked to the investments that we have consistently made over the years both in good markets and in less supportive wants.
As we had indicated to you previously with the backdrop of unprecedented market headwinds and volatility.
We aggressively manage the pace of our discretionary spend and also made select headcount realignments.
To best position MSCI for 2023 and beyond.
And to preserve our ability to deploy our investments to the greatest opportunities guided by client demand.
For our 2023 investment plan. These areas continue to include climate ESG client designed indexes fixed income and the ongoing modernization of the client experience.
To further illustrate the success of our approach I will spotlight specific accomplishments during the quarter and index analytics and climate.
In index, we delivered 12% organic recurring subscription revenue growth and 95% retention.
Which was certainly reflective of the strength of our franchise, our strong client relationships and the investments we've made.
In custom indexes, our subscription run rate grew 15% as we continued to invest heavily in the development of our models software and data to deliver custom indexes at scale.
These investments have increased our index building capabilities reduce turnaround time and strengthened our global support model positioning us well to capture the enormous opportunities that we see ahead.
We are also benefiting from continued investments into our index derivatives franchise.
In listed futures and options, we've delivered record full year revenue of $61 million, where we're benefiting from new product launches for Paris aligned climate action and low carbon target indexes with exchanges driven by ongoing asset owner demand.
To facilitate the net zero transition.
In addition sales of structured products linked to our indexes were $23 million growing more than 60% year on year for the full year.
We remain excited by the opportunities in fixed income indexes.
Another long term investment area for MSCI, especially.
Especially in the current period, where investors are focused on credit allocations now that they can earn higher yields with less duration.
At the end of December .
Fixed income ETF AUM linked to MSCI is proprietary and partner indexes was $46 billion.
We're attracting more than $19 billion of inflows during 2022.
We believe our flanking strategy, where we play to MSCI strengths in ESG and climate.
As well as our ability to forge partnerships with key players in the fixed income space have all been growth enablers.
Let me now turn to analytics, where we drove 7% subscription run rate growth excluding FX.
New subscription sales were lower versus a strong fourth quarter in 2021 well.
While also experiencing higher cancels, which were not so much reflective of higher cancel volumes, but rather from a few concentrated large client events.
It is important to remember what MSCI is trying to achieve in analytics.
You already have a large business and enterprise risk and performance, which drove about 60% of our new subscription sales.
These tools can serve as large operating systems for investors.
To help investors and asset allocation decisions and in calculating and understanding their risk and performance attribution.
We also offer tools for more targeted use cases, such as our equity models and portfolio construction tools.
Lyons can integrate into their investment processes and third party vendors can integrate into their platforms.
These offerings comprise roughly a third of our new recurring sales during the quarter.
Throughout 2022.
Our analytics growth came from both types of tools and we believe the same will be true in 2023.
The investments MSCI has made in modern flexible distribution channels are enabling us to chip away at new opportunities, including with front office investment professionals.
And increasingly for climate use cases, where we see a strong pipeline for the upcoming year.
These include our investments in platforms, such as climate Lab enterprise, where we have delivered over 15000 climate reports throughout the year for our analytics clients.
Since our launch in late 2021.
Our unique position of having our clients portfolios loaded in maps represents a competitive differentiator.
It allowed us to help clients understand all the carbon emissions as well as physical and transition risks associated with their holdings.
As Henry indicated climate remains one of the most attractive and tangible opportunities for MSCI as a firm to help the investment industry.
Across all MSCI product lines, we delivered $79 million of run rate growing around 80% year over year with real momentum across all client segments and regions.
Back in June we launched our total portfolio footprint tool, which helps clients measure portfolio wide emissions across asset classes, including equities munis corporate bonds sovereigns and private assets.
Since then it's been a key enabler for closing several strategic deals with asset managers.
<unk> insurance companies and others.
It's also enabled us to help clients align with emerging <unk> standards.
We also continued to drive new wins with large asset manager and asset owner clients to help them with specific use cases, including key cfd reporting.
Climate stress testing and scenario analysis.
Following the recent launch of MSCI, one I wanted to make a few clarifying observation is what we're trying to accomplish it is not a new product or a standalone new platform to replace other products. It is instead a vehicle for integrating MSCI as world leading.
Content and analytics using software powered by Azure we.
We are not providing clients with a common entry point to access some of our key products and applications that they can rely on day today, including climate lab risk manager ESG manager and others, which we believe will also enable self service self servicing self discovery and up sell.
Opportunities.
In summary, the high returning investments we made in 2022.
Our rigorous financial management helped us execute successfully during the year.
Our success provides a template for how MSCI will continue to operate and thrive in 2023 in the years ahead.
And with that I'll turn the call over to Andy Andy.
Thanks Bear and hi, everyone.
As Henry mentioned, we completed 2022 by delivering organic subscription revenue growth nearly 16% for the quarter and 15% for the full year outperforming our long term target of low double digit growth.
In the face of market headwinds our results reflect the durability of our franchise and the benefits of the consistent investments we've made into attractive high growth areas.
In index subscription run rate growth was 12% in the quarter, our 36th consecutive quarter of double digit growth.
We've seen tremendous traction in healthy growth within our market cap weighted modules as our buy side clients broaden their usage of our indexes.
And we continue to see the utility of our index content expand across a wide range of high growth segments.
Across our index subscription base asset managers and asset owners together had subscription run rate growth of 10% well hedge funds broker dealers and wealth managers together grew 17%.
We also saw continued momentum in our investment thesis index offerings with non market cap index modules collectively achieving a subscription run rate growth of 14%.
From the end of September through year end market appreciation contributed approximately $119 billion to AUM balances of equity Etfs linked to MSCI indexes.
Although for the full year, we saw a net decline of $284 billion AUM balances.
Additionally, we were encouraged by the $23 billion of cash inflows into Etfs linked to our equity index during the quarter with roughly $15 billion of inflows into emerging market exposures and over $9 billion into developed market exposures.
Equity Etfs linked to MSCI ESG and climate index has experienced inflows of $6 $5 billion representing.
Approximately 70% market share.
Flows into Etfs linked to MSCI factor indexes were more muted, but still positive with investor appetite more focused on yield and income where we have less presence than on other factors, where our indexes are more widely used such as momentum in minimum volatility.
During the fourth quarter, the run rate basis points on a U N paid to us by ETF clients was flat year over year supported by a mix shift out of lower fee products.
Despite the steady levels over the last year, we continue to believe the average basis points on AUM paid to us by ETF clients will gradually decline over time, although we expect the declines will be more than offset by strong growth in assets.
In listed futures and options. We once again saw some of the natural hedges embedded in our asset based fee revenue line.
It's traded volume showed healthy growth against the choppy market backdrop.
Looking ahead, if market levels continue to rebound and stabilize we would hope this would be constructive to AUM linked revenues from Etfs and non ETF passive at the same time futures and options volume and revenues may decline compared to the volatile period a year ago.
We continue to believe our opportunity is significant and licensing indexes for both AUM linked ETF for non ETF passive products as well as in transaction based listed derivatives products.
And analytic subscription run rate growth was nearly 7%. Excluding FX is bear mentioned, we continue to gain traction in front office use cases supported by tremendous strength in our factor analytics in our climate tools in recent quarters.
Additionally, our growth has been supported by firm wide enhancements to our interfaces and progress in delivering broader more flexible access to our content.
However, as we have previously noted we expect some lumpiness in the segment across both sales and cancels given the broad range of clients and use cases that we support.
And our ESG and climate segment, new recurring subscription sales grew 64% from the third quarter as we saw some rebound in large ticket deals in both ESG research ending climate and tremendous traction closing deals in EMEA.
Climate remains one of the most attractive growth engine for MSCI, our firm wide climate run rate reached $79 million.
An increase of 80% from a year ago, reflecting exceptional growth across geographies product offerings and client segments.
Across all of our segments, we continue to see strong secular demand for mission critical must have tools and we continue to see a strong sales pipeline, although we remain cautious given the market backdrop.
As we've mentioned previously in past periods of sustained equity market pullbacks, we can sometimes see slightly elevated levels of cancels and lengthening of sales cycles.
In connection with our downturn playbook, we continued to identify efficiencies to aggressively reposition our expense base to drive attractive profitability growth, while preserving investments in the most critical growth opportunities.
As part of our regular review of our talent at our expense base to base in the fourth quarter, we took proactive actions to recalibrate, our employee footprint, resulting in a $16 million severance charge, which was roughly $13 million higher than a year ago.
These tough actions have allowed us to preserve and even enhance our investment spending in certain key areas.
This expense discipline, coupled with our subscription revenue growth has enabled us to drive strong growth in adjusted EPS, even through tough environments.
The tremendous growth in our subscription base has been supported by doing more for our clients continuing to penetrate newer large addressable markets and capturing price increases enabled by the continuous enhancements to our products and client experience.
During the fourth quarter price increases contributed about 35% of our new subscription sales firm wide across all products and more than 40% within the index.
We ended the year with a cash balance of $994 million of which well over $600 million is readily available.
Free cash flow came in slightly below the low end of our previous guidance.
We saw a small slowdown in client collection cycles as a result of extra approvals within certain clients, which we believe is related to the market backdrop, but we believe overall collections remain healthy and we see no issues around collectability.
Our capital allocation framework, which is focused on maximizing shareholder returns remained unchanged.
We'll continue to deploy our investment dollars towards the highest returning organic growth areas return capital through a steady dividend that increases with adjusted EPS opportunistically capitalize on share repurchases and pursue value generative M&A.
It's Henry indicated earlier, we have decided to increase our dividend in the first quarter.
We're not making any changes to our dividend policy or a broader approach to capital allocation, we have decided to shift our annual dividend increase from the third quarter, where we have historically announced the increase to the first quarter in order to more closely align with our annual planning process.
Lastly, I want to underscore that we also continue to actively evaluate and source bolt on M&A opportunities, particularly in areas of unique content and differentiating capabilities, such as private assets climate and ESG as well as fixed income.
Lastly, I would like to turn to our 2023 guidance, which we published earlier this morning.
Our guidance ranges reflect the assumption of continued volatility in financial markets with overall equity market levels down slightly from current levels. During the first half of the year and gradually recovering in the second half of the year.
Our expense guidance range reflects the efficiency actions, we have taken in recent months.
Captures the investments we will continue to make in order to deliver growth.
We expect normal seasonality in our expenses with $15 million to $20 million of elevated benefits and compensation related expenses in the first quarter.
I also want to highlight that our Capex guidance reflects a continued high level of software capitalization as we continue to enhance our platforms and interfaces across product lines.
Our tax rate guidance highlights that we expect our effective tax rate to increase slightly year over year, primarily reflecting that we expect to receive a smaller windfall benefit in the first quarter as a result of where the share prices relative to the price at grant as well as based on the amount of awards vesting.
There could be pressure on year over year, adjusted EPS growth in the first quarter due to the higher tax rate and a significant decline in average ETF AUM levels relative to the average levels during Q1 of last year.
Lastly, I want to highlight that our free cash flow guidance reflects the expectation of higher cash tax payments in 2023 as well as a slight degree of caution on client collection cycles based on the environment consistent with what we saw in the fourth quarter.
Overall, we're well positioned for the year ahead, and we're excited to continue to drive growth and differentiation.
<unk> of volatility and uncertainty we believe MSCI is uniquely positioned to help our clients capitalize on unique opportunity opportunities and drive value creation.
These are the times when MSCI thrives.
We look forward to keeping you all posted on our progress and with that operator. Please open the line for questions.
We will now begin the question and answer session.
Last quick question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
At any time if your question has been addressed and you would like to withdraw your question.
Please press star two.
At this time, we will pause momentarily to assemble our roster. Thank you.
Our first question comes from Alex Kramm from UBS. Alex. Please go ahead, yes. Thank you good morning, everyone.
Starting off maybe on the retention side for a second here that dropped us I get from the three forks, you pretty decently relative to the last couple of years I think if I look at history, it's probably more seasonal but I. Just wondering if there's anything that you saw that gives you any sort of pause into into this year.
You mentioned the things on the analytic side, but outside of that anything that gives you a little bit more pause as you think about the sustainability of results.
Yeah, Hi, Alex it's it's Andy So we as you know and you alluded to we typically do have slightly lower retention rates in the fourth quarter given that it is our largest period of renewals.
I would say outside of analytics and you can see the retention rates were reasonably strong.
And if you look at full year retention rates, even for analytics, but across all product segments.
Retention rates were actually quite quite healthy I'd say continues to highlight that our products really do benefit from the fact that they are mission critical and in areas of long term secular growth, which does create some resiliency.
And I think you see that heavily in the retention rates for the full year. However, I would say, we do remain cautious as I've alluded to in the past when we see a few quarters of sustained market pullback, we tend to see a pick up in client events things like fund closures desk closures restructurings other mergers so.
Despite the overall strong retention rates for the year, we are proceeding with a degree of caution in our pretty silver that we might see some.
Clients pulling back a little bit in certain areas. So we are cautious moving forward here.
Okay, and then second secondly, and this is somewhat related but first of all thanks for clarifying some of the moving pieces on free cash flow I think some people were trying to read too much into what that means or the on the revenue side, which is kind of like my question. I know you don't guide revenues, but you highlighted again the long.
<unk> targets and history of delivering double digit subscription growth forget the asset sides four minutes as a baseline for a minute.
Any anything that would change your view on that low double digits. As we think about 2023, given some of the starting off points and some of the cautionary comments, you'll potentially made a little bit just now.
Yeah.
So Alex Henry.
Not at all.
Yes, I mean, obviously you are not tactical.
Short term basis.
In 2023.
We've done well in 2020 tool, we have a strong pipeline going into play in 'twenty three.
But you know.
There is the prospect of a global recession.
Global softness there is a war going on in Europe .
There is disruption in many markets, including the energy market.
We'll have to see if there is a real reopening a china or a return to lockdown. So we remain cautious in the very short term beyond that will remain extremely positive.
The number of opportunities.
That we see that MSCI is increasingly explanation.
I went to every day.
Well there is.
Custom indices to which we have high demand for whether it is <unk>.
Indexing.
Whether a climate risk in the context around analytics.
Clearly ESG climate at the whole the work that we're beginning to do in private asset classes.
Enormous so that should bode well.
For a for a continuation of our growth trajectory for the company in the years to come.
Fair enough thanks, guys.
Our next question comes from Toni Kaplan from Morgan Stanley Tony. Please go ahead.
Thanks, So much I wanted to take a step back and look at margins within that analytics business really stepped up a lot. This year I guess, how are you thinking about investment in that business are you investing enough. There you know just maybe talk about the drivers of the margin expand.
And you know basically.
Investment needs or growth opportunities.
Yes so.
Over the recent quarters there have been several factors that have been contributing to the high analytics margin.
I would point out that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our climate lab enterprise.
Skin sites broader enhancements that we're making to the capabilities and analytics I would also highlight that many of the downturn actions that we've been taking.
End up hitting analytics and that's not just directly within this segment, but when we take actions and corporate functions a meaningful portion of those expenses are allocated to analytics.
And then I would highlight that.
Analytics has benefited from the strong U S dollar as well given the size of the expense base a lot of FX benefits that we've been getting have.
Fit analytics.
And so there are a bunch of those more I'll call it technical or tactical factors that have impacted that the analytics margin.
Causes it to run up a bit here, but to your question around investments with them. We continue to be very targeted with our investments in analytics. So we are investing there.
It is not one of our top investment areas I think youre familiar with those areas, where we are heavily focused on but within analytics. We are focused on investing on those and those capabilities that support the broader MSCI franchise.
Well, it's continuing to focus on investments in areas like the front office, so front on it office content, including our factor models, how we go to the office on the equity and fixed income front office capabilities as well as some of the broader interfaces and applications that not only benefit the analytics users, but also the broader MSCI franchise.
I would like to add.
Tony If you don't mind.
Yeah.
Clearly there are parts of analytic that we're putting heavy investments on like climate, allowing for price.
Our fixed income portfolio analytics equity portfolio analytics and some of the content.
But also for the benefit of.
Everyone. In this call we also run a very.
Disciplined.
Very rigorous triple Crown investment process and on the call.
Good morning.
In which each one of the product areas.
Each one of the client segment areas and some of the support areas when they come to in front of this investment process they have to demonstrate.
Elements of the Triple Crown.
One is high return high IRR.
Sure shorter term paybacks and in areas of high multiple valuations for the company.
In the case of an Olympics.
They've been able to rationalize investment in some of the areas in our nation, but not in other areas. So they haven't gotten capital from us because of that.
Other areas like climate on ESG, and custom indices and like have gotten together.
Perfect.
I wanted to ask my follow up on MSCI, One I know you you recently launched that.
Maybe just clarify I know you said, it's not really supposed to replace an old product or be short of that.
You stand alone platform to replace other products. So I guess, maybe help us with.
Who the main users are there what the opportunity is there because I I think it's it seems meaningful and I just wanted to understand it a little bit better.
Sure Toni Baer here, So look I think the way to think about it is through a few different layers. One is we clearly have.
A diverse range of calculation engines, which create kind of state of the art analytics.
Signed and outputs.
Which which are distributed throughout the firm and different asset classes and we have some traditional platforms and other distribution methods through files et cetera.
And and then we have sort of newer newer content that we're building. So the way the best thing in a way to think about MSCI won is a combination of those traditional outputs of our if you like our calculation factory.
And sort of industry standard software that allows those to be presented in a more user friendly way and brought together in a similar type of platform.
In turn.
<unk> improves the user experience.
And end users the ability to manipulate that data.
You can do in fact greater flexibility in how they presented et cetera. So so.
First of all we think we're on a very important path forward here.
Yeah, it's incremental.
As we move forward during the course of 2023, we think that the client impact of that will we will.
Increase.
And and we hope definitely hope and intend.
To continue to give you positive news and update around all of that so I think the there is may be.
Absolutely put it a risk that we're understanding that somewhat and that's what I kind of wanted to make some comments about it.
Today at.
At the same time, we want to make sure that we that we are the delivery department and not a promise department in this area. So so so as the year progresses, we will make sure that as we bring out new functionality new capabilities, new ways of integrating and our clients start using was more we will keep you abreast.
Of that but we're certainly very positive about it and we think that over time. This will really be a way that our clients start to think of MSCI in a different way as regards the flexibility and ease of use.
Their day to day to day working with our content.
Okay sounds great. Thanks.
Our next question comes from Manav Patnaik from Barclays.
Please go ahead.
Thank you.
Andy I just wanted to get back to the retention rate comments you made in the drop I guess, particularly in analytics can you just give us some color around you know.
I guess, where those cancellations or or the crop came from and where the you know.
A more kind of one.
Okay and closures in each I know, you said, you're being a little bit more cautious going into 'twenty, two but just trying to understand you know how how.
What that is and how that might continue into 'twenty three.
Sure sure yes, thanks Manav.
So the bear noted this in his prepared remarks, but the cancels were in so much reflective of a higher frequency of cancels across the board in the segment, but rather a concentration of a few large ones.
On those those few large ones there were some competitive dynamics and some client event related dynamics at play.
And as we've mentioned in the past we do expect some continued lumpiness in both sales and cancels.
Within analytics and potentially some impact from the environment. So more broadly we are really encouraged by the momentum and an improving competitive position we continue to see in.
In the strategic focus areas that we're focused on and analytics like equity and fixed income portfolio management tools are climate tools or enhancements to content and capabilities.
And we are committed to the long term growth targets that we've got for the segment of high single digits, which actually were quite close to in the fourth quarter.
Subscription run rate growth on an organic basis is close to 7% in the.
Revenue was 95% excluding FX. So it was a quarter that demonstrated some of that lumpiness, but overall, we continue to be encouraged by the momentum we see in the segment.
Got it thank you and then.
I guess just a broader question just trying to.
I mean, I think that's I won't get it but I thought I'd take the opportunity just trying to understand you know the the cloud and technology strategy here.
And Google's announcement versus your key partnerships already have with Microsoft just trying to appreciate the differences in each of those agreements and what to look forward to.
Yeah.
Thank you.
So the.
First of all I mean, one of the major.
<unk> and investments in our firm.
It's in our data and technology platforms.
MSCI.
In the past.
This was a very large data processing.
With two third party data and run it through risk models factor models.
And this is in the light image methodologies on the light.
<unk> has become.
Starting with the ESG business now with climate in private assets and so on and so forth.
Large data building.
And our company. In addition to data processing company. So we are now of the original source of a lot of data. In addition to certain data from third parties.
Yeah.
All of that needs to be distributed to our clients in a very effective way. So we have basically three partnerships that we're trying to work and expand on our specialized on the first one clearly has been the Microsoft partnership.
Sure.
Theyre, helping us with that.
The data processing part processing large amounts of data, especially in our risk systems and all.
All of that.
<unk> systems et cetera, and.
The partnership there is also always help helping us on their software and how do we use their software to build products.
And power bi.
Obviously, we announced the MSCI won in partnership with them. So that is Microsoft and that continues to deepen.
The second one.
We announced with Google.
And the Google cloud.
Partnership is.
What about Google, helping on Bill data core data organized data index data.
Data building transformation that we're going through and then ran all of that data through their cloud.
As well so that is.
It's always a compounding of cloud computing.
The push here is data building as you know.
Google is one of the largest.
They are building and data processing companies in the world everyone focuses on the search engine, but certainly it won't be as good at all without the other.
And the third partnership is Salt Lake, which is in the distribution of our content our baby bear.
Our effective way with our clients. So we're trying to strengthen and deepen that relationship with snowflake.
Thank you very much.
And now we have a question from Alexander has from JP Morgan.
Alexander Please go ahead.
Yes, hi, everybody I'd like to step back and maybe look at the firm wide ESG and climate run rate growth, which remained pretty resilient. Despite.
The U S political headlines and then maybe in Europe . Some of the S. FTR implementation noise wanted to know maybe stepping back high level, what do you see sort of as the big opportunities, the big sort of regulatory and market tailwind and headwinds as well and how we should think about maybe ESG and climate <unk>.
To grow over the next few years.
So let me provide some quick comments and then pass it on to bear.
Okay.
First of all as I said in my prepared remarks, there is a lot of <unk>.
Political football here going on on ESG.
And eventually we will get the climate as well on.
The first point is our ESG business has nothing to do with political ideology.
Oh political philosophies.
Our ESG business is totally grounded on the fact that.
ESG or non financial risks are material investment risk.
Cereal financial risks and our company thinks about Donnie right now corporate governance.
Regardless of the company and the auditors' all of that.
<unk> market cap.
Some of it at Delta, that's political and Thats not investment risk I don't know what it is so so that if that is very clear what we're going and therefore, we don't know of any single client.
And the world that at least we haven't heard of that Theyre not looking to integrate this nonfinancial risks.
<unk> and governance and social issues into our investment.
We are the preferred provider of tools to them and secondly, clearly there is a lot of regulations around the world and a lot of our clients are trying to figure out how do they respond to that regulation, especially in Europe .
But also on the U S.
Proposals. So there is a little bit on the cost by clients and certain purchases are still trying to determine what are the right fit for beta tools on risks that they need to do to incorporate into their into their problems. So.
That's been a little bit of a blip that youll see in.
And the sales much less so the political component will bear anything else on that.
I think you've covered it well Henry I think the only other element is clearly the.
You mentioned the regulatory element on our clients, which has been notably a complex one for funds in Europe in the EU.
So so that is something that we're very focused on working with our clients on equally.
There will doubtless be an increase of regulation.
The providers of <unk>.
If data information ratings with ESG.
Which would include us.
And I think in that instance, we don't view that as something which is.
Particular risks to the business.
We believe that we run very high high quality business.
<unk>.
In structured with a view.
As an index.
Some form of further regulation could come to us and as a reminder.
And and were.
We're confident about the way that that as Ron and I are actually in contact with regulators related to that so I think overall.
Its clearly an environment, which is very noisy and complex from a number of grounds, but that doesn't in any way compromise the scale of the opportunity, which remains very real and in many regards precisely this regulatory.
<unk> is something which we believe we can benefit from.
Provider of high quality data.
Jason Research and services.
Thanks.
And then as a quick follow up maybe.
Can you speak a little bit to the opportunity in Paris aligned benchmarks and climate transition benchmarks.
The index franchise is that a meaningful opportunity going forward.
Absolutely. So we're clearly benefiting from our leadership role.
In.
In ESG and climate.
And our market share in.
<unk> and related ETF products is very high.
And it's been consistently so there are some questions related to flows in the short run but.
If you look I'm very confident that if you look back on this in a number of years time.
This will be.
Ah Ah moment that passes.
And the fact of the matter is that with all categories of investors globally. This is an enormous transition they have to go through.
There they will clearly do so through active management, but equally they will need to do so by allocating capital in a timely basis.
Through rule through indexes through rules based portfolios.
The indexes are.
As a benchmark and underlying for so so we only see this category is growing.
And as you mentioned certain specific methodologies those will continue to grow as will many customized versions of things, which serve specific investors specific needs. So we certainly view it as an important and growing category.
Thank you.
Our next question comes from Owen Lau from Oppenheimer. Please go ahead.
Thank you for taking my question I wanted to go back to your guidance could you. Please talk about your assumption about after market trend to come up with your free cash flow guidance do you expect the market to go up or stay flat or go lower from here and then on the expense side could you. Please.
Just talk about the work of the adjusted EBITDA expense built from 2022 to 2023 and what does it take to go to the low end of the guidance and also what does it take to get to the high end of the guidance. Thank you.
Sure sure Yeah. So a lot in there I'll try to unpack it in a logical fashion here. So firstly on the market assumptions that underlie all of our guidance. So we are assuming.
The market levels declined slightly from their current levels through the first half of the year and then rebound in the second half of the year and.
And so that assumption is underlying every every piece of our guidance you you alluded to free cash flow.
I do want to make a comment around our free cash flow guidance more generally just to underscore that we are being cautious on it.
Look at the full year of 2022 relative to 2021, and even the fourth quarter of 2022 relative to the fourth quarter of 'twenty, one we saw a pretty healthy growth.
And free cash flow.
Although if you remember after the third quarter, we actually increased our free cash flow guidance.
We made that change feeling confident about the strong momentum we had seen in collections.
To be Frank we probably got a bit of ahead of ourselves on that one and we actually saw a bit of a slowdown in collection cycles in the fourth quarter and so we are making that same assumption of caution around collection cycles for 2023 and as a result, we have a degree of caution on our our cash flow guidance for this year.
On the expense guidance piece.
I don't want to get too specific here, but I want to underscore that.
And you saw this in the fourth quarter or actually the last six months or so we have been taking very tough actions.
In our expenses.
And and identifying efficiencies to be able to continue to invest so we are being very measured on our pace of expense growth were continuing to find efficiencies. You saw we took some significant significant actions on the severance front in the fourth quarter.
And so that have a meaningful impact on the expense base. Although we are continuing to invest in key areas and so despite those efficiencies in.
Our continued actions on the head count front, we are planning to grow our investment spend in 2023 by 13%.
And that's more than double the overall expense growth and so we are in our guidance assuming that we continue to be quite disciplined.
In a number of areas, especially for the first half of the year, but we are continuing to grow our head count and invest in those key investment areas those key growth areas for us as a firm.
Got it that's super helpful. Thank you Andy.
And I want to go back to the Google partnership to Google Cloud partnership Henry could you. Please talk about maybe the potential incremental revenue and expense upwards.
An expense opportunity for these partnership I mean, it would be great. If you can even give us some more specific examples.
So that we can better understand the value equation of this partnership thank you.
So look I can at this point.
Do you any numeric.
Policies.
Revenue or pace or anything of that too early to tell.
What is very key is that.
Now, it's becoming a very large data building company.
We need to use the most advanced.
Methods and protocols and technologies and all of that and its partnership with Google will give us that.
For example, one specific area.
We're focused on right now is asset location. So in order for us to be the best on the field later in climate, we need to have.
Understanding of every manufacturing facility by every off of.
Every single company in the World, whether it's private or public company, so so being able to work with Google and gathering that information.
Through.
Max and Google's or geospatial services in the life will put us in a significant advantage there that would be one example of that.
Another example of clearly is the norm.
And the work that we're doing it.
There is a lot of data that we're collecting.
From GP and LP and all of that and we need to figure out how to how do we think the data organize it in the right. So the way to think about if you want to compare us who.
Obviously the work that Google is that everyone focuses on the search engine Google right.
That's what the top but underneath that third changing is clearly the data so think about our investment tools, whether it's indices methods and methodologies and ratings and.
Our risk models and stress testing models and all of that.
We will link all the search engines like the equivalent of <unk>.
And then underneath that they have to be a base of data that is large.
Third party data or our own data that is large and that's what we're trying to build with that.
Got it thank you very much.
And we have a question now from George Tong from Goldman Sachs.
George Please go ahead.
Alright. Thanks. Good morning, you mentioned, it's possible, you'll see higher cancels and longer sales cycles. During protracted periods of market volatility can you elaborate on where in your subscription businesses youre seeing most sensitivity to the macro environment, and Conversely, where you're seeing most resilience.
Yeah, I mean, it's very much at a general comment that I made you can see in the retention rates that with the exception of the Lumpiness, we saw in analytics in the fourth quarter.
Actually your retention rates have remained quite resilient.
You've heard us make comments and in particularly last quarter that we saw some slowdown in.
Sales cycle in ESG.
I'd say that the point that I would underscore is it's going to be dynamic across the board. So I don't think it will be necessarily concentrated in one product area.
Or region or client segment, but these are things that just as the environment remains choppy and volatile and large financial organizations start to implement cost controls. It can cause slowdowns across the board and so we're just baking in in our color and our commentary here a degree of caution.
Although I do want to underscore that our pipeline is it remains quite healthy and the overall size of the pipeline is quite quite large and we are having active dialogue and engagement and healthy discussion with our clients.
It's just we.
We've seen in past cycles that we should be prudent and cautious in our outlook.
Got it that's helpful.
You you've taken actions to recalibrate.
And expenses as part of your downturn playbook.
Can you talk about how much further runway you have for expense reduction what kind of levers do you have remaining would.
Would you say the majority of your cost right sizing actions are now behind you.
Yeah, I would say and I alluded to this in a prior question. It's important to really underscore that the tough actions. We've been taking are really to enable investment and so as I alluded to we plan to continue to invest at a pretty healthy.
In those key investment areas.
And we're going to continue to have an intense focus on efficiencies throughout the year.
Beyond the proactive actions that we took in in on the severance front.
And I alluded to this in the past, we've continued to slowdown and even stop hiring in certain less critical areas. We've been very selective about the areas, where we are adding adding people we've imposed certain.
Expense controls in areas like <unk> and other professional fees.
But it is important to underscore we have numerous levers at our disposal and we havent fully flex the downturn playbook, nor does our guidance reflect that we're flexing fully our downturn playbook, we can stop hiring in certain areas implementing a hiring freeze is closing back fills.
We have degrees of freedom on the non comp side.
As you know our incentive compensation will move with the performance of the business. So it is a constant calibration and something that we're going to continue to proactively manage but we are being cautious and implementing cost controls, but we do have many more levers if we need to flex down further including slowing down investment, which hopefully we don't have to do but that clearly can help.
Manage expenses.
Very helpful. Thank you.
Now we have a question from Faiza <unk> from Deutsche Bank. Please.
Please go ahead.
Yes, hi, Thank you good morning.
So I wanted to talk a little bit more about ESG.
Give us a sense of.
The new subscription sales that you signed on this quarter how much of that is just a seasonal acceleration from <unk> to <unk>.
Or are you seeing sort of sales cycles, Andy as you alluded to that last quarter I said that.
That increased a little bit are you seeing further increase in those sales cycles are things.
I think from that perspective.
Yeah.
And I think you could see this in the past and this is the case across most product areas, but as you alluded to the fourth quarter does tend to be a strong quarter for us.
I would underscore that ESG and climate had a very strong year overall and when you drill into it and we've alluded to this climate within there continues to grow at an incredible growth rate and is making a more meaningful contribution to the overall segment and so that is something that is helping to fuel some of that momentum.
Just to put a finer point on that $45 million of the $79 million of climate.
Run rate is actually within the ESG and climate segment and that is growing at close to 80%. So that's helping to drive some of the momentum we've seen.
As Henry alluded to earlier, there are many layers and dimensions of growth in ESG and climate across a wide range of solution serving various.
Objectives.
And a wide range of use cases, and we're seeing that the thinking around how to integrate ESG continues to evolve the regulations continue to evolve and as a result investors in spots are being more measured in their buying decisions.
And so I think there is some element of that there is some element of the market backdrop.
That are helping to contribute to the fact that the pace of sales in ESG and climate is likely to fluctuate up and down.
Based on all those dimensions that I alluded to overall, we continue to see very healthy growth and strong demand.
But for.
For those reasons, we think the growth rate will be a little bit dynamic in the sales could be a little bit dynamic quarter to quarter I would highlight that because you asked about it.
Some of those sales that we did see slip from the third quarter that we alluded to on the last call.
We were successfully able to close a lot of those and we had particular strength within EMEA.
Think that just speaks to some of those dynamics that will fluctuate up and down over time, but overall, we continue to be very very encouraged about the overall demand for the products. It's just a very dynamic engagement and discussion with our clients.
Understood. Thank you and then just a follow up on I guess capital allocation are you assuming in your interest expense guide is a little bit higher than I was anticipating and I'm curious if you're expecting to you know maybe incur higher debt to buy back shares.
So what what's embedded in your free cash flow guide as it relates to pop that allocation.
So the <unk>.
Interest expense guidance does not assume any incremental financings for the year.
One thing that is driving the interest expense slightly higher is are floating.
Term loan a so we have a $350 million term loan a which is floating rate and so we do have some expectation of rate increases.
And higher rates for the year, which factors into that interest expense guidance. So.
So that's what's embedded in our guidance, but I'd say more broadly no change to our approach to capital allocation. We are mindful of the overall financing market and rate market and so.
We will over time as our leverage starts to come down and look for opportunities to to raise capital, but given where rates are right now we're not in a rush to do that and we think we're in a strong capital position to continue to be very opportunistic on the M. P&A front as well as on the repurchase front. If there continues to be volatility in the market.
Great. Thank you so much.
We have a question from Craig Huber from Huber Research partners Craig. Please go ahead.
Great. Thank you I wanted to focus first if we could on the recurrent subscription part of your business in indexes. Obviously the numbers continue to be extremely strong there, but maybe just talk a little further if you would about the sales cycles. There your sales pipelines.
Client budgets or anything there that you're feeling a little less positive about and stuff, particularly the sales cycle.
Yeah, I would say you've actually seen remarkable strength on the index subscription biz.
So we have for the index subscription revenue line.
It's been quite encouraging given the backdrop to your point, where we've been having very constructive discussions within our more established client segments like asset owners and asset managers and I mentioned, we saw the subscription run rate growth within that segment of 10%, which is quite healthy and we've also.
<unk> continued to see strong dialogue and engagement with hedge funds wealth managers broker dealers, where we saw that elevated growth that I alluded to similarly from a product line standpoint.
We are having strong momentum within our market cap modules, so our market cap.
<unk> actually had strong growth of about 11%.
In subscription run rate and we saw outsized growth within some of our non market cap modules relative to that and so across the board, we've seen a healthy dialogue and momentum.
And it's it's not only with these newer high growth segments, but doing more for existing clients.
And so at this point, we haven't seen a lot of impact from the environmental though we are conscious that the index segment tends to have a shorter sales cycle and so.
There could be some impact, but right now it's overall very very healthy dialogue.
Great My follow up question.
You talked a lot about the enhanced that you guys made any analytics products. So I'd like to hear further on the fixed income side of things. What are you guys desk spending you're doing there where you're really focused on within the fixed income area. Please.
Sure.
So look this is clearly been a multi year effort.
Where we've had some important wins on <unk> Tom.
In the last few quarters.
And clearly we can't go into individual client names here because.
What we do but we're I think it's a really important inflection point, where we have some pretty significant deals in the pipeline.
And those deals are ones, which we hope if we can get a few of them done.
They should have really positive knock on effects for our credibility in this asset class.
And then hopefully become kind of a virtuous circle.
So I would say that across the teams.
People have never felt more positive than today about we're reducing fixed income.
As you know this has not been.
This has been more of an oil tanker and the speedboat, but I really hope and I think I've had good grounds for.
We're believing so that during the course of this coming year, we should be able to really show that we're making a lot of progress in 2016 common starting to win some pretty serious investors over to our fixed income analytics. So in short I don't think its one thing I think it's a compound over various sub asset classes in 16.
Different types.
Analytics.
It's what we're doing across the board and I really do think we are at.
Great place to have a strong year for 2023 and fixed income.
Great. Thank you.
Yeah.
Our next question comes from Russell quotes from Redburn Partners Russell. Please go ahead.
Yes. Thank you Jim just wanted to come back to the analytic business to stall.
Can you pin down exactly what's driven the Hudson growths in the last couple of quarters.
I know you've made a few comments already but is it new product tech enhancements to existing products is it pricing.
I'm trying to get a bit of a sense as to is this structural or cyclical as it grows.
And just kind of linked to that how does it get decided if climate related product revenue.
ESG and climate or analytic.
So I just wanted to check there's been no shift in the revenue allocation, which is flattering the growth in the analytic segment.
Looking at some.
<unk> product line.
We have been revamping.
The strategy on the.
Hum on the core is continual work on enterprise risk and performance.
Hey.
And we've made some good progress there, but the growth rates are not dramatic.
Dramatically different than they were before the growth areas are in three and three elements that were favorable thing for US one is the front office so equity portfolio analytics.
And fixed income portfolio analytics, along the lines of what bear was mentioning those are high growth areas of cross checking.
Secondly climate risk.
Climate allow enterprises and the third area, which we're just launching a whole bunch of products as more content.
We launched a local insights on the lights on.
So we're hoping that the 60% of the run rate, which is central risk continues to grow.
<unk> based upon the acceleration of the growth will come from those three people when I mentioned.
And Russell, there's there's no shifting of run rate from ESG and climate to the analytic segment. There are some climate in ESG focused tools that our analytics tools that are showing up in the segment like our climate lab enterprise.
Some of our ESG reporting.
Capabilities, but those are not shifting those have always been there.
Okay. Okay. Thank you and then just as a short follow up the basis point fee charged on the index business that was notably up in Q4 versus Q3 two two.
Five four.
I liked the effects from lower or are you in previous quarters I'm. Just wondering should we expect that before it again is a UN stays higher than Q1.
Yeah.
I'd say it was impacted by flows out of lower fee products. So there was that mix impact we saw a very small impact from a positive fee adjustment as well despite the steadiness that you've seen over the last year.
I do want to underscore that we do expect the average basis points to continued to decline gradually over time.
As we've seen over the last call. It eight to 10 years or so although we do expect the assets to increase at a faster growth rate and continue to be bullish about.
The growth in the ETF front, but we do expect fees to gradually come down overtime.
Okay.
Thanks very much.
We have a question from Greg Simpson from BNP Paribas.
Please go ahead.
Thank you.
And price increases being 35% to 40% of new subscription sales in the fourth quarter could you provide some color around how this components versus history do you get the impression that you are increasing pricing more or less similar to some of your competitors in index and ESG.
Sure Yeah, I don't want to I don't want to comment on what our competitors are doing but I would say that yes. We are generally increasing prices more than we have in the past the 35% contribution from pricing to new subscription sales.
Across our subscription base and the 40% plus.
That we are seeing in index.
Contribution within index from price increases those are about five plus percentage points higher than what we've seen in the recent past and so yes prices contributing more than it has in the past I would just underscore that we are in our price increases we are heavily focused on delivering.
<unk> value together with the price increases and so.
We're continuing to enhance the content that we deliver to our clients the capabilities the functionality and the overall client service that they are getting we.
We do recognize that our growth is heavily going to come from our existing clients and we want to do it in a constructive fashion, but given the overall pricing environment and cost environment, we are increasing prices more than we have in the past.
Great. Thank you and then just quickly on the real estate business, new sales were down year over year.
Is there anything in particular to call out and what is maybe a tricky a backdrop for real estate and <unk>.
Broadly how is your.
Progressing since your acquisition.
Yeah, I mean, it's.
Similar message to what we've seen in the past, which is things are progressing well and the segment I would I would highlight.
That our some of our portfolio services are getting a lot of traction and a lot of interest.
Investors in particular are focused on understanding what is driving the performance and the risk in their portfolios.
And so we're seeing strong engagement there.
On the data side, including the RCA data, we do see some pressure from the backdrop to your point there are aspects of the RCA business and the data that we have that are used.
As part of transactions in the real estate space and we have seen a slowdown in transaction volumes across the space.
But you can see the overall growth rate on an organic basis at 12% is still pretty good.
And we think there are some environmental impacts going on given the backdrop and the real estate space, but we continue to be quite encouraged about the long term opportunity there.
Thank you.
And we have a question from Simon clinch from Atlantic Equities Simon. Please go ahead.
Hello, everyone and thanks for taking my question I.
I Wonder if you could just.
Get your perspective on I guess the opportunity in the futures and options line, which which to date is still relatively small in the context of your overall index business.
I mean, how should we think about the structural growth opportunity here for that.
The larger it is the more diversified benefits you'll see during times of risks.
I imagine that that's quite a desirable thing to have.
Yes so.
There are three legs of any <unk>.
Large and successful index.
Business.
The active management fees that we charge to equity managers.
What we call the subscription business.
The fees that we charge to passive managers both.
In any of wrapper at the <unk> for institutional possible.
So mutual funds and the third leg is.
It is the law.
Licensing of indices into all sorts of derivative products. Some of them are listed futures and options on some of them are.
Understood.
Suggest swaps and options on the structured products.
Thanks, Mike we are very very intent and focus on building that third leg.
What you see now we comment on is it the listed futures and options on there is still a lot of runway for us to continue to grow.
<unk> you know we have a lot of missed it.
We're now focused on our list of options franchise.
Pushing new initiatives in the upfront more to come on that.
And while you don't hear us as often.
Although there were comments commentary.
The new structure approach.
On the.
On the other forms of OTC derivatives and that is those are growing very nicely.
And there's still the ground floor and where we can achieve.
Okay. That's that's really useful. Thank you and then I guess, just lastly on the environment for M&A.
M&A and bolt on acquisitions, I mean could you give me a sense of how rapidly that is changing.
And I guess, just get a sense of the opportunity ahead of you.
Yeah, Yeah. So when you you know when you see this on the repurchase front, we are an organization that likes to be contrarian and opportunistic.
And so in these environments, there are potentially opportunities to acquire companies that otherwise wouldn't be available.
So we are seeing some early stage companies that need growth capital.
They are finding that the growth capital is more expensive or tougher to find that it was in the past and so as a result, they are open to partnerships investments.
Even acquisitions in certain instances and so we're being very proactive in looking for those opportunities and think they can be instrumental in helping to accelerate.
Those strategic opportunities in our key focus areas that we've talked about in areas like private assets climate ESG fixed income broader technology and data capabilities. So yes, it's an intense focus for us right now.
Yeah.
Thank you. This concludes our question and answer session I would like to turn the conference back over to MFC is chairman and CEO .
Mr. Henry Fernandez. Please go ahead.
Well. Thank you everyone for joining as you can hear in our commentary.
We continue to see strong demand for our solutions.
We continue to invest.
<unk> in large growth opportunities.
They are ahead of us and preserve and enhance.
Profitability growth in the company.
Very excited about this momentum, especially in such areas like climate.
We are determined to become the undisputed leader.
Thank you everyone.
Look forward to a continued dialogue with all of you.
Okay.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.