Good day, ladies and gentlemen. And welcome to the MSCI Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Please go ahead and begin.

Thank you, operator. Good day, and welcome to the MSCI Third Quarter 2022 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter 2022. This press release, along with an earnings presentation we will reference on this call as well as a brief quarterly update are available on our website, 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 comparison and provide insight into our core operating performance. You’ll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates, at a particular point in time, the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. 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.

Thank you, Jeremy. Welcome everyone, and thank you for joining us today. In the third quarter, MSCI delivered another strong performance despite significant turmoil and dislocation in financial and commodity markets around the world. We posted organic recurring subscription run rate growth at over 14% and adjusted EPS growth of 12.6%. We achieved our best third quarter ever of net new recurring subscription sales growing at 26%. In addition, our retention rate was 96.4%, up by 188 basis points from a year earlier. In terms of capital management, we repurchased another $225 million worth of MSCI shares through October 24. For the year as a whole, our total share repurchases now stand at approximately $1.3 billion. This performance demonstrates the resiliency and adaptability of MSCI's all-weather franchise. There is no question that the global economy faced major headwinds. These headwinds have created challenges for all companies, including MSCI. Yet they have also created a massive opportunity for us to differentiate ourselves and to show both clients and shareholders the power of our all-weather franchise. In moments of extreme volatility and high uncertainty, investors become more reliant on high-quality data, models, and research. They want a clear blueprint for navigating choppy waters; MSCI's tools can help them design one. Indeed, our solutions take on even greater importance during periods of elevated global risk. In other words, the times when we do best matter most, and we fully intend to demonstrate it. Our third quarter performance shows continuous strength across client segments and product lines. In Index, we delivered our highest subscription run rate growth in a decade at 12.6%. Additionally, future options trading volume linked to MSCI indices increased by 21%. In Analytics, we achieved our highest retention rate ever at 95.9%. We also posted subscription run rate growth excluding foreign exchange of 97% in Climate and 35% in ESG ex Climate. All of these numbers illustrate how MSCI is capturing key market trends. As global economic pressures accumulate, we have provided the risk analytical tools investors need to stay ahead of the turmoil. Meanwhile, as ESG becomes increasingly mainstream, we are helping investors measure the full scope of sustainability risks, capitalize on sustainability opportunities, and achieve sustainability objectives. For all the political noise and controversy around ESG, the simple fact is that sustainability risks are financial risks and will continue to be so. Investors know this; in fact, a recent PwC report found that 81% of institutional investors in the U.S. along with 84% in Europe both plan to increase their allocations to ESG products over the next two years in growth. Recent reports projected that ESG-related assets under management will reach nearly $34 trillion globally by 2026, an 84% increase from 2021. I want to underscore that as our ESG product line becomes more diverse with many different use cases and client types, ESG sales growth will naturally fluctuate based on market shifts, difficult conditions, and regulatory development. Right now, the world is simultaneously witnessing a global energy and food crisis, the largest European war in almost 80 years, the biggest inflation surge in decades, rapidly rising interest rates and COVID lockdowns in China, which continue to affect supply chains. At the same time, MSCI remains bullish on ESG's long-term potential. If anything, the key factors driving ESG growth, including greater environmental and social awareness and demographic shifts, will become even more powerful in the years ahead. For Climate specifically, there is no turning back on the road to net zero emissions. While the global energy crisis has created new obstacles to decarbonization, policymakers continue to embrace bold green investment plans. Moving to the U.S., President Biden recently signed the most aggressive climate law in American history. In Europe, governments have also proposed a wide range of measures that would speed up a low carbon transition. These include more ambitious decarbonization and clean energy targets, policies to maintain or expand nuclear power, and a US$5.4 billion hydrogen project. For our part, MSCI will continue building a robust and dynamic climate franchise. Two climate wins in the third quarter deserve special attention because they demonstrate our emergence as a leader in this area. Both the California State Teachers' Retirement System, through CalSTRS, approved a plan to cut their portfolio emissions in half by 2030. To help them get there, they proposed a plan for 20% of their public equity assets to drive the MSCI ACWI Low Carbon Target Index. This means CalSTRS will now have nearly $27 billion allocated to tracking that index. State-owned New Zealand Super Fund announced that it has moved roughly 40% of its total investment portfolio to track the MSCI World Climate Paris-Aligned Index and the MSCI Emerging Market Climate Paris-Aligned Index. That 40% translates into NZ$25 billion or about US$15 billion. Each win represents a milestone on our Climate journey. As I have frequently said, MSCI aspires to be the number one provider of climate solutions to the global finance and investment industries. We recently published a Net Zero guide for asset owners outlining complete steps for decarbonizing portfolios. We also hosted White House National Climate Advisor Ali Zaidi at our New York offices during Climate Week. That same week, we joined with the Glasgow Financial Alliance for Net Zero or GFANZ to help launch a proposed climate data public utility. All of these efforts have helped MSCI generate strong momentum leading up to COP27 in Sharm el-Sheikh, Egypt. In Climate, ESG, Analytics, Index, and other areas, MSCI continues to benefit from our mission-critical solutions, diversified client base, and our commitment to financial discipline. Right now, many companies are retrenching and turning inward; MSCI is doing quite the opposite. In the U.S., we have reallocated resources and continue investing in key differentiators using our Triple-Crown investment framework. More than that, we continue to attract talent and show investment opportunities that focus on client centricity and reinforce our competitive advantages. All of these will help us emerge even stronger when the current market turmoil subsides. And with that, let me turn the call over to Baer.

Thank you, Henry. And greetings, everyone. As Henry discussed, the world is experiencing historic levels of economic, financial, and geopolitical turmoil simultaneously. Against this backdrop, we see not only big market and foreign exchange swings but also geographic, sector, and asset rotations. At MSCI, our highly diversified product offerings continue to serve us well. For example, the benefits of our non-U.S. dollar expenses have more than offset FX-related revenue headwinds. Likewise, the strong performance of our growing index derivative franchise has helped offset some of the pressures related to AUM revenues. As we noted last quarter, MSCI has activated our downturn playbook, which means we continue investing in key differentiators while tightening expenses in less time-sensitive areas. This has allowed us to generate attractive financial returns and position ourselves to capitalize on opportunities when they emerge. All of that represents essential context for understanding both our Q3 performance and our strategic priorities moving forward. Henry mentioned a few areas where MSCI delivered especially strong results including Index, Analytics, and Climate. In my remarks, I'd like to explore each of these areas in greater depth. In Index, MSCI posted 12% subscription recurring revenue growth, our highest retention rate in more than three years, and our 35th consecutive quarter of double-digit subscription run rate growth. We also achieved market cap subscription run rate growth of 11%. A key driver of our third quarter Index performance was custom index. MSCI has focused heavily on custom indices in response to a broader industry trend. More and more investors favor differentiated systematic outcome-oriented strategies for which they need to design custom indices. Last week, for example, we announced the launch of institutional client-designed indexes. It will make it easier for asset owners to design customized indices underpinning their investment strategies. Turning now to our Analytics business. In the third quarter, Analytics posted recurring net new sales growth of 73% with strong numbers across products and client segments. In particular, Analytics achieved robust growth with risk and equity models on the product side and with banks and hedge funds on the client side. At the regional level, Analytics delivered its best run rate growth in the Americas in more than five years. In Analytics, as with Index, MSCI solutions helped clients to distill and interpret a huge amount of complex data quickly and efficiently. Last month, we launched a new analytics module known as Risk Insights, which automates many previously burdensome tasks and processes, thereby giving clients more time to focus on their analysis. Risk Insights will make it easier for investors to translate raw data into meaningful usable information with an integrated view of performance and risks. We consider this a timely launch given the high levels of market volatility and uncertainty. Finally, just a few comments about Climate and ESG. As Henry mentioned, we posted subscription run rate growth excluding FX of 97% in Climate while also achieving a 97.6% retention rate. To put that last number in perspective, it represented a 456 basis point increase over our climate retention rate a year ago. The largest portion of our run rate Climate Metrics continues to grow at over 60% with exceptional growth in newer areas. For example, MSCI delivered over a 125% growth from Climate value with risks supported by our recently launched total portfolio footprinting solution. In addition, our ESG retention rate increased by 66 basis points to reach 97% overall. In September, we launched Bloomberg MSCI China ESG Index Week, which consists of nine separate ESG indexes. Collectively, they represent the first-ever Bloomberg MSCI Index Week to track both the RMB-denominated bond market and the U.S. dollar-denominated Chinese bond market, all incorporating ESG and socially responsible investment considerations. Last month, we expanded our index offerings by launching MSCI fixed income climate transition corporate bond indexes whose standards exceed the minimum requirements of the European Union's climate transition benchmark. We continue to see strong growth with our real asset and analytics climate solutions, growing run rate by approximately 250% year-over-year while our climate index solutions grew by approximately 80%. We helped to drive additional client progress with our recent minority investment in EVORA Global, a British environmental consultancy. By combining EVORA's proprietary software with MSCI's climate models and indexes, we will further embed climate risk considerations in the real asset investment process. Simply put, MSCI is constantly finding new ways to meet the needs and expectations of global investors. We have proven our ability to adapt, innovate, and succeed, even in the most challenging circumstances. And with that, I'll turn the call over to Andy.

Thanks, Baer. And hi, everyone. The strong secular demand for offerings and the resilient nature of our business model fuel impressive results across the business. In addition to the 14.2% organic subscription run rate growth this quarter, we experienced double-digit subscription run rate growth excluding FX across all geographic regions as well as across all major client segments. We recorded the highest third quarter ever for new recurring and net new recurring subscription sales, increasing by 8% and 24% year-over-year respectively, excluding the acquisition of RCA. Within Index, on top of the strength we see within our non-market cap modules, we continue to see remarkable resilience within our market cap index modules, which delivered an 11% subscription run rate growth. This has been fueled in large part by tremendous demand within higher-growth client segments. Across the index subscription franchise, we saw an 18% subscription run rate growth from broker dealers, hedge funds, and wealth managers, on top of 10% growth from asset managers and asset owners. Asset-based fee revenues experienced declines in the quarter. With ETFs and non-ETF passive fees impacted by declines in global market levels somewhat offset by continued elevated volumes in futures and options linked to our indexes. ETFs linked to MSCI indices have experienced marginal net cash sale outflows in the quarter resulting in outflows in broad-based EM exposure funds in all country products, two areas where the broader ETF market was muted. However, we continue to see inflows and high market share capture flows in funds linked to our equity ESG and Climate indexes, which captured $9.5 billion of the $13 billion of total industry flows. Additionally, fixed-income ESG and Climate ETFs linked to indexes developed with partners and our proprietary indexes witnessed nearly $7 billion of inflows during the quarter. Revenue from listed futures and options linked to MSCI indexes continues to provide a meaningful offset to AUM declines, growing 16% year-over-year. This growth has been fueled by elevated volumes that were in line with the last couple of quarters. In Analytics, the strong demand for our tools in our current environment helped drive 8% growth in subscription run rate excluding FX. We had 11% growth in recurring subscription sales while also experiencing a 35% decline in cancels and the highest retention rate of all time in the segment. Recurring net new sales were up 73% year-over-year. Within the segment, we continue to see strong momentum in front-office equity and fixed income portfolio management tools with strength in hedge funds helping to drive the growth. Additionally, Analytics continued to gain traction in our climate solutions, including Climate Lab Enterprise. In ESG and Climate, we delivered subscription run rate growth of 42% excluding FX; roughly one-third of recurring subscription sales were generated from our climate solutions and the climate run rate across all segments reached $65 million, which is an increase of 89% from a year ago. Within our ESG and Climate segments, emerging client areas including wealth managers, hedge funds, broker dealers, and corporates collectively have run rate growth of more than 60%. We did see a lower level of new recurring subscription sales in the third quarter; on top of changes in the broader market and economic environment, which is likely impacting purchasing decisions in some areas. However, many layers of growth in our ESG and Climate franchise across a wide range of solutions and use cases result in a dynamic growth rate that's impacted by the pace of new regulations, client segment dynamics, asset class shifts, and geographic factors. Shifts in these layers of growth will drive variations in overall segment growth rate. However, we continue to believe in significant long-term secular opportunities and continued momentum. With real assets, the organic subscription run rate growth was 12%, combining our legacy real estate business and RCA. Given the all-weather dynamics of our financial model and our ability to proactively manage the expense base, we were able to drive adjusted EPS growth of 12.6%. During the quarter, we continue to utilize our downturn playbook by further flexing our expense base to mitigate the impacts of the AUM-based headwinds. We are prioritizing key investment areas to address the most critical needs in this challenging environment while meaningfully moderating the pace of hires in less critical and time-sensitive areas. Additionally, we continue to flex certain non-compensation expenses in areas like professional fees, and we had a slightly lower bonus accrual. In the quarter, revenue had a $12 million FX headwind from an appreciating US dollar. This was more than offset by a $13 million FX benefit resulting from our global expense footprint. Additionally our proactive capital management contributed $0.15 of the adjusted EPS growth as we've now repurchased approximately $1.3 billion of our shares or approximately 2.7 million shares year-to-date. We ended the quarter with a cash balance of $867 million of which approximately $600 million is readily available. We continue to be well-positioned to opportunistically pursue bolt-on M&A and share repurchases against this volatile market backdrop. Lastly, I would like to turn to our updated guidance which we published earlier this morning. While we expect continued volatility, our guidance assumes generally flat market levels throughout the balance of the year. As mentioned earlier, we have continued to utilize more levers in our downturn playbook with a focus on moderating our pace of expense growth. Our downturn actions are reflected in our decreased operating and adjusted EBITDA expense guidance. It's worth noting that we remain consistent in our approach that the pace of spend may fluctuate up and down based on the trajectory of our asset-based fees, the performance of the business more broadly, and the global operating environment. We've modestly increased our range for depreciation and amortization expense mainly reflecting a continued higher level of capitalized software development costs across products. Lastly, we have increased our net cash provided by operating activities and free cash flow guidance, which reflects lower than originally projected tax payments and cash expenses in the second half of the year, as well as resilient fee and cash collections. We've narrowed our tax guidance, which continues to reflect an expectation of the higher rate in Q4 in line with what we saw in Q3. Across the business, we continue to see strong levels of demand for our products, underscoring the mission-critical nature of our tools. We are heavily focused on both driving the attractive runway of long-term growth while protecting the financial model of our all-weather franchise. And with that, operator, please open the line for questions.

Thank you. The first question is from Manav Patnaik with Barclays. Please go ahead.

Thank you. Good morning. Can you discuss ESG first? Specifically, what was the decline in the run rate for the quarter? Also, could you elaborate on the various components of ESG and the growth rate within that segment?

Sure, hi Manav. Yes, we did throw a number of climate metrics out during the call, so it's probably helpful to summarize them here. I'll start at the top. If we look across MSCI, across all product lines, we had $65 million of Climate run rate. That was growing at 89% year-over-year. If we look at just the subscription portion of the Climate run rate, that was $46 million. And that was growing at 92%. So, that excluded about $19 million, between $19 million and $20 million of ABF revenue from our Index segment. If we look at the Climate component in our ESG and Climate segment, that's $37 million. And that's growing at 97% ex-FX, as Henry and Baer alluded to in their prepared remarks. Climate is becoming a more meaningful component of the overall business. It's clearly contributing a meaningful amount to the overall growth of the segment and the overall company. And we continue to be quite bullish on the prospects more broadly across both Climate and ESG.

Right. And then Andy, in terms of obviously our retention rates are high as subscription growth is good. And if we enter in certain environment next year, just historically on what time lag or when do you start seeing the first signs of some of the pressure on those metrics?

Yes. I think you highlighted, and we've seen, the retention rates do underscore the fact that our tools are very mission-critical to our clients, and they are in areas of long-term secular growth, which is clearly driving some resiliency. And you can see that in not only the overall retention rate but the fact that it's close to record levels across all areas. Although, as you pointed out and I've mentioned in the past, in past downturns, when we've seen a few, I'll say, to several quarters of sustained market pullbacks, we do tend to see a pickup in client events like fund closures, desk closures, restructurings, mergers; so client events like that tend to pick up, and our largest source of cancels is client events. And so, we are proceeding with caution here. We are definitely excited about the high retention rates, but given past performance and what we've seen in past downturns, we could see a pick-up in cancellations if this environment persists.

Thank you. And the next question will come from Alex Kramm from UBS. Please go ahead.

Thanks for taking the question. We saw some pretty good improvement on the Analytics front as well. And so, I was just wondering if you could talk about what you're seeing from a deal pipeline perspective. Have you seen any change there, any elongation in the deal, sale cycle? Any color on the momentum in the business? Thanks.

Yes, thanks for the question. Look, I don’t think we've seen anything dramatically different to be honest. I think this is consistent with the messaging we've had for some time now. So, I think our level of execution is strong. As Andy mentioned, the retention rate shows the predictability of our products. So, I think we're really in a mindset of letting the numbers speak for themselves and continuing to execute with our strategy. And hopefully, we'll keep moving things in this direction. But there is, I don’t think there has been any really material changes in the outlook. It's more that we're doing a good job; we're enhancing our products, we're servicing our clients, and I think we're getting the results of that.

That's very helpful color. And maybe, just a quick follow-up on the private asset side. Again, pretty strong momentum there as well. I was wondering if you could talk about the RCA, now that that acquisition has anniversary, what have you seen on that front and what else is in line for private assets? Thanks.

Sure. Yes, absolutely. So look, we're definitely on plan with the integration and we're pleased with how that's going and we're definitely more convinced that the strategic logic of the acquisition than ever. As you say, the topline is growing attractively. Clearly, the environment for real estate is going to be interesting and challenging across the world. And there will definitely be different types of challenges depending on the segments and the country, et cetera. But I think in that environment, it’s clear that our tools are very necessary for people to understand performance and what's happening in the market. So, I think we're in a good situation; we’re executing well, and the only slight caution there is just the environment which could get a little bit jittery.

Thank you. And next question, we'll move back to Alex Kramm with UBS. Please go ahead.

Yes, hey guys, thanks. Sorry, my phone turned off in the middle of the question. Great, anyways, sorry if this has been asked already and that I was off. But on the ESG and Climate sales, you obviously proactively addressed that, and I understand it can be lumpy and obviously have tough comps too. But can you actually talk around about what areas may have seen outsized weakness in particular this quarter and why? And I know it was a tough quarter, particularly at the end of the quarter with the market selling off. So, I was just wondering if there's anything that in particular slipped that may or may not pick up again in the fourth quarter. So, any color there would be helpful. Thanks.

Yes, sure. Let me try to provide some perspective and I'll give a little bit of color on what we saw in the quarter. I do want to start by underscoring that we remain very bullish on the long-term potential for both Climate and ESG. I think the factors that have been driving the growth will remain powerful in the years ahead. And if you can tell by the Climate growth rates that we mentioned in the prepared remarks and I underscored to an earlier question, we continue to see very strong growth from Climate and expect Climate to be a larger and larger contributor to the overall growth of the segment. Now, within ESG, we did have softer sales in the quarter relative to recent quarters. Realistically, there probably is some cyclical impact from the environment in the market backdrop. We saw some deals taking longer to close, and we did see fewer large deals in the Q3 figures. We did see slightly higher declines in sales outside the U.S. in AMEA and APAC, although the run rate growth continues to be quite high across all regions. I think as we touched on in the prepared remarks, I want to underscore that there are so many layers and dimensions to growth in ESG and Climate, which I know Alex you know. But we've got a wide range of solutions serving Climate objectives, ESG objectives, as well as a wide range of users and use cases. Therefore, the growth rate will likely fluctuate based on the pace of new regulations, client segment dynamics, asset class shifts, various geographic factors, as well as the market and economic environment. I do want to underscore that there have not been any impacts from U.S. political rhetoric that's gotten a lot of attention recently. I think generally the focus on ESG and Climate remains front and center to investors globally.

Right, helpful. And then, just a very quick follow-up staying actually on the ESG and Climate topic. But if my math is right, since you're now providing some incremental data here, I think that the Climate and ESG portion of Analytics is $7 million this quarter. I think very nice increase there. So, can you just remind us exactly what's getting picked up in Analytics now and a new way to think about that term for that or how penetrated you are? Again, it's a very small number, but clearly, you have a pretty diverse Analytics customer base. So, just wondering how we should be thinking about those opportunities in particular on that segment? Thanks.

Yes. I'd say like in everything we do, our capabilities across segments are symbiotic and synergistic with the other segments. And so within Analytics, we not only benefit from the ESG and Climate franchise that we've built, we are also helping to fuel it. Within the Analytics segment, the main offering that we have is our Climate Lab Enterprise, which we've released very recently. I believe it was late last year, and that has grown at an attractive growth rate, although off a very small base. But that is feeding off the broader portfolio and risk management solutions that we offer, where when we have a client's portfolio, we can now provide very granular climate insights to them about the portfolio, helping them manage climate risk more systematically across the portfolio. We also have within the Analytics segment a broader range of reporting solutions. So, we can help clients with things like their TCFD risk sensitivities and help with various other reporting requirements. Analytics does have a very powerful reporting function and capability, which we've provided to clients across broader risk insights for quite some time. We're leveraging that to generate climate risk reports as well as broader ESG risk reports and broader ESG reports. These are probably the main areas I would highlight within Analytics. Listen, it's still, to your point about term, we're still very early in that journey. Our penetration is relatively small. It's actually extremely small but if we extrapolate across the entire Analytics client base, it can be a massive opportunity. The other thing that's exciting is that it really opens up some of the client segments and parts of clients that we haven’t served with the existing Analytics solution. So, it's helping us with insurance companies and it's helping us with banks and bank regulations. And so, there's some big wallets in big markets that we're very excited about on the climate side within Analytics.

And next question will be from Toni Kaplan from Morgan Stanley. Please go ahead.

Thanks so much. As usual, you guys have done a great job on expenses. And I know you called out maybe using less professional fees or being able to flex the bonus accrual and also sort of the less time-sensitive investments. I guess I think of you guys as a really efficient lean organization. I know you're not going to cut back on the growth investments that are really meaningful. So, I guess how much room is there on the expense side within the downturn playbook I guess.

Yes. So, it's a fair question, Toni. And it's something that we are spending every day thinking about and proactively managing the business. I do want to underscore just to provide context on the directional moves on the downturn playbook; some of the shifts that have happened since our last quarterly call. During our Q2 earnings call, we had mentioned that the guidance expense guidance was based on the premise of flat to slightly increasing markets. During Q3, we had the downward impact from market depreciation of over $100 million on ETF AUM, and so the market has come down below what we projected, or at least what our guidance was based on during the Q2 call. As a result, we've begun to take further actions in the downturn playbook. And it's really mostly in the same areas that we were focused on previously, just to a larger degree. So, we're further slowing the pace of hires in a broader set of areas, particularly in our run-the-business activities, areas like corporate function. We are continuing to – as you mention, prioritize hires in key growth areas and triple-crown investment areas like ESG and Index, custom Index capabilities, fixed income content and capabilities, key data and technology enhancements, particularly in areas like ESG and Climate data, as well as the broader technological infrastructure and cloud solutions. We continue to preserve investments in key areas within our go-to-market or sales and client service organization. But we are clamping down harder in the run-the-business areas and even in selected areas in the broader franchise. You alluded to on the non-comp side, we are squeezing further on professional fees, areas like T&E and recruiting, which actually comes down naturally with the pace of hiring. Our comp accrual is lower. We do have further levers to pull if we need to; hopefully we don’t. Generally, we are being cautious. So, our outlook is cautious, which you can tell by our comments and our guidance here.

Let me add to that, Toni. If you don’t mind, let me add to that. In addition to all the things that Andy has said, one of the things that we're obsessed with is protecting as much as we can the new investment plan. Therefore, what we're doing is squeezing and reviewing time and time again the run-the-business activities to lower expenses and protect profitability while protecting the investment plan. If you look back, if you move to look back at our budget from the end of last year to renew investments that we were planning to make in 2022, that total investment plan is only off by a couple of million dollars, which is an incredible achievement in the context of this difficult environment that we've been able to protect a vast majority of that investment plan. We surely have made some tweaks about reprioritizing that total investment plan but in general we haven’t cut it back. We believe strongly that in down markets, that’s where companies slow down their long-term growth because they cut back easily on their investment plans rather than doing the hard work of cutting back on their usual run-the-business activities.

That makes further sense. Wanted to ask my follow-up on pricing. How is it running this year, and what are your plans for '23? Are you seeing sort of clients watching spend really closely just given the environment? I imagine a lot of those conversations are taking place maybe right now. So, just wanted to understand the outlook for pricing for next year.

Yes. I'll talk generally, not specific to any year or point in time. But I would say in an environment like this where costs and prices are going up, we are generally increasing prices more than we have in the recent past. Given that our tools are really mission-critical to our clients, we do have some pricing power in many parts of the business. Although, as we've mentioned in the past, we are very focused on the long-term relationships we have with our clients and recognize that most of our growth is going to come from our existing clients. So, we're heavily focused on adding value in connection with any price increases that we are rolling out. Our approach to price increase is more generally factored in the value that we're adding to existing services that we're delivering to clients. It does factor in our broader cost structure, the overall pricing environment, client health, and client usage. Therefore, we are being measured and mindful of the health of our clients, but I'd say generally across products, we are rolling out higher price increases than we have in recent years, and you are probably seeing some impact of that in the Q3 recurring sales relative to a year ago. We expect probably similar benefits in the next couple of quarters.

The next question is from Owen Lau from Oppenheimer. Please go ahead.

Good morning, and thank you for taking my question. If the market recovers in the fourth quarter, how do you think about your bonus and other non-comp expenses? Would you consider giving back some of the bonus back to employees or stick with the downturn playbook because you try to be more conservative? Thank you.

Yes. I don’t want to be too prescriptive here because that really depends on the facts and circumstances. On the bonus point, I would underscore the large majority of the bonus accrual is formulaic. It depends on the performance of the business. Therefore, to the extent the business performance increases, in particular, if asset-based fees rise significantly, that will just trickle through how we accrue our bonus. Our bonuses are paid out, which is tied to the key financial metrics of the business; thus, the bonus accrual would likely go up. Across broader levers, it depends on the exact situation, but non-comp areas in particular can flex up and down where things like professional fees and other non-comp areas can flex up in pretty short order. The comp lever does take a little bit of time to trickle through and start having an impact that depends on the pace of hiring new hires, et cetera. But I'd say the bonus and big portions of the non-comp levers we have can flex in pretty short order.

Got it, that's helpful. So, I think you mentioned Climate was strong in this quarter, and that options and future trading volumes were also strong. Could you please talk about do you see any other product that you see strong demand for in the quarter? Thanks.

The other area I would highlight, and Baer mentioned, is Analytics. I think there has been a component of the strength we saw in Analytic sales that's attributable to focus on our risk models and broader risk management tools in these environments, which are critical to helping our clients navigate in market uncertainty across many asset classes, geographic, sector shifts, and rotations taking place. And so, that would be another area that I would highlight here. I would also highlight the extreme resilience of our Index subscription franchise as well. I think there is such a plethora of use cases across many different users in client segments that continue to be strong pockets of demand for and in the use cases for those products, particularly in areas like over-the-counter derivatives that can be very useful to our clients in these types of environments.

Next question is from Faiza Alwy from Deutsche Bank. Please go ahead.

Yes, hi good morning. I wanted to just drill down a little bit more on Climate. And wanted to ask if you're envisioning from here sort of an inflection in terms of the size of the business given the broad-based focus around Climate? Is the regulatory environment such that again we may see that type of an inflection? And maybe as you answer that, talk to us about your specific competitive advantages within Climate. I recognize that you have many different areas, but curious where you think you're best positioned?

Thanks for that question. As we have previously said, climate change is a complete existential threat to the planet. We’re witnessing a huge increase in physical risk and extreme weather events, such as floods, fires, and hurricanes. Therefore, this is going to be a clear and present danger for portfolios of all types around the world because the portfolios are made up of equity, fixed income, property, and infrastructure, all of which will be affected by both the physical risk and the transition risks associated with climate change. We believe that this $64 million or so across all of our areas will continue to increase rapidly over the years to come. We're positioning ourselves not only in terms of the underlying climate data, so just the carbon emission estimates for companies and bond issuers and private companies and real estate exposure and all of that, but also offering models, Value-at-Risk models, and implied temperature rise models to help people project into the future what the decarbonization path of their assets and portfolios will be. We're very bullish on this Total Portfolio Footprinting process. Essentially, we take the total portfolio of an asset manager or an asset owner and tell them what the current carbon emissions footprint of the entire portfolio is, including Scope 1, Scope 2, and Scope 3 emissions and what the trajectory of that emissions footprint will be in the next three to five years or five to ten years. This will be in extremely high demand. I think that the war in Ukraine has highlighted even more the importance of energy security and independence, and the easiest way to achieve energy independence is by investing in wind and solar capabilities within your own country. I expect to see tremendous growth in this area; yes, I believe there will be an inflection point that started last year with COP26 and continues this year with COP27, despite the balancing act between fossil fuels and renewable energy.

Great. Thank you so much for that. And then just a follow-up maybe for Andy on capital allocation. So far, it seems share buybacks have been the priority. I'm curious how you think about that in a rising rate environment and how much of a focus M&A is from here?

Yes. I would say, generally, no major changes to our approach. We continue to be highly focused on both repurchases and opportunistic bolt-on M&A in key strategic growth areas for us. To your point about the change in funding markets and cost of capital, we are watching the markets closely, being very mindful of what that means for valuation, and trying to be quite opportunistic about where we take advantage on the repurchase front and acquisition front. I'd say given where our gross leverage is and where our funding costs are, we're probably not in a rush to raise additional debt. But we believe we have a good amount of cash, and we'll continue to build cash to be opportunistic here on both fronts. We think there are opportunities for either bolt-on M&A or repurchase at attractive long-term values.

The next question will be from Craig Huber from Huber Research Partners. Please go ahead.

Yes, hi. In the past, you guys have talked about how you thought your Climate run rate over time would exceed the rest of ESG run rate. I wanted to ask if you still believe that. And back to the prior question, I wanted to hear a little bit further about the sort of mission-critical tools and data you have on the Climate side that make you guys stand out in a way that your competitors do not have that will help fuel that growth in your Climate area.

No, great question, Craig. Over a ten-year horizon or so, we believe that Climate tools per se—not just Climate in the context of ESG—but I’m talking about Climate tools separately from what’s embedded in the ESG offering, will grow at a very large clip and could potentially exceed the run rate of ESG at that time. Obviously, I’m talking about long-term projections here that can vary year-to-year, and it’s hard to say where they end up. But the reason we say that is to highlight the Climate tool opportunities. Climate solutions by MSCI are comprehensive because we integrate climate data for a broader scope. Some of our competitors are focused solely on developing climate data while others might target only physical risks or transition risks. Some competitors focus exclusively on the real estate industry or corporate bonds. Yet, at MSCI, you will find a holistic solution for your entire portfolio from one source incorporating data, models, and total portfolio assessments. I think the benefit lies in this integrated approach that covers all asset classes.

Sure. So, yes. And it’s a good point. Just taking a step back, we have this nice natural P&L hedge related to FX. So on the revenue side, I believe it’s around 11% or 12% of the revenue base that is in non-USD currencies. It's about 45% of the cost base in non-USD currencies, and just given the relative sizes of those bases—the revenue base and cost base as well as the mix of currencies within them—they tend to move in parallel. We saw in the current quarter, on the expense side, we had a $13 million—close to a $13 million benefit from the appreciating U.S. dollar relative to a year ago, that more than offset the $12 million headwind we had on the revenue side. It’s a good example of what you’ve seen in recent quarters where we do have this natural P&L hedge where any impact from currency fluctuations on our topline tends to be dampened or offset almost completely by movement on the expense line.

Thank you. The next question is from George Tong with Goldman Sachs. Please go ahead.

Hi thanks. Good morning. The Analytics business posted a new high in retention rates. Can you unpack the drivers behind the improvement and discuss how high retention rates can go?

So, yes, I’d say we are encouraged—really encouraged by the performance in our retention rate in Analytics. I think as I alluded to earlier, there's probably been some benefit from a heightened focus on risk and risk tools in this environment, but we're also seeing success in many of the areas where we've had the strategic focus. And so we’ve strengthened front-office equity and fixed income risk models and broader portfolio management tools. We’ve been benefiting from our strong models, really best-in-class models and content enhancements that we’ve been making as well as the broader improved functionality and tech-enabled access that we’ve been investing in. We’ve also had success on the enterprise risk side through the partnerships that we’ve developed just to deliver a broader value proposition to our clients. While it's still early days, we're seeing some real momentum in the Climate Lab Enterprise offering. We're encouraged, although I would say we are cautious and we're definitely not ready to declare victory. Analytics will likely continue to experience some lumpiness in not only its growth but I'd say cancellations within Analytics. So, we're cautious but very much encouraged. Analytics is not only a key strategic capability for us as a firm, but it's also a critical financial area for us; this performance is encouraging. You can see in the margin on the profitability growth, it's been a great source of operating leverage that can help fuel investments in other parts of the company as well.

Got it, that's helpful. And then you raised your free cash flow guidance for 2022. Can you walk through the moving pieces there, if that's being driven primarily by lower expenses? Or if there are also working capital and capex benefits?

Yes, I mentioned this in the prepared remarks, but it's mainly driven by a few factors. We had a larger-than-projected benefit from lower tax payments in the second half of the year. We've also seen, as you know, a decrease in cash expenses. Additionally, we’ve had some higher yields on cash and we've also seen some resiliency in collections. All those factors have helped to offset some of the revenue headwinds that have pressured a bit on the collection side. That was the essence behind the increase in the free cash flow guidance. I would say, like our profitability more generally, our downturn actions also help support our free cash flows, and free cash flow is a very important metric that we're intensely focused on.

The next question is from Gregory Simpson with BNP Paribas. Please go ahead.

Hi, good morning. Thank you for taking my questions. The first one is in Analytics; the EBITDA margin was 47% this quarter and 44% last quarter. It was more in the 30s historically. So, could you share any colors on the drivers of margin expansion and whether this level of profitability is sustainable in the segment?

Yes, there are several factors that have been driving the margin expansion in Analytics. I think we've seen similar dynamics in the previous quarter. I would note that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our Risk Insights and Climate Lab Enterprise and broader enhancements to our analytic capabilities. I would say that FX has a big impact just given the size of the Analytics cost base. The non-USD expense base that I alluded to in a prior question impacts Analytics heavily. Therefore, appreciating U.S. dollar has helped drive the Analytics expenses down. Additionally, our downturn actions have impacted the Analytics expense base. So, the confluence of all those factors has driven this really modest expense growth in Analytics and a higher margin within the segment.

Thank you. And just a follow-up, can you share some thoughts on the potential impacts on MSCI? If we started to see signs of headcount reductions across the asset management industry, how much of the subscriptions are tied to user numbers relative to more enterprise deals with the entire firm? Thank you.

Most of our—I'd say most of our agreements are not tied to users per se. They tend to be modules that are licensed to office locations for use of specific products. They can have a max number of users that are allowed to use that license, but they're not tied to seats per se. We also do have, as you're alluding to, more enterprise-type licensing arrangements. Therefore, seat count is not something that impacts us necessarily directly. Although, as I alluded to in my answer to an earlier question, when you start to have more client actions, including investment firms downsizing, closing funds, and desk closures, that will generally cause an increase in cancellations and a drop in the retention rate. We've seen those sorts of impacts as downturns are maintained for several quarters in the past, so we are proceeding cautiously, although we haven't seen it to this point.

Next question is from Russell Quelch from Redburn. Please go ahead.

Sorry, my headsets seem to be giving up; so I'll switch to the phone. Hopefully, you can hear me.

Yes, we can. Thank you.

Thanks very much. Given the 10% quarter-on-quarter fall in average AUM and ETF tracking MSCI indices in the quarter, I just wondered why did the period-end basis point fee not step up in the quarter? I'm just trying to understand the mechanics there.

Yes. Maybe if you're asking about the run rate basis points, they were quite resilient. Actually, the run rate basis points have remained constant at 2.52 bps. I'd say there were just very small mix impacts and fee impacts, which resulted in pretty strong resiliency in the fee, which we've seen in recent quarters. It's something that’s encouraging to us, but I wouldn’t flag anything too notable around it.

Yes. Just wondering if it should step up when the AUM steps down, that was more the question.

I see. Yes, yes. Well, listen, we've got a wide range of products out there that are licensed to our indexes under a wide range of agreements with various providers. To your point, there were some small negative mix impacts on the fee and some very small positive impacts from fees, and those fee impacts were driven by certain products dropping into lower AUM bands where we receive a higher fee. There was some embedded impact from that in the fee but it wasn't significant. I wouldn't overplay that.

Look, I don't think we're seeing increased competition; I think it's been a competitive market. It's hard to judge precisely. But for sure, we feel our competitive edge is rising. We're putting significant investments into it. I think it's both on two levels. It's on strategic client relationships of the kind of winners—those sort of big index wins in Climate that Henry alluded to in his prepared remarks. So, it’s understanding the clients' investment process. It’s also about the methodology and the skill and the investment process. Finally, it's the technology platform behind that. So, I think in all of those areas, on a relative basis, we're building competitive strength, but it's a very competitive market. We’re focused on it and forging ahead.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Henry Fernandez for any closing remarks.

Well, thank you for joining us today and for your continued support. As you can see from the results this quarter and our prepared remarks and the answers to your questions, our all-weather franchise continued to perform well despite a very significantly difficult operating environment. We truly remain excited about the very large opportunities in front of us, and we'll continue to invest significantly in those areas of significant strategic growth. Having said that, given the environment, we do remain cautious. But it is in times like this that MSCI shines. We intend to continue to do so. We look forward to your questions in the coming days or weeks or months, and please don't hesitate to reach out to our team with any thoughts or questions you have. Thank you very much. Have a great day.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.