MSCI Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Jisoo Suh, Executive Director, Investor Relations
• Henry A. Fernandez, Chairman, Chief Executive Officer
• Baer Pettit, President, Chief Operating Officer
• Andrew C. Wiechmann, Chief Financial Officer

Analysts

• Manav Patnaik, Barclays PLC
• Alex Kramm, UBS Equities
• Toni Kaplan, Morgan Stanley
• George Tong, The Goldman Sachs Group, Inc.
• Ashish Sabadra, RBC Capital Markets
• Owen Lau, Oppenheimer & Co.
• Craig Huber, Huber Research Partners
• Gregory Simpson, BNP Paribas
• Keith Housum, Northcoast Research

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2022 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the call over to Jisoo Suh, Executive Director, Investor Relations, you may begin.

[Jisoo Suh, Executive Director, Investor Relations at MSCI]

Thank you, Dylan. Good day, and welcome to the MSCI First Quarter 2022 Earnings Conference Call. Earlier this morning we issued a press release announcing our results for the first quarter 2022. This press release along with an earnings presentation, we will reference on this as well as a brief quarterly update are available on our website msci.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we will also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow.

We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insights into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate which estimates at a particular point in time, the annualized value of the recurring revenues under our client agreements for the next 12 months. Subject to a variety of adjustments and exclusions that we detailed in our SEC filings.

As a result of those adjustments and exclusions the actual amount of recurring revenues, we realized over the following 12 months will differ from run rate, we therefore caution you to not place undue reliance on run rate to estimate or forecast recurring revenues. Additionally, we will discuss organic run rate growth figures which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode and with that, let me now turn the call over to Henry Fernandez. Henry?

[Henry A. Fernandez, Chairman, Chief Executive Officer at MSCI]

Thank you, Jisoo. Welcome everyone and thank you for joining us today. Apologies for my scratched voice and a little bit of coughing. Before I talk about -- yes, can you all hear me? Okay. Thank you, Jisoo. Welcome everyone and thank you for joining us today. Apologies for my scratched voice and a little bit of coughing. Before I talk about MSCI's financial performance, I just want to say that our hearts go out to the people of Ukraine, who are suffering through one of the worst humanitarian tragedies in Europe since 1945.

My sincere hope is that the world would ultimately emerge stronger from this crisis. With a deeper respect for self-determination, national sovereignty, and human rights, and a clearer sense of purpose among the liberal democracies of the world. The war has certainly put everything else in greater perspective for many of us. In the first quarter, MSCI delivered strong results that highlight both, the strong resilience and long-term potential of our all-weather franchise.

Not only our solutions helping clients navigate market volatility and asset rotation they're also helping them understand major structural changes in the global economy and the financial markets. Those changes include the fallout from Russia's invasion of Ukraine, rise in interest rates, elevated inflation and the needed transition to a low-carbon economy. During a period of historic geopolitical and economic turmoil, MSCI solutions have become increasingly more valuable to plans across the whole global investment industry.

To put our first quarter results in perspective, we posted our best first quarter on record for both new and net new recurring subscription sales. We achieved organic subscription run rate growth of about 14% and nearly to 96% retention rate. Our adjusted EPS topped 21% and we repurchased almost $800 million worth of MSCI shares. Of course, the biggest global event of the quarter was Russia's unprovoked and unjustified invasion of Ukraine. MSCI responded immediately providing essential support to our colleagues in the region and donating to key relief organizations. We made necessary adjustments to our existing products and business tides including swift changes to our indices.

While also developing new products, services and insightful research to capture the new global landscape. All of these demonstrated once again how fast and nimble MSCI can adapt to an unexpected global crisis. Our resilience and momentum have allow us to continue driving growth despite the uncertain environment. Indeed we are finding innovative ways to grow both inside and outside our traditional client base. For example, our traditional client base of asset managers and asset owners collectively deliver subscription run rate growth of 11% in the first quarter excluding acquisitions.

So far this year, we have already seen more than $2 billion worth of incremental AUM from new mandates, benchmark to the MSCI climate, private aligned indices by asset owners in APAC and in EMEA. We're also driving a strategic benchmark winds with asset managers who are licensing first term indices they have defined using MSCI's new Index Builder application. We have on-boarded about 18 clients onto the Index Buider platform already. At the same time, we keep adding new layers of growth in areas such as fixed income, ESG and climate, and private assets. This quarter our ESG and Climate retention rate with -- hit an all-time high of 98.7% we also recorded our second-best quarter ever for new ESG and Climate subscription sales.

These data points tell us two things. First, ESG continues to become increasingly embedded in the global investment process. Second, our clients recognize the value that MSCI, ESG and Climate offering can provide. We continue to work to position MSCI as a leading provider of Climate solutions in standard setup. As of the first quarter we've calculated implied temperature rise metrics for more than 10,000 issuers and nearly 134,000 funds.

The implied rise metric computes how the carbon emissions of companies and portfolios align or do not align with different global temperature pathways which are 1.5 or 2 degree Celsius increases. Like all of our solutions, MSCI Climate products run on data. To give our clients a truly comprehensive and transparent view of the investment opportunity sense, we are transforming the way we collect claims and build data across product lines and asset classes. As I mentioned back in January, MSCI has always been a data processing factory. Now we're also becoming a data-building machine. During moments of global uncertainty and disruptions, high quality data becomes even more valuable as investors try to understand the present and imagine the future.

MSCI also continuously look to the future to reinvent itself, including with respect to our organizational structure and agility. As previously announced, we made a number of senior leadership changes at the start of the year to support our ever-evolving business needs. These changes position us well for increased growth in the years to come. Likewise, our first quarter performance reflects the long-term investments we have made to build a durable diversify all-weather franchise while external conditions make it more difficult, our fundamentals remain very strong. As we have proven MSCI can deliver impressive results in every type of operating environment. This is what we mean by an all-weather franchise and with that let me turn the call over to Baer. Baer?

[Baer Pettit, President, Chief Operating Officer at MSCI]

Thank you, Henry, and greetings everyone. As Henry mentioned the biggest global event of the quarter was Russia's invasion of Ukraine. I joined him in expressing our solidarity with the Ukrainian people. When the war MSCI quickly removed Russia from our emerging market indexes and reclassified it as a standalone index. We have also introduced new Stress Test scenarios specific to the war, that clients runs were analytics products.

Additionally, we closed out our de minimis financial exposure declines in Russia, which is less than $1 million of run rate. We are well-positioned to succeed in a complex external environment, thanks to our resilient all-weather franchise. Despite the current turmoil, we remain convinced that long-term trends benefiting MSCI including the indexation and globalization of portfolios well in Europe. In my comments today, I will review the areas of our business where we will continue investing for long-term growth as reinforced by strong financial results and a few examples of our actions to manage risks that we can control. I'll start with our continued momentum in scaling our ESG and Climate franchise.

Even as we enter a period of surging energy prices and user technology sector valuations, demand for integrating ESG and Climate considerations is resilient as clients continue to position themselves for long-term transformation. Our firmwide ES&G climate run rate is now $369 million growing 46% year-over-year. In our reportable ESG and Climate ratings in research segment, new client relationships continue to form, almost 50% of new subscription sales. Our multi-year investments to build a large and complete data coverage universe are supporting our position as an industry-standard insider. In ESG ratings and in our Climate metrics we now cover more than 9.5 million instruments across equities and fixed income including ETFs, corporate and government bonds, bank loans, and derivatives. Next, I will discuss our progress in scaling our newer frontier client segments.

In the ESG and Climate segment over half of new subscription sales during the quarter were to wealth managers, hedge funds, broker-dealers, corporates, and insurance firms. These clients have diverse use cases for MSCI solutions such as climate stress testing on their loan books, enhancing underwriting processes by better understanding counterparties, ESG and carbon profiles, complying with new and emerging regulations, and monitoring of net-zero commitments. We're also leaning into the connectivity across MSCI product lines to drive wins with these newer clients. Our strong first quarter sales included an EMEA insurance firm that launched insurance-linked products, benchmark to our testing indexes with a partner in fixed income.

Across MSCI our total run rate from insurance firms in all insurance-related use cases is $77 million, running 19% year-over-year. In analytics, we're lending strategic mandates with equity and fixed income portfolio managers seeking to integrate ESG in portfolio construction process. Our run rate in analytics fixed income front office has grown approximately 50% year-over-year. Finally, we continue advancing our data ecosystem to equip our clients with the insights they need to understand the impact of today's macro backdrop on their portfolios.

In analytics, we released an enhanced version of Climate Lab Enterprise during the quarter with dedicated dashboards related to carbon intensity. While it's still early days, we see Climate data as a sales enabler for various portfolio construction, reporting, and risk management use cases and we're encouraged by our recent large multi-year client win in the Americas. In private assets, we also expect climate data to commercial enabler including for cross-sell, we recently completed a product release of our climate value at risk due diligence reports for RCA's large commercial real estate property database. In ESG ratings our investments in our issuer communication portal are enabling a higher velocity of engagement with corporate issuers which is in turn further support during data quality and timeliness.

Our previously announced launch of MSCI data explorer places over 250 datasets across all MSCI product lines at our client's fingertips. This is empowering them to self-service discover and start new subscriptions. Across MSCI our pipelines are healthy. Having said that we're watching economic activity across regions closely and the effects on our clients which we recognize, maybe I mean in summary. Our resilient franchise continues to benefit from our actions in long-term investments to diversify and enrich our platform. Across varying and unpredictable operating environments, we are committed to driving continued growth in the most efficient way possible prudently for all our stakeholders.

Let me now turn the call over to Andy.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Thanks, Baer, and hi everyone. I wanted to drill into a few highlights of our all-weather financial model, we drove 14% organic subscription run rate growth during the quarter. To put that in perspective, this is an acceleration from 7% growth in that same period of 2017 and from 10% growth just the year ago. This acceleration of growth is a direct result of the increased investments we've been making in the key growth areas over the last few years with your support. Our strong performance reinforces our long-term target of driving low double-digit subscription growth across MSCI.

In index, we delivered 12% subscription run rate growth aligned with our long-term targets and our 33rd consecutive quarter of double-digit subscription run rate growth. Asset-based fees, which are approximately one-fourth of MSCI's run rate demonstrated remarkable resilience in the face of volatile global markets. During the quarter, equity ETFs linked to MSCI indexes grew net cash inflows more than $27 billion, ending the quarter with AUM of $1.9 trillion dollars on March 31st.

These inflows partially offset market declines of close to $90 billion since year-end. More broadly, since 2007 and through the end of last year, we've observed positive annual cash inflows into ETFs linked to MSCI indexes for all years except one. Finally, fees from listed futures and options linked to MSCI indexes which are roughly 10% of asset-based fees are based on traded volumes and are not linked to AUM and volumes in these products, historically have tended to pick up in periods of market volatility including this quarter where we saw traded volumes up 19% and run rate, up 11%.

Our continual advancements in index innovation which are centered on client demand have enabled our ABF franchise to be both durable and diversified for the long term. Since 2012, run rate from asset-based fees is growing at a CAGAR of 15%. For the quarter in analytics, we drove 15% growth in new recurring subscription sales which also cancels primarily from client events. We continue to see good opportunities in front office equity and fixed income portfolio management.

In ESG and Climate, we're driving a higher volume of larger ticket new sales with a pipeline that includes an encouraging set of large strategic deals across regions. As Baer mentioned, the firmwide sales pipeline remains healthy. We're watching the macro backdrop very closely and while it may cause some variance and sales are cancels here or there we're encouraged by the overall forward momentum. Across the firm the product and client experience enhancements we're investing in are enabling cross-sell and pricing opportunities while supporting continued strong retention as well as the ability to win new clients. Let me now turn to our full-year 2022 outlook.

Our guidance across all categories is unchanged and assumes that global markets gradually improve from the current levels throughout the year. If AUM levels remain flat or deteriorate further, we will likely begin to implement elements of our downturn playbook and adjust our pace of investing on a very measured basis. Our full-year tax rate guidance of 15.5% to 18.5% remains unchanged. Our low tax rate this quarter was consistent with our expectations of having a seasonally lower tax rate from the vesting of equity awards. We will expect a higher average tax rate for each of the remaining quarters in 2022.

For the full year, we expect to drive continued high 50% margins on a consolidated basis, which is in line with our long-term target. As a reminder, the margin also reflects the integration of our CA, which is a lower-margin business. On the capital front, our proactive actions provide another lever of value in volatile environments. Year-to-date through yesterday April 25th, we've repurchased $795 million of our stock or over 1.5 million shares. We ended the quarter with a cash balance of $679 million of which approximately $200 million is readily available.

We continue to have board authorization for a potential financing and we'll continue to monitor the markets for attractive windows, although we have no urgency to access the markets if they are not conducive. We have plenty of dry powder remaining to support strategic bolt-on MPNA deals. We can also support highly opportunistic repurchases, although at a more measured pace given current cash balances. In conclusion, so we are presented with an unpredictable operating environment, we remain laser-focused on executing on our growth agenda and remaining highly nimble and proactive against this backdrop, and with that, operator, please open the line for questions.

Questions and Answers

[Operator]

Thank you.

[Operator instructions]

I show our first question comes from the line of Manav Patnaik from Barclays. Please go ahead.

[Manav Patnaik, Analyst at Barclays]

Thank you, good morning. The -- I just wanted to focus on the chart you showed around the resilient AUM growth over the last decade or more, just curious how you guys think about flexing your downturn playbook, for say, to the extent the AU -- the market depreciation continues to happen like at what level do you guys start looking to approach that playbook to try and offset some of those declines?

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Sure. Yeah, thanks Manav. I would say there is not a specific trigger for the upturn or the downturn playbook. As I've mentioned before, we are continually monitoring the environment and calibrating the pace of investment and it's based not only on the current situation or how much the market AUMs have moved up or down historically to this point but importantly, it's based on the outlook. I'd say, in this case, we're not adjusting our guidance because it's, one, early in the year, two, we don't want to pull back on the very important growth investments that are fueling long-term value creation.

But I think importantly in this environment our business remains healthy. As Baer commented, the client buying behavior remains generally robust and the pipeline remains healthy. Even when you look at AUM levels this year they've been quite resilient. It's important to remember that even though a specific global markets may have traded off meaningfully on the year, we have a very diversified global ABF franchise that benefits from inflows into ETFs, as well as global market levels, and then we have the added benefit of the growth in the futures and options franchise, which is provided a nice offset to some of the market volatility, and so, when you look at just to put a finer point on that when you look at AUM year-to-date, AUM is down only 4% from 12/31 through 03/31, so based on what we said back in January, where our guidance for the year was assuming that AUM levels are relatively flat for the year.

We are now at a point where AUM levels are slightly below where we were in January, but there is a long way to go for the balance of the year and the environment fields at least on the operating metrics front feels relatively healthy and so, as I said in my prepared remarks if the markets deteriorate further or stay flat we will likely begin to go to the downturn playbook and pull back on expenses, but I'd say it's too early to say that right now. The last point that I would make a lot of the adjustment and expenses is automatic, so the first things that start to adjust our things like our comp accruals and we do have other levers, we can go to without impacting growth investments in the business, but it's something we're monitoring very closely and as I said we're calibrating on a day-to-day basis.

[Manav Patnaik, Analyst at Barclays]

Okay, got it, that's super helpful, and then just as my second question. In Henry or Baer, there is obviously a lot more regulatory announcements around climate disclosures and the efforts there. Some of it was expected but just curious, if this is a catalyst enough for your efforts to, or seeing more revenue accelerate because of this and also, I apologize if I missed it in moment, the climate-specific run rate this quarter?

[Baer Pettit, President, Chief Operating Officer at MSCI]

Well, that number is coming out, I'll answer your first question. So look, we view this as a really a fundamentally positive thing. We have leadership in this space. We believe that the manner that we operate is highly professional. So we have extremely high standards as we've had in other areas where we've been regulated such as index. So we believe that any environment that creates greater demand for transparency for quality that puts this topic central to investor's agenda and central to corporation's agenda is a very positive thing for us. We are clearly also in, often we're asked for our views on these topics by regulators in a variety of jurisdictions and are in contact with them, which hopefully we can help inform some of their thinking based on our expertise in these matters. So I think overall, we definitely view these things as -- that direction as being a positive for what we're trying to achieve.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

And then Manav just on the run rate, the climate run rate was $50 million at end of the first quarter, which is up over 100% year-over-year. I would say just to provide additional detail on it $18 million of that $50 million is from indexes.

[Manav Patnaik, Analyst at Barclays]

Thank you.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Thank you. Actually, our next question comes from the line of Alex Kramm from UBS. Please go ahead.

[Alex Kramm, Analyst at UBS Equities]

Yes. Hey, good morning everyone. First one on the index sales and this may be super nitpicky, but obviously it continues to be fairly strong, but if I look back over the last few years on a percentage basis is actually the lowest that I've seen in years. So again, very high numbers may be nitpicky here, but just wondering if there's anything you would point out, why maybe from a sales perspective it wasn't as good as some of us may have thought in particular given the inflationary environment and so forth.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, Alex. So I wouldn't read into that too much. I would say that as you know the sales can vary a little bit quarter-to-quarter, the run rate growth remains quite robust at north of 12% organic subscription run rate growth in index and so we're not too focused on either sales or cancels in one quarter and index. So, I think we continue to be pleased by the progress and trajectory on the index subscription franchise.

[Alex Kramm, Analyst at UBS Equities]

Fair enough, I said I was nitpicky. Secondly, and this may be a follow-up to Manav's question and I think there you answered is it's specifically on regulation. But zooming out a little bit more on ESG and Climate, your long-term or medium-term target CR, I think mid to high 20s, if I remember correctly for run rate growth here, you're just at 50 and if I look at the last few years that number has been accelerating despite numbers getting larger and larger.

So I guess just to ask more specifically if you look at the environment currently do you think that acceleration can actually continue even despite those big numbers given all the pipeline as you have in front of you, or should we be bracing for getting back to that mid-20s number in the not too distant future here. Thanks.

[Henry A. Fernandez, Chairman, Chief Executive Officer at MSCI]

Alex, I think that our base case is that the number -- the growth rate in ESG and Climate will stay elevated relative to our targets for a very prolonged period of time. As we expand the ESG franchise to more our client segments such as insurance and wealth and corporate and the like and as we increased the number of use cases for EFG, we are finding more and more demand.

If you just look anecdotally with investment banks and asset managers and asset owners compared to a year or two ago, almost every one of our clients already has a dedicated person employee ESG which is an incredible change over a short period of time. So I think we continue to be fairly optimistic, we are not going to change the target at this point. But we continue to be optimistic that that high growth rate will continue. Now, on top of that, we are still in the very early days of climate, $50 million run rate on climate across all products of MSCI, it's a smaller number, the smallest number but it's is growing at over 100% per year.

I think the potential for our Climate solutions over a prolonged -- over a long period of time to be that it exceeds the run rate of EFG itself given the existential threat to the world and in various, numerous use cases in client segments, including the corporates and appropriate advisors and the likes that we're -- that we're serving. So we are very positive and optimistic. If you thought that we were pretty bullish on this product line, two-three years ago, we're even more bullish today.

[Alex Kramm, Analyst at UBS Equities]

Very good. Thanks for the color.

[Henry A. Fernandez, Chairman, Chief Executive Officer at MSCI]

Yeah, let me add something else just to make sure none of this growth is going to come without a major investment, right in the product line in data, in analytical tools, and in the sales and all of that. So I hope that everyone understands that a meaningful part of our investment in the firm is to capitalize on this ESG and Climate opportunity and continue to be a leader in this space. So our investment plan, especially because of ESG and climate, it's going to stay like this and accelerate as revenues accelerate over a very long period of time.

[Operator]

Thank you. I show our next question comes from the line of Toni Kaplan from Morgan Stanley. Please go ahead.

[Toni Kaplan, Analyst at Morgan Stanley]

Thanks so much. I wanted to ask about labor inflation, how that's impacting you? Do you expect that to impact margins this year? Maybe you're able to offset it by either some sort of efficiencies or just flow through from growth, but just talk about the cost environment right now. Thanks.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, I'll touch on the cost. But at first want to give you the holistic picture around inflation for us. I think you know this, but we are a high margin business where small benefits on the topline can lead to net benefits on the bottom line. Even if we have some inflationary pressure on the expense line and so, I do want to point out that we are very thoughtful and focused on pricing appropriately for the value we're delivering, we also factor in what competition is doing and client relationships, but we also do factor in the cost environment and the cost impacts to us and so we shouldn't lose sight of that. Now on the expense side, I would point out to Henry's last comment expense growth has been much more driven by investing.

So the expense growth that you're seeing is as result of the meaningful investments we made last year, the carryover from those and our continued investments this year. There's also obviously an impact from RCA coming on board. But behind both of those we do see some impact to wages from inflation and just to dimension out roughly in a typical year we'd normally see low-single-digit to maybe mid-single-digit wage increases. This year we're seeing something more like mid to slightly above mid-single-digit increases in wages and so we are seeing some impact there, but in terms of dollar impact, it's not significant in the grand scheme of things, and I would point out on the non-comp side, well, we have seen some pickup in professional fees, areas like insurance we have seen some increases.

The bulk of our non-comp expense base where we have long-term vendor agreements that have embedded price within them, we're pretty well protected against the inflation and so, well, it is a factor to us, the bigger impact on expenses is really the pace of investment, and that's what we're primarily focused on.

[Toni Kaplan, Analyst at Morgan Stanley]

That's great. Also, you mentioned a couple times the pipeline being strong. Maybe you can zoom in on analytics for a second, just because that usually tends to be the most impacted during sort of periods of uncertainty, partially because of the bigger ticket sales there. So just wanted to understand how you feel like the analytics environment is going and given that incredibly strong growth rates in the other segments like I guess are you happy with 5% organic or do you sort of strive for better than that. Thanks.

[Baer Pettit, President, Chief Operating Officer at MSCI]

Well, Toni, we remain unhappy with the growth rate -- of the run rate in analytics we've done quite a lot of different the strategies to change that and a lot of it has work, but from a small run rate basis. So for example, we have been pivoting our analytics product line toward the front office to portfolio management offices so that's why you see meaningful, very meaningful double-digit increases in the run rate of Fixed Income Portfolio Management that they're a little bit, in equity analytics our Equity Portfolio Management Analytics as another area that we've been pushing pretty hard again from a slower -- from a smaller run rate base and I think the central issue remains the into our risk analytics platform which is sold to cost centers.

In our client base as opposed to profit centers and as there is a very much of a mature a product area for us, we're trying to reinvent that and reinvigorate that with climate risk as a driver of a risk management in the central office and we have some early successes on that purely the Climate Lab Enterprises becoming the sample of a product line in that category. So sales remained really robust, when you look at the operating metrics.

The challenge remain the lumpiness of the cancels at the time of renewals because of the mature nature of the product line, the cost core in that typically affects cost centers especially center on west cost centers and all of that. So hopefully over time we can outgrow the product -- the mature part of the book of the run rate and the newer bar, the prone office equity analytics, fixed income analytics, and the new use cases such as climate risk can continue to grow faster and therefore get the overall run rate to grow in the high single-digit on the ratio we lower the digits.

[Toni Kaplan, Analyst at Morgan Stanley]

Thanks a lot.

[Operator]

Thank you. I show our next question comes from the line of George Tong from Goldman Sachs. Please go ahead.

[George Tong, Analyst at The Goldman Sachs Group]

Hi, thanks, good morning. There is certainly an elevated degree of market and macro uncertainty in the external environment, can you describe customer sentiment and how their budgets are shaping up, as well as perhaps what you're seeing with the pace of client cross-sell and up-sell across the business?

[Baer Pettit, President, Chief Operating Officer at MSCI]

Sure. George. So look, we want to be very number is driven on this clearly, we have been in a volatile environment that has got people a little antsy generally, and when I say people, I don't mean our just our clients, I mean just market sentiment. But when we look at the facts of our pipeline, what's going on in the business day-to-day. We just don't see it yet. Now it may show up in the future, but for now, everything is what we would expect it to be at this stage in the quarter or looking pipeline, etc. So we will give you new information as soon as we get it, but right now we're not seeing any noticable change in the pipelines, the buyer behavior or anything of that kind.

[George Tong, Analyst at The Goldman Sachs Group]

Got it. That's helpful. You have a partial hedge in asset-linked fees from futures and options volatility-related revenues. Can you discuss how volatility is helping to offset AUM the declines that we're seeing year-to-date?

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, I know it's a great point, I would highlight that the volumes we saw in this quarter were the highest volumes that we've seen since the first quarter of 2020 with close to 30 million contracts traded. So given the scale of the futures and options franchise, it is creating a very nice hedge to some of those AUM levels we saw strong volumes in contracts based on our EM indexes, ABF indexes clearly strong volumes in the China A 50 products.

We also had a record single-day trading of close to 3 million contracts on March 14th and so I think you made an excellent point then hopefully as we continue to grow that franchise. It's going to provide some additional stability with strong secular trends that will drive long-term growth in the franchise that we have. The other point that I would highlight which doesn't show up in ABF, it shows up on the index subscription side, but is related, is the over-the-counter derivatives opportunity for us and so given broader macro-dynamics there are opportunities for us to continue to drive strong growth in the over-the-counter index-linked derivative opportunity set for us. So that's another area we're focused on in another driver of stability and growth on the subscription side.

[George Tong, Analyst at The Goldman Sachs Group]

Very helpful, thank you.

[Operator]

Thank you. I show our next question comes from the line of Ashish Sabadra from RBC Capital Markets. Please go ahead.

[Ashish Sabadra, Analyst at RBC Capital Markets]

Thanks for taking my question. I was wondering if you could provide some color on the progress of integrating the RCA acquisition, if you could talk about the progress in enhancing the transaction data as well as initial feedback from customer and any initial color on cross-sell opportunities there? Thanks.

[Baer Pettit, President, Chief Operating Officer at MSCI]

Sure. So I think we're really pleased with the progress so far. Clearly the technology infrastructure work, it takes time, but we're on schedule as far as what we hope to do. I think the most immediate progress we're seeing is on the client front, as you mentioned with the integration of the client coverage teams and that -- then working together as one unit both across the world, in the Americas, in EMEA and building out what we do in Asia, and we had a good quarter.

So we had a good quarter as a combined team the client feedback is very positive and we are, as I mentioned, we're starting to build out some product innovations, notably bringing some of the climate capabilities onto the RCA database, etc., all of that will take a bit more time. But I think most importantly, we have a significantly greater footprint now with real estate investors, and I think that show you the numbers, and hopefully we'll build our reputation as being serious in this space.

[Ashish Sabadra, Analyst at RBC Capital Markets]

That's great and then maybe just a quick question on a large asset manager cut the management fees on their passive ETFs. How should we think about how does that influence the index fees going forward? Any color will be helpful. Thanks.

[Baer Pettit, President, Chief Operating Officer at MSCI]

Yeah. Some, I'm not quite certain what you're alluding to, but the -- my point would be that we've been pretty consistent on saying that the over-time the fees in this area have been compressing and those numbers have shown themselves over many quarters and years. I don't think we have noticed any sort of notable changes in the last quarter. Since we spoke to you in our interactions clearly if market -- if the market environment continues to be more challenging, that could, that could change, but I'm not aware of anything very material that we've seen since we last spoke to you.

[Ashish Sabadra, Analyst at RBC Capital Markets]

That's very helpful color. Thank you.

[Operator]

Thank you. I show our next question comes from the line of Owen Lau from Oppenheimer. Please go ahead.

[Owen Lau, Analyst at Oppenheimer & Co.]

Good morning and thank you for taking my question. So, you previously expected, the adjusted EBITDA margin for the all other segment will be closer to mid-teens in 2022 and I think you had around 26% in the first quarter. I'm just wondering, the pace of the investment in this segment versus your original expectation in the first quarter and how should we think about the potential upside to your margin guidance for 2022 for these segment? Thank you.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, sure. So I would point out and make sure you keep in mind that there is some seasonality on the legacy real estate business where some revenues are recognized based on deliveries of service, which tend to be heavier weighted in Q1, in Q2. So if you look in the past you will tend to see margins being slightly higher in those quarters and so there is some continuing contribution from that granted it's smaller in the absolute basis because of RCA being in there. To your point, there are a number of moving pieces on the integration, which will cause the expenses to be non-linear.

At this point we're still working towards that mid-teens EBITDA margin for the year although there are a number of variables that could cause it to be slightly higher or potentially slightly lower, not only related to integration, but also the pace of capitalization, so there are certain expenses that we're finding we can capitalize a bit more, but I'd say it's too early in the year for us to change that mid-teen figure although it could have some variability around it.

[Owen Lau, Analyst at Oppenheimer & Co.]

I got it. That's helpful and then going back to the point you make about, I think the insurance firm -- $77 million run rate or 19% growth year-over-year in this segment. Maybe could you please add a little bit more color on the growth driver there and the potential kind of more product launches and the client sentiment there? Thank you.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, I think I would generalize it across all of our products that insurance is a exciting client opportunity for us in a segment where we've historically been less significant and so it cuts across areas on the analytics side, given that you've made and enhancements we've made to our fixed income analytics. We have a much more compelling solution to insurance companies.

Within ESG and Climates, we have some very differentiated insights and content that are extremely relevant to insurers who are trying to assess not only the impact of ESG and climate within their investment portfolios but also the general accounts at the organizations and for obvious reasons, climate is something that is very relevant to insurers and there's potential regulations around CAF that could drive strong demand for some of our solutions there.

And then on the index side, especially around some of our investment thesis indexes, particularly those with ESG and Climate angles are very compelling across a number of insurance use cases, including index-linked variable annuities and so it's a segment that we're very focused on. We've got a clear opportunity, and it's a matter of just executing against it.

[Owen Lau, Analyst at Oppenheimer & Co.]

Got it. Thank you very much.

[Operator]

Thank you. I show. Our next question comes from the line of Craig Huber Huber Research Partners. Please go ahead.

[Craig Huber, Analyst at Huber Research Partners]

I wanted to ask on the Analytics division, your long-term goal thereof high single-digit revenue growth. What sort of changes should we expect you guys to make there in the product or the service to help accelerate the growth? I know it's not a huge part of your story, but just update us there, if you would, please.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Baer, do you want to take that one?

[Baer Pettit, President, Chief Operating Officer at MSCI]

Sure. So look, one thing that we are working on now, and we'll have some announcements coming up in the next quarter is really moving away from our kind of legacy divisions of functionality and being able to deliver all of our capabilities through our ISS technology platform and what this really means is being much more flexible in integrating into our clients' environment and being able to -- basically in clients can pick and choose the functionality and capabilities that they want and integrate that into their workflow.

The next element, which Henry referenced earlier is focused on the front office. So, while some of those numbers are lower to start with, we're very pleased with the growth, for example, that we have in fixed income portfolio management, where it's an area where we have increasing credibility and are growing the number gets close to 50% year-on-year.

And then the last one -- a big driver is ESG and Climate and notably climate integration with a lot of both the risk capabilities and reporting capabilities where -- because we have both the enormous data processing and risk capacities and leveraging our new intellectual property on top of that, all of those things should be driving the growth rate up and in order to do that, we also have to then keep our retention rates of the existing book of business solid. So if we can combine those if you like, three growth drivers and also can maintain strong retention rates, those will be things that can get us on to that higher path.

[Craig Huber, Analyst at Huber Research Partners]

And then also a similar question on the futures and options side. You've talked about this in the past. What's new going on there the investments that you guys are doing there to help it further make that division a lot larger overtime to accelerate growth there significantly over time? What was the innovation going on there, please?

[Henry A. Fernandez, Chairman, Chief Executive Officer at MSCI]

Yes. So we're very excited about the work that we're doing there in two fronts. The listed futures and options opportunity continues to expand as we have been showing in the last few quarters and the use cases the licensing of new use cases is also expanded. So most of the futures and options that we have are on market cap indices. So we are now looking to -- with our partners, the exchange partners to do a whole generation of climate and ESG aligned indices for listed options and futures. And I think that will put another layer of growth in this area, in addition to the continued expansion of the market cap indices for listed futures and options.

The second category, which is what Andy alluded to which is reported in the index subscription line or area is the structured products, over-the-counter options, swaps and all of that, that area is growing significantly for us, not only on the market cap indices, but especially on new investment thesis indices, ESG climate being in that category, but also thematic indices in under core, that is an area that we're putting a lot of effort and that normally translates into sometimes onetime fees. So these are recurring onetime fees that show up in index in the index subscription. They don't show up in the asset base sees at this point. So we're very excited about that. And that is a major area of expansion that we see in the next few years

[Craig Huber, Analyst at Huber Research Partners]

Great. Great, thank you.

[Operator]

Thank you. Our next question comes from the line of Greg Simpson from BNP Paribas. Please go ahead.

[Gregory Simpson, Analyst at BNP Paribas]

Hi, good morning. So in Europe, at least, it seems ESG and climate is becoming really mainstream and a lot of mutual funds, Article 8 and 9 and so on. So I'm wondering if you could share any color about what you see in terms of usage of your ESG and climate products over time by, say, asset manage? Do your clients start with, say, more standard ratings products and then demand more bespoke data and content over time to try and differentiate? Just trying to think about how revenue per client retention rates develop over time. Just take a look, it would be great.

[Baer Pettit, President, Chief Operating Officer at MSCI]

Sure. So look, for sure, your observations about Europe are correct and I would say that the landscape in Europe generally, whether it's a business or in the institutional still looks somewhat different than in the U.S. or in Asia and you can say that Europe is leading in this regard. It's actually quite difficult to generalize across the variety of use cases that we have across different client types, etc.

Clearly, the -- as you rightly point out, the retention rate is extremely impressive at present. So we're -- in addition to 50% of our new business, our new business coming from new clients. I think what that retention rate signals, is that while this is, you could say, getting established in Europe, it is still very much in a growth phase. This is not by any stretch of the imagination, a mature business, clients are hungry for data, I think what they're trying to achieve.

So some of them want to build rules-based index products. Some of them want to use the ratings in active management processes. Some of them are less interested in the ratings themselves, but the data underneath the ratings that we collect on companies in the manner that we organize it and they can parse that data for their active management process.

So I think precisely, the element that is most exciting here is the variety of different types of investors and a number of different use cases that we're serving that make it hard to generalize about a particular path. So as long as we can continue to invest in the product line, to ensure that our coverage is extremely broad, that we're innovating around new areas of concern and focus for investors and that in addition to our leadership in ESG, we continue to invest in our leadership in climate. I think those are all the things we're doing and it is creating both enormous demand and a lot of work for us. So for the foreseeable, future, we're going to be continuing to invest in this area and serving quite a broad range of use cases.

[Gregory Simpson, Analyst at BNP Paribas]

Very helpful. And then just a follow-up question on whether you're seeing the current market, weaker market backdrop is creating more opportunities for positive M&A is maybe sell their expectations are falling for high-quality assets. Are there any kind of areas particularly keen to add scale in or is that just on that? Thank you.

[Baer Pettit, President, Chief Operating Officer at MSCI]

So I will say that we don't necessarily wish for and welcome difficult market conditions and difficult operating environment. But having said that, this is where we do our best at MSCI. These are the environments in which we tend to capitalize big time and further leadership in a lot of what we do and how this tense competition because we remain very focused on compliance centricity. We innovate a great deal in markets like this, and we take full advance locations and valuations such as certain types of bolt-on acquisitions and the like.

You haven't seen us make a lot of bolt-on acquisitions because the valuations are being elevated, given the bullishness of market conditions. If we have a prolonged period of disruption here, it will definitely be a great environment to pick up data sets or technology or people or whatever at a lot lower valuation. That hasn't happened yet because there's usually a long lag associated with strategic valuations, but we will become more active, but it's way too early to tell at this point.

But I think my underlying -- in my underlining position here is to say watch for the performance of MSCI in difficult market conditions because this is where we do our best. This is where franchises developed further as opposed to when you have very bullish conditions in which the time rights all bodes.

[Gregory Simpson, Analyst at BNP Paribas]

Thank you.

[Operator]

Thank you. I show our last question comes from the line of Keith Housum from Northcoast Research. Please go ahead.

[Keith Housum, Analyst at Northcoast Research]

Great, thanks, good morning guys. I was just looking at the R&D expenditures for the quarter, it looks like those grew, I guess, the least of all the tenors and it was down sequentially from the fourth quarter. So I'm reading too much into this, but was there a pullback in the spending? Or were you guys starting to execute your downturn playbook already? Or perhaps just walk me through, I guess, pullback on the R&D spending or lower growth than what the expense categories would have been.

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, nothing to read into there. I would highlight that expenses and individuals time allocations can move between R&D and cost of revenue just based on the nature of the work and so you will see quarters where cost of revenue looks high growth looks R&D growth looks lower. Those tend to be the two areas where you do see our investment going, and so you saw a cost of revenue showing a higher growth rate in the quarter, and that's on the back of investments in our product teams, technology and data our researchers. Sometimes those individual's time will be allocated to projects that are more R&D in nature and sometimes they're more cost of revenue in nature.

And so I would say it's not any indication that we're pulling back on the R&D type activities. It's more just a classification of where they show up and then I think the selling and marketing growth is a little bit more straightforward. There is some degree of investment spending there, but there's also just a degree of continuing to flex up on our go-to-market, where the expenses there are related to our selling effort, our investments into new feet on the ground and client services as well as tools to enable our sales force.

[Keith Housum, Analyst at Northcoast Research]

Okay. That's helpful. And then you guys talk about kind of having a natural hedge with the incentive compensation coming down if there was a downturn in the business. Can you just remind us or provide the color in terms of how much of the income statement would be allocated for an incentive comp like a normal period?

[Andrew C. Wiechmann, Chief Financial Officer at MSCI]

Yeah, yeah. So I think what we've said is -- and I think we had a slide on this that we put out during the last quarter where you can see the exact amounts, but just rough orders of magnitude, I think we said a 10% pullback would lead to about $15 million down flex or conversely up flex on the -- what is our bonus expense on an annualized basis. So kind of 10% moves on asset-based fees can lead to a $15 million up or down flex.

Behind that, things like non-comp and pacing of selected hiring, some things that are a little bit less related to growth investments. We've got a number of levers that we can flex up and down to the tune of about $20 million. And so we've got some pretty meaningful degrees of freedom. It depends on, as I said in my first comments, all of it depends on our outlook and what's going on. We don't want to go to these things but we are prepared to, to the extent the environment persists or deteriorates further.

[Keith Housum, Analyst at Northcoast Research]

Great. Any. Appreciate it. Thank you.

[Operator]

Thank you. That concludes the Q&A session. I would now like to turn the floor back to Henry Fernandez, Chairman, and CEO for closing remarks.

[Henry A. Fernandez, Chairman, Chief Executive Officer at MSCI]

So thank you all for joining us today and your interest in MSCI. We look forward to continuing to speak and meet with all of you, including at various investor events that are either sponsored by you, our analysts or some of them on our own.

As you can see from what you hear in the commentary, we benefit from an all-weather franchise at MSCI in good times and bad times. So clearly, very important to underscore what the messages that we're giving you as to where we stand in that part of the cycle and what is benefiting our business, what is affecting our business and at the moment, as I said, as Baer said a few times, we haven't seen any significant or meaningful change to our operating environment. Thank you, all.

[Operator]

[Operator Closing Remarks]