MSCI Inc (MSCI) — Q2 2021 Earnings Call Transcript

Thank you, operator. Good day, and welcome to the MSCI Second Quarter 2021 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the second quarter 2021. This press release, along with an earnings presentation we will reference on this call, as well as the brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we 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 detailed 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 revenue. Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Salli. Hello, everyone, and thank you for joining us today. MSCI delivered exceptional results in the second quarter. This outcome was the direct result of our vision to be a change agent for the investment industry, our mission to help investors build better portfolios for a better world, and the Triple-Crown investments we are making to support these efforts. For the quarter, we achieved total revenue growth of 22%, adjusted EBITDA growth of 25%, and adjusted EPS growth of 38%. Last month, we held our annual strategy session with our Board of Directors. Our Board and our management team are incredibly excited about the many opportunities we have to significantly accelerate our growth, including in solutions like investment thesis indices, fixed income, private assets, and of course, ESG. And now, even more so, climate. We are making great progress with the newer client segments that we have previously highlighted to you, including wealth managers, insurance companies, and corporates. And with respect to capabilities, we continue to transform and expand our technology and data infrastructure to align with our clients' needs. Let me now highlight one area within each of solutions, client segments, and capabilities. Within solutions, MSCI intends to lead all participants in the investment ecosystem in addressing climate change and carbon intensity in their investment portfolios and in their business operations. We believe that addressing the impact of climate change will require the largest reconstruction of the global economy since the Industrial Revolution some 200 years ago. Institutional investors will need to reallocate their enormous pools of capital to the decarbonizing companies that are on track to keep the world under a 1.5-degree Celsius rise and away from those companies that are moving too slowly or not acting at all. Investors and stakeholders are already exerting influence on companies and management teams to transform their business models to reduce their carbon emissions. Assets will be massively repriced, and we believe the net-zero revolution will produce spectacular winners and some losers. Moreover, this revolution will touch every company in the world. And for that matter, every part of our societies around the world. We believe this transformation will occur much sooner than companies and investors may see coming, and a number of market participants need to act faster and more decisively than they may appreciate. As you can imagine, this presents MSCI with enormous opportunities. We want to be the premier provider of all tools involved in portfolio decisions related to climate. In the near term, we look ahead to the COP26 conference to be held in Glasgow later this year. And we expect policymakers, regulators, market participants, and various other constituents to push for more extensive climate-related disclosures. MSCI will play its part and will join with the Glasgow Financial Alliance for Net Zero in organizing a net-zero financial service providers alliance. This new alliance will galvanize the world's index and data providers, credit rating agencies, and accounting firms to lay the tracks that can take investors and companies to a net-zero world. We are fast in reaching our suite of climate products and aggressively investing to provide the market with the climate models and reporting capabilities that can contribute to or even drive developing broader standards. We're also pursuing a multi-asset class coverage strategy within climate, which is beyond public securities. This strategy will include real estate, private equity, and private debt. Within client segments, our spotlight is on ongoing success with corporates, where we are providing public and private issuers of capital and their corporate advisors with solutions for TCFD reporting and ESG and climate benchmarking. Our greenfield success in this client segment and in others, such as wealth managers and insurance companies, directly reflects the investments that we have made not only in our product offerings but also in our client coverage organization. Our value proposition also remains very strong with asset managers and asset owners, which still represents the largest part of our client base. We are honored to have been selected by the California State Teachers Retirement System to provide their policy benchmark. CalSTRS adopted a custom MSCI All Country World Investable Market Index, displacing its prior domestic benchmark. The primary reason was to simplify their benchmarking process by moving away from a weighted calculation of separate U.S. and non-U.S. exposures. Using one index also simplifies performance attribution and better reflects CalSTRS' goal to target and manage active risk. Within capabilities, I would like to focus on how data is playing a critical role in our vision of revolutionizing the investment industry. Data is the core building block of investment analysis, reporting, and other processes and a competitive advantage for MSCI. For many years, we have made use of various technologies like artificial intelligence, machine learning, and natural language processing to harness the power of Big Data. More recently, our investments to develop MSCI Data Explorer and Data Lake aim to address our clients' strong appetite to ingest rich and extensive data in their operations. Clients want to leverage our data for a variety of use cases, including custom indices, liquidity reporting, factor analysis, among many others. They also want to easily expose, download, and manipulate massive volumes of underlying data for MSCI ESG ratings, SFDR metrics, and climate models. Before I turn the call over to Baer and Andy, I would like to take a few moments to note our current views on the global operating environment. We continue to be encouraged by the global economic recovery underway. While markets may oscillate day-to-day, the underlying trend is a positive one. Accordingly, we are aggressively positioned MSCI to take advantage of its many opportunities, and we will continue to increase our level of investment in the Triple-Crown areas we see for our company. With that, let me pass the floor over to Baer.

Thank you, Henry, and greetings, everyone. We have quite a number of exciting areas that I could cover here today, but I will focus my comments on three: One, our technology strategy and within that, our transition from Beon; two, climate where the market's focus and needs are accelerating; and three, data. On technology, flexibility is paramount, and we are pursuing a modular open platform strategy across MSCI. As part of our enterprise-wide integrated Investment Solutions-as-a-Service or ISaaS offerings, we are moving our analytics products into modular components, integrated through APIs, and delivered through a consistent client experience. This allows us to offer clients access to offerings from across MSCI on a common infrastructure. Given our plans for and progress with this initiative, as we announced earlier this morning, we are discontinuing our investment in Beon. Beon was originally conceived to consolidate analytics applications and distribute content in a unified way to our clients. With the investment industry increasingly converging around the use of cloud-based technologies for content production, distribution, and consumption, we will instead, over time, offer a range of new experiences through the integration of existing and planned ISaaS services. On climate, as Henry noted, we continue to enrich our suite of climate data models and tools. Our solutions help investors measure their portfolio companies and assets against emissions and temperature alignment goals, minimize transition risks and physical risks, and identify opportunities associated with the decarbonization of their portfolios. MSCI's climate tools are strongly resonating with clients, and we have seen robust uptake of our climate value at risk solutions, climate change metrics, and climate indexes. MSCI's run rate with climate offerings now totals more than $30 million, up nearly 2.5 times year-over-year. We also continue to launch new tools and products to address the quickly evolving landscape. We recently published a quarterly MSCI net-zero tracker. This tool gauges the level of climate change progress in meeting the 1.5-degree warming target. It currently covers the existing universe of public companies comprising the MSCI All Country World Investable Market Index. Coming soon, we are introducing an implied temperature rise tool, which provides investors with an indication of how companies in their investment portfolios align to global temperature targets. MSCI is also helping address gaps in climate data in private assets. We have been collaborating with our partner, Burgiss, to source Scope 1 and Scope 2 carbon footprint estimates for private companies and see significant opportunities to serve investors in these markets. These are all good examples of how MSCI contributes to transparency and standards as investors reallocate capital to lower-carbon assets. Each of these tools is intended to respond to the increasing need for high-quality data sets that clients can access directly or via various tools and applications that MSCI provides or through platforms outside of MSCI. Henry referenced SFDR, which imposes mandatory ESG disclosure obligations on asset managers and other financial market participants. MSCI has expanded its toolkit of climate data and reporting capabilities to address clients' SFDR-related needs, including issuer-level SFDR metrics for more than 10,000 companies and 175 sovereign issuers. We also provide index-level metrics that enable investors to easily report SFDR indicators for the benchmarks of their financial products. Given the strong market backdrop and our financial performance year-to-date, we have increased our upturn playbook investments in areas such as ESG and climate, fixed income and private markets, as well as to enhance our data and technology capabilities, our research, and our client coverage. As always, we will make these investments in the context of our rigorous Triple-Crown framework. Let me now turn the call over to Andy.

Thank you, Baer, and hi, everyone. As Henry and Baer have noted, the exceptional performance in the quarter highlighted the massive strategic opportunities in front of us and our continued ability to execute. We had our best quarter ever for net new recurring subscription sales and our best second quarter on record for recurring subscription sales. The client coverage footprint investments we've made in targeted subregions are also yielding strong business momentum. In EMEA, we had our best quarter ever for recurring subscription sales, and APAC had its second highest quarter on record for recurring subscription sales. The operating environment remains constructive, and our sales pipeline remains healthy across products and regions. And we continue to see strong momentum in our key franchises. Index recorded subscription run rate growth of over 11%, marking the 30th consecutive quarter of double-digit growth. We continue to experience steady index subscription run rate growth of around 9% within the asset management client segment, complemented by outsized growth within hedge funds, broker dealers, and wealth managers, collectively growing approximately 17%. In the ESG and climate segment, we witnessed a further acceleration of growth as we continue to broaden adoption and use cases within existing clients, while successfully expanding into new clients with over half of subscription sales in the quarter coming from new clients to ESG and climate. In all other private assets, run rate and revenue growth both benefited from solid new sales growth and FX tailwinds, and revenue growth also benefited from an elevated level of service deliveries relative to last year. I would note that a portion of our real estate business recognizes revenue upon delivery of service and typically sees more revenue in the first half versus second half of the year. Although the timing of the deliveries can shift between quarters, resulting in some swings in year-over-year revenue growth rates. Turning to asset-based fees, where revenue grew 55% year-over-year, the strong market rally as well as healthy cash inflows drove record AUM levels with continued strength both in developed markets outside the U.S. and within U.S. exposures. On a product level, ETFs linked to MSCI ESG and climate equity indexes experienced cash inflows of nearly $17 billion during the quarter, continuing to represent the leading market share of global ESG and climate equity ETF flows. Turning to our balance sheet. We ended the quarter with a cash balance of approximately $1.97 billion after issuing $600 million of notes in May. Our strong balance sheet affords us flexibility to support both organic investments in our business and other capital allocation opportunities. This includes actively pursuing both partnerships and potential acquisitions in key strategic growth areas. It also includes shareholder capital return, including dividends, which continue to grow with adjusted EPS. Yesterday, MSCI's Board approved a 33% increase to our quarterly dividend to $1.04 per share. As we go forward, I would like to highlight that we continue to monitor the market and may raise additional debt if we see an attractive opportunity to do so. Before I turn to guidance, I'll review the impact of the Beon write-down, which was included in amortization of intangible assets. As a reminder, this was a $16 million noncash pretax charge that has been excluded from adjusted EPS. Importantly, it does not impact the opportunities we see for our business nor our high single-digit long-term revenue growth target for analytics that we shared with you at our Investor Day in February. Turning to our guidance. As we mentioned throughout the first half of this year and at Investor Day, our pace of investment may flex up and down based on the trajectory of our asset-based fees and the business more broadly. The strong trajectory year-to-date in equity markets and ETF AUM, exceptional top line growth, and ongoing improvement in the macro backdrop give us further confidence to execute on our upturn playbook opportunities and continue to drive growth. Additionally, the strong business performance has led to increases in incentive compensation accruals. We've therefore increased our expense guidance range. We would note, however, that we remain committed to driving positive operating leverage and modest margin expansion. Our increased interest expense guidance range takes into account our May notes offering of $600 million. And our depreciation and amortization expense guidance reflects the noncash write-off of $16 million from Beon in this quarter, partially offset by the benefit from the removal of projected amortization expense associated with Beon in the second half of 2021. We reduced our tax rate guidance, taking into account the second quarter and our latest view on a number of discrete items, and we increased our free cash flow guidance primarily to reflect our strong asset-based fees in collections in the first half of the year, as well as lower interest expense, partially offset by higher operating expenses and cash taxes. In summary, we continue to monitor risks from the pandemic, but are encouraged by the improving economic backdrop. We are pleased with the strong quarter we delivered, the investments we continue to make in our growing franchise, and the many opportunities we see ahead of us. And with that, operator, please open the line for questions.

My first question is just on the decision to stop the Beon initiative. I guess, the high single-digit long-term growth rate, I think I can appreciate that stays the same. But I think Beon was supposed to be the difference between that and low double-digits in the past. Do you think low double-digits is now out of the question for the analytics business? Just curious about the moving pieces there.

Manav, this is Baer. I believe the path we're currently on is much more likely to yield stronger results for MSCI overall and in analytics. If we reflect on the past before Jigar joined as CTO, we were developing applications in a very product-specific and siloed technology environment. Since his arrival and the introduction of new leadership, we were positioned to launch Beon. At the same time, we are creating a more standardized architecture and infrastructure that aligns with MSCI's industry standards. This will support initiatives like our index builder and the new ESG manager. We will utilize this common infrastructure for analytics, making it less unique to individual products and more consistent across the organization. We are confident that this approach will enhance the user experience for our clients, and we expect the opportunities in analytics to remain the same or even exceed our previous expectations.

Okay. And just a quick follow-up on the climate business you talked about, I mean, obviously, some pretty good growth, and I can understand the focus given all the press out there. But do you have the tool set to keep that growth going? Or is that where maybe partnerships and M&A will play a role as well?

Partnerships and acquisitions are important to our strategy, but our main focus is on organic investments. We believe we have the right data, infrastructure, and talent to achieve our goals. About 18 months ago, we made an acquisition in the climate sector. Moving forward, our priority is to invest in our team, models, and data coverage. We are confident that these investments will present us with significant opportunities in this area.

I want to ask a question that I think I asked maybe last quarter already, but definitely have asked in the past, which is the impact of new regulations having on ESG and climate growth. When I've asked you previously, you've kind of said that new regulations like SFDR are not having an impact on new sales, et cetera. But clearly, you started talking about it a little bit more. So I guess my question is, are regulations helping? And if they're not helping yet, do you expect that, that could drive maybe acceleration from these high growth rates in the future? When we talk to some of your competitors, they're definitely acknowledging that regulation is a game changer. So maybe you can comment on that.

Yes, Alex. We may have downplayed this in the past or it might have been a focus point. You are absolutely correct. This situation is changing rapidly. It’s hard to determine when we last highlighted that this is a fast-evolving environment. Regulatory demands are certainly increasing the need for transparency from corporations. We are seeing more reporting from banks and asset managers. We believe this is a sector that will drive significant growth for us. It presents an exciting opportunity as it integrates the new information, models, and data related to climate. We have extensive experience in regulatory risk reporting, so this is a fantastic chance to combine our established risk management skills with the new focus on climate, leveraging both of those strengths.

Thank you for finally acknowledging it. I just wanted to quickly mention the CalSTRS win. While it may seem small, it's a positive development to see you replacing some competitors. I'm curious if this creates a network effect. I’m not sure how extensively CalSTRS outsources investments, but does their change in primary benchmark lead to increased sales for asset managers trying to target them? Or is this situation more of a one-off occurrence without a broader network impact? Could you elaborate on that?

It certainly has a significant network effect, which is why we invest considerable effort in achieving these benchmark wins or displacements. While there is some revenue linked to the asset owner during this process, what matters more to us is the range of investment products that emerge, whether from active or passive managers, including ETFs, futures, and options. For example, CalSTRS, which is the second largest pension fund in the U.S. and the largest teachers' pension fund globally, manages about $150 billion in equities from a total of over $300 billion in assets. Of that $150 billion, we are already involved in international benchmarking for half. The remaining $75 billion is now transitioning to an MSCI benchmark, replacing a domestic one. Much of this capital will be managed passively by asset managers and index managers, which will directly affect our revenues from asset-based fees.

Right. But this is a custom index, right? So I guess, it's new custom sales coming out of that. That was my point, right?

Yes, yes. Obviously, the direct revenues from the creation of a custom index are there, but the monetization of this is largely at the asset manager level, not on the asset owner level. But whether it's a standard benchmark off the shelf or a custom benchmark or a thematic benchmark or an ESG benchmark, the concept that I just described applies across the board.

Your cash balance is up to roughly $2 billion. And historically, you've been opportunistic with repurchases. And, I guess, there haven't been too many opportunities to repurchase stock. So that probably led to the 33% dividend increase. So just help us understand, just given the large cash balance, just update us on your capital deployment priorities. And if you were to look at M&A, would it be sort of more tuck-in and what type of assets you'd be looking at?

Sure. It's Andy. I would say no major change to our approach to capital allocation more broadly. We continue to pay a regular dividend, which generates a steady return of capital. And then we use the balance of excess cash for opportunistic share repurchases and opportunistic M&A. On the share repurchase front, as you know, we really factor in three components. One is, firstly, volatility in the shares. Secondly is value in the shares. And thirdly is availability of cash. And so we continue to use that discipline around the pace at which we repurchase our shares. On the M&A question, I would say we continue to be active in pursuing both acquisitions and partnerships. And our focus is really intensely on strategic growth areas for the firm. And so it's the areas you've heard us talk about in areas like real estate, private equity, ESG and climate, as well as in areas like fixed income. And within those categories, generally looking at assets that have unique and proprietary data as well as analytics and workflow software applications. And so no major changes. I'd say, generally, we're focused on what we call strategic accelerators, which you might call bolt-ons, but it's acquisitions that are going to further our current strategic endeavors, not be transformative-type acquisitions.

Great. I also wanted to ask about your fee rate on the ETF business, which has decreased a bit over the past couple of quarters. Is this due to more funds reaching their caps, the U.S. mix, or are there other factors at play that could explain this?

Yes, Toni, the decline in basis points this quarter is due to a combination of mix shifts and fee changes. The mix shift is influenced by various geographical factors that can cause fluctuations, as well as shifts in product areas. Significant movements into ESG and factor products can also affect the overall rates. Additionally, the mix of products has a diverse range of fees. Fee changes are typically contractual adjustments based on assets under management levels, and sometimes our partners modify fees to enhance product positioning in the market. All of these factors contributed to the movement this quarter.

So at the Investor Day, MSCI estimated that TAM of ESG is about $3.9 billion. So given the recent trend in ESG and client mix, do you think the TAM has expanded, especially when we start talking about climate being somehow separate from ESG? And also please remind us how MSCI estimates the TAM?

It certainly is increasing and increasing rapidly. As we have seen in the last 18 months, there's been a huge embrace of ESG investing in the world, and some of the evidence of that have been the performance of the ETFs that are linked to MSCI ESG indices as one example, but you could see that in institutional passive and active management, et cetera. And therefore, the addressable market of ESG investing is going to continue to increase. And people ask us all the time, how far? Well, I think ultimately, there won't be any such thing as ESG investing. Every investment decision that is made needs to be taking ESG into account. So the addressable market will be the entire global investing process. With respect to climate, it's the same, and it could be even bigger than ESG. ESG, clearly, is very important to the world, but climate is an existential threat to the world and it needs to be solved in the next 20, 30 years and a lot of solving needs to be front-ended, because as we know markets are discounting mechanisms, and they're going to start and they have already started discounting carbonizing companies and penalizing them, and putting more money into green technology, clean energy and less carbonizing companies. So the market, the TAM for climate tools is going to be the same. Every investment needs to take climate emissions into account; every company that you invest in, private, public; every real estate investment that you make, especially in real estate in coastal cities; every bond; everything. So I think the addressable market is extremely large. Now in terms of we, at MSCI, will spend a great deal of time trying to measure and report on that time and the sort of the comments and goings of that. We don't think it's a very useful exercise. It's just huge, and we're just at the early, early stages of penetration of all of that.

Yes. To clarify your question about how we determined the total addressable market, it was based on what I refer to as a tangible addressable market. We analyzed each client type and the different groups within those types to ascertain what they are willing to pay for our current products, depending on the maximum sales we can achieve with each category. We then projected how large the market could be if we could reach all clients in those groups. However, as Henry pointed out, this approach does not account for new use cases, new client types, and new products that we continue to introduce. Given the evolving climate scenario, we have only begun to understand the breadth of the opportunity available within individual clients and across all potential products we can offer.

Got it. That's very helpful. I have a quick follow-up regarding the cryptocurrency index. Can you discuss MSCI's interest in relaunching any cryptocurrency impacts? Do you think MSCI is exploring this area?

Yes. Very good question. Let me just start by saying that we, at MSCI, as you all know, are at the nexus, at the leading edge of the investment process between asset owners, managers, and financial intermediaries. And therefore, a lot of our clients always come to us first with new ideas, new concepts that are not even beginning to be invested in. So we are always exploring every single type of opportunity about enhancing our tools and our investment products and services for taking clients to that leading edge of investing. Examples are obviously thematic investing. And obviously, with where we're talking about emerging market investments over the decades and all of that. So cryptocurrency is one example of that. That we've had a number of institutional clients come to us and say, tell us more about this? How could I make an investment in this? What are the potential implications of this to climate, for example? I mean, there is a lot of carbon emission associated with the mining of cryptocurrencies. What is the disruption associated with the underlying blockchain technology? And who are the winners and losers? Etc. So it's a broader sort of universe and ecosystem that's just cryptocurrency. So we are evaluating all of that, analyzing that. We're talking to a lot of experts. We're looking for partnerships with some of those experts in order to then launch a variety of models and data and indices per se as well, and more to come over the next few months about all that.

I'd like to follow up on the climate business as well. Could you remind me about the distribution of your customers on the ESG and climate side, specifically regarding providers of capital, financial intermediaries, and uses of capital? What is the actual breakdown there? Additionally, on the corporate side, many companies are only now beginning to collect and report climate data. What is your market share in this area? How many of those companies do you engage with that are actively providing and reporting that information?

Yes. I don't have all the data in front of me, but we take the picture and can elaborate further. The key historical relationship is between asset managers and asset owners. This involves the adoption of information and benchmarks to create portfolios. I would say that the balance of revenues between asset owners and asset managers is approximately the same. There are new opportunities emerging.

Let me interrupt you for a moment because your line is broken. If you want to dial back in, I can answer the question while you do that. The first thing to recognize is that the climate tools apply to everyone: asset owners, managers, banks, and obviously, corporates and the like. We are present across the entire spectrum. It begins with helping the asset owner, such as pension funds, endowments, foundations, and sovereign wealth funds, understand how to decarbonize their portfolios. We conduct a lot of research to understand their intentions and what kind of policy benchmarks they need to measure their impact. This is similar to what we discussed regarding the CalSTRS transition, though not specifically about climate. At this stage, it doesn’t generate significant revenue, but that benchmark eventually gets put into operation by the asset owner, who looks for asset managers to run portfolios in accordance with climate indices aligned with the Paris Agreement. That’s how we monetize this area. Currently, the majority of our revenue comes from asset managers who assist asset owners in managing climate-aligned portfolios. In the last couple of years, especially the past 18 months, we have seen rapid growth with banks that are incorporating climate considerations into their capital markets through green bonds, IPOs, and various investment vehicles like swaps and options. They are also integrating climate into their equity research. In summary, most of our revenue is generated from asset managers, followed by banks, which are growing quickly, and then asset owners. However, the significance of asset owners extends beyond revenue because they are the ones that initiate this entire process. We are also seeing an increasing amount of revenue from corporates as we help them understand their carbon footprint, disclose their carbon data, and measure their temperature alignment.

To provide some figures on that, out of the $30 million climate run rate mentioned earlier, approximately $9 million is derived from asset-based fees, which mainly comes from asset managers. Additionally, the subscription portion, as Henry noted, constitutes the majority of the remaining amount and is also primarily from asset managers.

Okay, great. That's very useful. If I could ask one more question, I'm curious about retention rates overall. Is there anything happening in the market that's causing more volatility in the analytics retention rate that you've noticed?

Yes. I'd say no notable changes this quarter. As we've said in the past, analytics will tend to be a little bit lumpier where we, in certain periods, may have large cancellations and it can bounce around. I'd say there were no client segment specific indicators of note within analytics or across any of the other segments here.

Congratulations on a strong quarter. I have two questions regarding ESG, and I'll ask them both at once. The first pertains to the competitive landscape in ESG. With S&P acquiring IHS Markit and their growing influence, plus the increased consolidation in the sector, how do you foresee the competitive environment changing in the future? The second question is about the global regulator, IOSCO, which is planning to oversee ESG rating providers. Do you think this regulation will impact the market going forward, and in what ways could it benefit MSCI's acquisition strategy?

Our ESG offering has a strong competitive advantage because it covers the entire spectrum. We are the only provider that offers ESG tools from screening and ratings to indices and incorporating ESG into factor models across the equity spectrum. We have also significantly enhanced our capabilities in the fixed income sector for ESG, particularly through our partnership with Bloomberg and Barclays for index funds. While there is competition in specific sectors such as screening and ratings, we are the largest provider of ESG indices in both equity and fixed income. The competition is not as intense in our area compared to screening, for example. We are among a few providers that incorporate ESG as a factor in risk models and analytics reporting for portfolios. We believe that the combination of our offerings will help us outperform competitors in the long run. Although we anticipate more competitors entering the market, our leadership and comprehensive product line will give us a competitive edge. Regarding regulation, various securities commissions globally are working to establish ESG inclusion criteria for indices and investment products. This regulation, both direct and indirect, will require our clients to report specific ESG data and we will support them in this process. There may also be direct regulation affecting index providers and ESG rating entities. Regulation generally benefits us by reducing the number of competitors, as we are well-equipped to navigate regulatory challenges and scale our business effectively, creating operational efficiencies. Thus, while we do not actively seek regulation, it presents a competitive advantage when it arises.

My first question, can you just touch on further the futures and options area and the opportunity there you see going forward here? And maybe touch on maybe some more partnerships with some of the exchanges out there globally? And I have a follow-up.

We are highly focused on growing and developing this area as there is significant potential. As you know, listed index futures and options are predominantly domestic, typically reflecting country exposures. When there is multi-country exposure, it usually involves a single currency, such as the euro in the Eurozone. We are collaborating with our partners to create a market for multi-country, multi-currency index futures and options, a project we have been working on for some time. We have seen considerable success in futures, as we have indicated previously. Our aim is to expand not just with market cap indices in equities but also with ESG indices, like those focused on climate change. A major area of focus now is listed options; the market for multi-country, multi-currency index-listed options is currently very small, but we believe it holds tremendous potential. We are enhancing our partnerships to further develop this market, particularly in the U.S. This quarter, we have noticed that revenue from index futures and options licensing fees is countercyclical to AUM levels. This is an area we are concentrating on because, during a bull market when AUM increases significantly in ETFs and other index products, we may observe lower volatility and consequently reduced volume. Conversely, in bearish or highly volatile markets, we anticipate earning significantly more from derivatives compared to cash products. Therefore, we are pursuing this not only for growth and revenue generation but also to diversify our robust all-weather business model at MSCI.

And Craig, one point to keep in mind there, as Henry alluded to, volumes have been light given the low volatility in the market generally. But one very encouraging trend for us is the continued growth in open interest in futures contracts based on our indexes, which is up 50% year-over-year. So we continue to see kind of healthy adoption and use of the products despite the lower volatility.

I appreciate that. My other quick question, if I could ask, on your hedge fund business. Can we just touch on that how well that's doing? How do you feel about the health of that market? And are they adopting your products?

Yes. I would say there hasn't been a fundamental change from previous quarters. Nothing has changed dramatically since our last discussion. We have experienced good growth in index, although it's a bit inconsistent, and solid growth in ESG. The environment related to analytics remains relatively the same. Therefore, the main takeaway is that there have been no significant changes since we last spoke.

A question for you on the upturn playbook and the investments in the business. I guess, just remind us there, how quickly can you guys turn up and turn down those investments? And are these investments more on people or is it in technology? How should we think about that over the next several quarters?

Sure. Yes. So there typically is a little bit of a lag, especially when the driver of the upturn is asset-based fees, which can move up quite significantly in a short period of time. And while we can bring in some expenses, namely some non-comp expenses, the comp expenses take some time to ramp up here. And so we are, as you know, going to actively our upturn playbook now. As we've said in the past, the asset-based fees continue to grow at a very rapid growth rate, and the broader business health continues to be quite strong. And so that's the driver of our guidance going up where we are turning to the upturn here, and it's investing both in people and key areas as well as technology and other non-comp areas. I would highlight two other factors that relate to the all-weather franchise that we have. One is around compensation, where just based on the better business performance that we're seeing relative to where we started the year, compensation accruals naturally go up. I would highlight that the opposite happens when we enter a challenging period. And so that's a kind of nice all-weather franchise hedge. And similarly, on the FX side, so we have seen some FX headwinds on the expense side as the dollar has depreciated against several currencies. And so that's put some pressure on the year-to-date expenses as well as factored into the guidance. And that's something that also moves in the opposite direction sometimes. The nice thing about that is we get an offset on the revenue side. So we have benefited a bit on the revenue side from the U.S. dollar depreciation. If I can spend just a minute highlighting where the investments are going, these are really around the key growth areas of the firm. So we are very much sticking to our Triple-Crown framework and putting the incremental dollars to those areas that are going to drive growth for us. So in index, it's areas like the new index platform, innovative new index, product development. In ESG, significant investments, which you can see just based on the ESG expense growth rate, where we are using some of this improved business performance to really double down in ESG. So we're investing in areas like data sourcing and data quality as well, as Baer alluded to earlier, our new ESG platform, ESG manager platform, and then go to market on the sales side. And then more generally, in the technology area, continuing to invest in our cloud migration in areas like DevOps. So it's similar messages to what we've delivered in the past, just we're enacting that right now to a higher extent.

Great. And just a follow-up question, if I may. Assuming that businesses do come back in line and employees come back to work, how does that affect your business? Is there anything you weren't able to do over the past year because customers weren't there or you guys weren't in the office that perhaps gives you a new opportunity assuming people go back to work before the end of the year?

Yes. Last year's lockdown had a significant impact on large enterprise analytics deals, which require coordination among various levels of client organizations. This activity decreased considerably for us but is slowly returning, although not to previous levels. As people return to the office, that should improve. Overall, we have performed exceptionally well in a virtual environment, and our clients have been very receptive. The main areas we struggled with were large enterprise deals and the implementation of those deals, which affected the recognition of implementation fees. However, we have effectively communicated with clients, maintained strong relations, and our team's productivity while working remotely has greatly increased. It has been a positive experience despite the challenges of the pandemic, which has caused significant loss and disruption.

Sorry for dragging out the call. Just a couple of quick follow-ups. One, Andy, you talked about preserving operating leverage and margin expansion. So can you just remind us, when you think longer term, do you actually have a range in terms of margin expansion that you think about? I know you've laid out subscription growth and EBITDA cost growth, but like where does that arrive in terms of margin expansion on an annual basis?

Yes. And it's a very dynamic equation. So we have not been prescriptive about targeted operating leverage or margin expansion. There are going to be periods, like we've seen in the last couple of quarters, where ABF just runs up significantly, and we can't adjust our pace of investment to keep up with it, and you'll see the margin go up. Similarly, there will likely be periods at some point where the market goes in the opposite direction, and we continue to invest. And we might see at times the margin go down in periods. But our longer-term objective is to drive that positive operating leverage. And as we've said, it's going to be at a more modest pace than what we've seen in the future. Our core focus here is driving long-term growth. And to do that, we want to continue to invest at a healthy rate.

So not willing to put numbers around what modest means from a long-term perspective? Am I getting it right?

Yes. You've seen our long-term targets and what we've said on the expense side. And yes, I haven't been more prescriptive than that.

Fair. And then just one quick follow-up to the competition question on ESG and climate, maybe particularly on climate. And not to single out one firm in particular, but I know you have a big relationship with BlackRock in a lot of areas. And I think they are also talking a lot about climate and when it relates to the Aladdin products, et cetera. Like is that more of a partnership? Or are you viewing them as a competitor when it comes to these climate opportunities and climate modeling?

So it's the same as the overall relationship with BlackRock, which is, on one hand, we're strong partners in index and all the tools, all the climate tools and models and all of that, that go into construction of indices. On the other hand, clearly, their analytics business competes with our analytics business, and embedded in there are a number of models and tools and analytics and reporting and all of that. So that is obviously a bit more competitive. But having said that, one of the things to emphasize is MSCI is an open architecture company. And therefore, all of our content is available in any platform that wants to work with us, even if those platforms are in competition with our own software platforms. So in that vein, we have a number of collaborations and partnership with BlackRock in their analytics Aladdin business in terms of putting a lot of our content, ESG content, climate content, and climate models and all of that, in their platform. So there is an element of partnership there as well in the context of the competition on the overall workflow software and platforms.

Well, thank you for joining us today. As you have heard, we have enormous opportunities in front of us at MSCI. Therefore, we're stepping up our pace of investing, and at the same time, obviously, try to achieve some modest margin expansion. We like the revenue growth that we've achieved and the performance, and we're going to like it even more if we invest more to achieve even higher levels of revenue growth. So we look forward to speaking with you further. In the meantime, please enjoy your summer, and stay safe.