MSCI Inc (MSCI) — Q2 2023 Earnings Call Transcript

Thank you, operator. Good day, and welcome to the MSCI second quarter 2023 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter 2023. This press release, along with an earnings presentation we will reference on this call as well as a brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today’s call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS, and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You will find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. As a final housekeeping item, beginning on next earnings call for the third quarter, we will request our analysts to ask questions at a time during the Q&A portion of our call in order to reflect the growth in our brokerage coverage and allow larger participation. As always, analysts will be welcome to ask more questions by adding themselves back to the queue. And our goal is to devote more of our earnings call to the Q&A segment. With that let me now turn the call over to Henry Fernandez.

Thank you, Jeremy. Good morning, everyone, and thank you for joining us today. During the second quarter, MSCI delivered another solid performance against a fluid market environment. We achieved adjusted EPS growth of 17%, organic revenue growth of 13% and organic subscription run rate growth of 11%. We also maintain our laser focus on profitability, demonstrating rigorous financial and capital management. Our capital allocation framework has not changed. We will opportunistically buy back shares, support our dividend policy, and accelerate our strategy through bolt-on acquisitions. Most notably, our share repurchases since the beginning of the second quarter have totaled nearly $468 million. MSCI has repurchased close to 50 million shares or nearly 40% of our total shares outstanding from the end of 2012, and we intend to keep the same focus and discipline. All of this confirms the strength and durability of our business. One of our consistent differentiators is that MSCI can be nimble and flexible in significantly adjusting expenses up and down, depending on the operating environment. This helped stabilize our profitability through periods of market turmoil. More broadly, MSCI continues to benefit from our globally diversified and integrated franchise. In the second quarter, we delivered our 28th consecutive quarter of double-digit subscription run rate growth in index. We also had a strong quarter in Analytics, posting our highest second quarter retention rate ever of over 95% and recurring net new sales growth of 46% in equity portfolio management. In addition, we delivered 70% climate run rate growth across our product lines, along with a climate retention rate of over 97%. Our ESG run rate growth firmwide grew 18%, and the retention rate from our ESG and Climate product segment remains resilient at 97%. This shows that despite tightening budgets, our clients continue to make ESG and Climate a top priority. During my recent client trips to Asia, the Middle East, Western Europe, and parts of the U.S., ESG was the most popular topic clients wanted to discuss. For that matter, when the IBM Institute for Business Value recently surveyed corporate executives across 22 industries, 76% of them said ESG is now central to their business strategy. This reinforces our belief that ESG risks and opportunities are investment risks and opportunities. With all of that in mind, MSCI is working to accelerate our ESG and Climate product launches. Our climate solutions continue to drive growth across the company, and they have helped us build momentum across client segments. This gets to a larger point. The integration and interoperability of our product line, what we call our one MSCI ecosystem, can dramatically increase value and efficiency for our clients. We further amplify those benefits through our open architecture for clients and other outside parties and through MSCI's role as a standard setter, industry connector, and innovation hub. All of this represents our greatest competitive advantage as a company. It highlights our unique position in the industry, our unique mix of capabilities, and our unique range of client segments. Indeed, MSCI is now well placed to capitalize on major trends in shaping the industry. Those trends include the acceleration of the adoption of index investing; the continued shift to algorithm-oriented, rules-based, technology-driven portfolio construction; the rise in demand for sustainable investments and climate solutions; the growing role of regulation; and the increased allocations to private assets. As our strategy evolves to capture new opportunities, which will require new investments, MSCI will stay firmly committed to financial discipline and high profitability. Those commitments have always anchored our strategy in the past, and they will continue anchoring our strategy in the future. And with that, let me turn the call over to Baer.

Thank you, Henry, and greetings, everyone. My comments today will cover MSCI's business performance and also provide an update on our continued technology transformation. Our flagship index segment achieved another milestone, including 12% subscription run rate growth with 14% growth in Asia Pacific. We drove record onetime sales primarily from our recently launched float data products, which delivered nearly $8 million in gross sales. These deals facilitate deep engagement with clients while creating entry points for future recurring subscription sales. We also achieved record second quarter results for net new and new recurring sales in index. Globally, there were 20 newly available ETF products based on MSCI indexes during the quarter, 12 of which were based on MSCI ESG and Climate index. During the quarter, 96% of industry inflows into ETF products domiciled and sponsored by European fund managers were linked to MSCI indexes. All of this confirms the critical and growing role that our index segment plays in global investing, trading, and portfolio construction. Turning to our ESG and Climate reporting segment. We delivered overall run rate growth of 26%, while our retention rate was nearly 97%. As I can confirm from my client meetings during the quarter, demand for our ESG products remains high, fueled by regulatory pressure for high-quality data, MSCI's comprehensive coverage, and the transparency provided by our solutions. Looking at Climate subscription specifically. We delivered run rate growth of over 40% with both asset managers and asset owners, and over 75% run rate growth with banks, insurance, wealth management, and hedge funds collectively. Meanwhile, AUM in ETF products based on MSCI climate indexes totaled $71 billion at the end of June, which represented approximately 67% market share on the basis of AUM. As with ESG, both government regulations and voluntary disclosures continue to drive demand for advanced climate tools. Let me now turn to our Analytics segment. During the second quarter, MSCI achieved subscription run rate growth of 6.6% in Analytics, including 13% growth in equity portfolio management with notable strength in the hedge fund segment. We also posted our highest second quarter ever for retention at 95.2% and net new sales of about $11 million in Analytics. By providing investment risk and performance workflows in Analytics, we develop deep connectivity and access to client portfolios. This in turn helps us deliver additional innovative services, such as our ESG and Climate regulatory reporting solutions, including for the Sustainable Finance Disclosure Regulation. In fact, during the first half of 2023, MSCI delivered more than 47,000 total climate reports enabled by our Analytics reporting engines. Shifting to our Real Assets segment. It was a tough quarter in a challenging environment with historically low global commercial real estate activity. In that environment, our Real Assets segment posted overall run rate growth of 9% excluding FX and a retention rate of close to 93%. Regionally, we also achieved 14% Real Assets run rate growth in Asia Pacific, 10% growth in the Americas, and 8% growth in EMEA. As MSCI explores new ways to turn raw data into actionable investment insights, we continue moving forward with our technology transformation. Generative AI and large language models are a big part of that. We've been using AI and natural language processing for a decade now to enhance our content. Given our deep expertise in modeling and data analysis, this is second nature to MSCI. In ESG research, for example, AI helps us analyze and update more than 7 million data points per month with inputs from more than 4,700 news sources, 150 alternative data sources, 12,000 corporate websites, and submissions from more than 5,200 corporate issuers. We have also used generative AI and LLM to help us identify, extract and validate EU taxonomy data four times faster than our previous capabilities. These data represent crucial inputs for EU regulatory reporting. In Analytics, we use natural language processing and deep learning in our models to identify securities with similar characteristics, to examine emerging industries, and to support quantitative investment testing and systematic alpha use cases. We're also deploying AI in our corporate functions such as finance to help automate contract review, extract information and process invoices. MSCI is embracing generative AI to enhance the client experience and operate more efficiently. In particular, we are leveraging AI to continue evolving our data processing, audit, and quality mechanisms. In addition, we are working to integrate AI into our MSCI ONE platform to proactively deliver actionable insights for client portfolios. Investments in data and technology are central to our long-term strategy. Combining those investments with our strong commercial focus supports our ability to deliver solid performance amid external challenges. I'm confident that by staying focused and disciplined in our operations and financial management, MSCI will be able to deliver for our clients and our shareholders. And with that, let me turn the call over to Andy.

Thanks, Baer, and hi, everyone. During the quarter, it was encouraging to see the breadth of opportunities and diversity of revenue streams driving our solid top line growth. This included very strong nonrecurring revenue, which more than offset some of the lingering cyclical impacts we saw in parts of our asset-based fees. And we delivered solid double-digit subscription run rate growth with a remarkably stable retention rate despite some of the market pressures. In Index, client demand was broad-based with double-digit subscription run rate growth for all of our subproduct areas, including market cap modules, ESG and Climate modules, factor modules, and custom index offerings. Our run rate growth with asset managers and asset owners was 10% and 12%, respectively. Collectively, these client segments represent about 70% of our index subscription run rate. Asset-based fees have swung to positive growth driven by a rebound in AUM-linked revenues, which were supported by both market appreciation and strong inflows. Since the end of March, we've seen $18.7 billion of inflows into MSCI-linked equity ETFs, which combined with a gradual rebound in market levels has driven AUM balances to increase by over $67 billion. There were net inflows of $15.6 billion into MSCI-linked ETFs with geographic exposures to developed markets outside the U.S. and $3.1 billion of inflows into MSCI-linked ETFs with emerging market exposures. From a product lens, there were $5.2 billion of inflows into ETFs linked to MSCI ESG and Climate indexes, while $2.5 billion of inflows went to ETFs linked to MSCI factor indexes fueled by strong flows into the quality factor. In fact, the AUM balance of equity ETFs linked to MSCI indexes was greater than $1.4 trillion as of July 20th. Volumes from listed futures and options linked to MSCI indexes were lower year-over-year relative to the high volatility environment we saw a year ago. This is consistent with what we would expect to see when AUM balances rebound. In Analytics, subscription run rate growth was 7%. We had another quarter of very strong equity factor model sales as clients continue to turn to us to help understand risk and market factors in this dynamic environment. And our strong retention rate underscores the mission-critical nature of our tools, particularly in these challenging times. In June, we delivered roughly 47,000 liquidity analytics reports per day for our clients, which is up 15% from our average daily levels in December. We now process over 850 million security holdings daily on behalf of our clients in Analytics, a testament to the scale at which investors rely on us for their most important portfolio decisions. And the capabilities across Analytics are incredibly strategic for the firm, helping to fuel growth across product areas. Although, as we've mentioned before, we continue to expect new sales and cancelations to be lumpy quarter-to-quarter in Analytics. In our ESG and Climate reportable segment, our run rate grew 26% with 22% growth in ESG and 50% growth in Climate. The volume of large ticket deals has improved from last quarter, although still down from last year's levels. Net new recurring sales improved 20% since the first quarter but were down meaningfully from a record second quarter last year, reflecting more measured purchasing decisions and longer sales cycles from our clients. We continue to have conviction in our long-term targets of mid-to high-20% growth given the numerous layers of opportunities and the powerful secular drivers. As Henry and Baer mentioned, our long-term opportunities remain durable and attractive for both ESG and Climate. In Real Assets, we drove 9% organic run rate growth. As Baer indicated, our benchmarking and market and portfolio insights offerings remain strong with double-digit organic growth, while sales and retention of our transaction data products were more muted as they are cyclically correlated with the reduced volume of commercial real estate transactions. We continue to execute on our real asset product roadmap, and we are seeing early and encouraging demand for products like our mortgage debt intel offering. These solid operating results across the business helped drive 17% growth in adjusted EPS in the second quarter. Helping to fuel the growth, we had very strong nonrecurring revenue in the quarter, benefiting from strong sales of our index free float product. While these nonrecurring revenues will fluctuate meaningfully quarter-to-quarter, we continue to see healthy growth in the underlying demand for many of the products that are often sold as nonrecurring, such as index licenses for OTC derivatives, history data products, and other unique data sets as well as analytics implementations. Importantly, these sales often open the door for broader conversations and can convert into recurring subscriptions. Share repurchases drove $0.06 of the year-over-year increase as our consistent approach allowed us to continue to capitalize on attractive opportunities. It's worth noting that our free cash flow conversion and collections were reasonably strong in the quarter although we continue to remain somewhat cautious on collection activity for the balance of the year. We ended June with a cash balance of nearly $800 million, enabling us to remain positioned for strength. Finally, I would like to provide some color on our 2023 guidance, which remains mostly unchanged and assumes market levels remain relatively flat for the balance of the year. We have left our expense guidance ranges unchanged. Although if market levels remain stable at current levels or increase further, we could be towards the top half of our expense ranges. On CapEx, we have modestly increased our guidance range, mainly reflecting our increased pace of capitalized software development costs. We remain excited and encouraged by the strong client engagement we are seeing across numerous growth opportunities, and we continue to be closely aligned with employees to capitalize on the long-term trends transforming the investment industry. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions.

Thank you so much. I wanted to ask about the recent ESG regulatory proposal in Europe. I guess as it reads now, how do you see it impacting your business? And are there structural changes needed? Or are you operating already in a way that would comply with the new rules?

Hi, Toni, Baer here. So look, a few observations. So the first one is that we do think we're well positioned to make this transition to the new regulatory environment. There are certain standards and ways of operating inherent to the regulation, which, as you suggested, I believe we're meeting. But there will inevitably be some new aspects to that, but those will also hit all of our competitors. So it's a level playing field in that regard. And we believe that we can be a leader in meeting regulatory standards in index. And then more broadly, our regulation is in parallel with our clients' regulation. And in turn, what that reflects is how critical the sustainability agenda is in Europe. Overall, that creates a significant opportunity for us.

Great. Wanted to also ask about on the index side of the business, you had very strong success over a long period of time. I guess, first, could we see the ESG slowdown start to impact the index business at all just given ESG indices revenue is embedded in there? And maybe also when you think about sustainability of growth within indices itself, do you see any changes in the environment going forward or just still structurally similar to what we've seen over the last number of quarters and years?

So first of all, we believe strongly based on plan discussions and strategy meetings among ourselves that the index opportunity has only begun, and this trend will continue for years and decades to come. It's predicated on our view and our clients' view that indices are the basis of portfolios. Indices are tools to build portfolios. And the more comprehensive and global the portfolio is in terms of security selection, the more the need for underlying information and underlying organization of that. It has been mentioned about securities in the context of an index, which then becomes the basis of our portfolio. So we saw this trend on market exposures with market cap indices, which continues unabated. We then moved on to factor indices, which have become very, very popular and continue to grow. We then moved on to ESG indices. We're now very much into the climate index phase. We're also accelerating our thematic indices. So if you think about it, we are moving into what we call non-market cap indices, which are indices built on demand on an investment thesis and client requests. These become extremely valuable for people who are building portfolios across those variables, whether they want to launch an active management product, a passive one, structured products, or listed derivatives. To achieve that, you need to have a lot of underlying information about those securities. You have to know everything about their ESG profile, their climate profile, their thematic profile, their factor profile. So MSCI is turning into a giant equity research shop to understand the characteristics of securities so we can organize them accordingly. And everywhere we go in our shareholder base, people are waiting for the shoe to drop on the index business, and we think it's the opposite. We believe that this business will accelerate in the years to come in all use cases. We're now witnessing the direct indexing revolution that will make it more efficient to build personalized, customized individual portfolios. I think that is where we are. That's what we see from our clients, and from the ground up as well. And with respect to ESG, we're big believers that ESG is investment risk. Our clients tell us ESG is part of the fundamental analysis of securities, which will continue unabated in all aspects, whether it's ratings, research, or screening, but importantly, in the foundational element of building indices.

Hey, good morning, everyone. A quick question on ESG and Climate. I think when I compare today's sentiment and tone from you guys relative to last quarter, there's a markedly more positive sentiment. Now I don't know if that is because last quarter, you were talking a lot about the political and regulatory paralysis. In this quarter, you will focus more on the long term. So maybe you can just talk about why the more positive tone. And then importantly, given that there was a little bit more focus on the long term today, which is understandable, how do you feel about the near term? Very slight improvement quarter-over-quarter, but clearly still a lot of uncertainty.

So, Manav, the reality is we feel exactly the same a quarter ago as we do today. Maybe in the call, we go into political issues or other matters, and therefore, it can distort the message. In terms of communicating the overriding message, we feel fundamentally the same. And by the way, look, we're grounded business people, and we see what our clients are going through in the investment process. There is no alternative path but to believe that ESG will continue to be central to the investment process. It was a client of ours who said that the 70 years of fundamental analysis of security has focused on the market, products, competition, but never focused on the internal workings of the company. And ESG partly addresses that internal workings. Therefore, I think in my view, we believe that every client considers ESG in their investment processes. Even in U.S. states where there is political pressure to abandon ESG, investment teams are aware of the risks and opportunities associated with ESG. They understand that a failure to consider ESG could lead to a repricing of securities, which they want to avoid. This generates real demand for ESG considerations in investment processes.

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

Sure. Yes, Alex, it's Andy. So to broadly address pricing, we continue to see traction in rolling out higher increases than we've had in recent years. The contribution to overall recurring sales continues to be relatively consistent across the company with what we've seen in the last couple of quarters, with mid-30% contribution to overall new sales. Analytics has seen higher price increases. However, we are being measured and strategic, focusing heavily on product usage, client health, and the value we are adding. This is a key lever for us, and we'll continue to monitor the broader pricing environment while maintaining attention on the value we provide to clients.

Yes, hi. If I could just follow up on the ESG segment. Just looking out into the second half, I guess, it's a little hard to figure out some kind of seasonality in that net new business number over the last couple of years. If you could just help us with what you expect in the second half, especially in the context of, I think, Henry, you mentioned an acceleration of new products in ESG and Climate. Is that going to start impacting the second half already?

So Manav, I'm sorry if I mistook your accent earlier. But look, it's hard to say. The pipeline remains pretty good and solid. Some things are going to accelerate from ESG, some things may not. In the context of a consolidation process going on in Europe, people need to classify their funds and comply with regulations. In the U.S., they are looking for the same things. Our clients are coming to us requesting more ESG information. They want more granularity of the data and want us to supply more extensive accounts of the entire process. It is an active demand, and over time, that will translate into sales. We are currently in a cyclical soft period in ESG, but demand for our services remains high, and our investment will need to increase to align with upcoming sales.

Yes. So Manav, maybe I'll just broaden it to our approach to capital allocation and touch on M&A. I would underscore, and we mentioned this in the prepared remarks, that our approach to capital allocation remains unchanged and consistent. We are focused on delivering a consistent and increasing dividend, pursuing opportunistic share buybacks, and continually focused on strategic bolt-on M&A. We're going to stay disciplined on price and fit, and bolt-on M&A remains a key focus.

Yes, hi. Briefly following up on some of the ESG and Climate questions asked today. If I compare your ESG and Climate product portfolio and product ambitions for the next year or two to what you guys had laid out as your roadmap in your 2021 Investor Day, where have you guys sort of seen the most momentum versus your plan back then? What has maybe been pushed to the back and what has changed since that plan was announced?

Well, look, to be honest, I don't have the exact Investor Day presentation in my head, but I have a good sense of what we said. Overall, I think we're very much in line with the broad direction of what we indicated there. The element that has changed is that the distinction between ESG and Climate has become greater than we thought at that time. The climate agenda has its own specific topics, needs, regulatory framework, etc., distinct from ESG. While there remains significant overlap between the two, we're viewing them as distinct opportunities. As we look forward to the next year, I would say that the range of climate solutions is larger in terms of regulatory needs for several client types.

Great. Thank you so much, Baer. And then maybe to follow up on the M&A question just asked. If you could maybe dimensionalize where you see opportunities in ESG versus in other parts of the business and to what degree might recent regulations catalyze some desire for consolidation in ESG and Climate overall?

Sure. Yes. The areas where M&A is most strategic for us are where we can access unique data sets, capabilities, or distribution, particularly in sectors like ESG and Climate. With recent regulations potentially creating barriers for smaller players, our focus remains on strategic additions, though we have a rich pipeline of organic initiatives ahead. M&A can enhance our strategies, but we are confident without it.

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

Sure. So I know you know this, Owen, but if you remember in prior quarters, the assumption underlying our guidance was that market levels would drop slightly and then rebound in the back half of the year. Unsurprisingly, market levels have been running above those assumed levels. As a result, if AUM levels stay at these current levels or increase, we will likely be in the top half of our guidance range on expenses. We continue to reiterate our guidance on free cash flow.

Got it. And then could you please add more color on the growth driver of your index subscription run rate in the second quarter? And also, it will be great if you can also remind us the growth map of your index subscription run rate, which is how much of it is driven by pricing, new logos, and also further penetration. Thanks.

Yes. The overall index subscription franchise has been quite solid for us. There's not one thing driving the performance in the quarter. We've seen double-digit growth across all module types and across all major client segments. We did get a nice benefit from our newly launched free float data product, positively impacting both nonrecurring and recurring sides. Concerning pricing, the contribution from price within index remains consistent, around 40% to new recurring sales.

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

Look, I think the context is one where there are numerous and significant regulatory changes ongoing for ESG. We view them as significantly positive. I'm not concerned about any one change but rather the cumulative effect of all changes. Regulation signifies how important regulators consider this topic, with us being well-positioned in that context. Overall, it is the continued regulation across different client types that represents a significant growth engine for our business.

That's very helpful. I'd like to follow up on the fund launches, particularly for ESG, which have been relatively quiet. How important are new fund launches for overall revenues? Additionally, within the ESG space, I've noticed a shift from traditional ESG funds to more sustainability-themed funds. How does this shift enhance the value proposition for MSCI?

Sure. So just a few observations on this topic. There have been changes in the regulatory environment regarding classification of fund types, which has caused some temporary disruption, but we are very involved in those discussions with clients and regulators. There has been a steady trend for ESG funds to include a climate component. We will continue to see a variety of fund launches depending on client type and goals, which will only enhance our value proposition moving forward.

Let me just add something here in this context because oftentimes, the questions we get from shareholders and analysts are about the underlying regulation and how it negatively impacts MSCI. However, it's a huge positive. While our clients don't love regulations, once adjustments are made, regulations create a strong tailwind for us because clients need much more information for compliance. This creates incredible competitive advantages for us compared to others. Once regulations are in place, they become integral to client strategies moving forward.

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

Sure. Yes, I'd say the dynamics are reasonably consistent with what we saw last quarter. Growth continues to be slower in the Americas compared to EMEA. In the U.S., many investors are adopting a more measured pace in integrating ESG, leading to longer sales cycles. U.S. managers are focused on differentiating themselves through ESG considerations, but this maturation process will take time. We can provide the necessary tools and services to assist them on this journey.

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

Thank you for that question. I would like to distinguish two things. We have partnerships with various fixed income providers that have been successful, especially with Bloomberg on ESG. We see upside in this area. We also launched our own fixed income indexes, aiming to create differentiated products focusing on ESG, climate angles, and more liquid indexes for trading. We are in early stages but expect to exceed internal targets for growth in this segment.

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

Yes. First of all, there is already a slight acceleration underway in Europe after a period of understanding regulations. European clients are asking for more product launches and differentiation. While recovery may not be immediate, this indicates an impending increase in sales. In the U.S., as discussed earlier, the political environment could affect psychology, but the bigger driver is that our clients operate in global equity markets, and ESG considerations are imperative in those contexts. U.S. asset managers also manage money for global investors. Improved global market conditions, including Japan and Europe, will drive overall demand for sustainable investments domestically.

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

Sure. Yes, I would say not to overly focus on segment margins in any given period. Our primary focus is on driving strong EPS growth. Segment margins are the product of investment opportunities. Our focus is on directing spend to opportunities with the highest returns. Margin fluctuations can be influenced by allocations and FX, so it's essential not to put too much weight on quarterly margins.

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

Look, we view it as an opportunity, but we are also aware of disintermediation risks. The opportunity is twofold: we can provide greater insights and analysis for our clients and create efficiencies through these technologies. However, we will remain vigilant and invest in our capabilities to safeguard against complacency.

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

Sure. Yes. The nonrecurring revenues have been high in the quarter. We benefited from a large contribution from onetime license fees related to previous periods. We also had strong contributions from onetime purchases of our free float data set. These initial sales help broaden conversations with clients, leading them to see the integral role of our data in their ongoing strategy, potentially transitioning into subscription sales over time. We expect nonrecurring revenue to revert to levels seen in recent quarters but with strong long-term demand dynamics.

Thank you. Your numbers speak for themselves in a very positive way. But I'm curious, given all your various discussions with clients in Europe and the U.S., has the tone of business with clients from a budget standpoint, from their budget standpoint, do you feel like it's loosening up some here? I mean, obviously, your data, your analytical tools are mission-critical, as you talked about earlier and stuff, but are you feeling that budget constraints out there sort of loosening up versus maybe how you were thinking three or six months ago?

Well, first of all, our clients' budgetary processes are set on an annual basis and don't remain extremely flexible. There will be exceptions to this. A lot of the budget for this year was set back in December and January. However, there is a slightly more positive tone regarding the global economy. There is more optimism about soft landings in the U.S., Europe, and Japan, and perhaps returning to normal in China. This modest optimism could translate into increased sales over time, as our clients tend to allocate more to us compared to the growth of their budgets.

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

We will always consider acquisitions in areas we want to expand at the right price that creates shareholder value. Unfortunately, many others may buy assets for different reasons. We only acquire assets to create shareholder value. We are very disciplined in our financial approach even in strategic areas, and while we have looked at various opportunities, we have purposefully chosen organic growth. Our expertise lies in ESG, climate, and factors, leading us to focus our capital there. I believe fixed income will experience significant repricing of assets around climate. The largest players in fixed income are under regulatory pressure to lower climate risks in their portfolios. Thank you very much for your time, for your questions. We're available to answer any of your other questions at any time, so reach out to us. We'll be more than happy to share our perspective. Enjoy the rest of the day. Thank you.