MSCI Inc

NYSE:MSCI

Earnings Call Analysis

MSCI's Impressive Q2 2024 Growth and Strategic Partnerships

In Q2 2024, MSCI saw a 12% rise in adjusted EPS, 10% organic revenue growth, and a 21% boost in free cash flow. Asset-based fee revenue grew 18%, driven by record AUM balances in ETFs and non-listed products linked to MSCI Indices. The company repurchased $290 million worth of shares, maintaining a high retention rate of nearly 95%. Strategic initiatives included a partnership with Moody's to enhance ESG content reach and the launch of MSCI AI Portfolio Insights. MSCI's success in personalized wealth management and strong client engagement globally underscores its strategy of leveraging data-driven models and AI for growth.

Introduction

MSCI reported robust results for the second quarter of 2024, showcasing the strength of its comprehensive and mission-critical solutions. The company benefited from a diverse client base, which enabled double-digit growth across several key financial metrics. These results highlight MSCI's relentless pursuit of value creation for its shareholders.

Financial Performance

MSCI achieved a 12% growth in adjusted earnings per share, accompanied by a 10% increase in organic revenue. Particularly notable was the 18% growth in asset-based fee revenue, which was driven by record assets under management (AUM) balances in both ETFs and nonlisted products linked to MSCI indices. Free cash flow increased by 21%, emphasizing the company's efficient cash management and strong operational execution.

Share Repurchase and Capital Allocation

In line with its capital allocation strategy, MSCI repurchased $290 million worth of shares at an average price of $484 per share during the quarter. Since 2012, the company has repurchased more than 50 million shares, representing nearly 40% of the total outstanding shares. This extensive share buyback underscores MSCI's commitment to returning value to its shareholders.

Strategic Initiatives and Product Launches

MSCI's strategic initiatives include partnerships and product launches aimed at tapping into the evolving trends in the investment industry. The partnership with Moody's is a significant move to expand MSCI's sustainability content reach among financial institutions and corporates. Furthermore, new MSCI private capital closed-end fund indices and the innovative MSCI AI Portfolio Insights tool were launched, enhancing solutions for private markets and AI-driven investment analysis, respectively.

Performance Across Segments

The company's operating metrics were equally impressive. MSCI recorded a 14% growth in subscription run rate with a 9% organic increase. New recurring subscription sales reached a notable $83 million, reflecting a 22% year-over-year increase. The retention rate remained high at almost 95%. Specific segments such as ESG and Climate demonstrated 13% growth, supported by the Moody's partnership, along with a broader global uptake.

Guidance and Outlook

Looking ahead, MSCI remains focused on capturing long-term secular growth trends. The company has increased its guidance for depreciation and amortization expenses and operating expenses by $5 million due to the impact of the Foxberry acquisition. MSCI anticipates a modest rise in ETF AUM levels through the end of the year, with an expected effective tax rate of 20% to 22% for the upcoming quarters.

Client Engagement and Market Expansion

CEO Henry Fernandez emphasized the company's high levels of client engagement across the United States, Europe, and Asia. Wealth managers have shown significant interest in MSCI’s technology platform, acquired from Fabric. This has enabled personalized investment solutions at scale. Additionally, the Analytics segment achieved a 7% organic subscription run rate growth, along with significant contributions from new recurring subscription sales.

Challenges and Opportunities

Despite the strong performance, MSCI is cognizant of market headwinds and elongated sales cycles. However, the company remains optimistic about sustained momentum, especially with its comprehensive risk management solutions and evolving client needs in areas such as ESG, climate data, and private assets.

Conclusion

MSCI’s second quarter performance reflects a successful balance between long-term strategic initiatives and short-term execution, ensuring robust growth and profitability. With an unchanging focus on strategic capital allocation and innovative solutions, MSCI is well-positioned to continue delivering value to its shareholders.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the MSCI Second Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions]

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

[Jeremy Ulan, executive]

Thank you. Good day, and welcome to the MSCI Second Quarter 2024 Earnings Conference Call.

Earlier this morning, we issued a press release announcing our results for the second quarter 2024. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab.

Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. 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. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation.

On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. [Operator Instructions]

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

[Henry Fernandez, executive]

Thank you, Jeremy. Good day, everyone, and thank you for joining us.

In the second quarter, MSCI achieved strong results, thanks to our all-weather franchise, our blue-chip client base, our wide range of mission-critical solutions and our intense focus on execution. We delivered adjusted earnings per share growth of 12%, organic revenue growth of 10% with asset-based fee revenue growth of 18% driven by record AUM balances in both ETFs and nonlisted products linked to MSCI Indices, free cash flow growth of 21%. In our operating metrics, we delivered subscription run rate growth of 14%, including organic growth of 9%. Our highest second quarter on record for new recurring subscription sales of $83 million, up 22% year-over-year and a retention rate of almost 95% across MSCI.

Through yesterday, we repurchased $290 million worth of MSCI shares at an average price of $484 per share. We have now bought back more than 50 million MSCI shares since 2012 at an average price of $122 per share for a total consideration of roughly $6.1 billion. Our combined repurchases represent almost 40% of the total outstanding shares of MSCI. These actions are consistent with our own change and relentless focus on capital allocation. Year in and year out, we are obsessively focused on creating value for our shareholders.

Value creation starts with strategy, and our strategy has not changed. We are determined to capture the long-term secular trend disrupting the investment industry such as rising demand for high-quality data-driven models and insights, increased transparency across asset classes and a more outcome-oriented investment solutions.

MSCI is commercializing these trends by providing indexed and rules based solutions, establishing standards in private assets, delivering comprehensive climate and sustainability tools, transforming risk and portfolio management and enabling personalized wealth management at scale. The evidence of our progress can be seen not only in MSCI's financial results but also in our high levels of client engagement. Over the past few months, Baer and I have met with clients across the United States, Europe and Asia. Everywhere we traveled, our clients and prospects were eager to talk about new areas of collaboration with MSCI.

Our recent announcements and product launches highlight our strategy in action. For example, our strategic partnership with Moody's meaningfully expand the reach of our sustainability content among banks, insurance companies and corporates. It would also help us broaden our private company ESG coverage and expand our capabilities within private credit.

Likewise, our recently launched MSCI private capital closed-end fund indices will complement our real asset fund and property indices to deliver a wider view of private markets. This can also help us achieve our goal of becoming the global leader in private market indices. Meanwhile, MSCI AI Portfolio Insights combines generative artificial intelligence with advanced analytical tools and modeling capabilities to make it easier for clients to pinpoint the most important factors shaping investment risk and performance.

We see tremendous potential across our newer client segments such as wealth managers, general partners, insurance companies, corporates and corporate advisers. Wealth managers, in particular, have been excited to learn about our new technology platform acquired from Fabric earlier this year, which has dramatically increased our ability to support personalization at scale. This enabled us to close a large deal for these solutions during the second quarter.

Meanwhile, our wealth subscription run rate across product lines grew by 12%, reaching $107 million. We had a strong quarter with asset owners and hedge funds as well, posting organic subscription run rate growth of 12% and 15%, respectively.

All of this illustrates a key part of our strategy. We want to expand our footprint among large and rapidly growing client segment while strengthening our position among our more mature and traditional client segments such as asset managers. To maximize that strategy, MSCI will continue developing mission-critical solutions powered by advanced models, data and technology, including generative AI. All of this enables us to drive compounding growth and profitability for shareholders.

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

[C. Pettit, executive]

Thank you, Henry, and greetings, everyone. In my remarks today, I will discuss our second quarter performance in greater detail with the focus on both product lines and client segments.

Our performance shows how MSCI continues to balance long-term strategy and short-term execution. We designed our business plans for extended time horizons, but we also do the hard work necessary to deliver for shareholders in the short term.

Looking at our second quarter results. In Index, MSCI achieved 9% subscription run rate growth, including 10% growth in both EMEA and APAC and 17% growth in custom indexes and special package. In addition, direct investing AUM based on MSCI indexes is now $113 billion, up 28% year-over-year.

We are also encouraged by our product with custom indexes. In Q2, we supported a large asset manager client in their launch of a new custom ETF climate series linked to the MSCI transition aware select indexes. Meanwhile, we closed on our acquisition of Foxberry with an enhanced custom index platform launch underway for the second half of the year.

Looking at global investment flows, we are encouraged that ETF products linked to MSCI indexes casted the highest cash flows in over 2 years with over $28 billion of inflows during the second quarter. In general, the depth and scale of tradable products linked to MSCI indexes continues to grow.

During the quarter, we strengthened our position as a top index provider for ETF products as the number of launches of equity ETFs linked to MSCI indexes nearly doubled year-over-year, translating to $2.5 billion in cash flows and nearly 30% share of new equity ETF fund flows. Open interest in derivatives linked to MSCI indexes is now nearly $300 billion, up 9% for the same period last year.

Shifting to Analytics. We delivered another strong quarter across regions and business areas. Most notably, Analytics achieved our best-ever Q2 for new recurring subscription sales at over $21 million and our best ever Q2 retention rate at close to 96%. We had a strong quarter with hedge funds, including a large win for our equity risk model to support the new clients' recent fund launch. Our offerings are supporting broad use cases such as market risk, regulatory capital management, counterparty credit risk management, liquidity monitoring and investor reporting.

We also grow $3.6 million in new recurring sales from asset owners, up 63% year-over-year to support their enterprise risk management. Amid an industry reimagining of risk management, risk teams and global investment firms are under pressure to find efficiencies, modernize services, all while harnessing the potential power of generative AI.

We launched a new future risk product suite during Q2, including our MSCI AI Portfolio Insights tool, as Henry mentioned. This tool demonstrates how we can leverage our existing strengths and IP to drive innovation. It combines MSCI's deep history in natural language processing and machine learning with our industry-leading data and risk and factor models.

Turning to ESG and Climate. We delivered 14% run rate growth for the combined segment, along with 30% climate run rate growth across our product offerings. Our new game-changing partnership with Moody's to offer MSCI's ESG sustainability data to Moody's broad base of global clients reinforces MSCI as the market standard for ESG. The partnership will also help us expand our ESG and sustainability coverage for private company.

In addition, the Moody's partnership also confirms the continuing importance of sustainability considerations in global investing. MSCI continues to advance our product road map, including for regulatory solutions. Last month, for example, we launched a new data set to help issuers, advisers and corporates align with Corporate Sustainability Reporting Directive or CSRD in Europe.

In climate, we released an important new product, MSCI GeoSpatial Asset Intelligence, which will help clients identify physical and nature-based risks on more than 1 million locations for 70,000 public and private companies. With this product, we are once again using AI for data collection and mapping so that investors and lenders can better assess climate risks in their portfolios and loan books. Initial client interest is encouraging. And we've already signed 2 deals, including with a large prominent private credit GP.

In private assets, we're driving important products and client milestones. MSCI Private Capital Solutions subscription run rate is almost $106 million, which represents growth of 17% over Burgiss' performance in the same period last year prior to the acquisition. And the retention rate was almost 93%.

On the product side, we achieved a key milestone with the launch of MSCI Private Capital Indexes, which will accelerate our push to become a standard setter in private market, supporting investors seeking standardized economies and benchmarks to measure and evaluate private asset classes consistently. Given MSCI's global leadership and track record of success in indexing and benchmarking, clients have expressed significant interest in having us create benchmark indexes for private markets.

Finally, in Real Assets, we posted a run rate growth of 3% and a retention rate of 90%. While the commercial real estate market remains challenging, we are encouraged by client demand for products uncorrelated with transaction volumes, including portfolio services, index insights and climate, which enabled us to land almost $3 million of new recurring sales in Europe, growing 16% year-over-year.

Looking ahead, we will continue aligning MSCI's long-term strategy with secular trends and our competitive advantages while staying laser-focused on short-term execution.

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

[Andrew Wiechmann, executive]

Thanks, Baer, and hi, everyone.

In the second quarter, we delivered 10% organic revenue growth, 14% adjusted EBITDA growth and 21% free cash flow growth. We are encouraged by the results, which reflect our unrelenting dedication to execution even in the face of market headwinds, which may persist in the short term.

We are encouraged by the rebound in retention rates from the first quarter, which we did expect, and we have not seen any deterioration in conditions although we expect cancels to remain elevated in Q3 compared to last year, and we expect somewhat longer sales cycles to persist in the short term.

I also want to note that Q3 tends to be a seasonally softer quarter for us on the sales front. Within Index, we grew our subscription run rate among asset managers and asset owners at 8% and 12%, respectively. These segments collectively represent 68% of our Index subscription run rate. Meanwhile, our Index subscription run rate with wealth managers and hedge funds grew 11% and 24%, respectively. Across Index subscription modules, we saw another strong quarter from custom and special packages, growing 17%.

ABF revenues were up 18% year-over-year, benefiting from $28 billion of cash inflows and about $21 billion of market appreciation in ETFs linked to MSCI equity indexes during the second quarter. ETFs linked to our indexes continue to attract flows in non-U.S. exposures, particularly in developed markets outside the U.S. and in emerging markets as we have seen a pickup in flows into ETFs with exposures outside the U.S.

Fixed income ETFs AUM linked to MSCI and Bloomberg partnership indexes is now at $64 billion with year-to-date inflows of over $6 billion. Given strong recent equity market performance, non-ETF revenue in this quarter included the impact of true-ups related to higher reported client AUM and newly reported product launches. We reached a significant milestone in the quarter with AUM in ETFs and non-ETF passive products tracking MSCI indexes now surpassing $5 trillion.

In Analytics, organic subscription run rate growth was 7%, and revenue growth was 11%. The difference is largely attributable, once again, to the impact of recent client implementations, which continued from the last couple of quarters. As we've noted in the past, Analytics revenue growth can be lumpy because of items such as these implementations, and we expect revenue growth rates to more closely align with run rate growth in Q3.

In our ESG and Climate reportable segment, organic run rate growth was 13%, which excludes the impact of FX and about $5 million of run rate from Trove. Q2 new recurring subscription sales for the segment included a significant contribution from the Moody's partnership. Regionally, the subscription run rate growth for the segment was 17% within Europe, 20% in Asia and 9% in the Americas.

In Private Capital Solutions, year-over-year run rate growth was 17%, and we continue to gain traction in key markets. New recurring sales in Europe reached a record, and we also saw solid traction in sales with our GP client base. The Private Capital Solutions retention rate was approximately 93%, and we recorded almost $27 million of revenue in the quarter.

In Real Assets, run rate growth was roughly 3% with a retention rate slightly above 90%. We continue to have solid momentum in our Index Intel and our income and climate insights offerings, while we continue to see industry pressure impacting our transaction data offerings, including our RCA and property intel products, which we expect to continue to face headwinds in the near term.

Our rigorous approach to capital allocation remains unchanged. Through yesterday, we have repurchased over $290 million or roughly 600,000 shares since late April. Our cash balance remains over $450 million, including readily available cash in the U.S. of more than $200 million.

Turning to our 2024 guidance. We've increased our guidance for depreciation and amortization expense and operating expenses by $5 million, reflecting in part the impact of acquired intangible amortization expense from the Foxberry acquisition, which closed in April.

I would note that our guidance assumes that ETF AUM levels increase slightly from June 30 levels through the end of the year. To the extent AUM levels track higher than this, we would expect to be towards the higher end of our expense guidance ranges. As of right now, we expect the quarterly effective tax rate in both Q3 and Q4 to be in the range of 20% to 22% before any additional discrete items.

Before we open it up for questions, I want to underscore that we see tremendous opportunities with compelling secular trends. We see strong client engagement and tangible opportunities to drive growth. We see near-term headwinds and client pressures, but we continue to execute and drive leadership in these large addressable markets that will drive long-term growth for us. We look forward to keeping you posted on our progress.

And with that, operator, please open the line for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Alex Kramm from UBS.

[Alex Kramm, analyst]

Just wanted to maybe unpack the strong sales growth in the quarter a little bit more. I mean last quarter, obviously, fairly soft, and I think the tone even look forward still fairly somber. So maybe you could just help us what happens across the different segments.

I mean did you gain more pricing? Was it just timing that a lot of these maybe longer sales cycle deals closed? Or was the sales force really engaged after what happened last quarter? Just trying to understand the really strong results here after what's been a challenging environment.

[Andrew Wiechmann, executive]

Sure. Thanks, Alex. It's Andy. So a few observations here. Firstly, I would remind you, and I think you know this, sales and cancels can both be lumpy quarter-to-quarter. I would say that we haven't seen a deterioration in conditions. And I would say the sales in Q2 were solid, as you pointed out. I would also say that we haven't seen an inflection yet. Overall, we still see pressures on clients. We still see the longer sales cycle. So we would expect the lumpiness in sales and cancels to continue here. And as I mentioned in the prepared remarks, Q3 can be a seasonally softer quarter for us. But as we've highlighted before, sustained momentum in equity markets is helpful to overall buying dynamics, although the impact on our subscription sales and op metrics more generally tends to lag the market.

I would highlight that we are seeing strong client engagement across the globe, and we see it across most product areas and client segments. I think both the momentum in the equity markets and the strong client engagement should eventually lead to some momentum on the sales front. And so we're encouraged here, but we remain cautious and expect some continued lumpiness.

[Operator]

The next question comes from the line of Manav Patnaik from Barclays.

[Manav Patnaik, analyst]

I wanted to ask about the Moody's partnership actually. It's a very interesting partnership. Sounds like a win-win. I know you alluded to a bit, Henry. But maybe just on context on why now and how the mechanics of the agreement works between the two of you. I presume there's like revenue sharing going on.

And just quickly, Andy, I think you mentioned in your remarks that there was already some contribution from Moody's. I apologize, I missed that. If you could just help us with that.

[C. Pettit, executive]

Hey, Manav. Baer here. Yes. So look, simply put, the deal is -- so first of all, maybe on a higher level, we've stated repeatedly here in the call and in various meetings with many of you that we're constantly on the lookout for partnerships. And I think this is a critical thing, which we hope will have a positive impact across our business in a variety of ways.

So we started exploring with Moody's on a variety of fronts. And in essence, what we've come up with here is Moody's felt that we're being -- that us being a leader in ESG that they could use us significantly across a variety of their products, their services to their clients. And in turn, Moody's has an extraordinary private company database with a product they now call Orbis. And that's an area where we at MSCI have been really focused on trying to get better data and information for a variety of use cases, but notably for in ESG and Climate where that sort of company information can be very hard to get hold of.

So that's kind of the two parts, the two sides, if you like, of the deal. We're very pleased with it mostly because -- well, overall, we think it's a great deal for both parties. But specifically, we were able to put this together very quickly in just a number of months with a true spirit of partnership with Moody's. So we see a lot of upside from this in the future.

[Andrew Wiechmann, executive]

And maybe if I could just touch on the second part of that question, Manav, about the economics. As I mentioned in the prepared remarks, the partnership has resulted in a significant contribution to new recurring sales in Q2. Unfortunately, I can't give more specifics, but I would highlight that we haven't seen any notable changes to the segment trends that we've been seeing in recent quarters.

[Operator]

Next question comes from the line of Toni Kaplan from Morgan Stanley.

[Toni Kaplan, analyst]

In the past couple of quarters, I think one of the debates that has emerged is this cyclical versus secular debate around the asset manager end market. And you've spoken about the challenges of tight budgets, which have intensified, I guess, over the past roughly 2 years. It seems like it's still going to be a little bit tough in 3Q.

I guess what do you think the catalyst is for the change that we'll see at some point? Because I think that you are sort of alluding to this being more of a cyclical issue. And what -- so what drives that change? And can you sustainably grow double digits in an environment that continues to be challenged? Or do you need that end market to sort of pick up?

[Henry Fernandez, executive]

Yes. Thanks, Toni. The -- there are 3 big buckets in the global investment industry. There are the barbells on both sides. One is rules-based systematic index investing, which continues to grow unabated. And on the other hand is very active, concentrated management, which obviously, the ultimate expression of that is private asset class management, private equity, private credit, private real estate, et cetera. But it does include concentrated portfolios, very thematic portfolios and things like that.

And in the middle is the largest segment, the more traditional active management diversified widely -- a large number of shares, active management. That segment will continue to grow but at a slower pace than the two other ones. And it will go through ups and downs. It will go through challenges and all of that. And we're going through a challenge with that segment right now. And we clearly have been relying on that segment for about 50-plus percent of our subscription revenues. But rapidly increasing our penetration on index -- systematic rules-based index management, which includes quantitative investing and index investing and all that and on the other hand, very active management, including our foray into private assets.

So as we look into the future, I don't see us slowing down in our growth rate because we will definitely penetrate the traditional active management more and more. They're going to rely on us more and more in what they do even though it's an industry that is going through some difficulties right now cyclically. And we will increase our growth significantly in the other 2 sides, which is systematic rules-based investing and private asset class investing.

[Operator]

The next question comes from the line of Ashish Sabadra from RBC Capital.

[Ashish Sabadra, analyst]

Henry, I just wanted to drill down further on the index front and particularly, look, the slowdown in subscription growth, that is understood. But as we think about marching back into the low double-digit growth over the midterm, I was wondering if you could help us parse how do you think about the market cap versus custom and direct indexing versus factor and thematic indices? And how do you think about those growth profile?

And thanks for flagging some of those wins for Fabric as well as the AUM for direct indexing. How should we think about the direct indexing? Right now, these direct custom indices are only 15% of Index subscription revenue. But how do we think about that over the next 3 to 5 years?

[Andrew Wiechmann, executive]

Sure. Ashish, a number of questions there. I'll try to touch on several of them. I would say, and I think you alluded to this, if we focus on the Index subscription growth rate, we are seeing the slowdown now from softer recurring net new over the last few quarters, which is a reflection of the tougher environment and the pressures that we've talked about, although I would highlight that we are seeing resilience and momentum based on the second quarter results, which I think reinforces the long-term opportunity for us.

And if we double-click on what's driving the growth and the outsized areas of growth across the Index franchise, I think it's similar to the drivers that we've seen in recent quarters. So we saw 8% growth in our market cap modules, but as you highlighted, 17% growth in our custom and special packages, which is a reflection of this move towards rules-based systematic custom- or outcome-oriented type investing where indexes are a very effective and efficient mechanism to develop those strategies. We're well positioned to benefit there.

If we look across client segments, we saw 8% growth with asset managers and more than 11% and 12% growth with wealth managers and asset owners and 24% growth with hedge funds. And so as Henry alluded to, we see tremendous opportunities in large part related to this move towards indexation in many different large client segments. And that trend is continuing and I think a reflection of a long-term compelling secular opportunity for us.

If we're going to focus on direct indexing, as you alluded to or asked about, I think direct indexing is mainly showing up in the non-ETF passive line for us. It is still very early in its evolution, and it's a place where we are, I think, well positioned to help both wealth managers and asset managers that are serving wealth managers with direct indexing solutions to provide them not only the underlying indexes, which is where most of our run rate comes from today and most of our revenue comes from in that non-ETF passive line, but also broader solutions that help them on that customization journey at scale.

Fabric is an enabler there, our broader Analytics tools like our optimizers and risk models and things like our ESG content and climate content. So we are uniquely positioned to benefit from direct indexing, which I believe is still in its early days and will be a big opportunity longer term.

[Operator]

The next question comes from the line of Alexander Hess from JPMorgan.

[Alexander EM Hess, analyst]

So there was a large deal in the private asset space involving one of your larger clients this quarter. Can you -- and one of the points touched on that was the opportunity for private indexes. Now MSCI is out talking about your own private index business, your own opportunity for private capital indexes. But how do you think about the technical challenges to creating those sorts of indexes and gathering the data? And how has Private Capital Solutions been able to tackle some of those? Any comments about how to frame the demand and opportunity for that business would be appreciated as well.

[Henry Fernandez, executive]

So thanks for that question because we're very excited about what we're doing in private assets, in private capital and real assets as we look at the differences between the 2 of them. So as you know, we announced yesterday the launch of 130 private capital indices, private equity, private debt, private credit, private infrastructure, et cetera. And we already have about 80 or so real property or real asset indices, both at the fund level and at the asset level. So we're very excited about that launch.

The technical challenges and opportunities first come with the data, access to the data. So MSCI now has access to about $15 trillion worth of underlying data across all private assets. And that is the highest quality data that exists in the planet because it comes directly from the GP at the request of the LP. So we have that enormous amount of data. So the private capital indices that we announced yesterday are built on about $11 trillion of that $15 trillion. And the other $3 trillion, $4 trillion, say, is what the other real asset indices are built upon. So it starts with that.

Then secondly is the -- your understanding of the investment process and the methodologies that you need to do to create these indices. And we've written the book about index construction and index methodologies throughout the last 50 or so years. So there is no question that we're an expert on that.

And the third technical challenge is, do you have the distribution associated with that in terms of the asset owners and the asset managers, the allocators and the managers of assets. And we have 1,200 people at MSCI calling on pretty much every one of those clients around the world. So that is important.

I think a key part of this thing is obviously as well independent. People want to see their indices and other tools come from an independent source. And obviously, MSCI has excelled in that in terms of quality and in terms of independence and in terms of a robust and transparent methodology, et cetera.

So we feel pretty confident that we will be the leader in all aspects of private assets from the data to the tools. And the tools include the benchmark indices, the performance attribution, the risk models, liquidity, evaluated prices, portfolio construction, asset allocation, et cetera, et cetera. And that's what we're setting out to do with the completion of the Burgiss acquisition on top of the RCA acquisition and on top of our position in real assets before that, we feel pretty good about where we are.

[Operator]

Next question comes from the line of Owen Lau from Oppenheimer.

[Kwun Sum Lau, analyst]

So the broader market was quite strong in the first half and probably better than the initial market assumption. And I'm just wondering what else you would like to see so that you can raise your full year free cash flow guidance?

[Andrew Wiechmann, executive]

Sure. Yes. So the cash flow performance has been strong for us. It was strong in the second quarter. I think we've benefited from both high collections compared to a year ago and lower cash tax payments. I would highlight on the guidance front that there are a lot of factors that can impact free cash flow. Everything from billing and collections across both subscription and ABF. Obviously, a higher ABF environment does help us, although ABF, we tend to bill on a lag.

And then cash expenses and cash tax payments can swing quite a bit. We're only halfway through the year. And we are continually focused on driving strong free cash flow growth and strong free cash flow conversion, but I would highlight that it can swing quarter-to-quarter.

[Operator]

The next question comes from the line of Heather Balsky from Bank of America.

[Heather Balsky, analyst]

Last quarter, during the call, you talked about -- you talked around margin expansion going forward. And I think the message was you expect sort of more modest expansion. As we think through the strong growth you're seeing with regards to AUM, how are you thinking about reinvesting that? Have your thoughts changed anyway from last quarter? And if you were to sort of accelerate investments, where are you most focused?

[Andrew Wiechmann, executive]

Sure. So Heather, I would say we are not focused on and we don't target a specific margin expansion or margin level. What we are continually doing is balancing investing for the long term while driving attractive profitability and free cash flow growth. And so that is the calibration that we are continually focused on and driving.

I would highlight the comments that I made in the prepared remarks here, where as you alluded to, AUM levels have been running higher than what underlied our guidance in previous quarters. And we've assumed for the current guidance that AUM levels increased slightly from the 6/30 balances. And if AUMs track above that, we will likely be at the high end of our expense guidance ranges.

We would use the higher growth to invest in key areas in the business as we have in the past, and those key areas tend to cut across the big growth frontiers that we're talking about. And so from a solutions standpoint, very focused on the custom index front, and that's a broad topic involving everything from technology to researchers to go to market. We do have investments in the climate front. There are a number of opportunities across private assets and private capital that we are investing in. And so we are laser-focused on continuing to drive these long-term growth drivers while at the same time continuing to squeeze to run the business expenses and identify efficiencies in the business.

But it's a constant calibration for us. And we are calibrating based on not only AUM levels, but overall business performance, outlook and financial dynamics more generally, and we'll keep you posted on that.

[Operator]

The next question comes from the line of Faiza Alwy from Deutsche Bank.

[Faiza Alwy, analyst]

So I wanted to follow up on the environment that you're seeing out there, specifically in ESG and Climate because it sounds like there was a pretty significant increase in new recurring subscription sales growth. And I know you alluded to the Moody's partnership that may have driven a chunk of that growth. But then I also heard you talk about sort of new products around CSRD. So give us a bit more around what you're expecting for ESG and if the underlying environment is any different or has improved.

[Andrew Wiechmann, executive]

Sure. So I would say we've seen a continuation of the dynamics that we've been seeing in recent quarters. There haven't been major changes to the trends that you've been seeing and we've been seeing.

I think we highlighted this, but from a regional standpoint segment within the segment run rate growth in the Americas was about 9%, is about 17% in EMEA and 20% in APAC, which is generally in line with what we saw last quarter. And the themes that we're seeing in each of the regions is fairly consistent with what we've seen in the past.

In the U.S., we're still seeing investors take a more measured pace on how they're integrating ESG. That's causing longer sales cycles and more deliberate purchasing decisions. In EMEA, we do see opportunities, as you alluded to, in areas like regulations. So we've had some early wins with things like CSRD and EBA Pillar 3. But regulation at the same time is creating some complexity and confusion as it cuts across many different objectives from financial materiality to do no harm to specific climate objectives. And so that is resulting in some hesitancy for many clients.

And then in Asia, we are seeing solid engagement, and it feels like Asia is earlier in its adoption of ESG. And so very similar trends to what we've seen in the past.

I would highlight that the industry pressures that impact all parts of the business are probably more impactful within the ESG and Climate segment, where we serve such a wide range of client types and use cases and users that there probably are similar nice-to-have type use cases that will get impacted more significantly from environmental pressures.

We expect these dynamics to persist in the short term, but we remain encouraged by the long-term dynamics here. And so as I alluded to, areas like regulation are compelling opportunities, and we've seen some early wins, but also opportunities in some of the new offering areas that Baer highlighted around our asset level, physical risk and nature data sets.

Our offering with the GeoSpatial Explorer is quite exciting, very early days, but these are things that continue to add value to our clients. And on top of that, we still see climate as a very dynamic area that has tremendous opportunities across not only new solution sets but client segments for us.

And so as Henry alluded to, opening up opportunities in areas like banks, insurance companies, corporates directly, even opportunities with GPs. And so there are a wide range of opportunities we are excited about in the long term. But in the short term, no change in the dynamics, and we expect it to continue in the short term.

[Operator]

The next question comes from the line of George Tong from Goldman Sachs.

[Keen Fai Tong, analyst]

Your Analytics business had another strong quarter, including strong new recurring subscription sales and retention rates. What are the top factors enabling this performance? And how sustainable is double-digit organic growth in Analytics?

[Andrew Wiechmann, executive]

Yes. So I would say -- and you've noticed this in the results of the last several quarters, we've seen some good momentum. So we're seeing strong client engagement across many different parts of our analytical tools. There's probably some benefit from the environment driving an intense focus on investment risk and credit risk and liquidity risk. And we are a leader on all fronts, and so that definitely has been helpful to us in certain areas.

The performance is also driven in part by the enhancements and innovations that we've continued to deliver. So we've been seeing traction with our insights offering, which delivers our risk analytics through a modern data architecture with enhanced visualization. And as you know, we've now integrated AI capabilities into that, and that's an area where we do see strong client engagement. And we've seen some traction in enabling new sales for us. We've seen solid sales within our fixed income offering and see opportunities -- continue to see opportunities there. And we continue to see strong momentum with our equity analytics business or equity risk models, which is something we've highlighted in the recent quarters.

So a lot of the same drivers we've talked about in the past that has been encouraging. We continue to see opportunities, although I will say that it's likely to be lumpy, and some of the pressures that have impacted the broader company are likely to impact Analytics as well.

[Operator]

The next question comes from the line of Scott Wurtzel from Wolfe Research.

[Scott Wurtzel, analyst]

Wanted to stay on the Analytics segment and maybe talk about the margin that you were seeing there. Obviously, it's pretty notable expansion, both sequentially and on a year-over-year basis. So just wondering if you can maybe walk us through and maybe drill down into the drivers of that notable margin expansion in Analytics?

[Andrew Wiechmann, executive]

Sure. Yes. We've commented on this in the past. There are several factors that drive the Analytics margin and have driven it higher over the last several years.

So one is we have been capitalizing software. And so the level of capitalized software has picked up a bit, which will drive the EBITDA margin. Doesn't impact the operating margin, but does impact the EBITDA margin.

Broader expense efficiencies and expense discipline that we have across the company tends to impact the Analytics segment, just given how we do many of our allocations. I would also highlight there are parts of the Analytics business that we have invested less in as well. We've been very strategic and targeted with the parts of Analytics that we have been investing in, but there have been some parts that we have invested less in to allow us to invest in other parts of the company that are very strategic for us.

And so all those factors have contributed to the Analytics margin increasing over time. As you can tell by the growth, we do see very compelling opportunities within Analytics that are not only attractive growth opportunities in their own right, but they are very strategic for driving growth across the company. And so we do have investment opportunities in Analytics that we will be putting money into and continue to invest in.

[Operator]

Next question comes from the line of Craig Huber from Huber Research Partners.

[Craig Huber, analyst]

Just wanted to ask you guys a question on AI here and stuff. Can you give us some examples of where you're really excited about the uses of AI to help drive revenues long term? And also a similar question on the cost efficiency side, where AI can really help you on the cost side, help your margins out even better.

[C. Pettit, executive]

Sure. So look, both of those areas are really critical, and we're engaging on both fronts quite dramatically. So first of all, in terms -- and I would say that within the efficiency, the cost efficiency, there's also even what you could call like a quality efficiency story, notably in our whole data environment. So we're doing tremendous amounts of work across the board in data, data calculations, production, extraction, whether that be in private markets, in ESG and Climate across the board, notably in areas that can be difficult to find hard data in such as controversies.

So we are -- so we're moving ahead in all those areas. And we have been -- we've had a really special focus on this, both internally and with certain members of our board of directors, who happily have some expertise in this area.

So the efficiency area is one where we're starting to see some pretty attractive numbers. As Andy mentioned, this is a continuous effort. And as we typically go into the end of the year here and start setting budgets for next year, we're starting to see that AI efficiencies for -- probably for the first year, next year will be a nontrivial part of our budgeting exercise and the efficiencies we can make.

In terms of new product development, this is also very much across the board. We clearly have 2 examples which we brought out today, which are sort of live, if you like, which is the work on geospatial data, where really we wouldn't have been able to do that without the use of AI and the recent launch as part of our future of risk. By the way, you may want to just Google future of risk MSCI. There's a very interesting paper on our website, which goes into the whole use of AI in the future of risk, and you can download it for free.

So in Analytics, in ESG and Climate and pretty much in private markets, so there's no part of the business where we're not using AI. And I think both in terms of a new product development and an efficiency story, we hope to be able to give you -- increasingly specific information in the quarters ahead and going into next year.

[Operator]

The next question comes from the line of Russell Quelch from Redburn Atlantic.

[Russell Quelch, analyst]

Congratulations on a strong Q2 result. I wanted to focus on private asset benchmarks, if I can. I wondered if you could size the current addressable market you see there and the rate at which you think that market is growing.

And also if you could talk to the competitive dynamics. Is this mainly white space for you guys? Or is there others that you'll be looking to displace as you grow?

And finally, do you have all the data assets you need to grow now? Or will you be looking further to sort of inorganic growth opportunities, particularly around data in this area?

[Henry Fernandez, executive]

So there are -- on the benchmark themselves, there are 2 sources of value to us. The first one is the sales themselves in benchmarking for LPs and GPs in the various subsectors -- or I should say, the various asset classes within private assets. One of the biggest providers of private credit in the world that I met with recently said, "I needed benchmark to be able to get more assets from both the institutional LPs and the wealth management part."

So that will create revenue opportunities. We haven't yet created a dimension of how much that will be and the timing of that, but that's clearly one area.

The second one and probably even bigger area is that if we become -- by becoming the leading provider of private asset class benchmarks, it puts us right in the center of the ecosystem of the LPs and the GPs and the underlying assets that they invest in. And in that center stage inside the tent, so to speak, then we're able to then expand from there to provide performance attribution models, risk management models, liquidity models, valuation models, obviously, asset allocation models and all of that.

Of course, it will put us in a key position to provide the underlying data as well, but that's part of "the benchmark sale." And therefore, it puts us in an enormously advantageous position.

And that's what we've done throughout our 50-plus-year history. That's what we expanded since I created the company 30 years ago, and we built it upon the market cap business created by the Capital Group and Morgan Stanley.

So we're very excited about what we can do in the overall private capital, private asset investing world. Obviously, all of this is totally alluding to transparency, to understanding what you bought, to understanding the risk -- the sources of risk and return on what you got and to create a seamless understanding of asset allocation across private assets and public assets.

So a unit of risk in a building, in a bridge or in private credit or in a venture capital company can be identified easily and compared easily with a unit of risk in a public company and a public bond or in a hedge fund. So that's what we're going after.

[Operator]

The next question comes from the line of Gregory Simpson from BNP Paribas.

[Gregory Simpson, analyst]

Can I just quickly check in on the latest contribution of pricing to new sales across Index and the other segments and if there's any client behavioral changes around pricing each?

[Andrew Wiechmann, executive]

Sure. Yes. So I would say across the company, the contribution of price increases was slightly smaller than last year, so very consistent with what we said last quarter. We have been slightly moderating our price increases in many places, given the pricing and economic environment, which is very much in line with what we said last quarter.

I'd say importantly, and I want to underscore this, we are focused on aligning price increase with the value that we are delivering. And so we do factor in the overall pricing environment and client health, but we also are focused on ensuring that we're capturing the value for the enhancements that we make to our solutions and our service and balancing that as well with the long-term relationship with our clients.

So most of our growth is going to come from existing clients. And so we are very focused on being a strong, long-term partner to our clients. And that means adding value, that means selling more to them, providing enhanced services to them. And that will translate through to enhanced price increases but also translates through to additional services that we can deliver to them. And so we're continually balancing that value with price increases.

[Operator]

The next question comes from the line of Alex Kramm from UBS.

[Alex Kramm, analyst]

Just a quick follow-up on the sales environment as I asked about earlier. When you think about the second half, and I know it's maybe a little bit too specific, but if you compare to last year's maybe sales in dollars, are you still comfortable? Or are you comfortable that you can do more sales this year in the second half or anything specific to 3Q or 4Q? So yes, that's the question.

[Andrew Wiechmann, executive]

Sure. So as I mentioned, 3Q, and I know you're aware of this, Alex, 3Q is typically a softer quarter for us, seasonally softer quarter for us from a sales perspective. Q4 tends to be a seasonally strong quarter for us. I don't want to be too specific or prescriptive about what can happen.

As I mentioned, sales and cancels can both be lumpy, and we do see some challenging dynamics out there. But as I alluded to earlier, we are seeing strong client engagement. We see opportunities out there. And as we've seen in past cycles, if there is sustained momentum in the equity markets, that tends to translate through over time into more favorable buying dynamics for clients. But as I said earlier, we are cautious. We still see some pressures on clients. But overall, we do see opportunities as well.

[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, executive]

So as you heard in our commentary, we're intensely focused on executing our grand strategy and compounding growth quarter-to-quarter, year-to-year and that's what we do. We're not an entity, as you know well, that flares up and flares down. We are consistently executing and executing. And there'll be some quarters that are going to be very strong relative to expectations, some of the quarters that are going to be weaker. But the longer trend horizon of this company is extremely powerful compounding of growth and compounding on profitability. We're very excited by the very large growth opportunities in front of us, as you heard in the commentary and answers to your questions and are encouraged by a very high level of client engagement that is typically a leading indicator of sales in the future.

So we look forward to engaging with all of you over the next few months. And thank you again for joining us, and I hope you all enjoy the summer and take some time off.

[Operator]

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