MSCI - Q1 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the MSCI first quarter 2024 earnings conference call. As a reminder, this call is being recorded. This time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, Head of Investors and Treasurer. You may begin.

Jeremy Ulan (Head of Investor Relations and Treasurer)

Thank you. Good day and welcome to the MSCI first quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter 2024. This press release, along with an earnings presentation and brief quarterly update, are available on our website, MSCI.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements which are governed by the language on the second slide of today's presentation. Your caution not to place undue reliance on forward-looking statements which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements.

For discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, Baer Pettit, our President and COO, and Andy Wiechmann, our Chief Financial Officer.

As a final housekeeping item, we want to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?

Henry Fernandez (Chairman and CEO)

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the first quarter, MSCI delivered solid financial results that demonstrate the resilience of our business and our ability to maintain profitable growth supported by durable secular trends. Our operating metrics included some key product and segment milestones, but new recurring sales were flat from last year's levels and reflect the lagging effect of market pressures on client budgets, and cancels were meaningfully elevated in some concentrated areas. On the financial side, MSCI achieved organic revenue growth of 10%, adjusted earnings per share growth of 12%, and free cash flow growth of 14%. Meanwhile, our ABF revenue grew by 13%, powered by record AUM balances in both ETFs and non-listed products linked to MSCI indexes. We consider AUM levels in MSCI index-linked products as a leading indicator of improving client conditions.

Operationally, we delivered our highest Q1 recurring sales in analytics in a decade at $14 million, our best-ever Q1 of recurring sales among hedge funds at nearly $11 million, and another quarter of double-digit subscription run rate growth of 11% among asset owners, driven by index analytics. Non-recurring sales of $18 million were up 16%. At the same time, our first quarter results showed the lingering impact of market volatility, changes in interest rate expectations, and pressures on investment and financial firms, especially active equity managers. Notably, MSCI witnessed elevated cancels, which reflected a concentration of unusual client events. Roughly $7 million worth of cancels came from a single client event, a historic merger of two major global banks in Europe that affected us across index, ESG, and analytics. While some client pressures may continue, we do not expect this high level of cancels to continue.

In fact, we remain greatly encouraged by our high levels of engagement across all client segments and all geographies. Despite the tough Q1 operating environment for us, we deliver double-digit organic subscription run rate growth among asset owners, hedge funds, wealth managers, and corporates. Among asset managers, redemption, outflow, and fee pressures continue to weigh on some managers, but we were able to deliver 7% organic subscription run rate growth with that segment. In addition, we achieved 39% climate run rate growth across our product lines, driven by APAC and EMEA regions. Likewise, APAC and EMEA helped stabilize our ESG run rate growth at 12% amid continued headwinds in the Americas. Meanwhile, amid a strong U.S. dollar, the benefits of our non-dollar expenses help offset FX-related revenue headwinds. MSCI's all-weather franchise supports our financial resilience.

Our diverse mix of clients, products, and geographies helps stabilize our performance in difficult environments, as we experienced in the first quarter. Looking ahead, to the extent equity markets and high AUM balances and liquidity levels remain supportive, that should mitigate certain pressures that have weighed on client spending on MSCI products. We remain keenly focused on capitalizing on the biggest secular trends reshaping our industry, such as portfolio customization and indexation, the growth of and increasing allocations to private assets, and the global sustainability revolution. Just last week, we closed our acquisition of the London-based index provider Foxberry. This will give us a new technology platform to accelerate custom index production while providing simulation and backtesting capabilities for the creation of indices for institutional investors and intermediaries.

Turning to our other recent acquisitions, combining the Fabric platform with MSCI's factor risk models, ESG and climate data, and indices has dramatically enhanced our capabilities and solutions for the wealth segment. Finally, the MSCI Carbon Markets team, formerly Trove Research, has expanded our climate solutions and deepened our engagement with existing and prospective clients beyond institutional investors such as corporates, trading desks, and banks. Considering the lagging effect of market volatility that our clients and MSCI have faced, we expect our all-weather franchise to continue to withstand external challenges such as the client events we saw in Q1. This makes us confident that MSCI can maintain high levels of revenue growth and profitability in 2024 and beyond. With that, let me turn the call over to Baer. Baer?

Baer Pettit (President and COO)

Thank you, Henry, and greetings, everyone. In my remarks today, I will discuss some of the key sources of strength in our first quarter results at both the product and segment levels while putting our results in a broader strategic perspective. First, I would like to expand a bit on Henry's comments about our elevated cancels. As he noted, the vast majority of our first quarter cancels stem from client events such as industry consolidation, cost pressures, fund closures, and reorganization. Excluding the single client event from a bank merger, our Q1 retention rate across MSCI was 94%. Clients who use multiple MSCI product lines account for 85% of our total subscription run rate. The Q1 retention of those clients, on average, is 93% or higher.

Turning to our product and segment results, as demand for index investments continues to grow, the product ecosystem linked to MSCI indexes remains a competitive advantage, especially as more and more investors push for customized products. In the first quarter, assets under management in equity ETF products linked to MSCI indexes hit a new record high of $1.58 trillion, while AUM in non-listed products linked to MSCI indexes also set a record of $3.23 trillion. We also delivered index subscription run rate growth of 9.3%, including 12% growth in Asia-Pacific and 24% growth among hedge funds. The 24% subscription run rate growth in index among hedge funds was driven primarily by our Float Data product and custom index sales. Meanwhile, our custom and special index run rate growth was 19%.

MSCI's recent acquisition of Foxberry will further enhance our wide range of custom index solutions and provide a new client-centric interactive experience. The trend towards greater customization cuts across all product lines and client segments. For example, wealth managers increasingly want to customize their client portfolios using advanced technology platforms. That is what motivated MSCI's acquisition of Fabric, whose platform is now part of our analytics offering. Combined with our total portfolio toolkit, the Fabric platform has already boosted our ability to serve the wealth segment, and the feedback from clients has been extremely positive. Our run rate among wealth managers has now surpassed $100 million, growing over 15% year-over-year. The push for customization is closely related to another shift in the analytics space.

Clients have always depended on us for risk and performance attribution tools, but they now want highly specialized insights and deeply integrated content, all supported by leading-edge technology, including generative AI. Our Analytics team has met this demand through products such as our multi-asset class factor models, our Risk Insights and RiskManager solutions, and our MSCI One platform built on Microsoft Azure. As we have recently seen, these tools can become even more relevant amid market volatility, cyclical pressures, and geopolitical uncertainty. In the first quarter, Analytics posted revenue growth of 12% and our highest Q1 in a decade for recurring new sales. At the product level, recurring sales of our RiskManager tool were up by 60% and included a large strategic win with a major global alternative asset manager facilitated by our Risk Insights offering.

At the segment level, analytics achieved recurring sales growth of 27% among banks, 20% among hedge funds, and 15% among asset owners. Rising demand for highly specialized analytics tools intersects with growing client needs for climate and sustainability regulatory solutions. This represents an attractive opportunity for MSCI, and we have doubled down on our efforts to capture it. Our first quarter run rate growth for ESG regulatory solutions was 33%. To build on this momentum, we have enhanced our solutions for the EU Sustainable Finance Disclosure Regulation while developing a new solution for the Corporate Sustainability Reporting Directive, or CSRD. In addition, we will continue exploring untapped opportunities in APAC, where we achieved 18% ESG run rate growth in the first quarter.

In MSCI Private Capital Solutions, we achieved a run rate growth of 17% over Burgiss's performance in the same period last year prior to the acquisition and a retention rate of close to 96%. We had early momentum in EMEA, which accounted for over half of new client wins in the product segments. We continue to drive new recurring sales of key existing products such as private capital transparency data and Total Plan portfolio management. We're also making progress on our integrated product roadmap, including evaluated pricing for LPs and GPs, leveraging MSCI's data, models, and research. In summary, MSCI remains laser-focused on translating our long-term strategy into near-term delivery while harnessing competitive advantages and secular trends. And with that, let me turn the call over to Andy. Andy?

Andy Wiechmann (CFO)

Thanks, Baer, and hi, everyone. In the first quarter, we delivered double-digit organic revenue growth, 11% adjusted EBITDA growth, and 12% adjusted EPS growth. We delivered 10% organic revenue growth as well as record asset-based fee revenue driven by record AUM balances in ETF and non-ETF products linked to MSCI indexes. The solid financial performance highlights the resilience of our business model, even in the face of headwinds reflected in our operating metrics. As we have mentioned previously, we are seeing the impacts of a slow-moving business cycle, as the prolonged period of muted flows into active equity strategies have resulted in a lengthening of sales cycles and, in this quarter, a concentration of client events on top of what is typically a seasonally softer quarter for us.

To provide a bit more color, if we compare our cancels to the first quarter of 2023, the two product segments with the biggest increases were index and ESG and climate. Within index, nearly the entirety of the increase, or roughly $7 million of the increase, related to a higher contribution from corporate events. From a client segment lens in index, $5.2 million of the year-over-year increase in cancels came within the broker, dealer, and hedge fund client segments, including roughly $4 million from the previously mentioned large global bank merger. Similarly, within ESG and climate, nearly $4 million, or 80% of the increase in cancels, came from a higher level of corporate events, including $2.5 million from the large global bank merger event.

The large majority of cancels related to this global bank merger occurred in Q1, although there could be some smaller items that come through in future quarters as the integration is completed. Across all product segments, the retention rate with asset owners and asset managers was 95% and 97%, respectively. While we do expect some elevated level of client events to continue in the near term, we do not expect to see cancels continue at this level in the coming quarters, and we expect retention rates to rebound through the year. Additionally, we have a solid pipeline of new sales opportunities. In index, we had 8% subscription run rate growth in our market cap-weighted modules and 19% growth in custom indexes and special packages.

As a reminder, in Q2 of last year, we had a large non-recurring revenue item related to unlicensed usage of our indexes, which drove an unusually large level of non-recurring revenue. ABF revenues were up 13% year-over-year, benefiting from about $21 billion of cash inflows and about $93 billion of market appreciation so far in 2024 within ETFs linked to MSCI equity indexes. Most of the MSCI-linked ETF flows were in developed markets outside the U.S. and emerging markets products, which together were over $22 billion. In analytics, organic subscription run rate growth was 7%, which reflects the benefits from the investments we've made into innovations such as our next-gen models and our insights offering. These have helped us to drive strong sales and enterprise risk in multi-asset class models across client segments. We also had several client wins in fixed income analytics.

Analytics revenue this quarter included a large contribution from catch-up revenue items, much of which related to large client implementations. In our ESG and climate reportable segment, organic run rate growth was 13%, which excludes about $4.8 million of run rate from Trove and the impact of FX. Run rate growth for the reportable ESG and climate segment was nearly 18% within Europe and close to 22% in Asia, while the Americas' growth was 9%. In real assets, run rate growth was about 4%, with subdued net new subscription sales continuing to reflect lower transaction activity and other commercial real estate pressures. We continue to be pleased with our progress on the integration of Burgiss, which, as a reminder, is referred to as the Private Capital Solutions operating segment within our All Other Private Assets reportable segment.

Retention was strong at nearly 96% and contributed over $24 million of revenue for the quarter. We continue to have a vigilant focus on disciplined capital allocation, and our cash balance at the end of March was over $500 million, including readily available cash in the U.S. of over $200 million. Last week, we closed on the acquisition of Foxberry for approximately $22 million of upfront consideration. The transaction also has the potential for additional performance-related payments tied to the achievement of key milestones. Our 2024 guidance across all categories remains unchanged and assumes that AUM declined slightly in Q2 and rebounds gradually in the second half of the year. I would note that our first-quarter effective tax rate of 13.5% benefited from favorable discrete items and higher excess tax benefits recognized on stock-based comp vested in the period.

For the remainder of the year, we expect a quarterly effective tax rate of 21%-22% each quarter before any discrete items. Overall, our client centricity and multi-year investments position us well to drive growth throughout 2024, and we look forward to keeping you posted on our progress. With that, operator, please open the line for questions.

Operator (participant)

We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not unmuted when asking your question. We ask that you limit yourself to only one question at a time and queue back for any additional questions. Again, press star one to join the queue. Your first question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Kaplan (Executive Director)

Terrific. I wanted to talk about the closures. Thank you for giving the segment breakout for the large client event. It sounds to me like that is now in the numbers, but wanted to just confirm that there isn't going to be more. And just more in general around the non-UBS event, it sounded like maybe there were more closures of asset managers that you saw in the quarter. So do you expect that to improve throughout the year? Thanks.

Andy Wiechmann (CFO)

Sure. Hey, Toni, it's Andy. So on the large global bank merger, as we mentioned, the large bulk of the cancels related to that merger occurred in Q1. We did have some small items in previous quarters, and there could be some smaller items that trickle through as the integration continues later in the year. But we don't expect it to be anywhere close to what we saw in Q1 here. Just more generally, I would underscore that retention rates among asset managers and asset owners remain healthy, so at 95% and 97%, respectively. And maybe I can provide a little bit more color on the elevation in cancels that we saw in Q1 in addition to what I mentioned on the prepared remarks here.

So of the $7.6 million increase we saw in index, $7 million, so the large majority of that, came from client events or these corporate events that we alluded to, $4 million of that attributable to this global bank merger. Beyond that, we did see a concentration of hedge fund-related events, so strategy changes, closures, team departures. That all came together in the first quarter here. Similarly, the area that we saw, the other area where we saw an increase in cancels year-over-year was ESG and climate. And as I mentioned, 80% of the increase year-over-year came from higher level of corporate events, including $2.5 million from the global bank merger that we've been alluding to. And so there really was this acute bunching of events that occurred during the first quarter here.

As we alluded to, we don't expect this level of cancels to continue going forward.

Operator (participant)

Your next question comes from the line of Alex Kramm with UBS.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Yes, hey. Good morning, everyone. At the risk of almost asking the same thing, wondering in particular as it comes to the asset management end market, which is still your largest client set, what you are seeing and what gives you confidence that things are getting better? I mean, it sounds like markets are getting better, and that should be a leading indicator. But at the same time, it seems like you guys have historically said that you're doing really, really well with the largest asset managers, but there's a smaller set that I think continues to really struggle with flows and just the overall environment. So I guess the question is, why are you not worried that that smaller end of the asset management market is structurally challenged and could structurally hit you and that it comes back?

I mean, you talk to a lot of the clients all the time, so just wondering what you're hearing.

Andy Wiechmann (CFO)

Sure. Yeah. And so as we've mentioned before, Alex, budgets were set for this year last year when it was a tough environment. And so we are seeing the impacts of tighter budgets on sales cycles, buying decisions, and the overall selling environment on top of what is typically a seasonally soft quarter for us in Q1. As we've alluded to, we are seeing strong engagement among asset managers, and we are focused on helping them where we can, which means selling more to them. And so we continue to view them as a key opportunity for us and a key area where we see attractive growth as they reposition their business models for the future. And you can see that in the elevated growth in areas like our custom and special packages. And so we continue to have this steady growth of 8% with asset managers.

When you look at across the module types, we've got the outsized growth in some of these key areas that asset managers are moving towards. We would expect, as you alluded to, sustained momentum in equity markets to be a positive factor and be something that continues to be constructive to buying behavior. This has been a slow-moving cycle, and I think it will take some time to work through. I would also highlight that we see large and growing demand across other segments. We see that with new solutions and existing solutions, and we hope that'll continue to build as well.

Operator (participant)

Your next question comes from the line of Manav Patnaik with Barclays.

Manav Patnaik (Managing Director and Equity Research Analyst)

Thank you. Good morning. I guess my question is broadly on visibility, so maybe just a two-parter. First, all these elevated cancellations that occurred in the first quarter, when, I guess, did you guys know that was going to happen? How much in advance did they typically give you notice? And then similarly, looking ahead, you've talked about a lot of client engagement, selling them new business, but then you also talked about lengthening sales cycles. So maybe just your thoughts on when we could see these engagements convert to bookings and show a pickup in the numbers.

Andy Wiechmann (CFO)

Yeah. On the first point about visibility, listen, we do have some visibility into the overall level of activity. As we've alluded to in the past, we've been seeing some elevated levels of pressure from our clients, and we've been expecting an elevated contribution from client events. The exact timing of when they occur, we don't always know. We did not expect this type of concentration in the first quarter here. We had this bunching of cancels that ended up occurring altogether. As a result, we don't expect this level of cancels to continue going forward. We do expect some elevated level of client activity just given the environment. We are expecting retention rates to rebound through the year here and move more towards what we saw last year as we move towards the latter part of this year.

In terms of outlook on the sales side and visibility into the longer-term pipeline, listen, as I mentioned, we do have a solid pipeline. We've got solid engagement from clients. And at the same time, we are seeing just longer sales cycles and these budget constraints. And so to the extent and when the pressures begin to alleviate, that should translate through into, I think, encouraging growth for us. And as I alluded to in the last question, it's not just in our core products, but we do see opportunities in newer solutions that we have as well as in many of these client segments that are a little less exposed to some of the cyclical dynamics that we're talking about.

Operator (participant)

Your next question comes from the line of Alexander Hess with J.P. Morgan.

Alexander Hess (VP)

Yes. Hi. I was wondering if you could break down the growth and index subscription run rate year-over-year into sort of pricing, upsell, cross-sell, new business wins, and then maybe some comments, what you expect for those line items as the year progresses. Thank you.

Andy Wiechmann (CFO)

Sure. Sure. Hey, Alex. So on the pricing front, I would highlight that we—and we've alluded to this in the past—that we had a lower contribution on a dollar amount and on a percentage level from price increases within new subscription sales. It's important to underscore that we continue to be very measured with our increases. It is an important lever for us, and we do want to make sure we're capturing the value that we are delivering to clients. But we do factor in the overall pricing environment as well as client health. And so the contribution from price increase was a little bit more modest relative to what we saw last year. The balance of new subscription sales was largely related to what we would call cross-selling or upselling, so delivering more solutions to existing clients.

That is the bulk of sales in the quarter, and we believe a key to our growth going forward. So that strong engagement with clients is encouraging because we do believe we can continue to sell more to them. As we've alluded to, when you break down the components of growth here, we saw 8% growth within our market cap modules. We saw 19% growth in custom and special packages. We saw across client segments, outsized growth, continue to see outsized growth with asset owners and wealth managers, and very strong growth despite this bunching of some hedge fund events. Despite that bunching, we continue to see strong growth among hedge funds as well. So the growth is multifaceted, and I think many of the drivers of long-term opportunity.

Operator (participant)

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

Ashish Sabadra (Managing Director)

Thanks for taking my question. I just wanted to drill down further on the ESG and climate segment. I was wondering if you could talk about how some of the new regulations in Europe, particularly CSRD, could potentially help influence the demand for the products going forward. But also, have you seen any incremental headwinds of politicization of ESG in the U.S.? And lastly, on the climate side, how should we think about the growth momentum there? Thanks.

Baer Pettit (President and COO)

is a very important tailwind for us, notably in EMEA. But where it is the broadest and a variety of directives are coming in, which affect our clients. But it's also in many other jurisdictions. Notably, there's been news in Australia about the regulator being very focused on disclosure and ESG and climate. And I won't go through a laundry list of jurisdictions, but this is a very important continued driver for growth. And for sure, not merely is it not going away, but we see it increasing with new regulations appearing in different jurisdictions. And we're convinced that we can add a lot of value there. The second thing is we want to put a great emphasis that in our ESG, we're focused on financial materiality, which is not a political issue.

As we go into the rest of this year, and notably with our sales and marketing in the United States, we're going to be bringing this central to our communication with clients in the market. We're confident that we can bring a lot of value to investors with these types of insights. Those are my observations, both related to regulation and the way that we want to bring our ESG focus back to financial materiality where it started.

Operator (participant)

Your next question comes from the line of Owen Lau with Oppenheimer.

Owen Lau (Senior Analyst)

Good morning, and thank you for taking my question. So going back to slide nine, and thank you for putting together this slide. It mentioned that 85% of subscription run rate, subscribing to multiple product lines. Could you please talk about the historical pattern for this percentage? Has it been going up or down or relatively flat? Also, what does it take to increase the engagement with your clients to increase the product line from one product to, let's say, more than one? Thanks.

Andy Wiechmann (CFO)

Yeah. I would say, Owen, that we have historically seen outsized retention with our largest clients as well as those clients that are subscribing to multiple products. It's a key part of our strategy and has been a key part of our strategy for many years. As you're probably aware, we have had a more strategic selling effort with these large accounts. We have what we call senior account managers and key account managers across the organization where we engage holistically with them. And so we're engaging typically at the C levels of these organizations, talking to them about what their objectives are and how MSCI can help them achieve those objectives. And that not only leads to higher engagement and retention rates over time, but it also leads to additional selling opportunities. And so the beauty of MSCI is our solutions are interoperable.

We run an integrated franchise where our indexes are built on the same frameworks as our risk models and our ESG ratings and research. And so we can more effectively help these clients achieve their investment objectives over time and help them operate more efficiently. And so this strategic selling effort has been integral to that. And as you can see by the figures we put on slide nine here, it's critical to driving that higher level of retention and continued growth among these larger organizations around the globe.

Operator (participant)

Your next question comes from the line of Kelsey Zhu with Autonomous Research.

Kelsey Zhu (Financial Information Technology Analyst)

Hi. Good morning. Thanks for taking my question. I want to talk about custom index products for a second. So this segment saw a really strong run rate growth of 19%. Was wondering if we can get your thoughts around the total addressable market for this product and kind of medium-term run rate growth for this segment? Thanks.

Baer Pettit (President and COO)

Yeah. I don't have an exact number for total addressable market in front of me right now. But what I would say is that the range of use cases for customization is very broad. It ranges from asset owners of various different descriptions who require customized benchmarks for their portfolios. And in turn, those could be very different depending on the client type, whether it's an insurance company or a pension fund or an endowment. It then, of course, links to asset managers, both for those institutional mandates and for mutual funds. There is a very large market for structured products, which in turn is linked to our wealth segment strategy. So it's really the structured products where the investment banks are building products for wealth distribution.

When we look across the entire sort of ecosystem, this demand for customization is driven by different client types, different use cases, but also by different underlying ingredients. As we have more components, different asset classes, different types of content such as ESG and climate, and different types of strategies, there's a very large upside here. We're very excited by this. Our relatively modest-sized acquisition of Foxberry, which we think will be a great addition, is going to help us accelerate that by building on our sort of great industry quality and reputation with a nimble new software interface, which will help us bring product to market even faster.

Operator (participant)

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

George Tong (Senior Research Analyst)

Hi. Thanks. Good morning. This question is for Henry. Henry, can you discuss how you're strategically balancing reinvestments to support long-term growth initiatives with near-term margin performance? Specifically, to what extent do you believe MSCI will be entering a new investment cycle that could fuel strong pursuit of new growth initiatives at the potential expense of near-term margins?

Henry Fernandez (Chairman and CEO)

That's definitely the key balancing act that we face at MSCI every year. How do we balance continued high levels of profitability for our shareholders with investments that are going to drive significant revenue growth in the future? So the first thing that we do, George, is that the first thing we try to do is we try to keep the level of investments every year despite any headwinds. And we do that by creating even more efficiency and at some point hitting our compensation expenses to keep that high level of investment within the year. The second thing that we do is that we try to increase that level of rate of growth of investment on a year-over-year basis at a rate, say, double the non-investment expenses in the company so that we continue to feed the funding of significant growth opportunities we have ahead of us.

The third thing that we do is we believe that having short-term pressures and having short-term, meaning within a year or so, within a few quarters or a year, discipline of maintaining high levels of profitability is actually a positive, not a negative, because it helps us focus on the highest return investment, on the ones that are going to be paying off shorter term rather than long term, and making sure that the whole company is mobilizing to continue to do what we currently do, not what we're investing in, but what we currently do much more efficiently and much more productively. So that's kind of the balancing act. So I don't think that that's going to dramatically change given it's almost like a dual mandate. If you were the Fed, right? Growth, employment, and inflation is a little bit of that.

We have a dual mandate to maintain high levels of short-term profitability versus long-term growth. So now, there are outside possibilities that we have discarded. We're not going to run the EBITDA margin significantly higher in the company unless there is an incredible amount of money that flows through the P&L because of higher equity values in our index-linked products. And on the other hand, we're not going to meaningfully lower at all the levels of margins that we currently have. So that's the objective that we have so far. Thank you for that question.

Operator (participant)

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

Heather Balsky (VP)

Hi. Thank you for taking my question. I just wanted to piggyback on the last question and just ask you, as you think about areas of investment and areas where you'd like to accelerate investment to drive growth longer term, where are you most focused? What type of products, what segments of your business? Thank you.

Henry Fernandez (Chairman and CEO)

There are a number of areas. I mean, pretty much everything that we do at MSCI has a tail in its back and incredible long-term potential. We're very fortunate about that. Now, some things materialize faster in the short term, and some things are going to take a few quarters, maybe a few years to materialize in a big way. The first thing that we always focus on is the continual growth of our index franchise because despite what some people think about indexation, whether it's benchmark indexes to active managers, active equity managers, or the pace of growth of passive investing, we see enormous possibilities on derivative products, both listed options, listed futures, and structured products. We see enormous potential for non-market cap indices in ESG and thematics and climate and factors and all of that.

And now, we have a new wave of growth coming from direct indexing in wealth management, which is an ability to basically customize an individual's portfolio in a way that is scalable with indices rather than active management. And on top of that, that's the equity part. And on top of that, we see a lot of potential in fixed income indexation. So this is all part of the barbell in the investment world. On one hand, it's high levels of systematic investing in which index investing is part of that. And the other part is very high levels of active management, which obviously, private asset management is the most important one, but also concentrated portfolios and things like that. So that's where we're positioning the company. So we start with definitely index. Then we look at the next level, which is sustainability.

Within sustainability, ESG, obviously, but climate, we think ESG will continue to grow. ESG is not a political philosophy. It's not; it's an investment risk and investment opportunity. Period. No matter what people say, what people politicize it or whatever, is part of the fabric of investing as to how you're going to manage a portfolio with respect to all these factors in addition to financial factors and other market factors. So we're in a, obviously, down cycle on that given the political situation in the U.S., given the reset of regulations in Europe, but we're beginning to see significant growth of that in Asia. So that's a second component. The third component, which we're now positioning ourselves enormously, is our ability to be a large provider of transparency and performance and risk tools and benchmark indices and asset allocation, etc., in the private assets.

The biggest revolution going on in the world right now is private credit. It's going from balance sheet-driven things on the balance sheet of banks and the balance sheet of insurance companies to a fund structure. So if that revolution in private credit into a fund structure has an investor in it, whether it's an institutional or wealth management individual investor, they're going to need transparency tools. They're going to need. They're going to have to understand performance and risks and all of that, which will be a lot different than on the balance sheet of a bank or an insurance company. This is where we come in. Those are three big areas that we're focused on.

There are other areas that, obviously, our role in fixed income portfolio management is a big one, our role in providing even more tools on analytics insights, for example, into portfolios and climate risk within analytics. So those are basically the broad areas that we're focusing on on the product side. Of course, all of that has a huge corollary of the areas that we're expanding into the client side beyond active managers. As it was said before, you hear quite often, "The balance sheet of banks, the hedge funds, the corporates, the asset owners," and so on and so forth. So that is an area. Those are on the client side, we see enormous growth opportunities in the non-asset management segment. So that's a little bit of an overview.

Operator (participant)

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

Scott Wurtzel (Director)

Hey. Good morning. Thanks for taking my question here. Just wanted to touch on the basis point fees within the index segment and kind of seeing that steadily decline over the last few quarters. Are there any mixed dynamics there we should be aware of as it relates to the current market environment, and how should we be thinking about that basis point fee going forward? Thanks.

Andy Wiechmann (CFO)

Sure. Yeah. So we did see a modest decline in the basis points from the prior quarter from 2.50 down to 2.48 basis points. That was driven almost entirely by mix shift. Most of that resulted from a lower contribution of higher-fee international products and a higher contribution to AUM from lower-fee products with U.S. exposure. I would say there's nothing new to call out here. There can be some dynamics with AUM levels. And you saw this when AUM levels dropped. There was more stability in the fee. So there are some fee arrangements we have where the fees do step up at lower AUM levels and vice versa. They step down at higher AUM levels. And so that can be one small factor to point out, but I'd say nothing out of the ordinary or nothing new relative to what we've seen in the past.

We do expect over time fees to gradually come down driven by mix shift, although we expect the growth in assets and the tremendous opportunity we have across so many different frontiers to more than offset that decline, which is what we've seen, and as you can tell by the healthy overall ETF revenue contribution, but also the overall ABF revenue growth. And so I would highlight that within non-ETF passive, the fee dynamics have been much more stable there. And that's going back to the question about custom indexes. In the non-ETF passive category, that is an area where we see tremendous engagement and growth around areas like custom indexes. And many times, those can be higher-fee type mandates that we see.

Operator (participant)

Your next question comes from the line of Craig Huber with Huber Research Partners.

Craig Huber (CEO and Managing Director)

Thank you. Can you touch on AI and the benefits that you can see going forward here to benefit your products over time? You could potentially sell it at a significantly higher price point. What excites you on that front? And also touch on, if you would, the cost-cutting opportunity going forward on that front. Thank you.

Baer Pettit (President and COO)

Sure. I'll make a few observations on that. So I'll start with the first point, which is about efficiencies. So I think we prefer to see it as efficiencies rather than cost-cutting per se because a lot of our goal is to try to get things done faster and to reinvest a lot of that in these growth opportunities that we're talking about. But we're very focused on that aspect of things across a variety of projects that we have going on. So in turn, we're also working to apply AI in a variety of product areas. We have actually a launch coming up during the course of this quarter on analytic insights where we, in essence, take an enormous amount of complex data for clients, which they normally would have to parse through in rather inefficient ways and bring them direct insights using AI.

So I think that will just be the beginning of that. We have to really be focused on thinking about this in a competitive environment. And so as we go forward, I think the real benefit of AI for us is that we are a very data-rich environment, and our clients are always trying to get greater insights out of all of those capabilities that we deliver to them. And so in terms of new product development, that's where we'll definitely have more news during the rest of this year as we bring out, as I said, both in this quarter and quarters ahead, capabilities about bringing our clients greater insight and faster and differentiated calculations using AI.

Operator (participant)

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

Faiza Alwy (Managing Director)

Yes. Hi. Good morning. Thank you. I wanted to touch on capital allocation just given what the stock has been doing over the last year and more recently. I'm curious if your views on capital allocation have evolved and how you would prioritize share buybacks versus potential M&A opportunities and other things. Thank you.

Andy Wiechmann (CFO)

Sure. Yeah. So I'd say generally, our approach to capital allocation has not changed. So we pay a steady dividend that grows with EPS of the company. And then we look to generate value with excess capital and cash beyond that. And so we are continually looking for opportunities to do that. While we do monitor the market for potentially strategic, attractive MP&A, sometimes the best opportunity for us for creating value is investing in MSCI, so buying our stock back. And so we are long-term believers in the company and the future value. And so our approach to share repurchases has not changed. And we'll look to use available cash when we see attractive opportunities in the stock.

Operator (participant)

Your next question comes from the line of Russell Quelch with Redburn Atlantic. Russell, I think you're on mute. Your next question comes from the line of Greg Simpson with BNP Paribas.

Greg Simpson (Equity Research Analyst)

Hi there. I just wanted to check in on private markets. Can you talk about the run rate growth at Burgiss and if you think the 20% top-line growth you talked about for 2024 and beyond still looks on track, or are there any challenges in the sales environment within private markets? Thank you.

Andy Wiechmann (CFO)

Sure. Yeah. So as Baer alluded to, we saw 17% run rate growth in private capital solutions. I would say generally, our integration is largely on track from both a go-to-market and a technology and data infrastructure standpoint. We have seen encouraging signs in the areas where we think we can add value. So we've seen outsized growth in EMEA and getting good traction in Asia, so areas where I think MSCI can help on the go-to-market. I would say more generally, we continue to be optimistic about the long-term opportunity across private capital solutions and continue to see big long-term opportunities there.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Henry Fernandez, Chairman and CEO of MSCI.

Henry Fernandez (Chairman and CEO)

Thank you for joining us today and for those very insightful questions that you had. As we have said in the past, our operating structure at MSCI is to continue to be a long-term compounder of our earnings and our share price and our revenues and all of that. There is absolutely no change in our objectives to achieve that. Despite the operating environment challenges that we have had in the last few quarters, we remain confident in the secular tailwinds and opportunities that we see ahead and that will continue to power our business. The elevated cancels we experienced in the first quarter were as a result of a concentration of client events that we do not expect to continue at these levels in quarters to come. As we said, our level of engagement with clients is unparalleled. It's at a record high.

The level of things that they want us to do, solutions that they want us to come up with, is totally unparalleled, and it is increasing pretty much every day, every week, every quarter. Therefore, we are very committed in helping them achieve those objectives, whether it's capitalizing on opportunities or dealing with problems in their portfolios. Therefore, our all-weather franchise is pretty resilient, and it supports the business through good times and bad times. We would like to thank you again for joining us this morning, and we look forward to speaking with you in the next few days and weeks.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.