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MSCI Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Jeremy Ulan
    Head of Investor Relations and Treasurer
  • Henry Fernandez
    Chairman and Chief Executive Officer
  • Baer Pettit
    President and Chief Operating Officer
  • Andrew Wiechmann
    Chief Financial Officer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the MSCI Second Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions]

I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Jeremy Ulan
Head of Investor Relations and Treasurer at MSCI

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 call, as well as a briefly 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 also refer to non-GAAP measures, including, but not limited to adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP 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 exclusions, the actual amount of 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 recurring revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, 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. As always, analyst will be welcomed to ask more questions by adding themselves back to 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?

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

Thank you, Jeremy. Good morning, everyone, and thank you for joining us today. During the second quarter, MSCI delivered another solid performance against a fluid market environment. We achieved adjusted EPS growth of 17%, organic revenue growth of 13%, and organic subscription run-rate growth of 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, and 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 has repurchased close to $50 million shares or nearly 40% of our total shares outstanding from the end of 2012, and 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 adjust and expenses up and down, depending on the operating environment. This helps stabilize our profitability through periods of market turmoil.

More broadly, MSCI continues to benefit from our globally diversified and integrated franchise. In the second quarter, we delivered our 38th 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 of over 95%, and recurring net new sales growth of 46% in equity portfolio management. In addition, we delivered 70% climate run rate growth across our product lines along with a climate retention rate of over 97%.

Our ESG run rate growth firm-wide grew 18%, and the retention rate from our ESG & Climate product segment remained resilient of 97%. This shows that despite tightening budgets, our clients continue to make ESG & Climate a top priority. During my recent client trips to Asia, the Middle East, Western Europe, and parts of 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 said ESG is now central to their business strategy. This reinforces our belief that ESG risks and opportunities are investment risks and opportunities. With all of that in mind, MSCI is working to accelerate our ESG and climate product launches.

Our Climate Solutions continue to drive growth across the company and they have helped us build momentum across client segments. This gets to a larger point. The integration and interoperability of our product lines, what we call our One MSCI ecosystem can dramatically increase value and efficiency for our clients. We further amplify those benefits through our open architecture for clients and other outside parties, and through MSCI's role as a standard center, industry connector and innovation hub. All of this represents our greatest competitive advantage as a company.

It highlights our unique position in the industry, our unique mix of capabilities, and our unique range of client segments. In this, MSCI is now well placed to capitalize on major trends reshaping the industry. Those trends include the acceleration and -- of the adoption of Index investing, the continued shift to outcome-oriented rules-based technology-driven portfolio construction, the rising demand for sustainable investments and Climate Solutions, the growing role of regulation, and the increased allocations to private assets.

As our strategy evolves to capture new opportunities, which will require new investments, MSCI will stay firmly committed to financial discipline and high profitability. Those commitments have always anchored 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 Baer.

Baer Pettit
President and Chief Operating Officer at MSCI

Thank you, Henry, and greetings everyone. My comments today will cover MSCI's 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 Float Data product, 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 & Climate Index.

During the quarter, 96% of industry inflows into ETF products domiciled and 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, creating and portfolio construction.

Turning to our ESG & Climate reporting segment. We delivered overall run rate growth of 26%, while our retention rate was nearly 97%. As I can confirm from my client meetings during the quarter, demand for our ESG products remains high, fueled by regulatory pressure for high quality data, MSCI's comprehensive coverage, and the transparency provided by our solutions.

Looking at Climate subscriptions 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, AUM in ETF products based on MSCI Climate indexes totaled $71 billion at the end of June. We've represented approximately 67% market share on the basis of AUM. As with ESG, both government regulations and voluntary disclosures continue to drive demand for advanced climate tools.

Let me now turn to our Analytics segment. During the second quarter, MSCI achieved subscription run rate growth of 6.6% in Analytics, including 13% growth in equity portfolio management with notable strength in the hedge funds segment. We also posted our highest second quarter ever for retention at 95.2% and net new sales of about $11 million in Analytics. By providing investment risk and performance workflows and analytics, we developed deep connectivity and access to client portfolios. This in turn helps us deliver additional innovative services such as our ESG & Climate regulatory reporting solutions, including for the Sustainable Finance Disclosure Regulation. In fact, during the first half of 2023, MSCI delivered more than 47,000 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 Assets 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 4,700 new stores, 150 alternative data sources, 12,000 corporate websites, and submissions for more than 5,200 corporate issuers. We have also used generative AI and LLMs to help us identify, extract and validate EU taxonomy data 4 times faster than our previous capabilities. These data represent crucial inputs for EU regulatory reporting.

In Analytics, we use natural language processing in deep learning in 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, to help automate contract review, extract information and process invoice.

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'm confident that by staying focused and disciplined in our operations in financial management, MSCI will be able to deliver for our clients and our shareholders.

And with that, let me turn the call over to Andy. Andy?

Andrew Wiechmann
Chief Financial Officer at MSCI

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 top line growth. This included very strong non-recurring revenue, which more than offset some of the lingering cyclical impacts we saw in parts of our asset-based fees. 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 & 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 represent about 70% of our Index subscription run rate.

Asset base 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 & 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 was greater than $1.4 trillion as of July 20. 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.In Analytics, subscription run rate growth was 7%. We had another quarter of very strong equity factor model 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 47,000 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 & Climate reportable segment, our run rate grew 26%, with 22% growth in ESG and 50% growth in Climate. The volume 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 the powerful secular drivers. As Henry and Baer mentioned, our long-term opportunities remain durable and attractive for both ESG & Climate. In Real Assets, we drove 9% organic run rate growth. As Baer indicated, our benchmarking and market and portfolio insights offerings remains strong with double-digit organic growth, while 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 and encouraging demand for products like our mortgage debt intel offering. These 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 non-recurring revenue in the quarter, benefiting from strong sales of our index free-float product. While these non-recurring revenues will fluctuate meaningfully quarter-to-quarter, we continue to see healthy growth in the underlying demand for many of the products that are often sold as non-recurring, such as index licenses for OTC derivatives, history data products and other unique datasets, as well as analytics implementations.

Importantly, these sales often open the door for broader conversations and can convert into recurring subscriptions. Share repurchases drove $0.06 of the year-over-year increase, as 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 remain relatively flat for the balance of the year. We have left our expense guidance ranges unchanged, although, if market levels remain 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.

Questions and Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Toni Kaplan with Morgan Stanley.

Toni Kaplan
Analyst at 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?

Baer Pettit
President and Chief Operating Officer at MSCI

Hi, Toni, Baer here. So look, a few observations. So 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 inherent to the regulation, which, as you suggested, I believe we're meeting. But there will inevitably be 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, the -- 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.

Toni Kaplan
Analyst at Morgan Stanley

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 ESG indices revenue is embedded in there? And 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? Thanks.

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

So first of all, we believe strongly based on plan discussions and strategy meetings among ourself that the index opportunity, it's only begun, that this trend will continue for years and decades to come. And it's predicated on our view and our clients' view that indices are basis of portfolios, indices are tools to build portfolios. 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, it's mentioned about securities in the context of an index, which then becomes the basis of our portfolio.

So we saw this trend on market exposures with market cap indices, which continues unabated. We then moved on to factor indices, which have become very, very popular and continue to grow. We then moved on to ESG indices. We're now very much into the climate index phase. We're also accelerating our thematic indices.

So if you think about it, we're -- in addition to market cap indices, which are simple exposures to market, we are moving into what we call non-market cap indices, which are indices built on demand on an investment thesis and demand for -- by clients. So again, these are ways of organizing the securities of the world according to certain variables, whether it's an industry variable, a climate, a thematic, a factor or whatever, variable, and they become extremely valuable for people who are building portfolios across those variables, whether they want to then launch an active management product, whether they want to launch a passive one, whether they want to launch structured products or listed derivatives, it's all the same concept, which is a basket -- a 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, their thematic profile, their factor profile. So MSCI is turning into a giant equity research shop to try to understand the characteristics of securities so we can organize them that way.

And everywhere we go in our shareholder base, people are waiting to -- waiting for their shoe to drop on the index business, and we think it's the opposite. We think that this business will accelerate in the years to come in all the use cases. We're now witnessing the direct indexing revolution as well that is going to make it more efficient for -- to build personalized, customized individual portfolios.

So anyhow -- so I think that, that is where we are, that's what we see from our clients, that's what we see from the ground up and the like. And with respect to ESG, we're big believers that ESG is investment risk, and it's not we, our clients are telling us, ESG is investment risk, ESG is part of the fundamental analysis of securities, it cannot be avoided. So therefore, that will continue unabated in all aspects, whether it's ratings or research or screening, but importantly, in the foundational element of building indices.

Operator

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

Alex Kramm
Analyst at UBS Financial

Yes. Hey, good morning, everyone. A quick question on ESG and Climate. I think when I compare today's sentiment and tone from you guys relative to last quarter, there is a 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 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? Very slight improvement quarter-over-quarter, but clearly still a lot of uncertainty.

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

So Manav [Phonetic], the reality is, we feel exactly the same a quarter ago that we feel today. Maybe in the call, we go into political issues or this or that, and therefore, it can mess up the message. And that's a problem that we blame it on us. In terms of communicating the overriding message is. And therefore, we feel fundamentally the same. And by the way, look, we're not valuers, we're not philosophers, we're not the idealists. We are grounded business people, and we see what our clients are going through in the investment process. And we talk to them extensively. We review that among us and all of that, and there is no alternative path but to believe that ESG will continue to be central to the investment process.

It was a client of ours who said to me one time, "Look, Henry, this is very simple, the 70 years of fundamental analysis of security is focused on market, products, competition and all that. They never focus on the internal workings of the company." And what ESG partly is about the internal workings of the company. What are the motivations? What are the governance issues? What are the social issues of -- what are -- how do they view the environmental issues and all of that, and that should be part of the investment process.

So therefore, I think in my view, look -- and this is not just me speaking, I was just on the road for six months talking to clients all over the world. And the answer was that, Alex, is that honestly, everyone wants to talk about this because when I incorporate it in what they do every single day. Look, we can argue all day long. We can look -- talk at 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 take ESG considerations into account in the creation of the investment process.

One last thing that I would say is that even in those states in the U.S., where there is a lot of political pressure on the pension plan to abandon looking at, I think, from the ESG 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 caught holding the bag.

So look, that is the bottom-up, on the ground description on what happens. And we can talk about it all day long as to whether [Technical Issues], but what I'm telling you is -- 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.

Alex Kramm
Analyst at UBS Financial

All right. Fair enough. And then just switching gears very quickly on the Analytics side. Noted, obviously, the strong performance in new sales, etc. I think you've also, given the inflationary environment been a little bit more strong on price. So maybe you can just differentiate how much came from pricing relative to new logos or new core sales. And given that the inflationary environment is probably softening a little bit, just wondering how you feel about the sustainability of growth in Analytics?

Andrew Wiechmann
Chief Financial Officer at MSCI

Sure. Yes, hi, Alex, it's Andy. So maybe just more broadly touching on price increases. We 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 the rest of the company, higher price increases, although, I'd 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 that's probably the most important point, the continued value that we're adding to the product and the service that we're delivering as well as the clients' overall usage of our tools. I think it is an important lever for us, and 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.

Operator

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

Manav Patnaik
Analyst at Barclays

Yes, hi. If I could just follow up on the ESG segment. Just looking out into the second half, 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 with what you expect in the second half, especially in the context of, I think, Henry, you mentioned an acceleration of new products in the ESG and Climate. Is that going to start impacting second half already?

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

So Manav, I'm sorry if I misspoke earlier. I didn't recognize the German accent versus the Indian accent. Sorry about that. But look, the -- it's hard to say. I mean the pipeline remains pretty good and pretty solid. Some things are going to accelerate from 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 classify their funds, they comply to their regs and all that. And in the U.S., they're looking for the same things.

But in reality, our clients are coming to us and asking us for a lot more ESG information. They want a lot more. They want more granularity of the data. They want to organize in a way that they can analyze it better because they now have a higher risk of regulatory compliance issues. They want us to be -- to put more pieces describing this whole process for the marketing campaign. They want a significant expansion of the coverage of the universe of issuers that we rate on ESG. They want changes to the ESG methodologies in some respects. They want an update on what we -- how we're incorporating climate into ESG and so on and so forth.

So we have a lot of demand for what we do. And of course, over time, that will translate into sales. Right now, we're in a cyclical soft period in ESG, and it's logical. We've been running at a breakneck [Phonetic] pace for years now. And there have been changes going on in the regulatory environment in Europe because there's 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 this in a fashion that is even more granular, even more prescriptive, even more comprehensive and all of that. And that's what we're looking to expand on. So our investment will have to increase and our sales over time beyond these cyclical soft are going to increase.

Manav Patnaik
Analyst at Barclays

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 -- into the stock buyback market, which made sense. So just any updates on that M&A pipeline?

Andrew Wiechmann
Chief Financial Officer at MSCI

Yes. So Manav, maybe I'll just broaden it to our approach to capital allocation, and then I can touch on M&A. So I 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 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 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's no certainty around it, but bolt-on M&A remains a key focus for us and part of our strategy.

Operator

We'll take our next question from Alexander Hess with JPMorgan.

Alexander Hess
Analyst at JPMorgan Chase & Co.

Yes. Hi. Briefly following-up on some of the ESG and Climate questions already asked 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 road map in your 2021 Investor Day, where have you guys sort of seen the most momentum versus your plan back then? What has maybe been pushed to the back and -- to the back burner? And what has changed since that plan was announced.

Baer Pettit
President and Chief Operating Officer at MSCI

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 very much in line with the broad direction of what we indicated there. I think the element that has to a degree changed, is that the distinction between ESG and Climate has become greater than we thought at that time. And the climate agenda has its own specific topics, needs, regulatory framework, etc., distinct from ESG.

So I would say that increasingly, while there is -- there remains, of course, significant overlap between the two, we are, in some regards, viewing them as distinct opportunity. And as we look forward to the next year, I would say that the range of Climate Solutions is doubtless larger in terms of regulatory needs, whether it be for banks, for asset managers, private company coverage on a kind of on-demand basis. And that doesn't mean in any way that the ESG product pipeline isn't also growing and being enhanced. It's just that I think the role of Climate has become even more significant than we expected at that time.

Alexander Hess
Analyst at JPMorgan Chase & Co.

Great. Thank you so much, Baer. 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 desire for consolidation in ESG and Climate overall?

Andrew Wiechmann
Chief Financial Officer at MSCI

Sure. Yes. So listen, 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 datasets, 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'd say the recent regulation 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 road map, and we think M&A can be an accelerant there, although it doesn't need to be. And we have, as Baer 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.

Operator

We'll take our next question from Owen Lau with Oppenheimer.

Owen Lau
Analyst at Oppenheimer

Good morning, and thank you for taking my questions. So I think your market assumption earlier this year was down in the first half and then recover in the second half. But now the market it's up quite a bit in the first half. I'm just wondering how much conservatism do you have baked into your full year free cash flow guidance or there is any change in your investment plan for the second half? Any more color would be helpful. Thanks.

Andrew Wiechmann
Chief Financial Officer at MSCI

Sure. So I know you know this, Owen, 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, we 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 don't want to comment too specifically on free cash flow guidance given that there are a wide range of factors that can swing that up and down even beyond business performance. Clearly, business performance and billings are something that help 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 all environments. And if AUMs are higher, we can hopefully capitalize and invest more.

Owen Lau
Analyst at Oppenheimer

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 great if you can also remind us the growth map of your Index subscription run rate, which is how much of it is driven by pricing, new logos and also further penetration? Thanks.

Andrew Wiechmann
Chief Financial Officer at MSCI

Yes. As Henry alluded to, 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 non-recurring side but also on the recurring subscription side. I'd say just as Henry alluded to, the overall performance is reflective of this trend of indexation, the 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 price is contributing around 40% or so, give or take a bit, to recurring -- new recurring sales within 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.

Operator

We'll take our next question from Ashish Sabadra with RBC Capital Markets.

Ashish Sabadra
Analyst at RBC Capital Markets

Thanks for taking my question. Wanted to focus on the newly announced IFRS sustainability disclosure standards. The question there was how does that change the value proposition going forward? Does it change the competitive environment? And how does it improve the value proposition for ESG ratings?

Baer Pettit
President and Chief Operating Officer at MSCI

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 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 important regulators 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 come to the U.S. yet. And so that is more what I would put an emphasis on at the distinction rather than any other topic. So overall, it is the continued regulation, not merely in ESG, but also in Climate and across all client types, which is a very significant growth engine for our business.

Ashish Sabadra
Analyst at RBC Capital Markets

That's very helpful color. And if I can follow-up on the fund launches. Those particularly for ESG has been relatively muted. I was wondering how important new fund launches are for overall revenues. But also there is -- within the ESG, there is a shift from vanilla ESG funds to more of sustainability funds -- sustainability-themed funds. And how does that, again, improve the value proposition for MSCI? Thanks.

Baer Pettit
President and Chief Operating Officer at MSCI

Sure. So just maybe a few observations on this topic. As we alluded to before -- and this was particularly at the beginning of the year, and there have been changes in the regulatory environment regarding the classification of fund types eight and nine. That is not over, but it's -- I would say the largest element is likely over. And we're very involved in those discussions both with clients and regulators. So that's what I would call a temporary administrative blip. But again, just to reiterate, in the context of a very positive regulatory environment for us, right?

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 obvious climate component. And I think we'll continue to see a wide variety of those type of fund launches depending on the client type, the geography, etc., and the investment goals of the clients. So I think it's a pretty broad and diversified landscape.

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

Let me just add something here in this context because oftentimes, the questions we get from shareholders and analysts is, how underlying that regulation is a negative for MSCI? It's a huge positive. Now our clients don't love regulations. I mean, we don't love -- we would rather operate without regulation than with regulation, but it's a reality of life. And once it comes and once you go make the adjustment, it becomes as a very strong tailwind for us because the clients need a lot more information to comply with the regulatory framework, more granular, more extensive, more this, more that.

And secondly, the regulation on us creates incredible competitive advantages because it puts a lot of other people at a disadvantage compared to people like us. So again, we don't go asking people to regulators, and we don't like it when it comes. But after a period of adjustment that we made, it becomes very positive for us.

Operator

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

George Tong
Analyst at The Goldman Sachs Group

Hi, thanks. Good morning. Can you discuss new recurring subscription sales trends you're seeing for ESG specifically excluding Climate over the past quarter? Has there been stabilization, improvement or a step back? And what are the puts and takes?

Andrew Wiechmann
Chief Financial Officer at MSCI

Sure. Yes, I'd 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 how ESG impacts their overall investment objective, how they differentiate themselves relative to competitors, how they market and position themselves externally. And so there is a maturation taking place. And so we continue to see longer sales cycles, most notably in the Americas on the ESG front. But as Henry alluded to, 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.

Operator

We'll take our next question from Kelsey Zhu with Autonomous.

Kelsey Zhu
Analyst at Autonomous Res

Hey, thanks for taking my questions. So BlackRock has recently talked a lot about the growth opportunities in fixed income ETFs during its Investor Day. I was wondering if you can tell us a little bit more about your investments there and kind of the revenue potential in the fixed income space.

Baer Pettit
President and Chief Operating Officer at MSCI

Great. Thank you for that question. So I would 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 that's one element. And we really see -- 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 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 in the very early stages of this.

And we're -- as -- 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, and in our case, 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 material.

Kelsey Zhu
Analyst at Autonomous Res

Appreciate that. And then maybe just one more question on ESG. What needs to happen for net new subscription sales growth to reaccelerate again? Is it the macro conditions need to improve? Is it rate cuts? Is it the political dynamic needs to stabilize in the U.S.? Just curious to hear your view on this.

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

Yes. So first of all, it is already beginning to accelerate at a small pace in Europe after a period of understanding the regulation, classifying funds, understanding the ingredients that they need in order to market these funds as a sustainable investment funds and all of that, a lot of our European clients are beginning to go beyond that. They're beginning to say, okay, what are we going to do now? What kind of launches -- product launches, what kind of differentiation and all of that? And they're beginning to request a lot of different data from us, as I alluded to before.

That's not necessarily going to be a ramp up immediately, but it's beginning to preface, hopefully, an increase in sales and the like. Notice also that the high level of retention rates also speak to the fact that people are not abandoned in this area. So that's in the Europe. In the U.S., I think we may spoke last quarter in which we talked about the political environment because that's what everyone is talking about. But look, does that have some effect or minor effect? Yes, it will because it affects the psychology of people.

But a lot more of what is going on in the U.S. is that the global -- remember, we play in the global equity markets. We not only play in the U.S. equity market. So the global equity markets in the past were muted. People were concerned about what the effect of the war in Europe and the recession in Europe and China, the opening or lack of opening or whatever. So 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 is part of global equity investing as well. So we have -- we saw a slowdown on that, as we begin to see maybe some reopening, better reopening of China, some of the statements about the Chinese government in the last couple of days maybe creates a more forward momentum.

We are seeing a lot of momentum in Japan. Europe is obviously stuck a little bit in the economic process there. But hopefully, the markets will get better in Europe as well. I think all of that will then bode well for higher sales of every type to U.S. asset managers as it relates to everything, but ESG in particular. The other thing to keep in mind is that the American asset managers not only manage money for U.S. investors, they manage 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.

Operator

[Technical Issues] [Operator Instructions] We'll take our next question from Faiza Alwy with Deutsche Bank.

Faiza Alwy
Analyst at Deutsche Bank Aktiengesellschaft

Yes, hi. Thank you. I wanted to talk about margins. And Andy, I was hoping you could give some perspective on segment-level margins. I noticed that while Index top line growth was really strong, we didn't see a lot of margin expansion. So curious if there's something as it relates to the new non-recurring product. Or any other color around investments within Index? And then Analytics, margins declined and then ESG, margins were up on a year-over-year basis as were Private Assets. So curious on any perspective on any of those segments.

Andrew Wiechmann
Chief Financial Officer at MSCI

Sure. Yes. 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 is an input into that. But overall, we're really focused on driving that attractive EPS growth over time.

I would say segment margins are byproduct of investment opportunities that we have. And so our primary focus is on directing spend to those opportunities, which are going to be the fastest payback, the highest return for us and the most valuable, most strategic for us. And the margin is a byproduct of that. The other factor that feeds into segment margins period-to-period which can cause some fluctuations are allocations. And so we do have a chunk of centralized costs that get allocated to our segments as well as FX. And so for all those reasons, the quarter-to-quarter margins are not something I would focus too much on.

Operator

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

Seth Weber
Analyst at Wells Fargo & Company

Hey, good morning. I appreciate the color on AI and generative AI. Maybe can you just touch on whether you see any risks there, disintermediation risks or anything like that? Or do you see this as more of an opportunity for the company? Thank you.

Baer Pettit
President and Chief Operating Officer at MSCI

Look, we -- I think the way I would say it is we definitely view it as an opportunity, and we're never complacent about disintermediation, right. So the opportunity, I think, is two-fold. We have an enormous range of very interesting data, which we can make ever more from -- for our clients, greater insights, more analysis that can feed things like modeling and indexes, etc. So I think we're -- so that's a key point.

The second thing is precisely related to modeling is that these technologies, the true value added to them is not under or over-specifying the modeling in order to get great outputs. And we have an enormous amount of teams and research, etc., 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 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 competitive advantages. And we're not complacent about people who may be able to start new businesses or create new opportunities to start up some of these items.

Operator

We'll take our next question from Heather Balsky of Bank of America.

Heather Balsky
Analyst at Bank of America

Hi, thank you so much for taking my question. I wanted to go back to earlier in the call when you spoke about being able to convert some of the non-recurring index revenues over time. I'm curious if you can talk about sort of how that transition happens, how you're able to convert those revenues and kind of the pace at which you could do so.

Andrew Wiechmann
Chief Financial Officer at MSCI

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 one-time license fees related to prior periods. Specific to your question, we did also have a healthy contribution from one-time 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 datasets that we have are going to be integral to their ongoing strategy. And so oftentimes, we will see an initial sale of a dataset as a 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.

I would say non-recurring 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 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 and another area where sometimes there can be a switch from more of a non-recurring type license to a recurring license over time if they become a frequent user for these over-the-counter instruments of our Index content.

And just along those lines, what we call this, a non-recurring line, many components of it reflect products and use cases that clients will use repeatedly, which hopefully will create more stability quarter-to-quarter.

Operator

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

Craig Huber
Analyst at Huber Research Partners

Thank you. 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 feeling that budgets constraints out there sort of loosening up versus maybe how you were thinking three or six months ago?

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

Well, first of all, the budgetary processes of our clients are pretty much set on an annual basis. And they don't remain extremely flexible up and down that much. There will be exceptions that they need to be run all the way to the senior management of our clients. 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 a slightly more positive tone to the global economy, in the case of the U.S., the soft landing, in the case of Europe, that the worst is over and that, hopefully, this energy crisis and the war in Ukraine is not going to create more havoc, and in the case of Japan, obviously, that they're trying to inflate the economy in order to grow faster, and obviously, in China, we're still trying to figure out what the government will do there.

So -- but there is that small amount of positivism. That will normally translate into slightly higher sales over time. And the reason is that we -- our clients end up allocating more money to us compared to the growth of their budgets than not. And therefore, they will be able to maybe spend less in other areas and spend more with us because a lot of what we sell them is mission-critical, is cutting-edge. It's something that is on-demand immediately from their own clients, etc. So compared to a quarter or two ago, yes, in which people were talking maybe by hard landing, these people were talking about inflation staying high for a very long period of time, etc. There is a little more positivism going on in the world.

Operator

We'll take our last question from Russell Quelch with Redburn.

Russell Quelch
Analyst at Redburn Partners

Yes. I would just appreciate you squeezing me in here. So I appreciate your earlier comments around growth in fixed income indices. S&P have obviously chosen to grow inorganically, acquiring the iBoxx and the CDX indices as part of their IHS Markit acquisition. So given the step up in the opportunity here as a result of the rise in global yields, might you consider an acquisition to accelerate your growth in fixed income and multi-asset indices? Or will you continue to be sort of selective and organic in your approach?

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

We will always consider an acquisition in the areas that we want to expand at the right price that creates shareholder value. And unfortunately, a lot of other people in our space buy assets maybe for different reasons. We only buy assets to create 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 will always consider it at the right prices.

We have looked at everything and 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, issuance-weighted indices in the lingo of fixed income, issuance-weighted indices in the world. So we're not going to add a lot of value by deploying our capital to go out and launch of all family of issuance within indices.

The area that we're experts on is ESG and is in Climate and is in factors. And therefore, we are pushing our capital investment into those areas that we believe we have significant competitive advantages. I believe that, by the way, that fixed income will be one of the early places of most significant repricing of assets and re-costing of capital and reallocation of capital with respect to Climate, probably more than equities and probably more than other asset classes. And the reason is that the largest players in the fixed income space, the banks and the insurance companies, are going to be under significant regulatory pressure to lower their climate risk in their corporate bond portfolios, in their mortgage portfolios, in their corporate loan portfolios and the like.

And they're going to have to add soon and fast, and that's going to lead to a big repricing. So, therefore, one of the areas that we're really targeting strongly is the intersection of fixed income and Climate, whether it's Analytics or whether it's fixed income and Climate and indices and the like. So that's an example of places where we see competitive advantage on our part to create value.

Operator

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

Henry Fernandez
Chairman and Chief Executive Officer at MSCI

Well, thank you very much for your time, for your questions. We're available to answer any of your other questions at any time, so reach out to us. We'll be more than happy to share our perspective. Enjoy the rest of the day. Thank you.

Operator

[Operator Closing Remarks]

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