Q2 2023 MSCI Inc Earnings Call

I'd now like to turn the call over to Jeremy you and head of Investor Relations and Treasurer you may begin.

Thank you good day and welcome to the MSCI second quarter 2023 earnings Conference call earlier. This morning, we issued a press release announcing our results for the second quarter 2023. This press release, along with an earnings presentation, we will reference on this fall.

As well as a briefly quarterly update are available on our website MSCI dot com under the Investor Relations tab.

<unk> reminds 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 of which they are made and are governed by the language on the second slide of today's presentation.

For a discussion of additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call. In addition to results presented on the basis of U S. GAAP. We also refer to non-GAAP measures.

Including but not limited to adjusted EBITDA adjusted EBITDA expenses, adjusted EPS and free cash flow, we believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance.

Youll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.

We will also discuss run rate, 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 exclusion the actual amounts.

Our recurring revenues, we will realize over the following 12 months will differ from run rate.

We therefore caution you not to place undue reliance on run rate to estimate or forecast, earning 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.

On the call today are Henry Fernandez, our chairman and CEO Baer, Pettit, our president and COO and Andy Wichmann, Our Chief Financial Officer.

As a final housekeeping item beginning on our next earnings call for the third quarter, we will request our analysts to ask one question at a time during the Q&A portion of our call in order to reflect the growth in our brokerage coverage and allow broader participation.

Always analysts will be welcomed to ask more questions by adding themselves back in the queue and our goal is to develop more of our earnings calls to the Q&A segment.

With that let me now turn the call over to Henry Fernandez Henry.

Thank you Jeremy good morning, everyone and thank you for joining us today.

During the second quarter MSCI deliver another solid performance against a fluid market environment.

We achieved adjusted EPS growth of 17%.

Organic revenue growth.

13%.

On an organic subscription run rate growth.

11%.

We also maintain our laser focus on profitability.

Demonstrating rigorous financial and capital management.

Our capital allocation framework has not changed.

We will opportunistically buy back shares support our dividend policy.

To accelerate our strategy through bolt on acquisitions.

Most notably our share repurchases since the beginning of the second quarter have totaled nearly $460 million.

MSCI.

Repurchase.

215 million shares or nearly 40% of our total shares outstanding from the end of 2012.

We intend to keep the same focus and discipline.

All of this confirms the strength and durability of our business.

One of our consistent Differentiators is that MSCI can be nimble and flexible in significantly adjusted expenses up and down.

Depending on the operating environment.

This helped stabilize our Brooklyn ability through periods of market Tomorrow.

More broadly MSCI continues to benefit from our globally diversified and integrated franchise.

In the second quarter, we deliver our 38 consecutive quarter of double digit subscription run rate growth in index.

We also had a strong quarter in analytics.

Posting our highest second quarter retention rate ever although over 95%.

And recurring net new sales growth of 46% in equity portfolio management.

In addition, we deliver 70% climate run rate growth across our product lines.

Along with our climate rotation right.

Over 97%.

Our ESG run rate growth firm wide grew 18%.

And the retention rate from our ESG and climate products segment remained resilient at 97%.

This shows that despite tightening budgets, our clients continue to make ESG and climate a top priority.

They remain recent planned trips to Asia, the middle East Western Europe .

So the U S. ESG was the most popular topic clients wanted to discuss.

For that matter when the IBM Institute for business value recently surveyed corporate executives across 22 industries.

76% of them.

ESG is now central to their business strategy.

This reinforces our belief.

That ESG risks and opportunities our investment risks and opportunities.

With all of that in mind MSCI is working to accelerate our ESG and climate for our launches.

Our climate solutions continue to drive growth across the company and they have helped us build momentum our gross client segments.

This gets to a larger point the integration and interoperability of our product line.

What we call our one MSCI ecosystem can dramatically increased value and efficiency for our clients.

We further amplified those benefits through our open architecture for clients and other outside parties and through Msci's role as our standards center industry connector.

Innovation hub.

All of this represents our greatest competitive advantage as a company.

A highlight our unique position in the industry.

Our unique mix of capabilities.

Our unique range of client segments.

And then <unk> is now well placed to capitalize on major trends reshaping the industry.

Those trends include the acceleration and adopt the adoption of index investing.

The continued shift to outcome oriented rules based technology driven portfolio construction.

The rising demand for sustainable investments in climate solutions.

The growing role of regulation.

And the increased allocations to private assets.

As our strategy evolves to capture new opportunities.

Each will require new investments.

<unk> will stay firmly committed to financial basic Blaine and high profitability.

Those commitments have always anchor our strategy in the past.

And they will continue anchoring our strategy in the future.

And with that let me turn the call over to Barry.

Thank you Henry and greetings, everyone. My comments today will cover our <unk> business performance and also provide an update on our continued technology transformation.

Our flagship index segment achieved a number of milestones, including 12% subscription run rate growth with 14% growth in Asia Pacific.

We drove record one time sales primarily from our recently launched flow data products, which delivered nearly $8 million in gross sales.

These deals facilitate deep engagement with clients, while creating entry points for future recurring subscription sales.

We also achieved record second quarter results for net new.

And new recurring sales in index.

Globally, there were 20 newly available ETF products based on MSCI indexes during the quarter.

12 of which were based on MSCI ESG and climate index.

During the quarter, 96% of industry inflows into ETF products domiciled in sponsored by European Fund managers were linked to MSCI indexes.

All of this confirms the critical and growing role that our index segment plays in global investing trading and portfolio construction.

Turning to our ESG and climate reporting segment, we delivered overall run rate growth of 26%.

While our retention rate was nearly 97%.

As I can confirm for my client meetings during the quarter demand for our ESG products remains high fueled by regulatory pressure for I quality data Msci's comprehensive coverage and the transparency provided by our solutions.

Looking at climate subscription, specifically, we delivered run rate growth of over 40% with both asset managers and asset owners and over 75% run rate growth with banks insurance wealth management and hedge funds collectively.

Meanwhile.

In ETF products based on MSCI climate indexes totaled $71 billion at the end of June which represented approximately 67% market share on the basis of AUR.

As with ESG, both government regulations and voluntary disclosures continue to drive demand for advance climate tools.

Let me now turn to our analytics segment.

During the second quarter MSCI achieve subscription run rate growth of six 6% in analytics, including 13% growth in equity portfolio management with notable strength in the hedge fund segment.

We also posted our highest second quarter ever for retention at 95, 2% and net new sales of about $11 million and analytics.

By providing investment risk and performance workflows and analytics, we develop deep connectivity and access to client portfolios. This in turn helps us deliver additional innovative services, such as our ESG and climate regulatory reporting solutions, Inc.

<unk> for the sustainable finance disclosure regulation.

In fact during the first half of 2023 MSCI delivered more than 47000 total climate reports enabled by our analytics reporting engines.

Shifting to our real assets segment, it was a tough quarter in a challenging environment with historically low global commercial real estate activity.

In that environment, our real asset segment posted overall run rate growth of 9%, excluding FX and a retention rate of close to 93%.

Regionally, we also achieved 14% real assets run rate growth in Asia Pacific, 10% growth in the Americas, and 8% growth in EMEA.

As MSCI explores new ways to turn raw data into actionable investment insights, we continue moving forward with our technology transformation.

Generative AI and large language models are a big part of that.

We've been using AI and natural language processing for a decade now to enhance our content given our deep expertise in modeling and data analysis. This is second nature to MSCI.

In ESG research for example.

AI helps us analyze and update more than 7 million data points per month with inputs from more than 4700, New stores is 160 alternative data sources, well corporate websites and submissions for more than 5200 corporate issuers.

We have also used generative AI to.

To help us identify extract and validate EU taxonomy data four times faster than our previous capabilities.

These data represent crucial inputs for EU regulatory reporting.

In analytics, we use natural language processing and deep learning and our models to identify securities with similar characteristics to examine emerging industries and to support quantitative investing and systematic alpha use case.

We're also deploying AI in our corporate functions such as finance.

Our automated contract review extract information and process invoice.

Yeah.

MSCI is embracing generative AI to enhance the client experience and operate more efficiently.

In particular, we are leveraging AI to continue evolving our data processing audit and quality mechanism.

In addition, we are working to integrate AI into our MSCI, one platform to proactively deliver actionable insights for client portfolios.

Investments in data and technology are central to our long term strategy.

Combining those investments with our strong commercial focus supports our ability to deliver solid performance amid external challenges.

I am confident that by staying focused and disciplined in our operations and financial management.

<unk> will be able to deliver for our clients and our shareholders and with that let me turn the call over to Andy Andy.

Thanks, Baer and hi, everyone.

During the quarter it was encouraging to see the breadth of opportunities and diversity of revenue streams driving our solid topline growth. This.

This included very strong nonrecurring revenue, which more than offset some of the lingering cyclical impacts we saw in parts of our asset based fees and.

And we delivered solid double digit subscription run rate growth with a remarkably stable retention rate. Despite some of the market pressures.

In index client demand was broad based with double digit subscription run rate growth for all of our sub product areas, including market cap modules, ESG and climate modules factor modules and custom index offerings.

Our run rate growth with asset managers and asset owners was 10% and 12% respectively.

Collectively these client segments represented about 70% of our index subscription run rate.

Asset based fees have swung to positive growth driven by a rebound in AUM linked revenues.

Which were supported by both market appreciation and strong inflows.

Since the end of March we've seen $18 $7 billion of inflows into MSCI linked equity Etfs, which combined with a gradual rebound in market levels has driven AUM balances to increase by over 67 billion.

There were net inflows of $15 $6 billion into MSCI linked Etfs with geographic exposures to developed markets outside the U S and $3 1 billion of inflows into MSCI linked Etfs with emerging market exposures.

From a product lens, there were $5 2 billion of inflows into Etfs linked to MSCI ESG and climate indexes, while $2 5 billion of inflows went to Etfs linked to MSCI factor indexes fueled by strong flows into the quality factor.

In fact, the AUM balance of equity Etfs linked to MSCI indexes with greater than one four trillion as of July 20th.

Volumes from listed futures and options linked to MSCI indexes were lower year over year relative to the high volatility environment, we saw a year ago.

This is consistent with what we would expect to see when AUM balances rebound.

And analytics subscription run rate growth was 7% we had another quarter of very strong equity factor models sales as clients continue to turn to us to help understand risk and market factors in this dynamic environment.

And our strong retention rate underscores the mission critical nature of our tools, particularly in these challenging times.

In June we delivered roughly 47000 liquidity analytics reports per day for our clients, which is up 15% from our average daily levels in December .

We now process over 850 million security Holdings daily on behalf of our clients in analytics, a testament to the scale at which investors rely on us for their most important portfolio decisions.

And the capabilities across analytics are incredibly strategic for the firm helping to fuel growth across product areas.

Although as we've mentioned before we continue to expect new sales and cancels to be lumpy quarter to quarter in analytics.

In our ESG and climate reportable segment, our run rate grew 26% with 22% growth in ESG and 50% growth and climate <unk>.

<unk> of large ticket deals has improved from last quarter, although still down from last year's levels.

Net new recurring sales improved 20% since the first quarter, but were down meaningfully from a record second quarter last year, reflecting more measured purchasing decisions and longer sales cycles from our clients.

We continue to have conviction in our long term targets of mid to high 20% growth given the numerous layers of opportunities and a powerful secular drivers.

Henry and Barry mentioned, our long term opportunities remain durable and attractive for both ESG and climate.

In real assets, we drove 9% organic run rate growth as Baer indicated our benchmarking and market and portfolio insights offerings remained strong with double digit organic growth.

Sales and retention of our transaction data products were more muted as they are cyclically correlated with the reduced volume of commercial real estate transactions.

We continue to execute on our real asset product road map and we are seeing early but encouraging demand for products like our mortgage debt Intel offering.

The solid operating results across the business helped drive 17% growth in adjusted EPS in the second quarter.

Helping to fuel the growth we had very strong nonrecurring revenue in the quarter benefiting from strong sales of our index free float product.

While these nonrecurring revenues will fluctuate meaningfully quarter to quarter, we continue to see healthy growth in underlying demand for many of the products that are often sold as nonrecurring such as index licenses for OTC derivatives history data products and other unique data sets as well as analytics implementations.

Importantly, the sales often open the door for broader conversations and can convert into recurring subscriptions.

Share repurchases drove <unk> <unk> of the year over year increase is our consistent approach allowed us to continue to capitalize on attractive opportunities.

It's worth noting that our free cash flow conversion and collections were reasonably strong in the quarter. Although we continue to remain somewhat cautious on collection activity for the balance of the year.

We ended June with a cash balance of nearly $800 million, enabling us to remain positioned for strength.

Finally, I would like to provide some color on our 2023 guidance, which remains mostly unchanged and assumes market levels remained relatively flat for the balance of the year.

We have left our expense guidance ranges unchanged, although if market levels remained stable at current levels or increase further we could be towards the top half of our expense ranges.

On Capex, we have modestly increased our guidance range, mainly reflecting our increased pace of capitalized software development costs.

We remain excited and encouraged by the strong client engagement, we are seeing across numerous growth opportunities and we continue to be closely aligned with employees to capitalize on the long term trends transforming the investment industry.

We look forward to keeping you posted on our progress and with that operator. Please open the line for questions.

Thank you if you would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad to remove yourself from the queue. It is star one again, we do ask that you limit yourself to one question and one follow up we'll.

We'll take our first question from Toni Kaplan with Morgan Stanley .

Thank you so much.

I wanted to ask about.

The recent ESG regulatory proposal.

In Europe , I guess as it reads now how do you see it impacting your business and are there structural changes needed or are you operating already in a way that would comply with the new rules.

Hi, Toni Baer here.

Look a few observations.

The first one is that we do think we're well positioned to make this transition to the new regulatory environment.

There are certain standards and ways of operating.

In aerie to the regulation, which as you suggested I believe where we're meeting, but there will inevitably be.

Some some new some new aspects to that but those will also.

Hit all of our competitors. So it's a level playing field in that regard and we believe that we as we in index. We can be a leader in meeting regulatory standards and then more broadly.

<unk>.

Our regulation is in parallel with our clients' regulation and in turn what that reflects is how critical the sustainability agenda is in Europe , and overall that creates a significant opportunity for us.

Great.

Wanted to also ask about on the index side of the business you've had very strong success over a long period of time.

I guess first could we see the ESG slowdown start to impact the index business at all just given.

Indices revenue.

That is in there.

Maybe also when you think about sustainability of growth within indices itself do you see any changes in the environment going forward or just still structurally similar to what we've seen over the last number of quarters and years.

So first of all.

We believe strongly based on planned discussions on strategy meetings among ourselves.

That the index.

Opportunity.

It's only begun.

That this trend will continue for years and decades to come.

And it's predicated on.

In our view and our clients view that in this is our basis of portfolios in business our tools to build our core news.

And the more comprehensive and global the portfolio is.

In terms of security selection, the more the need for underlying information and underlying organization of that nation about secure at this in the context of an index, which then becomes the basis of our portfolio.

So we saw this brand on market exposures with market cap indices.

Which continues unabated.

We then moved on to factor in this half, which became very very popular and continue to grow. We then moved on to ESG indices. We're now very much into the into.

And to the climate.

<unk> phase.

We're also accelerating our thematic indices. So if you think about it.

In addition to market cap indices, which are simple exposures to markets.

We are moving into what we call non market cap indices, which are in this is built on the mat.

On an investment thesis in demand by clients. So again. These are these are.

Ways of organizing the securities of the World.

According to certain variables when there is an ESG a verbal agreement on dramatic actor whatever variable and they become extremely valuable for people who are building portfolios across those variables whether they wanted then.

Launched in active management product, whether they want to launch a vacuum one whether they want to launch in our structured products or at least the derivatives. It's all the same concept, which is a basket of large basket of securities organized in different ways to achieve that you need to have a lot of underlying information about those securities.

You have to know everything about their ESG profile their climate profile the thematic profile their factor profile. So MSCI is turning into a giant equity research.

Trying to understand the characteristics of securities, we can organize them that way.

Everywhere we go.

Shareholder base people are waiting to waiting for the shoe to drop on the index business.

The opposite we think that this business will accelerate in the years to come in all the use cases, we are now witnessing the direct indexing revolution as well.

He is going to make it more efficient to build personalized customized individual portfolios. So anyhow. So I think that that is where we are and thats, what we see from our clients. Therefore with key from the ground up and the like and with respect to ESG.

We're big believers that ESG is investment risks and there is no. We our clients are telling those ESG as investment rates ESG is part of the fundamental analysis and securities.

Cannot be avoided it so therefore that will continue unabated.

And in all aspects, whether its ratings or reserves or a screening, but importantly in the foundational element of building and visits.

We'll take our next question from Alex Kramm with UBS financial.

Yes, Hey, good morning, everyone.

Quick question on ESG and climate I think when I compare today's sentiment in tone from you guys relative to last quarter are theirs.

Markedly more positive.

Sentiment now I don't know if that is because last quarter you were talking a lot about the political and regulatory paralysis. In this quarter you will focus more on the on the long term. So maybe you can just talk about why the more positive tone and then importantly, given that there was a little bit more focus on the long term today, which is understandable how do you feel about the near term.

There is slight improvement quarter over quarter, but clearly still a lot of uncertainty.

So manav.

The reality is we feel exactly the same.

A quarter ago, but we see them today.

Maybe in the call we go out into political issues for us based on that.

And therefore, a general messed up the message.

That's a problem that we blame it on us.

In terms of communicating the over the overwriting.

Message is.

And therefore, we feel fundamentally the same by the way, but we're not.

We're not in all.

Phil also birds were not.

We are grounded businesspeople and we see what our clients are going through in the investment process and we talk to them extensively with review of that among us and all of that and there is no alternative path, but do believe that ESG continues to be central.

So the investment process. It was a client of ours, who said to me one time no. Kennedy. If this is very simple the 70 years of fundamental analysis of securities focus on market products competition and they never focus on the internal worker workings of the company.

On what ESG, partly is about the internal workings of the company what are the motivations what are the governance issues what are the social lesions of what or how do they view the environmental issues on all of that and then to be part of the sale of the investment process.

Therefore, I think I think we my view look.

And this is not just me speaking.

Just on the road six months talking to clients all over the world and and the answer was.

The answer was that.

Is that honestly, everyone wants to talk about this because the one I incorporated in what they do every single day.

Look we can argue all day long weekend look docker Docker, the political picture, the big picture and all of that but from the ground up we do not know anybody in the world that doesn't want to think ESG considerations into account and the creation of the investment process. One last thing that I would say that even in those.

In the U S.

There is an awful lot of political pressure on the pension plan to abandon looking at Bob.

I think from <unk> perspective, the people the investment teams of those places are telling us that they cannot do that because the rest of the world is going to take them into account and if they do it's going to lead to repricing of securities and they don't want to get.

We don't want to get caught holding the bag. So look that is the bottom on the ground description on what happens and we can talk about it all day long as to weather.

But what I'm, telling you is.

And in.

The reality is that it is investment risk. It is investment opportunity. It is fundamental to the investment process and people are going to have to continue to take it into account for decades and generations to come.

Alright fair enough. Thanks for that and then just switching gears very quickly on the analytics side noted obviously the strong performance in new sales stay et cetera.

Thank you Paul so given the inflationary environment been little bit more.

Strong on price. So maybe you can just differentiate how much how much came from pricing relative to new.

New logos or new state new core sales.

Given that the inflationary environment is probably softening a little bit just wondering how you feel about the sustainability of growth in analytics.

Sure Yeah, Hi, Alex it's Andy.

Maybe just more broadly you're touching on on price increases.

Continue to get traction rolling out higher increases than we have in recent years.

The contribution to overall.

Recurring sales new recurring sales continues to be relatively consistent across the company with what we've seen in the last couple of quarters, which is mid 30%.

Contribution to overall new sales.

Analytics as you alluded to we have been rolling out like like the rest of the company higher price increases, although I would say, we are being more measured and more strategic we focus heavily on.

The use of our product the health of the client the value that we are adding and thats probably the most important point the continued value that we're adding to the product and the surface. The service that we're delivering.

As well as the client's overall usage of our tools I think it is an important lever for us.

I think it's something we'll continue to focus on here, obviously, we do monitor the overall pricing environment, but I think the broader.

Considerations around the value that we're adding in client usage are probably more important on the analytics side.

We'll take our next question from Manav Patnaik with Barclays.

Yeah, if I could just follow up on the ESG segment.

Just looking out into the second half I.

I guess, it's a little bit hard to figure out some kind of seasonality in that net new business number over the last couple of years. If you could just help us what do you expect in the second half, especially in the context of I think Henry you mentioned an acceleration.

New products in ESG and climate is that going to start.

Is that impacting second half already.

So manav.

I am sorry, if I misspoke earlier.

<unk> been recognized.

German axiom versus the indexes.

Sorry, I went out of it.

But look at the <unk>.

And it is.

It's hard to say.

Pipeline remains.

But it's pretty good and pretty solid.

Some things are going to accelerate on ESG. Some things may not in the context of clearly there is a consolidation process going on in Europe people trying to make sure they can.

Classify their bonds the comply to the rags and all of that in the U S and looking for the same things, but in reality our.

Our plans are coming to us and asking us for out lot more ESG information.

One a lot more they want more granularity of the data there wasn't an organized in a way that they can they can analyze it better because they now have a higher risk and regulatory compliance issues.

One or two to be to put more pieces, describing this whole process more for their marketing campaigns. They won a significant expansion of the coverage of the universe of <unk> that we are right on ESG day, one changes to the agile methodology in some respects they won.

An update on that.

On Huawei, how we're incorporating climate into ESG and so on and so forth. So.

We have a lot.

Auto demands for what we do and of course over time that will translate into sales right now we're in a cyclical soft vireo in.

In ESG and it's logical we've been running at in our.

Base for years, now and there have been changes going on in the regulatory environment in Europe . There has been noise in the political environment in the U S and all of that but at the end of the day people are now focused on how are they going to continue to integrate days in AR.

And that in a fashion that is even more granular even more prescriptive, even more comprehensive and all of that and Thats what were looking to expand on so our investment will have to increase our.

Sales overtime overtime beyond this cyclical trough are going to increase.

Got it Okay, and then last quarter you talked about.

M&A pretty proactively and I guess with the stock pullback you went into the buyback.

And to the stock buyback market, which makes sense, but just any updates on that M&A pipeline.

Yes.

Yes, so manav.

Maybe I'll just broaden it to our approach to capital allocation and then I can touch on M&A. So.

Would underscore and we mentioned this in the prepared remarks that our approach to capital allocation really remains unchanged and consistent we are focused on delivering a consistent and increasing dividend.

Pursuing opportunistic share buybacks and continually focused on strategic bolt on M&A.

And so as you saw in the quarter our approach to repurchases has remained consistent where we tend to repurchase more when we have more cash when we see more volatility and when we see share prices, where we have more conviction.

And those three factors are lined up in the quarter and so we took advantage.

On the M&A point listen we continue to actively explore a number of.

Opportunities.

We have seen an increase in conversations due to the harder environment for capital raising from for many early stage companies that would be strategic for us and we are hoping.

We can find some unique opportunities, but we remain disciplined and so we're going to continue to remain very disciplined on price and strategic fit and by their nature M&A is opportunistic.

And so there is no certainty around it but bolt on M&A remains a key focus for us and part of our strategy.

We will take our next question from Alexander <unk> with Jpmorgan.

Yes, hi.

Briefly following up on some of the ESG and climate questions already.

Today, if I compare your ESG and climate, maybe product portfolio and product ambitions for the next year or two to what you guys had laid out as your roadmap in your 2021 Investor Day, where have you guys sort of seeing the most momentum versus your planned back then.

What has maybe been pushed to the back end or to the <unk>.

Back burner, and what has changed since that.

<unk> was announced.

Well look to be honest I don't have the exact investor day.

Presentation in my head, but I have a pretty good sense of what we said.

So overall I think we're we're very much in line with the broad direction of what we indicated there.

The element that has fair degree changed is that the distinction between ESG and climate.

<unk> become greater than we thought at that time.

And the and the climate agenda as its own specific topics needs the regulatory framework et cetera distinct from ESG, So I would say that increasingly.

In while there is there remains of course significant overlap between the two we are we are in some regards viewing them as distinct opportunity.

And as we look forward.

On to the next year.

I would say that.

The range of of climate solutions is doubtless larger in terms of regulatory needs, whether it would be for banks for asset managers.

<unk> <unk> coverage.

On a kind of on demand basis, and that doesn't mean in any way that the ESG product pipeline is also growing and being enhanced and suggest that I think the role of climate has become even more.

Significant than we expected at that time.

Great. Thank you so much better and then maybe to follow up on the M&A question just asked.

If you could maybe dimensionalize, where you see opportunities in ESG versus in other parts of the business and to what degree might.

Recent EU regulations catalyze.

Some some desire for consolidation in ESG and climate overall.

Sure, Yes, so with.

Within the areas, where M&A is.

Most strategic for us in areas, where we probably spend most of our time are the areas where.

We can get access to unique data sets.

We can get access to unique capabilities or unique distribution and so areas like ESG and climate, where data and capabilities are critical differentiators as well as areas like private assets are the areas, where we spend most of our time and there are many small players that.

Have developed capabilities or access to data points that we believe could be differentiators.

And there's a long tail of those players both on the private asset side and on the ESG and climate side.

I would say the recent regulation.

He is not something that is catalyzing more activity at this stage to your point I would say over time.

It will lend.

Market dynamics to probably be a little bit more consolidated and tougher for smaller players to compete.

And that potentially creates opportunities, but right now our focus is on really accelerating our strategic roadmap and we think M&A can be an accelerant there.

So it doesn't need to be and we have thats ferro was alluding to a very rich pipeline of organic initiatives and new product launches on the horizon M&A can just enhance that but we're confident even without it.

We will take our next question from Owen Lau with Oppenheimer.

Good morning, and thank you for taking my questions. So I think the market assumption earlier this year was.

Down in the first half and then we call for in the second half.

Now the market is up quite a bit in the first half I'm just wondering how much conservative conservatism you have baked into your full year free cash flow guidance or there is any change in your investment investment plan for the second half any more color would be helpful. Thanks.

Sure. So I know you know this one but.

If you remember in prior quarters, the assumption underlying our guidance was that market levels will drop slightly and then rebound in the back half of the year Needless to say to your question market levels have been running above those assumed levels.

And so as a result as I mentioned in the prepared remarks, if AUM levels stay at these current levels or increase will likely be in the top half of our guidance range on expenses as we recalibrate, our spending and level of investment.

To those higher AUM levels.

I want to comment too specifically on free cash flow guidance given that there are wide range of factors that can swing that up and down even beyond business performance clearly business performance and billings are something that helped there.

But there are a number of other things that can swing it and so we continue to reiterate our guidance on the free cash flow front, but.

Listen we continue to monitor the markets and calibrate our pace of spending and I think it's one of the advantages of our business model is our ability to financially manage through through all environments and if <unk> are higher we can hopefully capitalize and invest more.

Got it and then could you please add more color on the growth driver of your index subscription run rate in the second quarter and also it will be Greg. If you can also remind us the growth math of the index subscription run rate, which is how much of it's driven by pricing new logos and also further.

Penetration thanks.

Yes. It is.

Henri alluded to that the overall index subscription franchise has been quite solid for us there's not one thing that I would call out driving the performance in the quarter.

As we mentioned we've seen double digit growth across all module types.

We've also seen double digit growth across all geographic regions, and we've seen growth of 10% or higher across all major client segments and so the success is broad based.

We did mention that we got a nice benefit from our newly launched free float data product and that benefited us both on the nonrecurring side, but also on the recurring subscription side.

I would say just since Henri alluded to the overall performance is reflective of this trend of indexation.

A growing ecosystem around our indexes and the growing value and utility of our index content.

In portfolio construction just on the algorithm.

Listen I would say that the contribution from price within index remains relatively consistent with what I've mentioned in recent quarters, so prices contributing around 40% or so give or take a bit.

Two recurrent new recurring sales.

With an index, that's a little bit higher than it's been in past years, just given we are rolling out higher price increases.

In addition to that the biggest source of new sales for us is selling more to clients.

And then the smallest component is new clients for us.

We will take our next question from Ashish <unk> with RBC capital markets.

Hi, Thanks for taking my question.

I wanted to focus on the newly announced <unk> sustainability disclosure standards.

Question, There was how does that change the value proposition going forward does it change the competitive environment.

Yes.

And how does it improve the value proposition for our EAC thing things.

Look I think the context is one where there are numerous and significant regulatory changes ongoing for ESG.

And we view them as significantly positive.

So I don't think that there is this particular change that is the that is a material. It's the sum of all the changes that are occurring.

And certainly the likelihood that.

Those will continue including us being regulated which was mentioned earlier, which is a sign of how.

How important regulators can consider this topic to be so going back to the distinction between.

The Americas and Europe .

I think the we should discard the political noise and just make the simple statement that that regulation has not.

Yes.

So that is more what I would put an emphasis on it the distinction rather than any any other topic. So overall it is the continued regulation.

Not merit in ESG, but also in climate and across all client types, which is a very significant growth engine for our business.

That's very helpful color and then if I can follow up on the <unk>.

<unk> launches those lethal AAC has been relatively muted I was wondering how important new fund launches.

But overall revenues, but also better within the shift from an NIH funds to more of a sustainability fund.

Sustainability team funds and how does that.

<unk> improved the value proposition for MSCI.

Sure. So so just maybe a few observations on this topic as we alluded to before and this was particularly at the beginning of the year.

There have been changes in the regulatory environment regarding the classification of <unk> eight and nine.

That is not over but it's I.

I would say the largest element is likely and were very involved in those discussions both with clients and regulators.

So that's what I would call.

Temporary administrative blip, but again just to reiterate in the context of a very positive regulatory environment for our stride. So so so so I think that and then in terms of your observation regarding fund launches there has been a steady trend for ESG.

Funds to also include a more a more obvious climate component.

And I think we will continue to see a wide variety of those type of fund launches depending on the client type geography et cetera, and the investment goals of our clients. So I think it's a pretty broad and diversified landscape.

Let me, let me just add something here in this context because.

Oftentimes the questions, we get from shareholders and analyst.

Yes.

Underlying that regulation is a negative.

For MSCI.

A huge positive.

Now our clients don't love regulations will allow we would rather operating without regulation.

But is that a reality of life once it come on once you go may make the adjustment it becomes.

A very strong tailwind.

For us because the clients need a lot more information to comply with the regulatory framework more guidance or more extensive more of these more of that and secondly, the regulation on us creates incredible competitive advantages because.

It is.

It puts a lot of all of the deepwater this advantage compared to people like us. So again, we don't go all asking people to regulators and we don't like it when he comes back.

A period of adjustment that we make it becomes very important thing for us.

We will take our next question from George Tong with Goldman Sachs.

Hi, Thanks, good morning can.

Can you discuss new recurring subscription sales trends youre seeing for ESG, specifically, excluding climate over the past quarter has there been stabilization improvement or step back in and what are the puts and takes.

Sure Yeah, I would say the dynamics are reasonably consistent with what we saw last quarter, we're seeing similar dynamics there.

I would say the growth continues to be slower in the Americas.

Relative to EMEA and in the U S.

We alluded to this earlier many investors continue to take a more measured pace on how they are integrating ESG and that is driving some of the longer sales cycles, I'd say U S investors and managers are really thinking about.

ESG impacts our overall investment objective, how they differentiate themselves relative to competitors, how they market and position themselves externally and so there is a maturation taken place and so we continue to see.

Longer sales cycles, most notably in the Americas on the ESG front, but as Henri alluded.

Two we continue to have a very rich dialogue with them and the encouraging thing is we have the tools and the services that can help them on that maturation and on that journey.

We will take our next question from Kelsey <unk> with autonomous.

Hey, Thanks for taking my question. So Blackrock has recently will talk a lot about that.

Both opportunities.

Staring with Investor Day, I was wondering if you can talk a little bit more about your investments there and kind of the revenue potential.

In the fixed income space.

Great. Thank you for that question, so I will.

Just distinguish two things so clearly we have partnerships with various fixed income providers, which have been very successful, notably with Bloomberg on ESG. So thats, one element and we really continue to see a lot of upside in that.

Equally very importantly, we launched not so long ago, our own fixed income indexes, where we are looking to create a very differentiated products, which are either focused on ESG climate angle.

And also on more liquid indexes, which are more suited for tradable products. So we're at the very early stages of this.

And we are.

Which is a general MSCI approach, we're feeding some investments, but we're not going over the top we've got a great pipeline for this year clearly from a very very from a modest start, but we're likely exceeded our internal targets. So we really do believe that this is a growth opportunity in <unk>.

Cadence from a small base, but I think that hopefully as we go through the end of this year and start to move into next year. Our plan is for it to become something much more mature.

I appreciate that and then maybe just one more question on yes.

What needs to happen for net new subscription sales growth to Reaccelerate again is that the macro conditions improve as the rate cuts is that political dynamic to stabilize in the U S. Just curious to hear your view on that.

Yes, so first of all it is already beginning to.

To accelerate.

On a small base in Europe after a period of.

Understand and deregulation classifying funds understanding the ingredients that they need in order to grow.

In order to market these funds.

Sustainable investment funds and all of that a lot of our European clients.

Are beginning to well beyond that they are beginning to say, okay. What are we going to do now what kind of launches.

Just what kind of differentiation and all of that and they are beginning to request a lot of different data from us.

What is doing before that not.

That's not necessarily going to be a ramp up immediately but it is beginning to produce a pretty face.

Hopefully.

Greece and sales on the light not is also that.

The high level of retention rates also speak to the fact that people are not abandoning this area. So thats in the Europe in.

In the U S a.

I think we may spoke last quarter in which we've talked about the political environment, because that's what everyone is talking about but no.

Got to have some <unk>.

There are minor effect, yes, you will because it affects the psychology of people put a lot more of what is going on in the U S is that the global remember we play in the global equity markets with not only play in the U S equity market. So the global equity market in the past where unit.

People were concerned.

Churn about what was the effect of.

The war in Europe on the recession in Europe , and China, the opening or lack of Albany, what Eric So a lot of a lot of our clients were more.

Tightening their budgets with respect to global equity investing and therefore ESG is part of that process Esg's vital global equity investing as well. So we have we saw a slowdown on that as we begin to see may it may may be some reopening better reopening of China.

Some of the statements by the Chinese government in last couple of days, maybe creates a more a forward momentum we are seeing a lot of momentum in Japan.

Europe is obviously stock and little bit in the <unk>.

And the economic process, there, but hopefully the market will get better in Europe as well I think all of that will then bode well for higher sales of every type two U S asset managers.

As it relates to.

To do everything but ESG in particular, the other thing to keep in mind is that the American asset managers, not only managed money for U S investors.

Managed money for European investors too so.

Those people need to also be part of the recovery of the demand for sustainable investments in Europe . So we hope to see a recovery from there as well.

Given the strong participant participation on today's call, we will be limiting participants to one question. We will take our next question from Faiza <unk> with Deutsche Bank.

Yes, hi, Thank you I wanted to talk about margins and Andy was hoping you could give some perspective on segment level margins.

I noticed that while index topline growth was really strong we didn't see a lot of margin expansion. So curious if there is.

Something as it relates to the not new nonrecurring product or any other color around investments with an index and analytics.

Margins declined and then ESG when margins were up on a year over year basis as my private asset so curious on any perspective.

Those segments sure Yeah, I would say I would not overly focus on the margins in any given segment in any period and more generally.

We are not focused heavily on segment margins or the company margin overall, our primary focus is on driving strong EPS growth. The margin is an input into that and our pace of spend as an input into that.

But overall, we're really focused on driving that attractive EPS growth overtime I would say segment margins are a byproduct of investment opportunities that we have and so our primary focus on directing spend to.

To those opportunities, which are going to be the fastest payback the highest returns for us and the most valuable most strategic for us.

And the margin is a byproduct of that the other factor that feeds into <unk>.

Segment margins period to period, which can cause some fluctuations or allocations.

And so we do have a chunk of centralized costs that get out allocated to our segments as well as FX and so for all those reasons that quarter to quarter margins are not something I would focus too much on.

We will take our next question from Seth Weber with Wells Fargo.

Yes.

Hey, good morning.

I appreciate the color on on AI and generative.

Maybe can you just touch on whether you see any risks there for.

<unk> aviation risks or anything like that.

Or do you see this as more of a more of an opportunity for the company. Thank you.

Look we I think the way I would say it is we definitely view it as an opportunity and we are never complacent about disintermediation right. So so the opportunity I think is twofold, we have an enormous range of very interesting data.

Yes.

Which we can make ever more from for our clients greater insights.

More more analysis that can be things like modeling indexes et cetera. So I think we are.

So that's a key point the second thing is precisely related to modeling is that.

These technologies.

The true value added to them.

<unk> is not under or over specifying the modeling in order to get great outputs and we have an enormous amount of.

Teams in research et cetera, who are trained in this and then I think more generally beyond that.

There are big opportunities for us to create efficiencies as well so so the way I would say it is.

We need to not be complacent, we want to invest we want to move as fast as we can and we think that this can give us some some some competitive advantages and we're not complacent about people who may be able to start new businesses are great new opportunity to startups.

This item.

Okay.

We'll take our next question from Heather <unk> of Bank of America.

Hi, Thank you so much for taking my question I wanted to go back to earlier in the call and you spoke about being able to convert some of the nonrecurring index revenues overtime. I'm curious if you can talk about sort of how that transition happens how youre able to Eric.

Convert those those revenues in the end.

Can you kind of the pace at which you could see yourself.

Sure, Yes, and maybe I can just broaden it to touch on the non recurring revenues, which were quite high in the quarter.

I would say we benefited from a very large contribution from onetime license fees related to prior periods.

Specific to your question. We did also have a healthy contribution from onetime purchases of our free float dataset.

Oftentimes that can broaden the conversation with the client.

To help them appreciate why some of that data and other unique data sets that we have are going to be integral to their ongoing strategy.

So oftentimes we will see an initial sale of a data set as a <unk>.

One time sale and then they want to broaden the use of it get updated data over time and that converts into a subscription sale. So it's a helpful feeder for us.

Say nonrecurring revenue is by its nature quite lumpy, which you've probably seen.

We would expect it to revert to levels seen in recent quarters.

But we do have a number of areas where the there are kind of strong long term demand dynamics.

Most notably in areas like over the counter derivatives and structured products as well.

Where we believe there could be healthy demand over time and those are things that lead to repeat sales in another area, where sometimes there can be a switch from.

More of a nonrecurring type license to a recurring license over time, if they become a frequent freak.

A frequent user for these over the counter instruments of our index content.

And just along those lines, what we call. This a nonrecurring line many components of it to reflect products and use cases, the clients will use repeatedly.

Which hopefully will create more stability quarter to quarter.

We'll take our next question from Craig Huber with Huber Research partners.

Thank you and obviously your numbers speak for themselves in a very positive way, but I'm curious given all your various discussions with clients in Europe and the U S has the tone of business with clients from a budget standpoint from their budget standpoint.

Do you feel like it's loosening up some here I mean, obviously.

Your numbers your data your analytical tools are mission critical as you talked about earlier and stuff, but are you still in the budget constraints that there were sort of loosening up versus maybe how you were thinking three or six months ago.

Well first of all the budgetary processes of our clients are pretty much set.

Basis.

And.

And they don't remain extremely flexible.

Up and down.

That much that would be exceptions that there needs to be run through all the way through the senior management of all of our clients.

So so a lot of the budget for this year was set back in December and January .

But we are what we are seeing for sure is.

Slightly more losses, they've tone to the global economy.

In the case of the U S and a soft landing.

And against all of Europe .

That the worst is.

As Oliver and then hopefully these energy prices and the war in Ukraine.

To create more havoc.

And in the case of Japan, obviously that Bryan to inflate the economy in order to grow faster.

And obviously in China.

Trying to figure out what the government will do there so.

There is that small amount of positive momentum.

Normally translate into.

Into slightly higher sales over time and the reason is that we are.

Our clients end up allocating more money to loss.

Compared to the growth of their budgets.

And therefore, they will be able to maybe spend less in our area and spend more with us because a lot of what we sell them. It's mission critical.

Is cutting age is something that is on the mining media link from there from their own clients et cetera, so compared to a quarter or two ago.

Yes in which people were talking maybe off by higher lending. These people were talking about.

Inflation staying high for a very long period of time and set out there its a little more positively as something going on in the world.

Yes.

We will take our last question from Russell quotes with Redburn.

Yes, Hello, Joseph appreciate you squeezing me in here.

I appreciate you already have comments around growth in fixed income indices S&P have obviously chosen to grow inorganically acquire books of CTX indices as Paul that IHS small acquisition.

Given the step up in the opportunity here as a result of the rising global yields might you consider an acquisition to accelerate your growth in fixed income and multi asset indices.

Or will you continue to be selective.

On the organic in your page.

We will always consider an acquisition.

In the areas, we want to expand.

The right price.

That creates shareholder value.

And.

Unfortunately, a lot of other people in our in our space by assets.

For different reasons, we only buy assets to <unk>.

Shareholder value.

In the short medium and long term so we're very financially disciplined.

Even in areas that are very strategic to us. So we were always consideration.

Prices, we have looked at everything.

Obviously, there's not a lot out there. So what we have purposely chosen is a path of organic growth in areas that we have significant competitive advantages. So for example, there are a lot of market cap businesses. Each one is weighted in the lingo fixed income.

Issuance when it in business in the world. So we're not going to add a lot of value by deploying our capital Y launch a whole family of issues with the.

The area that we're experts on its ESG and climate and its impact.

Therefore, we are we are boosting our our capital investment into those areas.

We believe we have significant competitive advantages I believe that by the way that fixed income will be one of the early places.

Most significant repricing of assets and re costing of capital and reallocation of capital with respect to climate, probably more than equities and Brian and more than other asset classes and the reason is that the largest layers and the big fixed income space in banks and insurance companies are going to be on <unk>.

Difficult regulatory.

Due to lower their climate risk in their corporate bond portfolios in their mortgage portfolios in their in their corporate loan portfolios under light and Theyre going to have to add soon and fast and thats going to lead to a big repricing. So therefore, one of the areas that we're really targeting strongly is the intersect.

Fixed income on climate when there is analytics, whether it's fixed income on climate and indices and the like so that's an example of places where we see competitive advantage on our part to create value.

And that does conclude our question and answer session I would like to turn the floor back over to Henry Fernandez, Chairman and CEO for closing remarks.

Well. Thank you very much for your time for your questions. We're available to answer any of the earlier questions on any time to reach out to us will be more than happy to share our perspective Im joined the rest of the day. Thank you.

Thank you that does conclude todays presentation. Thank you for your participation and you may now disconnect.

Yes.

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Thank you.

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