MSCI Inc

NYSE:MSCI

Earnings Call Transcript 2022-Q1

[Operator]

Good day ladies and gentlemen, and welcome to the MSCI First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session where we will limit participants to one question and one follow up. We will have further instructions for you at that time. As a reminder, this conference call is being recorded.

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]

Thank you, Dillon. Good day, and welcome to the MSCI First Quarter 2021 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 call, as well as a brief quarterly update are available on our website www.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'll 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 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. 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 maybe 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 Fernandez, Chairman, Chief Executive Officer]

Thank you, Jisoo. Welcome everyone and thank you for joining us today. Apologies for my scratchy voice and a little bit of coughing. Before I talk about – yep, can you all hear me? Okay, thank you Jisoo. Welcome everyone and thank you for joining us today. Apologize for my scratchy voice and a little bit of coughing.

Before I talk about MSCI 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 will ultimately emerge stronger from this crisis, with a deeper respect for self-determination, national sovereignty and human rights, and a clearly 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 are our solutions helping clients navigate market volatility and asset rotations, they are 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 plan 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 a 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 ties, including swift changes to our indices, while also developing new products, services and insightful research to capture the new global landscape.

All of this demonstrated once again how fast and nimble MSCI can adapt to an unexpected global crisis. Our resilience and momentum have allows 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 delivered 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 benchmarked to the MSCI, Climate Paris aligned indexes by asset owners in APAC and in EMEA.

We are also driving strategic benchmark wins with asset managers who are licensing custom indexes they have designed using MSCI's New Index Builder Application. We have on-boarded about 18 clients on to the Index Builder Platform already. At the same time, we keep adding new layers of growth in areas such as fixed income, ESG and climate, and private asset.

This quarter our ESG and Climate retention rate hit an all-time high of 98.7%. We also recorded our second best quarter ever for new ESG and Climate subscription sales. This data point tells us two things; first, ESG continues to become increasingly embedded in the global investing 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 and a standard setter.

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 temperature rise metric computes how the carbon emissions of companies and portfolios align or do not align with different global temperature pathways such as 1.5°C or 2°C 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 set, we are transforming the way we collect, clean and build data across global clients and asset classes.

As I mentioned back in January, MSCI has always been a data processing factory. Now, we are also becoming a date 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 looks 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, diversified, 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]

Thank you, Henry and greetings everyone! As Henry mentioned, the biggest global event of the quarter was Russia's invasion of Ukraine. I join him in expressing our solidarity with the Ukrainian people. When the war began, 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 client's run though our analytics products. Additionally, we closed out our deminimis financial exposure to clients in Russia, which is lesser than that $1 million of run rate.

We are well positioned to succeed in the 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 will endure. 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 firm wide ESG and Climate run rate is now $369 million, growing 46% year-over-year. In our reportable ESG and Climate ratings and 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 setter. In ESG ratings and in our Climate metrics, we now cover more than 9.5 million instruments across equities and fixed income, including ETF’s, 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 are also leading 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, benchmarked to our custom indexes with a partner in fixed income.

Across MSCI, our total run rate from insurance firms and all-insurance related use cases is $77 million, growing 19% year-over-year. In analytics we're landing 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 used case, and we are encourage by a recent large multi-year client win in the Americas.

In private assets, we also expect climate data to be a commercial enable, including for cross sales. We recently completed a product release of our Client value-at-risk due-diligence reports to RCA’s large commercial real-estate property data base.

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 supporting data quality and timeliness. Our previously announced launch of MSCI data explorer places over 250 data sets across all MSCI product lines at our clients’ fingertips. This is empowering them to self-service and discover, test and start new subscriptions.

Across MSCI our pipelines are healthy. Having said that, we are watching economic activity across regions closely and the effects on our clients, which we recognize maybe uneven. In summary, our resilient franchise continues to benefit from our actions and 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.

[Andy Wiechmann, Chief Financial Officer]

Thanks Baer and hi everyone! I want 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 the same period of 2017 and from 10% growth just a 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 base 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 lined to MSCI Indexes grew net cash inflows of more than $27 billion, ending the quarter with AUM of $1.39 trillion on March 31. 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 continued 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 has grown at a CAGR of 15%. For the quarter, in analytics we drove 15% growth in new or current subscription sales, which offset 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 are 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 firm-wide sales pipeline remains healthy. We are watching the macro backdrop very closely and while it may cause some variance in sales or cancels here or there, we are encouraged by the overall forward momentum.

Across the firm the product and client experience enhancements we are 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 improved 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 would expect a higher average tax rate for each of the remaining quarters in 2022. For the full year we expect to drive continued high of 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 RCA, which is a lower margin business.

On the capitol front, our proactive actions provide another lever of value in volatile environment. Year-to-date through yesterday, April 25, 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 potential financing and will continue to monitor the markets for attractive windows, although we have no urgency to access the market if they are not conducive. We have plenty of dry powder remaining to support strategic bolt-on MP&A deals. We can also support highly opportunistic repurchases, although at a more measured pace given current cash balances.

In conclusion, that 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.

[Operator]

Thank you. [Operator Instructions]. I show our first question comes from the line of Manav Patnaik from Barclays. Please go ahead.

[Manav Patnaik, Barclays]

Thank you. Good morning! 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 per se, to the extent the AU – the market depreciation continues to happen. Like at what level you guys start looking to approach that playbook to try and offset some of those declines?

[Andy Wiechmann, Chief Financial Officer]

Sure, yeah, thanks Manav. I would say there's 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 that the market and 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 remained 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 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 has provided a nice offset to some 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 3/31. 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 in 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 feels, 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 is a lot of the adjustment and expenses is automatic. So the first things that start to adjust are 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, Barclays]

Okay, got it, that's super helpful. And then just as my second question, you know Henry or Baer, you know there’s obviously a lot more regularly 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 you know more revenue accelerate because of this. And also, I apologize if I missed it, what was the climate specific run rate this quarter?

[Baer Pettit, President, Chief Operating Officer]

Well, that number is coming out, I’ll answer your first question. So look, we view this as really a fundamentally positive thing. You know 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 had in other areas where we've been regulated such as Index. So we believe that any environment that creates greater demands for transparency, for quality, that puts this topic central to investors’ agenda and central to corporations’ agenda is a very positive thing for us.

We're clearly also in – often we’re asked for our views on these topics by regulators in a variety of jurisdiction 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 or what we're trying to achieve.

[Andy Wiechmann, Chief Financial Officer]

And Manav, just on the run rates, the climate run rate was $50 million at the 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, Barclays]

Thank you.

[Operator]

Thank you. I show our next question comes from the line of Alex Kramm from UBS.

Please go ahead.

[Alex Kramm, UBS]

Yes hey! Good morning everyone. First one on the Index sales, and this may be super nit-picky, but obviously it continues to be fairly strong, but if I look back over the last few years on a percentage basis, it’s actually the lowest that I've seen in years. So again, very high numbers maybe NIT picky here, but just wondering if there's anything you could 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.

[Andy Wiechmann, Chief Financial Officer]

Alex, 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 and Index and so we're not too focused on either sales or cancels in one quarter and Index. I think we continue to be pleased by the progress and trajectory on the Index subscription franchise.

[Alex Kramm, UBS]

Fair enough, I said it was nit-picky. Secondly, and this may be a follow-up to Manav’s question and I think Baer you answered it specifically on regulation, but zooming out a little bit more on ESG and Climate, your long term or medium term targets, your I think mid to high 20’s if I remember correctly for run rate growth here. You just said 50 and as I look at the last few years, that number has been accelerating despite the 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 that you have in front of you or should we be bracing forward, getting back to that mid-20s number in the not too distant future here. Thanks.

[Henry Fernandez, Chairman, Chief Executive Officer]

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 client segments such as insurance on wealth and corporate and the like, and as we increase the number of used cases for ESG we are fining more and more demand.

If you just look anecdotally with investment banks and asset managers and asset owners, you know compared to a year or two ago almost every one of our clients already have a dedicated person for 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 high growth rate will continue.

Now, on top of that we are still in the very early days of Climate. $50 million run right on climate across all products of MSCI is a smaller number, a smallish number, but is growing at over 100% per year. I think the potential for our climate solutions over a long period of time could be that it exceeds the run rate of ESG itself, give the exercise and product to work for world and in various numerous, you know use cases and clients segment including the corporates and corporate advisors and the like that we are 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 are even more bullish today.

[Alex Kramm, UBS]

Very good! Thanks for that color.

[Henry Fernandez, Chairman, Chief Executive Officer]

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 and data, in analytical tools and indexes and all of that, so. I hope that everyone understands that a meaningful part of our investment in the firm is to capitalize of this ESG and Climate opportunity and continue to be a leader in this space. So our investment plan, especially because of ESG and Climate is going to stay like this and accelerate as revenues accelerate over a very long period of time.

[Alex Kramm, UBS]

Thank you.

[Operator]

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

[Toni Kaplan, 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 or 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.

[Andy Wiechmann, Chief Financial Officer]

Yeah, I’ll touch on the cost, but I 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 top line 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 a result of the meaningful investments we made last year that carry over 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 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, where we have seen some pick up 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 inflation and so while it is a factor to us, the bigger impact on expensive is really the pace of investment and that's what we're primarily focused on.

[Toni Kaplan, Morgan Stanley]

That's great. Also, you mentioned a couple of 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 you know given the incredibly strong growth rates in the other segments like – you know I guess are you happy with 5% organic or do you sort of strive for better than that? Thanks.

[Henry Fernandez, Chairman, Chief Executive Officer]

Well Toni, you know we remain unhappy with the growth rate of the run rate in analytics. We've done quite a lot of different strategies to change that and a lot of it has worked, but from a small run rate basis – for example, we have been pivoting our analytics product line towards the front office, the 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 alluded to, in equity analytics or equity portfolio management analytics; that’s another area that we’ve been pushing pretty hard, again from a slower, from a smaller run rate base.

I think the central issue remains, the central risk analytics platform which is sold to our cost centers in our client base as opposed to profit centers and that is a – you know very much of a mature product area for us. We're trying to reinvent that and reinvigorate that with climate risk as a driver of risk management in the central office and we have some early successes on that. Clearly the climate large enterprise is an example of our product line in that category.

So sales remain really robust when you look at the operating metrics. The challenge remains you know the lumpiness of the cancels at the time of renewals, because of the matured nature of the product line, the cost current that typically affects cost centers, especially central rate cost centers and all of that.

So hopefully over time we can outgrow the part, the mature part of the book of the run rate you know and the UFR, the prognosis equity analytics, fixed income analytics and the new use cases such as climate rate can continue to grow faster and therefore get the overall run rate you know to grow in the high single digits and eventually in the lower double digits.

[Toni Kaplan, 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, Goldman Sachs]

Hi! Thanks. Good morning! There's 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 that’s what you're seeing with the pace of client cross sell and up sell across the business.

[Baer Pettit, President, Chief Operating Officer]

So George, so look, we want to be very numbers driven on this. Clearly we have been in a volatile environment that has got people a little antsy, you know generally. When I say people, I don't mean 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, looking at the pipeline, etc. So we will give you new information as soon as we get it, but right now we're not seeing any noticeable change in the pipeline, the bar behavior or anything of that kind.

[George Tong, Goldman Sachs]

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 declines that we’re seeing year-to-date?

[Andy Wiechmann, Chief Financial Officer]

Yeah, no 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 and contracts based on our EM indexes, our EAFE indexes. Currently strong volumes in the Chinese A 50 products. We also had our record single day trading of close to 3 million contracts on March 14, 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 link derivatives opportunity set for us. So that's another area we're focused on and another driver of stability and growth on the subscription side.

[George Tong, Goldman Sachs]

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, 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]

So, I think we're really pleased with the progress so far. Clearly the technology infrastructure work 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 mention with the integration of the client coverage teams and them working together as one unit, both you know across the world, in the Americas, in EMEA and you know building out what we do in Asia and you know we had a good quarter. So we had a good quarter as a combined team.

The client feedback is very positive and we are – you know as I mentioned, we are 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 you know most importantly we have a significantly greater footprint now with real estate investors, and I think that that’s showing the numbers and hopefully we’ll build our reputation as being serious in this space.

[Ashish Sabadra, 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 ETF. How should we think about how does that influence the index fees going forward? Any color would be helpful. Thanks.

[Baer Pettit, President, Chief Operating Officer]

Yes, I'm not quite certain what you're alluding to, but the – my point would be that you know we've been pretty consistent on saying that the – you know over time the fees in this area has 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 you know if the market environment continues to be more challenging, that could change, but I'm not aware of anything very material that we've seen since we last spoke to you.

[Ashish Sabadra, 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, Oppenheimer]

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 this segment? Thank you.

[Andy Wiechmann, Chief Financial Officer]

Yes, yes 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 and Q2. So if you look in the past you will tend to see margins being slightly higher in those quarters, and so there's 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 variable as it could cause it to be slightly higher, potentially slightly lower, not only related to integration, but also the pace of capitalizations. 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-teens figure, although it could have some variability around it.

[Owen Lau, Oppenheimer]

Got it. That's helpful. And then going back to the point you make about, I think the insurance from the $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.

[Andy Wiechmann, Chief Financial Officer]

Yeah, you know I would generalize it across all of our products that insurance is a exciting client opportunity for us, and a segment where it's historically been less significant, and so it cuts across many of our product areas on the analytic side given the investments we'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 Climate. You know we have some, as you know 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 peak-half [ph] 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, Oppenheimer]

Got it! Thank you very much.

[Operator]

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

[Craig Huber, Huber Research Partners]

Yes, I want to ask on the analytics division, your long term goal of 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?

[Henry Fernandez, Chairman, Chief Executive Officer]

Baer, you want to take that one?

[Baer Pettit, President, Chief Operating Officer]

So look, one thing that we’re working on now, we’ll have some announcements comings 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 ISaaS technology platform, and what this really means is being much more flexible in integrating into our clients environment, and being able to – you know basically clients to pick and choose the functionality and capabilities that they want and integrate that into their workflow.

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

And then the last one, the 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 you know 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, you know those will be things that can get us on to that higher path.

[Craig Huber, Huber Research Partners]

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

[Henry Fernandez, Chairman, Chief Executive Officer]

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 this, the futures and options that we have are on market cap indices. So we are now looking to our – with our partners, the exchange [ph] partners, to do a whole generation of climate and ESG aligned indices for the productions and features, 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 – you know what Andy alluded to, which is reported in the index subscription line or area is the structured products, over the counter options, you know flaps 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 and Climate being in that category, but also thematic indices and therefore that is an area that we're putting up a lot of effort, and that normally translated into sometimes you know one-time fees, so these are recurring one-time fees that show up in Index and the Index description, they don't show up in the asset base fees at this point. So we are very excited about that, and that is a major area of expansion that we see in the next few years.

[Craig Huber, Huber Research Partners]

Great! Thank you.

[Operator]

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

[Greg Simpson, BNP Paribas]

Hi! Good morning! So in Europe at least it seems you are seeing Climates is becoming really mainstream and the loss of mutual funds, [inaudible] 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 amongst the asset managers. Do your clients start with say, more standard rate in these products and then demand more prospective data and content over time, just trying to differentiate. I’m just trying to think about how revenue per client retention rates develop over time. Just any color would be great.

[Baer Pettit, President, Chief Operating Officer]

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 mutual fund business or in the institutional still looks somewhat different than in the U.S. or in Asia, and you know 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 as you rightly point out, the retention rate is extremely impressive at present. So we are, you know in addition to 50% of our 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 really depending on what they are trying to achieve.

So some of them want to build rules based Index products, some of them want to use the rating in active management process, some of them are less interested in the rating themselves, but the date underneath the rating 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 are 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 you know 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 hence. 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.

[Greg Simpson, BNP Paribas]

Very helpful. Thanks! And then just a follow-up whether you see in the current markets, the weaker market backdrop is creating more opportunities for both M&As. Maybe seller expectations are falling for high quality assets. Is there any kind of areas you are particularly keen to upscale or is that just [inaudible]? Thank you.

[Baer Pettit, President, Chief Operating Officer]

I would say that you know we don’t necessarily wish for and welcome difficult market conditions and difficult operating environment. But having said that, this is what we do, our best at MSCI. These are the environments in which we tend to capitalize big time and create further leadership in a lot of what we do and out distance our competition, because we remain very focused on client complicity. We innovate a great deal in markets like this and we take full advantage of this locations and valuations such as certain types of bolt on acquisitions and the like.

You know 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 you 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 is usually a long lag associated with strategic valuations, but we could become more active, but it’s way too early to tell at this point.

But I think my underlying – my underlying position here is it say, you know watch for the performance of MSCI in difficult market conditions, because this is where we do our best. This is where franchises develop further as oppose to when you have very bullish conditions in and we decide right to sell both.

[Greg Simpson, BNP Paribas]

Thank you.

[Operator]

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

[Keith Housum, Northcoast Research]

Great! Thanks. Good morning guys. Just looking at the R&D expenditures for the quarter, It looks like those grew I guess the least of all the expense categories and you were down sequentially from the fourth quarter. So maybe 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 the pullback from the R&D spending or lower growth and what your expense categories would have been?

[Andy Wiechmann, Chief Financial Officer]

Yeah, nothing to read into there. I would highlight that expenses and individuals’ time allocation 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 look higher and R&D growth looks lower. Those tend to be the two areas where you do see our investment going and so you saw cost of revenues showing a higher growth rate in the quarter, and that's on the back of investments and/or product teams, technology and data, and our researchers, sometimes those individuals time will be allocated to projects that are more R&D in nature and sometimes they are more cost of revenue in nature. And so I would say it's not any indication that we are 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, Northcoast Research]

Okay, that's helpful. And then you guys talked about kind of a natural hedge with the incentive compensation coming down if there was a downturn in the business. Can you just remind us there, probably a little color in terms of how much of the income statement would be allocated for incentive comp like in normal periods?

[Andy Wiechmann, Chief Financial Officer]

Yeah, so I think that what we 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% pull back 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, all of it depends on – as I said in my first comments, all if 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, Northcoast Research]

Great Andy! I appreciate it. Thank you.

[Operator]

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

[Henry Fernandez, Chairman, Chief Executive Officer]

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 analyst or some of them you know in 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 you know, and what is benefiting our business, what is affecting our business, and at the moment as I said, Baer said a few times, we haven't seen any significant or meaningful change to our operating environment. Thank you all.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.