明晟 (MSCI) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Ms. Jisoo Suh of Investor Relations. You may begin.

Thank you, Elizabeth. Good day, and welcome to the MSCI Fourth Quarter 2021 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2021. 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'll also refer to non-GAAP measures, including, but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.

We will also discuss run rate which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode.

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

Thanks, Jisoo. Hello, everyone, and thank you for joining us today.

MSCI delivered exceptional results in 2021, especially in the fourth quarter, demonstrating the strength of our ambitious strategy, key long-term investments and consistent execution. The results also reflect unprecedented demand for our solutions and enormous growth opportunities for the years ahead.

To list just a few highlights, in the fourth quarter, MSCI achieved organic revenue growth of nearly 20% and adjusted earnings per share growth of over 28%. For the full year, we achieved organic subscription run rate growth of over 13%, record recurring subscription sales of more than $255 million and close to 95% retention. In addition, we generated free cash flow of more than $883 million, which represented a 16% growth rate.

Our strong financial results reaffirm our strategic progress. MSCI continues to expand its role as a change agent for the global investment industry while providing the common language and the tools investors use for indexation, risk management, factors, ESG, climate and other key investment categories.

Across all of our business lines, MSCI is making a big impact and gaining further recognition. We saw numerous examples of this during the fourth quarter. In October, Hong Kong exchanges launched a futures contract on an MSCI China A share index, the first offshore sector balance China A share future supported and approved by Chinese regulators. It proved to be the most successful launch ever of a futures contract based on an MSCI Index.

In November, we affirm our status as a leading provider of climate solutions for investors. During the COP26 Finance Day, the UN Capital Development Fund even launched a new ETF linked to the MSCI ACWI Climate Pathway Select Index. Before and after COP26, we rolled out several new climate tools, including an analytical tool that provides carbon emissions data for more than 15,000 private companies and nearly 4,000 active private equity and debt funds. This is in addition to the carbon emission data we provide on nearly 10,000 public companies.

As the global race to net zero accelerates, we'll see enormous opportunities to provide data, tools and solutions to support investors' and companies' decarbonization initiatives and the resulting asset repricing and capital reallocation. Our ongoing and incremental investments will help us maximize these opportunities and drive climate progress across the whole of the capital markets industry.

Climate is just one example of the historic changes reshaping the global economy. At this time, MSCI's products and services have never been more important to investors and business leaders around the world.

Across most client segments and regions, we currently see a strong operating environment. Among our clients, we've seen more confidence than at any point since the 2008 financial crisis. Our intense client centricity has enabled us to add wallet share organically and emerged as a go-to partner for clients seeking to differentiate themselves. That includes asset managers and asset owners, MSCI's largest installed base of clients. Last year, our subscription run rate among those 2 client segments increased by 11%, excluding acquisitions.

We're also rapidly expanding client segments and end markets such as wealth managers, case funds, broker-dealers, insurance companies and corporates. We generated close to $78 million of incremental subscription run rate from those groups in 2021 for a growth rate of nearly 20%.

Within our products and services, we continue to address the enormous market for indices across asset classes, exposures and investment thesis. In indices, MSCI remains a go-to provider for tools to support asset allocation, portfolio construction, performance benchmarking, indexation and customized [outcome]. As we modernize the client experience and capitalize on growth opportunities, MSCI continues investing in and executing on our data transformation strategy. This strategy was a direct result of the feedback we received from many of you more than a year ago and before the last Investor Day.

To put this data transformation in context, MSCI has traditionally used third-party data to create indices, risk models and other products. We will continue to do that in the future while creating new pathways for clients to access and interact with our products, but we will also source and collect much more data from alternate and direct sources on areas ranging from private equity and fixed income to real estate and climate in order to generate more meaningful and richer insights for our clients.

In effect, MSCI has always been a data processing factory. Now we are rapidly becoming a data-building machine. The value of this transformation cannot be under -- overstated. In a world that increasingly runs on data, MSCI's new capabilities will dramatically enhance our competitive advantages and boost our long-term growth potential.

Our new data strategy is closely connected to our technology transformation. We recently launched MSCI Developer Community, a cohesive platform for clients to access our APIs and our code. This platform will help developers and quants customize and improve their offering and scale various use cases such as integrating front- and back-office applications. We're also pleased with our accelerated migration to the cloud. Last year, we successfully exited one of our on-premise data centers, and we are on track for another exit this year.

Looking at the larger picture, MSCI's all-weather franchise and mission-critical solutions position us favorably in every type of operating environment. That includes periods of sector, factor, geographic and ESG rotation due to our diversified product line; periods of elevated inflation due to our pricing power; and periods of market volatility due to our franchise in risk management and index derivatives around the world and, of course, our approach to repurchase of shares. Today, with a strong momentum in a constructive environment, MSCI continues making investments that we are confident will deliver tangible near-term benefit. These investments are fueling robust business growth and helping us modernize the client experience. We believe that they will also help us build on this historic achievements of 2021 and reach even greater heights in 2022.

With that, let me pass the floor over to Baer. Baer?

Thank you, Henry, and greetings, everyone.

As Henry alluded to, our Triple-Crown framework, emphasizing the highest returns, fastest payback and most highly valued business opportunities, is driving accelerated growth across the board as you can see from the record numbers. On today's call, I will provide more detail on some of our investment areas and growth opportunities. Most of our investments will be in areas where we have demonstrated leadership and see incredible demand.

Let me start with index where we are uniquely positioned to serve the global investment community. We are transforming the ability of our index clients to access, monetize and leverage our indexes and calculation capacity. MSCI currently calculates more than 260,000 indexes per day. With our investments, we expect that number could reach several million indexes calculated over the next few years.

Our forthcoming client application called Index Builder will provide investors with the opportunity to create, customize and test indexes around MSCI's world-class frameworks and content. This will put an index calculation solution at our clients' fingertips for the first time, accelerating our ability to meet their demand.

Customized index subscription modules overall continued to show excellent momentum, growing by 18% to $93 million of subscription run rate. Additionally, customized indexes are a key driver of new growth opportunities within index-based products.

We're also investing to stay ahead of clients' needs for direct indexing as demand continues to grow in the wealth industry for personalized tax-aware portfolios at scale. Our strong brand across indexes, ESG and climate, factors and analytics, coupled with our portfolio construction and tax optimization tools, are helping us land several big wins, including with clients who are licensing our indexes and expanding their use of our ESG content and risk models. In fact, the AUM of direct indexing licensed to MSCI indexes is now roughly $60 billion, while our run rate for index -- direct indexing offerings across the firm is roughly $10 million.

In the climate space, clients continue to adopt MSCI's Paris-aligned indexes, climate data insights, physical and transition risk models, implied temperature rise measures, our net-zero tracker and our TCFD-aligned and other reporting tools. Our climate-related run rate across the firm now totals $45 million, well more than double from last year. Following the successful product launch of Climate Lab in October, we signed several new clients during the quarter, including asset owners in EMEA. These wins also benefit the Analytics segment and leverage their reporting infrastructure. One of our largest current priorities is to build and enhance our core products, including Climate Lab and our climate models, data and research. As you can see from the numbers, ESG at MSCI continues to perform strongly and is a central focus for us in 2022. Our ESG franchise serves different types of investors including ESG integration investors, impact investors and values-based investors. Some focus only on the financial impact of ESG issues, while others concentrate more on ethical and sustainability concerns. We offer data and solutions to support each of these use cases.

New clients in the ESG and Climate segment comprised more than 50% of new recurring subscription sales during the quarter. We're proud of the role we have played in the investment ecosystem as the largest ESG ratings provider covering over 14,000 issuers. We will continue to expand and deepen our large securities coverage universe and high data quality. We believe our focus on rules-based and transparent methodologies, financial materiality of ESG risks and assessing resiliency to those risks has enabled MSCI to transform the investment process for our clients. Recent conversations about the need for standards and common definitions in ESG integration and sustainable investing present further opportunities for MSCI to help our clients.

I'd now like to highlight some successes in Analytics this quarter. Our subscription sales grew 72% quarter-over-quarter. Year-over-year, they grew 36%, and our retention rate improved to 93.4%. This resulted in record-high net new recurring subscription sales of $18.2 million for the quarter. The wins were broad-based, including with asset owners and asset managers for use cases where we have leadership, such as enterprise risk and performance and equity models. We're also leveraging our traditional offerings for target client segments such as our enterprise risk platform for insurance firms and our fixed-income factor models for broker-dealers. Our business wins also consisted of new offerings to solve new use cases, including, as I mentioned previously, in climate reporting within Analytics platform and Climate Lab.

Across Analytics, we continue to benefit from the enhancements we have made to portfolio construction and the reporting tools that we have developed, including factor and risk models, optimization engine and performance attribution tools while providing our index, ESG and climate franchises with critical and differentiated IP. We're also adding to our coverage footprint and leveraging our existing offerings to serve newer and potentially significant client use case. Our recent success scaling the hedge fund client segment is a great outcome of this approach, where our subscription run rate totals $143 million, growing over 18%.

Before concluding, I'd like to say a quick word about our data capabilities. We continue to rapidly incorporate new proprietary third-party data sets to expand and enrich our existing content, improve interoperability with external sources and establish deep network effects and client stickiness. This is evident in fixed income indexes and modules where we have added data on roughly $53 trillion worth of additional fixed income assets.

Meanwhile, through our climate investments, we are rapidly adding data on physical assets, target emissions and other key metrics. We're also investing in the data consumption experience for our clients. To that end, we recently launched MSCI Data Explorer, our new cloud-native data search and exploration application, which enables clients to access and download data sets across all product lines in index, ESG and climate, analytics and real estate.

Looking ahead, we remain confident that our long-term investments will drive future growth opportunities. With that in mind, we will continue investing and continue meeting client demands for our offerings using MSCI's rigorous Triple-Crown framework as our north star.

With that, let me turn the call over to Andy.

Thanks, Baer, and hi, everyone.

The record results for the quarter and for the year reflect the enormous opportunity set available to MSCI and our long-term actions to identify, invest in and capture those opportunities. Each of our product segments, index, analytics, ESG and climate and all other private assets, recorded their highest quarter ever for recurring subscription sales and net new recurring sales.

We drove very strong double-digit sales and subscription run rate growth in each of the Americas, EMEA and APAC regions, reflecting our ability to unlock the significant addressable markets in front of us. Our One MSCI ESG and climate franchise delivered 58% run rate growth year-over-year, adding $129 million of additional run rate during 2021. And looking forward, our longer-term sales pipeline across products and regions looks quite healthy.

Across the firm, our 13% organic subscription run rate growth was fueled by strength across nearly all dimensions, geographies, client segments and product segments. Index subscription run rate grew more than 12% year-over-year, our 32nd consecutive quarter or eighth consecutive year of achieving double-digit growth. Market-cap-weighted subscription modules, which represent approximately 75% of index subscription run rate, grew 9% while we recorded strong double-digit growth in our investment thesis index modules, particularly in areas like factors, ESG and climate, which collectively drove 28% year-over-year subscription run rate growth while customized index subscription modules grew 18%.

Analytics recorded 5% organic revenue growth and 7% organic run rate growth with double-digit organic growth in both equity portfolio management tools and fixed income portfolio management tools, reflecting the strategic business wins Baer described earlier. Importantly, our strong profitability growth across Analytics is fueling company-wide operating leverage and enabling us to make investments in key growth areas across the firm.

In ESG and climate, we drove outstanding organic growth of 53% in revenue and 47% in organic subscription run rate with strong demand from new and existing clients alike. To put this in context, since MSCI's acquisition of RiskMetrics in 2010, it took almost 10 years for the products in our ESG and climate segment to cross $100 million of run rate, which happened at the end of 2019. In the 2 years since, we've doubled that, and in 2021, with nearly $200 million in run rate.

Within all other private assets, we are building momentum with organic revenue growth of 13% while benefiting from growing traction with our climate offering. Additionally, we're seeing strong early traction from RCA, which added $76 million of run rate as of 12/31.

As we had indicated previously, we expect the annualized adjusted EBITDA margin for the All Other segment to be close to the mid-teens for full year 2022, impacted by some employee retention and integration expenses as well as the reallocation of certain internal costs to the segment.

Turning to asset-based fees. Despite year-end volatility, we observed healthy cash inflows across geographic exposures and product areas and equity ETFs linked to MSCI indexes. This included healthy inflows into products with emerging markets, developed markets ex U.S. and U.S. exposures. AUM and equity ETFs linked to MSCI ESG and climate indexes as of year-end was $227 billion, growing a tremendous 114% from a year ago, with cash inflows of nearly $34 billion during the quarter, resulting in more than 75% market share in global ESG and climate equity ETF flows. The period-end basis point fees were 2.54 bps. The quarter-over-quarter decline was almost entirely driven by mix shift, with higher growth in lower-fee products.

Solid operating performance and notably strong revenue growth drove nearly all of the adjusted EPS outperformance in the quarter, with some puts and takes from higher tax rate and interest expense. Even in the context of business investments we've made, we drove modest margin expansion during the quarter, which continues to be a key objective. Excluding results from the RCA business, MSCI's adjusted EBITDA margin across the firm would be roughly 59.3% for the quarter, which would imply roughly 150 basis points of margin expansion.

We also continued our track record of delivering strong free cash flows of over $880 million for the full year or growth of over 16%. This was also higher than our prior expectations as we did not make accelerated incremental cash tax payments in the fourth quarter that we had previously assumed as a result of our latest views of the tax environment.

Turning to capital allocation and our balance sheet. Including December and January month-to-date through Tuesday, we have repurchased approximately 925,000 shares or close to $480 million. Also, MSCI's Board of Directors has authorized the company to opportunistically explore financing options, although any potential financing is subject to market and other conditions and there can be no assurance as to the timing or certainty of the transaction. As a top priority, we remain focused on reinvesting in our business across the Triple-Crown areas that we've highlighted today, including custom, ESG, climate and other investment thesis indexes; fixed income and private asset content and solutions; data and technology capabilities; as well as client coverage, product and research enhancements. Additionally, we will continue to pursue opportunistic MP&A in highly strategic growth areas for us.

Turning now to our full year 2022 guidance, which we published this morning. Our expense guidance range primarily reflects the investments we are making to fuel continued growth as well as enhance the client experience. Our projected level of spend assumes relatively flat market levels for the year. And as always, our expenses may flex up and down depending on market conditions. As a reminder, we expect normal seasonality in our expenses during the year with certain compensation and benefits expenses typically being higher in the first quarter. Our free cash flow range continues to reflect our confidence in strong collections and operating performance. Our tax rate guidance range assumes no significant changes in global tax regimes. Excluding the impact of combining with the lower-margin RCA business, we would expect margin expansion in 2022 across the balance of the company.

In summary, as both Henry and Baer have noted, we are seeing unprecedented levels of demand for our offerings, and we are focused on capitalizing on those opportunities. We have an all-weather franchise that positions us well for all operating environments, and we're excited for the continued growth opportunities ahead of us in 2022 and beyond.

With that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Toni Kaplan with Morgan Stanley.

Andy, you're guiding to about a 15% increase in EBITDA expenses year-over-year. Is your expectation that revenue will grow at least in line with the expense increase? Or is this sort of more of an investment year? And also just embedded in the guide, are you assuming that markets stay at this level? Or if they are choppy, I know you mentioned that you could sort of dial it back, but maybe that -- maybe for future growth, it's sort of the right decision to make the investments. So just wanted to hear about some more color on the expense guide.

Sure. Sure. Yes. Thanks, Toni. So just on the comment about growth. Obviously, we don't provide top line guidance, so I'm not going to touch that. But I would highlight that -- and you see this in our long-term targets, over the long term, positive operating leverage, very marginal and positive operating leverage is something that's embedded in the business model. But our core focus today is really investing in the very attractive and large opportunities in front of us. We did that last year. And in the expense guidance that you see here, we're planning to continue to do that.

I would highlight that the largest driver of the growth in expenses really is those investment dollars. So it's investing in all the attractive opportunities that we've talked about and believe are very compelling, long-term secular opportunities. We do have some carryover impact from the 2021 hiring and investments, and now we're going to continue to invest in 2022.

Behind that, it is worth highlighting and noting that there is an impact from RCA, getting the full year impact of RCA expenses, which feeds into that expense guidance. And then the smallest contributor is same-store wage increases, and we are projecting slightly higher wage increases than we typically do. But this is the smallest item, and we do have a number of levers at our disposal to manage through wage impacts both on the expense line item but also at the top line where we have a value-based pricing approach, which positions us very well for inflationary environments.

Terrific. Helpful. And then Baer, you spoke about investing in data. And could you just talk about how differentiated your ESG data is versus competitors and how hard you think it will be for others to replicate once you make these sort of investments? And I think this is a particularly interesting topic because I think the perception is that you have this leading brand. It sort of helps with client relationships and benchmarking. But I think the common perception around data is that data could become more commoditized or things like that. So just talk about how important it is to have this differentiated ESG data and how you get to that.

So thanks, Toni. So it's absolutely critical. So I think that at this stage, roughly 45% of our ESG data comes from alternative sources. So we're highly dependent both on, I would say, the expertise and depth and breadth of our research and our data environment, the combination of both of those. So I think we're very far from a stage where data in either ESG or climate is anything like a commodity. We're doing a lot of interesting and new research in this area. We're stepping up our investment dramatically, and that includes in both our infrastructure for managing all of that data. It includes the software, which enables us to go directly to issuers and makes it very easy for them to send us that data. And it also includes precisely those alternative data techniques such as natural language processing that allow us to go broader and deeper to look for topics such as controversies in the ESG area and new sources of information in climate. So this is really central to what we do in -- at MSCI generally and in ESG and climate, and we're very confident that it will be central to our competitive advantage for quite a number of years to come.

Our next question comes from Alex Kramm with UBS.

Yes. Another question on ESG. It seems like recently, there's been an increase of autocalls in whatever, call it, popular press around ESG, about firms like you and maybe how some of these ESG scores are not really a reflection of what people think -- they're buying or getting into when they're investing in ESG products. So I don't think that's a new topic, and maybe this is just noise and maybe it's a sign of your success. But I'm just curious how you, a, view these kind of things out there? And then more importantly, are you seeing any impact from your clients? Are you getting more scrutiny from them? Are they asking more questions? Or is it not just having an impact at all? And are you seeing any potential like regulatory scrutiny increasing here, too? So I know it's a lot question but curious if you have any color.

Yes. Well, thanks, Alex, for that question. Now first of all, there's been no impact on our clients and client request. If anything, because of the controversy that has been created in the (inaudible) press, as you call it. Clients have become more intrigued because one of the [tenets of these reporters] was that MSCI is the leading provider of all of this. So people want to come to us because of that.

Secondly, and as Baer indicated in the prepared remarks, we at MSCI serve a large number of different type of investors. In ESG and in climate, we serve investors that are looking to integrate ESG and climate considerations into their investment process and, therefore, they only focus on financial risk associated with ESG controversies and ESG issues or climate issues in security selection or pricing of -- in their portfolios, right?

The second type of investors are impact investors. And those are very different than the ones that are looking for financial metrics only. These are investors that are looking to, as the name says, make an impact in what they do, and some of them may be willing to give up returns. And the mandate that they've been receiving [as a fiduciary] indicates that they could do that.

The third type of investors is values-based investors, religious organizations and the like in which they want to -- they only want to be investing in what they believe in and are willing to give up substantial returns sometimes for that or increase risk in their portfolios for that. So we serve every one of those types of investors. So I think a lot of what has been twisted and done in these kinds of controversies in the media is a particular tool. These ESG ratings are largely used by this -- by people who are looking for financial risk on that.

So I think that everyone that we have talked to as a consequence of these articles has completely recognized the differences between one thing and another. And many of them have indicated that it is very incredible to have people that think that they can take [fiduciaries] money and go out and fight social causes with the fiduciaries money, when that is not part of their mandate.

So a lot of what these articles have been allocating is for people like you and others on this call to go out and invest and get lower returns on the basis of helping different parts of the world. And that is -- that's not what it is in your mandates and how people run money. So there are others that do that, and we serve all kinds of investors. We don't tell them what to do. We provide the tools for them to achieve their investment objectives, not ours.

Moving on and maybe staying in the segment but maybe on climate, $45 million, I think, the run rate you gave, pretty impressive. Can you maybe help us break this down a little bit into what the biggest chunks of those run rates are? You just mentioned that around COP26, you've been introducing a lot of new products. So just wondering where most of that is coming from and then maybe in the next couple of years, as you invest into all these new products, where you actually think in the future most of the growth is going to be coming from.

Alex, Baer again. So look, the biggest driver is clients needing to report to either within certain organized frameworks, such as TCFD, or to their investors and to look at the climate exposures across their portfolios or, for example, within a given index or an index exposure. So we're really working around the clock as it were to meet a lot of those demands.

Now there are subcomponents of that. There are elements of physical risk in climate risk. So there are building blocks of those type of the climate exposures or climate reporting needs. But overwhelmingly today, if you want to put it in very plain English, people want to know what is going on in their portfolio and their security exposures as it relates to the climate transition and to keep them on either the portfolio itself or in the interest of their investors to record where they are in the path to net zero, where many of them have set goals and targets, right?

So really, and if you think about that, it's an enormous effort for transparency and understanding in a category where the underlying data and assets is extremely broad. So that's where really our work is going on.

Our next question comes from Manav Patnaik with Barclays.

I just wanted to follow up. Henry, you talked about how I think you moved from one -- you shut down one on-premise center, I suppose, and you were going to do another one this year. I was just hoping you could you give us a little bit more color on how many there are, I guess, maybe some more stats and perhaps how much is on the cloud or some other milestones to track this tech transformation here.

Yes, Manav. So look, I'm not going to go into like every data center on this call. But directionally, what I would say is first of all, which we're very excited about, we have moved all of our ESG, climate products into the cloud. They were the first. They're clearly amongst our newer areas relatively, but what that allows us to do is to work in an environment, where in keeping with the previous topics we've just been discussing here, we can enormously accelerate innovation, right? So we're very excited about that because it really means that it's a critical step forward in ensuring that we keep up with this enormous demand and that our investments are not merely in the data -- the underlying data, the research people but also in the infrastructure supporting all of that.

So I think, generally, we're very happy with the cloud progression. We -- I think 2022 is going to be an even more important year for us and really critical. And on top of that, we're doing this on kind of a cash spending neutral basis across where we were before. So I think it's a great story for innovation. It's a great story for the future of the company, and we'll keep you guys updated as we make progress.

Got it. That makes sense. And then just the Board authorization to explore financing, Andy, should we read that as basically looking to raise some more debt to buy back more shares? Or is it more just refinancing ahead of rate rises, et cetera? Just curious how you guys are thinking about that.

Yes. I'd say it's consistent with the approach we've taken in the past where as we delever, we look for opportunities to take the leverage back up. In this case, it would be new capital, so new money, additional cash coming in. And that would be used for general corporate purposes, including potentially repurchases, potentially some targeted MP&A. But it's really just taking advantage of an attractive financing market if we see it. And if we do, we're confident that we can get a good return on that capital, whether it goes towards continued repurchases at potentially attractive levels or MP&A or organic corporate purposes.

Our next question comes from Ashish Sabadra with RBC.

So just focusing on Analytics, you called out a pretty good subscription sales in that business. How should we think about the growth trajectory there and getting to your longer-term growth targets in Analytics? Any color would be helpful.

Yes. So look, we're pleased with the quarter we had. We -- I think we've got some strong plans in some of the growth areas that we've mentioned in analytics before, such as fixed income. We're really doing a lot of work also to ensure that the upside that we have in ESG and climate is translated into our Analytics business. And I think we're just generally really being in a very client-focused mode, and they paid off in Q4. So we hope to be able to continue to show positive numbers as we go into the next quarter. We always have a certain amount of lumpiness there. But I think with the continued improvements in both our content and our platforms, we will -- we intend to continue to show that we can move the run rate up and with that, the revenue with time.

That's very helpful color. And maybe just a quick follow-up question on the future contracts on the MSCI China Asia Index. I just wanted to get a more broader perspective. How big is the derivative revenues based on currently MSCI indices? And how do you think about that over the mid to long term? How big is that opportunity and where we are in that process?

So the opportunity is very, very large in the context of the creation of a new market. There are 2 types of opportunities, one, in selected areas to create single-country, single-currency index futures and options and structural products that come out of that. Those are -- that's traditionally what we have been doing. But in the last 5, 7 years or so, we have opened up with our partners in derivative exchanges, the market for multicountry, multicurrency index futures options and those being used for structural products and over-the-counter products and the creation of investment vehicles.

So that is in the context of the emerging market index futures and options, the EAFE index futures and options, the European one, the trade in Europe, et cetera, and the like. So we are very pleased with the -- so that opportunity is multiples, multiples of what we have right now. It's just going to -- just takes time to grow and educate the market and the work that the exchanges have to do to promote these products, et cetera. So we continue to do that.

Now this particular product, China Asia futures was -- is an access product that, as you know, you can either go directly to the mainline to try to trade the local index futures or trade another futures that trades in Singapore or come to Hong Kong and look at this one. The benefit of these futures and the reason for this tremendous success is that even though it's narrow, [50 stocks], it is sector balanced. It is constructed in a way that represents the broad market of China rather than the top 50 companies in the country, right? So there is a secular presentation from the major areas, the major industries in China. And it has been incredibly successful. And on the heels of that, our clients have launched EPS on that inside China and in Hong Kong, and we have converted certain other clients around in the U.S. and in Europe from other indices to this one. And all in, when you include the notional amount that -- in open interest in the futures contract and you include the assets that have been raised in EPS, we're already upwards of $10 billion in a short period of time. So that bodes well for a continuation of that -- of products to use.

And Ashish, I heard you reference the futures and options -- listed futures and options run rate as of 12/31 was $54 million. The over-the-counter derivatives opportunities that are very closely related but different show up in our nonrecurring index revenue, and there is also some portion in the recurring subscription revenue as well. So the geography there is just slightly different on the over-the-counter products.

That's really helpful color, and congrats on the solid results.

Our next question comes from Owen Lau with Oppenheimer.

So the retention rate was pretty strong at 94.4%, and fourth quarter is typically a weaker quarter for retention. Could you please talk about what drove that strength? Was it driven by a -- maybe a shift in client mix? Or was it driven by healthy capital markets? Any more color would be helpful.

Yes. So look, I think it's a mixture of things as in all these circumstances. We've clearly been continuing to invest in the quality of our products continuously. We've also been extremely focused from a client coverage point of view on client retention and put enormous amount of effort into making sure that we contact clients, that we monitor their use of our products, that we're regularly ensuring that they're getting value out of them. And so I think it's probably those 2 things. Maybe it's been a reasonably good environment, too, at the end of the year overall. But I think it's, for sure, I hope and believe both the quality of the products and the extreme client service focus on client retention.

Got it. And then on RCA, could you please give us some more update on RCA in terms of the pipeline and retention rate? And based on all the information we have in terms of like people may go back to office or working in hybrid and your conversation with clients, how do you expect the demand and retention of RCA in 2022?

Yes. So maybe just -- I don't know if we're giving out those exact numbers yet going forward, but maybe on a slightly higher level, we're really pleased with the integration process with RCA. We did some internal surveys, and the RCA team is extremely enthusiastic about being part of MSCI. We're in the process of integrating both what you can prudently call the front and the back office. And we're putting together a very clear, combined real estate go-to-market strategy. So, so far, everything is going well. And I think what we've got here to all the real estate clients, whether they were MSCIs or RCAs, really shows our commitment to both the asset class and the -- very shortly, I think we'll see a lot of cross-fertilization of content and data, which will give us even better client offerings.

Our next question comes from Craig Huber with Huber Research.

Question on pricing. As you know, historically, your recurring subscriptions in indexes, 2/3 of the growth there, historically, will be from volume, 1/3 from pricing. I'm just curious, in this higher inflation environment, are you still thinking pricing would be about 1/3 of the growth for this year or maybe roughly 4%? Or is there a little bit more of upside there?

Yes. So clearly, in everything we do, have enormous pricing power. That is undisputed at MSCI, and our clients understand that, too. For us, though, it's -- we also have a responsibility to ensure that our interests continue to be aligned with clients in the context of how we deliver value and how do we do price increases relative to the way they run their cost structure and their business. So we've been very prudent in terms of that balancing act.

Clearly, as we have been making enormous investment in the data that goes into the products, the tools are being refined. The models are being refined. The client experience is getting better. The resources on client service are much larger as I indicated just a few minutes ago. All of that means that we're giving higher value to clients.

And then secondly, as certain areas of our business have inflation -- higher inflation, particularly wage inflation, we're bound to be putting higher price increases this year than in prior years but in a way that is consistent to the approach we've always done in terms of never jump in the market, never abusing any kind of situation. We're trying to be constructive, at the same time being financially prudent and delivering -- and getting a return for the investment that we have made in a lot of our products.

And then my other question, please, on the index business for margins this year, assuming that the markets are roughly flattish, as I think you alluded to, that's your just basic expectation here. Do you think there's -- your margins there, you're expecting to hold them flat, maybe slightly up for the year. How should we think about margins in indexes, please, given all the investments you guys are doing there?

Yes. So you highlighted correctly our baseline assumption here is that markets remain relatively flat for the year. I would say our top objective is really investing in the long term, very attractive opportunities we see in front of us in index. We're not trying to solve for a specific index margin per se. We really are, as a top priority, trying to drive leadership in these key large big markets.

Just regarding more generally, your upturn and downturn playbook, it's a constant calibration. So it's not only based on where AUM levels are at any point in time, but it's looked -- it's based on the outlook, and it's based on the success we're seeing in the areas we're investing in.

We do have some self-adjusting expenses in comp and some discretionary areas that we can go to pretty easily. But generally, the last thing we want to do is impact those key investment areas. And so at any point in time, we may decide to pull back on expenses if the market goes down. But if the market goes up, we're likely going to start to invest even more in these very attractive opportunities. So it's tough to be more prescriptive than that, but I would say it's an ongoing calibration and something that we are continually focused on and having discussions around.

Let me also -- if you don't mind -- yes, let me -- Craig, let me also add that the -- when we say markets, remember that our asset-based business is completely diversified across geographies, whether it's Japan and Asia -- it's Japan, whether it's Europe, whether it's in the U.S., Canada, emerging markets, all that is diversified -- is highly diversified with respect to market cap indices, thematic indices, ESG indices, climate indices, et cetera. And it's diversified on our asset-based fees from the, what we call the institutional passive and the listed ETF products.

So when you look at the totality, we're assuming that when you put all of that together in the blender, that is going to be flattish. That's our base assumption. There is -- that doesn't mean that there is not a huge sector rotation, but if sourcing goes up and the other thing goes down, that there will be money flowing to the U.S. maybe from emerging markets or whether more money goes to ESG and climate and it comes out of other parts. So it's very important to recognize that this is not one market like the U.S. And it is -- the totality of the ups and the downs when we look at all of that.

So we're very comfortable that this is a conservative assumption in a year in which started with a lot of volatility, but hopefully, the fundamental earnings and economic growth, like we saw today in the U.S., will continue to improve and eventually set a framework for a more constructive appreciation of equity assets.

Our next question comes from Keith Housum with Northcoast Research.

Sales have been phenomenal this year, both recurring as well as nonrecurring. And I appreciate the investments you guys have made in new products and whatnot. But have you guys also made any changes in the sales force to help contribute to that and make this more sustainable in the long run?

Look, I think in a narrow sense, we haven't made any changes, but we have fantastic leadership in our client coverage organization. So I'd just like to call out Alvise Munari and his team who have done really an outstanding job across the globe. And it's just exciting to be around the organization because we have just really smart, positive, energetic leaders. I mentioned earlier that this is not only in sales but in client service and everything we do with our consultants to help our clients.

So I just think we've -- and we have made, as ever, in any client coverage organization, we've made some tweaks to how we approach certain client segments. We're very focused on senior client relationships, which as we have been for a number of years. So all those things bring cumulative benefits over time. But just across the board, I think we've got a great team. We've got great leadership. We've got people who are really committed, and that's what we're getting from it.

Got you. Appreciate that. And then just as a follow-up, you guys recently announced the strategic, I guess, alliance or relationship with Menai Financial Group. Can you provide a bit more color on the arrangement of that? Is that a partnership of any time -- of any type? Or how is that working?

So we have a large number of partnerships with experts in various fields, and so we are expanding our knowledge of areas such as biopharma or clean energy or disruptive technologies and the like. We have a partnership with a number of entities there. So with respect to Menai, that's one partnership, clearly, that we have announced with respect to blockchain and cryptocurrencies and the like. And we're not yet in a position to talk about the launch of any products. We are evaluating all aspects of that market and what value add can we bring, what opportunities for -- to serve our clients in the investment industry we can provide. So that's a continuation of our philosophy that we have had about building partnerships with subject matter experts in various fields.

That concludes today's question-and-answer session. I'd like to turn the call back to Henry Fernandez for closing remarks.

Well, as you can see and hear from -- as you can see from the numbers and hear from us and from the commentary, we continue to have enormous opportunities in front of us at MSCI. If anything, I've said it in a number of forums that in the 26 years since I created the company out of various product lines, I have not seen this level of opportunities ever. And I've always been bullish, as all of you know, in the development of MSCI and the opportunities that we have had, but we're just seeing it all over the place. And MSCI is becoming a central location where people come to us for a lot of ideas in terms of turning them into products and services for the global investment industry. So we're very much of a nexus of innovation and ideas.

So we will continue to capitalize on a lot of that incredible momentum with investments, in some cases, significant and heavy investment, in the Triple-Crown framework that we have created in order to have very high rates of return, fast paybacks and in areas of significant value. So our internal asset allocation is very demanding and very robust and, in some cases, they're brutal, right? We only go in those areas where we see very attractive opportunities. And we are very comfortable in the position that we're in right now and the expansion of the business.

So we thank you very much for your attention and for your support, and we look forward to speaking to all of you in various investor conferences sponsored by many of you.

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