Good day, ladies and gentlemen, and welcome to the MSCI third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session where we will limit participants to one question and one follow-up. We will have further instructions for you at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Please go ahead and begin.
Thank you, operator. Good day, and welcome to the MSCI third quarter 2022 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter 2022. This press release, along with an earnings presentation we will reference on this call, as well as a brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the Risk Factors and Forward-Looking Statements Disclaimer in our most recent Form 10-K and in our other SEC filings.
During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to Adjusted EBITDA, Adjusted EBITDA expenses, Adjusted EPS, and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period 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 twelve 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 twelve months will differ from run rate. We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO, Baer Pettit, our President and COO, and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. With that, let me now turn the call over to Henry Fernandez. Henry.
Thank you, Jeremy. Welcome, everyone, and thank you for joining us today. In the third quarter, MSCI delivered another strong performance despite significant turmoil and dislocation in financial and commodity markets around the world. We posted organic recurring subscription run rate growth of over 14% and adjusted EPS growth of 12.6%. We achieved our best third quarter ever of net new recurring subscription sales, growing at 26%. In addition, our retention rate was 96.4%, up by 188 basis points from a year earlier. In terms of capital management, we repurchased another $235 million worth of MSCI shares through 24th October . For the year as a whole, our total share repurchases now stand at approximately $1.3 billion. This performance demonstrates the resilience and adaptability of MSCI's all-weather franchise.
There is no question that the global economy faces major headwinds. These headwinds have created challenges for all companies, including MSCI. Yet, they have also created a massive opportunity for us to differentiate ourselves and to show to both clients and shareholders the power of our all-weather franchise. At moments of extreme volatility and high uncertainty, investors become more reliant in high-quality data, insightful models, and relevant research. They want a clear blueprint for navigating choppy waters. MSCI's tools can help them design one. Indeed, our solutions take on even greater importance during periods of elevated global risk. In other words, this is the time when what we do best matters most, and we fully intend to demonstrate it. Our third quarter performance showed continuous strength across client segments and product lines. In Index, we delivered our highest subscription run rate growth in a decade at 12.6%.
The listed futures and options trading volume linked to MSCI indices increased by 21%. In Analytics, we achieved our highest retention rate ever at 95.9%. We also posted subscription run rate growth excluding foreign exchange of 97% in climate and 35% in ESG ex- climate. All of these numbers illustrate how MSCI is capturing key market trends. As the indexing trend continues beyond market capitalization indices, we are meeting investor demand for tools to support more customized and personalized portfolio construction and highly specialized outcomes. Likewise, as global economic pressures accumulate, we are providing the risk analytical tools investors need to stay ahead of the turmoil. Meanwhile, as ESG becomes increasingly mainstream, we are helping investors measure the full scope of sustainability risks, capitalize on sustainability opportunities, and achieve sustainability objectives.
For all the political noise and controversy around ESG, the simple fact is that sustainability risks are financial risks and will continue to be so. Investors know this. In fact, a recent PwC report found that 81% of institutional investors in the U.S., along with 84% in Europe, quote, "plan to increase their allocations to ESG products over the next two years," end quote. The same report projected that ESG-related assets under management will reach nearly $34 trillion globally by 2026, an 84% increase from 2021. It is important to underscore that as our ESG product line becomes more diverse with many different use cases and client types, ESG sales growth will naturally fluctuate based on market shifts, cyclical conditions, and regulatory development.
Right now, the world is simultaneously witnessing global energy and food crisis, the largest European war in almost 80 years, the biggest inflation surge in decades, rapidly rising interest rates, and COVID lockdowns in China, which continue to affect supply chains. At the same time, MSCI remains bullish on ESG long-term potential. If anything, the main factors driving ESG growth from greater environmental and social awareness to demographic shifts will become even more powerful in the years ahead. As for climate specifically, there is no turning back in the race to net zero emissions. While the global energy crisis has created new obstacles to decarbonization, policy makers continue to embrace bold green investment plans. Here in the U.S., President Biden recently signed the most aggressive climate law in American history. In Europe, governments enacted or proposed a wide range of measures that would speed up the low carbon transition.
This include more ambitious decarbonization and clean energy targets, policies to maintain or expand nuclear power, and a $5.4 billion hydrogen project. For our part, MSCI will continue building a robust and dynamic climate franchise. Two climate wins in the third quarter deserve special attention because they demonstrate our emergence as a leader in this area. First, the California State Teachers' Retirement System, CalSTRS, approved a plan to cut their portfolio emissions in half by 2030. To help them get there, they endorsed a proposal for 20% of their public equity assets to track the MSCI ACWI Low Carbon Target Index. This means CalSTRS will now have nearly $27 billion allocated to tracking that index.
Second, the New Zealand Super Fund announced that it had moved roughly 40% of its total investment portfolio to track the MSCI World Climate Paris Aligned Index and the MSCI Emerging Markets Climate Paris Aligned Index. That 40% translates into NZD 25 billion, or about $15 billion. Each win represents a milestone on our climate journey. As I have frequently said, MSCI aspires to be the number one provider of climate solutions to the global finance and investment industries. We recently published a net zero guide for asset owners outlining concrete steps for decarbonizing portfolios. We also hosted White House National Climate Advisor Ali Zaidi at our New York offices during Climate Week. That same week, we joined with the Glasgow Financial Alliance for Net Zero, or GFANZ, to help launch a proposed climate data public utility.
All of this has helped MSCI generate strong momentum during the run-up to COP27 in Sharm El-Sheikh, Egypt. In climate, ESG, analytics, index, and other areas, MSCI continues to benefit from our mission-critical solutions, our diversified client base, and our commitment to financial discipline. Right now, many companies are retrenching and turning inward. MSCI is doing quite the opposite. Even as we reallocate resources, we continue investing in key differentiators using our Triple-Crown investment framework. More than that, we continue to attract talent, pursue M&A opportunities, double down on client centricity, and reinforce our competitive advantages. All of this will help us emerge even stronger when the current market turmoil subsides. With that, let me turn the call over to Baer. Baer?
Thank you, Henry, and greetings everyone. As Henry discussed, the world is experiencing historic levels of economic, financial, and geopolitical turmoil simultaneously. Against this backdrop, we see not only big market and foreign exchange swings, but also geographic factor, sector, and asset rotations. At MSCI, our highly diversified product offerings continue to serve us well. For example, the benefits of our non-U.S. dollar expenses have more than offset FX related revenue headwinds. Likewise, the strong performance of our growing index derivatives franchise has helped offset some of the pressures related to AUM revenues. As we noted last quarter, MSCI has activated our downturn playbook, which means we continue investing in key differentiators while tightening expenses in less time-sensitive areas. This has allowed us to generate attractive financial returns and position ourselves to capitalize on opportunities when they emerge.
All of that represents essential context for understanding both our Q3 performance and our strategic priorities moving forward. Henry mentioned a few areas where MSCI delivered especially strong results, including index, analytics, and climate. In my remarks, I'd like to explore each of these areas in greater depth. In index, MSCI posted 12% subscription recurring revenue growth, our highest retention rate in more than three years, and our 35th consecutive quarter of double-digit subscription run rate growth. We also achieved market cap subscription run rate growth of 11%. The key driver of our third quarter index performance was custom indexes. MSCI has focused heavily on custom indexes in response to a broader industry trend. More and more investors favor differentiated, systematic, outcome-oriented strategies for which they need to design custom indexes.
Last week, for example, we announced the launch of Institutional Client-Designed Indexes, which will make it easier for asset owners to design customized indexes underpinning their investment strategies. Turning now to our analytics business. In the third quarter, analytics posted recurring net new sales growth of 73%, with strong numbers across products and client segments. In particular, analytics achieved robust growth with risk and equity models on the product side and with banks and hedge funds on the client side. At the regional level, analytics delivered its best run rate growth in the Americas in more than five years. With analytics, as with Index, MSCI Solutions help clients distill and interpret a huge amount of complex data quickly and efficiently. Last month, we launched a new analytics module known as Risk Insights, which automates many previously burdensome tasks and processes, thereby giving clients more time to focus on their analysis.
Risk Insights will make it easier for investors to transform raw data into meaningful, usable information with an integrated view of performance and risk. We consider it a timely launch given the high levels of market volatility and uncertainty. Finally, just a few comments about climate and ESG. As Henry mentioned, we posted subscription run rate growth excluding FX of 97% in climate, while also achieving a 97.6% retention rate. To put that last number in perspective, it represented a 456 basis point increase over our climate retention rate a year earlier. The largest portion of our run rate, Climate Metrics, continues to grow at over 60%, with exceptional growth in newer areas. For example, MSCI delivered over 125% growth from Climate Value-at-Risk, supported by our recently launched Total Portfolio Footprinting solution.
In addition, our ESG retention rate increased by 66 basis points to reach 97% overall. In September, we launched the Bloomberg MSCI China ESG Index Suite, which consists of nine separate ESG indexes. Collectively, they represent the first-ever Bloomberg MSCI Index Suite to track both the RMB-denominated bond market and the U.S. dollar-denominated Chinese bond market while incorporating ESG and socially responsible investment considerations. Last month, we expanded our index offerings by launching MSCI Fixed Income Climate Transition Corporate Bond Indexes, whose standards exceed the minimum requirements of the European Union's Climate Transition Benchmark. We continue to see strong growth with our real asset and analytics climate solutions, growing run rate by approximately 250% year-over-year, while our climate index solutions grew approximately 80%. We hope to drive additional climate progress through our recent minority investment in Evora Global, a British environmental consultancy.
By combining Evora's proprietary software with MSCI's climate models and indexes, we will further embed climate risk considerations in the real asset investment process. There is a common theme that ties together all these various products and partnerships. Simply put, MSCI is constantly finding new ways to meet the needs and expectations of global investors. We have proven our ability to adapt, innovate, and succeed even in the most challenging circumstances. With that, I'll turn the call over to Andy. Andy?
Thanks, Baer, and hi, everyone. The strong secular demand for our offerings and resilient nature of our business model fueled impressive results across the business. In addition to the 14.2% organic subscription run rate growth this quarter, we experienced double-digit subscription run rate growth excluding FX across all geographic regions, as well as across all major client segments. We recorded the highest third quarter ever for new recurring and net new recurring subscription sales, increasing 8% and 24% year-over-year, respectively, excluding the acquisition of RCA. Within Index, on top of the strength we see within our non-market cap modules, we continue to see remarkable resilience within our market cap index modules, which delivered 11% subscription run rate growth. This has been fueled in large part by tremendous demand within higher growth client segments.
Across the Index subscription franchise, we saw 18% subscription run rate growth from broker-dealers, hedge funds, and wealth managers on top of 10% growth from asset managers and asset owners. Asset-based fee revenues experienced declines in the quarter, with ETF and non-ETF passive fees impacted by declines in global market levels, somewhat offset by continued level of elevated volumes in futures and options linked to our indexes. ETFs linked to MSCI indexes experienced marginal net cash outflows in the quarter, resulting from outflows in broad-based EM exposure funds and all country products, two areas where the broader ETF market was muted. However, we continue to see inflows and high market share capture of flows into funds linked to our equity, ESG, and climate indexes, which captured $9.5 billion of the $13 billion of total industry flows.
Additionally, fixed income ESG and climate ETFs linked to indexes developed with partners and to our proprietary indexes witnessed nearly $7 billion of inflows during the quarter. Revenue from listed futures and options linked to MSCI indexes continued to provide a meaningful offset to AUM declines, growing 16% year-over-year. This growth has been fueled by elevated volumes that were in line with the last couple quarters. In analytics, the strong demand for our tools in the current environment helped drive 8% growth in subscription run rate excluding FX. We had 11% growth in recurring subscription sales, while also experiencing a 35% decline in cancels and the highest retention rate of all time in the segment. Recurring net new was up 73% year-over-year.
Within the segment, we continue to see strong momentum in front office equity and fixed income portfolio management tools, with strength in hedge funds and banks helping to drive the growth. Additionally, analytics continued to gain traction in our climate solutions, including Climate Lab Enterprise. In ESG and climate, we delivered subscription run rate growth of 42% excluding FX. Roughly 1/3 of recurring subscription sales were generated from our climate solutions, and the climate run rate across all segments reached $65 million, which is an increase of 89% from a year ago. Within our ESG and climate segment, emerging client areas including wealth managers, hedge funds, broker-dealers, and corporates collectively had run rate growth of more than 60%. We did see a lower level of new recurring subscription sales in the third quarter.
On top of changes in the broader market and economic environment, which is likely impacting purchasing decisions in some areas, there are many layers of growth in our ESG and climate franchise across a wide range of solutions and use cases, which results in a dynamic growth rate that's impacted by the pace of new regulations, client segment dynamics, asset class shifts, and geographic factors. Shifts in these layers of growth will drive variations in the overall segment growth rate. However, we continue to believe in the significant long-term secular opportunities and continued momentum. Within real assets, the organic subscription run rate growth was 12%, combining our legacy real estate business and RCA. Given the all-weather dynamics of our financial model and our ability to proactively manage the expense base, we were able to drive Adjusted EPS growth of 12.6%.
During the quarter, we continued to utilize our downturn playbook by further flexing our expense base to mitigate the impacts of the AUM-based headwinds. We are prioritizing key investment areas to address the most critical needs in this challenging environment, while meaningfully moderating the pace of hires in less critical and time-sensitive areas. Additionally, we continue to flex certain non-compensation expenses in areas like professional fees, and we had a slightly lower bonus accrual. In the quarter, revenue had a $12 million FX headwind from an appreciating U.S. dollar. This was more than offset by a $13 million FX benefit resulting from our global expense footprint. Additionally, our proactive capital management contributed $0.15 of the adjusted EPS growth, as we have now repurchased approximately $1.3 billion of our shares, or approximately $2.7 million shares year-to-date.
We ended the quarter with a cash balance of $867 million, of which approximately $600 million is readily available. We continue to be well-positioned to opportunistically pursue bolt-on M&A and share repurchases against this volatile market backdrop. Lastly, I would like to turn to our updated guidance, which we published earlier this morning. While we expect continued volatility, our guidance assumes generally flat market levels throughout the balance of the year. As mentioned earlier, we have continued to utilize more levers in our downturn playbook with a focus on moderating our pace of expense growth. Our downturn actions are reflected in our decreased operating and Adjusted EBITDA expense guidance.
It's worth noting that we remain consistent in our approach that the pace of spend may fluctuate up and down based on the trajectory of our asset-based fees, the performance of the business more broadly, and the global operating environment. We have modestly increased our range for depreciation and amortization expense, mainly reflecting a continued higher level of capitalized software development cost across products. Lastly, we have increased our net cash provided by operating activities and free cash flow guidance, which reflects the lower than originally projected tax payments and cash expenses in the second half of the year, as well as resiliency in cash collections. We have narrowed our tax guidance, which continues to reflect an expectation of a higher rate in Q4, in line with what we saw in Q3.
Across the business, we continue to see strong levels of demand for our products, which is underscoring the mission-critical nature of our tools. We are heavily focused on both driving the attractive runway of long-term growth while protecting the financial model of our all-weather franchise. With that, operator, please open the line for questions.
Thank you. We will now begin our question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question is from Manav Patnaik with Barclays. Please go ahead.
Thank you. Good morning. Can I just talk about ESG first? Can you just what was the climate specific run rate in the quarter? If you could just talk about the different pieces of ESG, kind of the growth rates and the trends you're seeing there.
Sure. Hi, Manav. Yeah, we did throw a number of climate metrics out during the call, so it's probably helpful to summarize them here. I'll start at the top. If we look across MSCI, so across all product lines, we had $65 million of climate run rate. That was growing at 89% year-over-year. If we look at just the subscription portion of the climate run rate, that was $46 million, and that was growing at 92%. That excluded between $19-20 million of ABF revenue from our index segment. If we look at the climate component in our ESG and climate segment, that's $37 million, and that's growing at 97% ex FX, as Henry and Baer alluded to in their prepared remarks.
Climate is becoming a more meaningful component of the overall business. It's clearly contributing a meaningful amount to the overall growth of the segment and the overall company, and we continue to be quite bullish on the prospects more broadly, across both climate and ESG.
Got it. Andy, you know, in terms of, you know, obviously your retention rates are high, your subscription growth is good. You know, if we enter an uncertain environment next year, just historically at what time lag or when do you start seeing the first signs of, you know, some of the pressure on those metrics?
Yeah. I think as you highlighted and we've seen the retention rates do underscore the fact that our tools are very mission critical to our clients, and they're in areas of long-term secular growth, which is clearly driving some resiliency. You can see that in not only the overall retention rate, but the fact that it's close to record levels across all areas. Although as you pointed out, and I've mentioned in the past, in past downturns, when we've seen a few, I'll say to several quarters of sustained market pullbacks, we do tend to see a pickup in client events like fund closures, desk closures, restructurings, mergers. Client events like that tend to pick up, and our largest source of cancels is client events. We are proceeding with caution here.
We're definitely excited about the high retention rates, but given past performance, what we've seen in past downturns, we could see a pickup in cancellations if this environment persists.
Got it. Thank you.
Thank you. The next question will come from Alex Kramm from UBS. Please go ahead. Sorry about that. Looks like Alex may have just disconnected as he was being promoted into the queue. We will move to the next question, and that is from Ashish Sabadra with RBC Capital Markets. Please go ahead.
Thanks for taking my question. We saw some pretty good improvement on the analytics front as well. I was just wondering if you could talk about what you're seeing from a deal pipeline perspective. Have you seen any change there? Any elongation in the deal sales cycle? Any color on the momentum in the business? Thanks.
Yeah, thanks for the question. Look, I don't think we've seen anything dramatically different, to be honest. I think this is consistent with the messaging we've had, you know, for some time now. I think our level of execution is strong. You know, as Andy mentioned, you know, the retention rate shows the criticality of our products. You know, I think we're really in a mindset of letting the numbers speak for themselves and continuing to execute with our strategy. Hopefully we'll keep moving things in this direction. You know, I don't think there's been any really material changes in the outlook. It's more that we're doing a good job, we're enhancing our products, we're servicing our clients, and I think we're getting, you know, the results for that.
That's very helpful color. Maybe just a quick follow-up on the private assets side. Again, pretty strong momentum there as well. I was wondering if you could talk about the RCA now that that acquisition has anniversaries. What have you seen on that front and overall?
Sure.
Just demand for private assets? Thanks.
Yeah, absolutely. Look, we're definitely on plan with the integration, and we're pleased with how that's going. We're definitely, you know, more convinced of the strategic logic of the acquisition than ever. As you say, you know, the top line is growing attractively. Clearly, you know, the environment for real estate is gonna be interesting, in quotes, across the world. There will definitely be, you know, different types of challenges depending on the segment and the country, etc . But I think in that environment, you know, thematically, in keeping with the comments we've made across the board, our tools are very necessary for people to understand risk and performance and what's happening in the market. I think we're, you know, in a good situation.
We're executing well, and the only slight caution there is just the environment which, you know, could get a little bit jittery.
Thanks again, and congrats on solid results.
Thank you. The next question will move back to Alex Kramm with UBS. Please go ahead.
Yeah. Hey. Hey, guys. Thanks. Sorry, my phone turned off in the middle of a question. Great. Anyways, sorry if this was asked already since I was off, but on the ESG and climate sales, you obviously proactively addressed that, and I understand it can be lumpy and obviously had tough comps too, but can you actually talk about what areas maybe saw outsized weakness, in particular this quarter and why? I know it was a tough quarter, in particular at the end of the quarter with markets selling off. Just wondering if there's anything that in particular slipped that may pick up again in the fourth quarter. Any color there would be helpful. Thanks.
Yes, sure. Let me try to provide some perspective and I'll give a little bit of color on what we saw in the quarter. I do want to start by underscoring that we remain very bullish on the long-term potential for both climate and ESG. I think the factors that have been driving the growth will remain powerful in the years ahead. As you can tell by the climate growth rates that were mentioned in the prepared remarks, and I underscored to an earlier question, we continue to see very strong growth from climate and expect climate to be a larger and larger contributor to the overall growth of the segment. Now within ESG, we did have softer sales in the quarter relative to recent quarters.
Realistically, there probably is some cyclical impact from the environment and the market backdrop. We saw some deals taking longer to close, and we did see fewer large deals in the Q3 figures. We did see slightly higher declines in sales outside the U.S. in EMEA and APAC, although the run rate growth continues to be quite high across all regions. I think as we touched on in the prepared remarks, I do wanna underscore that there are so many layers and dimensions to growth in ESG and climate, which I know, Alex, you know. We've got a wide range of solutions serving climate objectives, ESG objectives, as well as a wide range of users and use cases.
The result is going to be that the growth rate will fluctuate up and down based on pace of new regulations, client segment dynamics, asset class shifts, various geographic factors, as well as the market and economic environment. I do want to underscore that there have not been any impacts from the U.S. political rhetoric, that's gotten a lot of attention recently. I think generally the focus on ESG and climate remains front and center to investors globally.
Right. Helpful. Just very quick follow-up, staying actually on the ESG and climate topic, but if my math is right, since you're now providing some incremental data here, I think that the climate and ESG portion analytics is $7 million this quarter. I think very nice increase there too. Can you just remind us exactly what's getting picked up in analytics now? Any way to think about the TAM for that or how penetrated you are? Again, it's a very small number, but clearly you have a pretty diverse analytics customer base. Just wondering how we should be thinking about, you know, those opportunities in particular in that segment. Thanks.
I'd say, like in everything we do, our capabilities across segments are symbiotic and synergistic with the other segments. Within analytics, we not only benefit from the ESG and climate franchise that we've built, but we're also helping to fuel it. Within the segment, within climate in particular, the main offering that we have is our Climate Lab Enterprise, which we've released very recently. I believe it was late last year. That has grown at an attractive growth rate, although off a very small base.
That is feeding off the broader portfolio and risk management solutions that we offer, where when we have a client's portfolio, we can now provide very granular climate insights to them about the portfolio, help them manage climate risk more systematically across the portfolio. We also have within the analytics segment a broader range of reporting solutions, so we can help clients with things like their TCFD risk sensitivities that they will do as well as help with various other reporting requirements. Analytics does have a very powerful reporting function and capability, which we've provided to clients across broader risk insights for quite some time. We're leveraging that to generate climate risk reports as well as broader ESG risk reports and broader ESG reports.
Those are probably the main areas I would highlight within analytics. Listen, it's still to your point about TAM, we're still very early in that journey. Our penetration's relatively small. It's actually extremely small. If we extrapolate across the entire analytics client base, it can be a massive opportunity. The other thing that's exciting is it really opens up some of the client segments and parts of clients that we haven't served with the existing analytics solution. It's helping us with insurance companies. It's helping us with banks and bank regulation. There's some big wallets and big markets that we're very excited about on the climate front within analytics.
Super helpful. Thanks, guys.
The next question will be from Toni Kaplan from Morgan Stanley. Please go ahead.
Thanks so much. As usual, you guys have done a great job on expenses, and I know you called out maybe using less professional fees or, you know, being able to flex the bonus accrual and also sort of the less time-sensitive investments. I guess I think of you guys as a really efficient, lean organization. I know you're not gonna cut back on the growth investments that are really meaningful. Like, I guess how much room is there on the expense side within the downturn playbook, I guess?
Yeah. It's a fair question, Toni, and it's something that we are spending every day thinking about and proactively managing the business. I do wanna underscore, just to provide some context on the directional moves on the downturn playbook, some of the shifts that have happened since our last quarterly call. I think during our Q2 earnings call, we had mentioned that the guidance, expense guidance was based on the premise of flat to slightly increasing markets. During Q3, we had the downward impact from market depreciation of over $100 billion on ETF AUM. The market has come down below what we projected or at least what our guidance was based on during the Q2 call. As a result, we've begun to take further actions in the downturn playbook.
It's really mostly in the same areas that we were focused on previously, just to a larger degree. We're further slowing the pace of hires in a broader set of areas, in particular run-the-business activities, areas like corporate functions. We are continuing to, as you mentioned, prioritize hires in really our key growth areas and Triple-Crown investment areas like ESG and index, custom index capabilities, or fixed income content and capabilities, key data and technology enhancements, particularly in areas like ESG and climate data, as well as the broader technological infrastructure and on the cloud. We continue to preserve investments in key areas within our go-to-market, so our sales and client service organization.
We are clamping down harder in running the business areas and even in selected areas in the broader franchise. You alluded to on the non-comp side, we are squeezing further on professional fees, areas like T&E and recruiting, which actually comes down naturally with the pace of hiring. Our comp accrual is lower. We do have further levers to go to. Hopefully, we don't have to, but clearly, based on the comments I just made, there are areas where we can stop hiring more dramatically. We could cut into the investment portfolio. Things like the comp accrual naturally adjust with the direction of the business. There are additional levers out there if we need to go there. Hopefully we don't need to.
Generally, we are being cautious though, and our outlook is cautious, which you can tell by our comments and our guidance here.
Let me add to that, Toni, if you don't mind. In addition to all the things that Andy said, one of the things that we're obsessed with is protecting as much as we can the new investment plan. You know, therefore what we're doing is squeezing and reviewing time and time again all the normal run the business activities to lower expenses and protect profitability and protect the investment plan.
If you look back at, you know, if you were to look back at our budget from the end of last year to the new investments that we were planning to make in 2022, that total investment plan is only off by $2 million, which is an incredible achievement in the context of this difficult environment that we've been able to protect the vast majority of that investment plan. We surely have made some tweaks about reprioritizing, you know, that total investment plan, but in general, we haven't cut it back. We believe strongly that in down markets, that's where companies slow down their long-term growth because they cut back easily on their investment plans rather than doing the hard work of cutting back on the run rate, you know, the usual run-the-business activities.
That makes a lot of sense. Wanted to ask my follow-up on pricing. How is it running this year, and what are your plans for 2023? Are you seeing sort of clients watching spend really closely just given the environment? I imagine a lot of those conversations are sort of taking place, maybe, you know, right now. Just wanted to understand the outlook for pricing for next year.
Yeah. I'll talk generally, not specific to any year or point in time, but I would say in an environment like this where cost and prices are going up, we are generally increasing prices more than we have in the recent past. Given that our tools are really mission critical to our clients, we do have some pricing power in many parts of the business. Although as we've mentioned in the past, we are very focused on the long-term relationships we have with our clients and recognize that most of our growth is going to come from our existing clients. We are heavily focused on adding value in connection with any price increases that we are rolling out.
Our approach to price increases more generally is factoring in the value that we're adding to existing services that we're delivering to clients. It does factor in our broader cost structure, the broader cost environment, the broader pricing environment, as well as client health and client usage. We are being measured and being mindful of the health of our clients, but I'd say generally across products, we are rolling out higher price increases than we have in recent years. As a result, you've probably seen some impact of that in the Q3 recurring sales relative to a year ago, and we expect probably similar benefits in the next couple quarters.
Perfect. Thanks.
The next question is from Owen Lau from Oppenheimer. Please go ahead.
Good morning, and thank you for taking my question. If the market recovers in the fourth quarter, how do you think about your bonus and other non-comp expense? Would you kind of give back some of the bonus back to the employees, or you would stick with your downturn playbook, because you try to be more conservative? Thank you.
Yeah. I don't wanna be too prescriptive here because it really depends on the facts and circumstances. On the bonus point, I would underscore the large majority of the bonus accrual is formulaic, and so it depends on the performance of the business. To the extent the business performance increases, in particular if asset-based fees run up significantly, that will just trickle through how we accrue our bonus, and our bonuses are paid out, which is tied to the key financial metrics of the business, and the bonus accrual would likely go up.
Across broader levers, listen, it depends on the exact situation, but non-comp and comp areas in particular, we can flex those pretty quickly up and down, where things like professional fees and other non-comp areas, you know, can flex up a little bit in pretty short order. The comp lever does take a little bit more time to trickle through, and start to have an impact. That depends on pace of hiring, new hires, et cetera. I'd say the bonus and big portions of the non-comp levers that we have can flex in pretty short order.
Got it. That's helpful. I think you mentioned climate was strong in this quarter, and then options and futures trading volume was also strong. Could you please talk about, do you see any other product that you saw a pretty strong demand in the quarter? Thanks.
Yeah. The other area that I would highlight, and Baer mentioned this, is analytics. I think there's been a component of the strength we saw in analytics sales that's attributable to focus on our risk models and broader risk management tools in these environments, which, you know, are critical to helping our clients navigate the market uncertainty. A lot of the asset class, geographic sector shifts and rotations that are taking place. That would be another area that I'd highlight here. I would also highlight the extreme resilience of our index subscription franchise as well. I think there's just such a plethora of use cases across many different users and client segments.
There continues to be strong pockets of demand, and use cases for those products, particularly in areas like over-the-counter derivatives, that can be very useful to our clients in these types of environments.
Got it. Thank you very much.
The next question is from Faiza Alwy from Deutsche Bank. Please go ahead.
Yes. Hi, good morning. I wanted to just drill down a little bit more on climate, and wanted to ask if you're envisioning from here sort of an inflection in terms of the size of the business, given, you know, the broad-based focus around climate. Like, are there, you know, is the regulatory environment such that, you know, again, we may see that type of an inflection? And maybe as you answer that, talk to us about your, you know, specific competitive advantages, within climate. I recognize that you have, you know, many different areas, but, curious where you think you're best positioned.
Sure. Thanks for that question. As we have previously said, climate change is a complete existential threat, you know, to the planet. We're witnessing the huge increase in physical risk, you know, in heat waves and floods and fires and hurricanes and all of that. Therefore, this is gonna be a clear and present danger for portfolios of all types, you know, around the world, because clearly the portfolios are made up of equity and fixed income and property and infrastructure and all of that will be affected by both the physical risk and the transition risks associated with climate change.
We're in the very early stages of the demand for tools for portfolio managers and portfolio allocators, you know, to decarbonize their portfolio and protect their assets from repricing of assets, higher cost of capital and reallocation of capital. We think that this $64 million or so across all of our areas will continue to increase pretty rapidly, you know, over the years to come.
We're positioning ourselves not only in terms of the underlying climate data, so just, you know, carbon emission estimates for companies and bond issuers and, you know, private companies and real estate, you know, exposure and all of that, but also the models, the value at risk models, the Implied Temperature Rise models, you know, to try to help people project into the future what decarbonization paths of their of the assets in their portfolios are. We're very bullish on this Total Portfolio Footprinting process.
Basically, what we do is we take the total portfolio of an asset manager or an asset owner and tell them what the current footprint of carbon emissions of the entire portfolio is, it's Scope one, it's Scope two, it's Scope three, and what the trajectory of that footprint will be in the next three to five years or five to 10 years. This is gonna be in extremely high demand.
I think that the Ukraine war, you know, Putin's war in the Ukraine has highlighted even more so energy security and the dependence on the energy from other sources. Even though in a short-term basis have had enormous increases in fossil fuel prices, you know, every country is thinking about their energy dependence, and the easiest, you know, way to achieve energy independence is by wind and solar that is in your own land, in your own country, and the like. I think we're gonna see tremendous. Yes, there is an inflection point that is happening last year, you know, with COP26. This year with COP27, despite the clearly the balancing act between fossil fuels and renewable energy.
Great. Thank you so much for that. Just to follow up maybe for Andy on capital allocation. You know, so far, it seems sort of share buybacks have been the priority. I'm curious how you think about that in a rising rate environment, and how much of a focus is M&A from here.
Yeah, I would say generally no major changes to our approach. We continue to be highly focused on both repurchases and opportunistic bolt-on M&A in key strategic growth areas for us. To your point about the changing funding markets and cost of capital, I would say that we are watching the markets closely, being very mindful of what that means for valuation and trying to be quite opportunistic about where we take advantage on the repurchase front and acquisition front. I'd say given where our gross leverage is and where funding costs are, we're probably not in a rush to raise additional debt. We do think we've got a good amount of cash, and we'll continue to build cash to continue to be opportunistic here on both fronts.
We think there are opportunities to get, either bolt-on M&A or repurchases at attractive long-term values.
Got it. Thank you so much.
The next question will be from Craig Huber from Huber Research Partners. Please go ahead.
Yes. Hi. In the past, you guys have talked about how you thought your climate run rate over time would exceed the rest of ESG run rate. I wanted to ask if you still believe that. Back to the prior question, wanted to hear a little bit further about sort of the mission-critical tools and data you have on the climate side that make you guys stand out that your competitors do not have that help fuel that growth in your climate area.
No, great question, Craig. Over a 10-year horizon or so, you know, we believe that climate tools per se, not just climate in the context of ESG, but I'm talking about climate tools separately from what's embedded in the ESG offering, will grow at a very large clip and could potentially, you know, exceed the run rate of ESG at that time. Obviously, talking about long-term projections here, that can vary, you know, year to year and is hard to say where they end up. The reason we say that is to highlight the climate tool opportunities, right?
The climate tools, the climate solutions by MSCI, that's, you know, because we're pairing it against a fairly rapid growth rate on ESG that will continue, and we're saying, you know, climate per se could even exceed that, you know, that incredible business that we have in ESG. The competitive advantages we have is that, remember, the mission of MSCI is to provide mission-critical tools for the investment and finance industries. So a lot of our competitors are focused on developing, you know, climate data, for example. Some of our competitors are only focused on physical risk. Some other ones are focuses on transition risk. Some of them are only focused on the real estate, you know, industry. Some of them are focusing on corporate bonds.
What you will find in MSCI is a holistic solution to your entire portfolio from one source, one source of data, one source of models, one source of the total portfolio, whether it's, you know, private equities and private credit, which we're doing an incredible amount of work on climate emissions and, you know, carbon emissions and things like that. I think the benefit, and you can have that in an index, you could have that in a model, you know, you could have that in individual securities. Maybe as I said, you could have it across, you know, different asset classes and the like. I think this is completely in keeping to the way we do and manage MSCI.
Andy, I have a quick housekeeping question. What percent of your costs right now are outside the U.S., and what percent of those are billed in U.S. dollars? Follow-up question real quick is, what is your organic ex-currency cost growth in the third quarter year-over-year, please? Thank you.
Sure. Yeah, it's a good point. Just taking a step back, we have this nice natural P&L hedge related to FX. On the revenue side, I believe it's around 11 or 12% of the revenue base is in non-USD currencies. It's about 45% of the cost base is in non-USD currencies. Just given the relative sizes of those bases, the revenue base and the cost base as well as the mix of currencies within them, they tend to move in parallel. We saw in the current quarter, on the expense side, we had close to a $13 million benefit from the appreciating U.S. dollar relative to a year ago. That more than offset the $12 million headwind we had on the revenue side.
It's a good example, and you've seen that in recent quarters where we do have this natural P&L hedge where any impact from currency fluctuations on the top line tends to be dampened or offset almost completely by movement on the expense line.
Great. Thanks, guys.
Thank you. The next question is from George Tong with Goldman Sachs. Please go ahead.
Hi. Thanks. Good morning. The analytics business posted a new high in retention rates. Can you unpack the drivers behind the improvement and discuss how high retention rates can go?
Yeah, I'd say we are encouraged, really encouraged by the performance and the retention rate in analytics. I think as I alluded to earlier, there's probably been some benefit from a heightened focus on risk and risk tools in this environment. We're also seeing success in many of the areas where we've had a strategic focus. We've seen strength in front office equity and fixed income risk models and broader portfolio management tools. We've been benefiting from our strong models, really best-in-class models and content enhancements that we've been making, as well as the broader improved functionality and tech-enabled access that we've been investing in. We've had success on the enterprise risk side through the partnerships that we've developed just to deliver a broader value proposition to our clients.
As we talked about earlier, while it's still early days, we're seeing some real momentum in the Climate Lab Enterprise offering. We're encouraged, although I would say we are cautious and we're definitely not ready to declare victory. Analytics will likely continue to experience some lumpiness in not only its growth, but I'd say cancellations within analytics. We're cautious but very much encouraged. Analytics is not only a key strategic capability for us as a firm, but it's also a critical financial area for us, and this performance is encouraging. You can see in the margin and the profitability growth, it's been a great source of operating leverage that can help fuel investments in other parts of the company as well.
Got it. That's helpful. You raised your free cash flow guidance for 2022. Can you walk through the moving pieces there if that's being driven primarily by lower expenses or if there are also working capital and CapEx benefits?
Yeah. I mentioned this in the prepared remarks, but it's mainly driven by a few factors. We had a larger than projected benefit from lower tax payments in the second half of the year. We've also seen, as you know, a decrease in cash expenses. And then we've had some higher yields on cash, and we've also seen some resiliency in collections. All of those factors have helped offset some of the revenue headwinds that have pressured a bit on the collection side. That was the real essence behind the increase in the free cash flow guidance. I would say, like our profitability more generally, our downturn actions also help support our free cash flows and free cash flow growth.
Free cash flow is a very important metric that we're very focused intensely on.
Great. Thanks for confirming.
The next question is from Gregory Simpson with BNP Paribas. Please go ahead.
Hi. Good morning. Thank you for taking my questions. The first one is in analytics. The EBITDA margin was 47% this quarter and 44% last quarter. It was more in the 30s historically. Could you share any colors on the drivers of margin expansion or whether this level of profitability is sustainable in the segment?
Yeah. You know, there's several factors that have been driving the margin expansion in analytics, and I think we've seen similar dynamics in particularly the last quarter. I would note that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our Risk Insights and Climate Lab Enterprise and broader enhancements to our analytic capabilities. I would say that FX has a big impact just given the size of the analytics cost base. The non-USD expense base that I alluded to in a prior question impacts analytics heavily. The appreciating U.S. dollar has helped drive the analytics expenses down. Our downturn actions have impacted the analytics expense base.
The confluence of all those factors has driven this really very modest expense growth in analytics and a higher margin within the segment.
Thank you. Just to follow up, can you share some thoughts on the potential impacts on MSCI if we started to see signs of headcount reductions across the asset management industry? How much of the subscriptions are tied to user numbers relative to more enterprise deals with an entire firm? Thank you.
Most of our, I'd say most of our agreements are not tied to users per se. They tend to be modules that are licensed, and it varies very much on product. They tend to be either modules licensed to office location for use of specific products. There can be max users that are allowed to use that license, but they're not tied to seats per se. We also do have some, as you're alluding to, more enterprise-type licensing arrangements. Seat count is not something that impacts us necessarily directly. Although, as I alluded to in my answer to an earlier question, when you start to have more client actions, including investment firms downsizing, closing funds, closing desks, consolidating, that will generally cause an increase in cancellations and a drop in the retention rate.
We've seen those sorts of impacts as downturns are maintained for several quarters in the past. We are proceeding cautiously, although we haven't seen it to this point.
Great. Thank you.
The next question is from Russell Quelch from Redburn. Please go ahead. Russell, your line is open. Please proceed with your question.
Sorry, my headset.
Welcome.
Seems to have given up, so I'll switch to the phone. Hopefully you can hear me.
Yes, we can. Thank you.
Thanks very much. Given the 10% quarter-over-quarter fall in average AUM and ETF tracking MSCI indices in the quarter, I just wondered why did the period end basis point fee not step up in the quarter? I'm just trying to understand the mechanics there.
Yeah. Maybe if you're asking about the run rate basis points that were quite resilient, actually the run rate basis points have remained constant at 2.52 basis points. I'd say there were just very small mix impacts and fee impacts which resulted in pretty strong resiliency in the fee which we've seen in recent quarters. It's something that is encouraging to us. I wouldn't flag anything too notable around it.
Yeah, just wondering if it should step up when the AUM steps down. That was more the question.
I see. Yeah. Well, listen, we've got a wide range of products out there that are licensed to our indexes under a wide range of agreements with various providers. To your point, there was some small negative mix impacts on the fee and some very small positive impacts from fee, and those fee impacts were driven by certain products dropping into lower AUM bands where we receive a higher fee. There was some embedded impact from that in the fee, but it wasn't significant. I wouldn't overplay that.
Okay. Okay, that makes sense. Just as a follow-up, are you seeing increased competition in the custom index space? If so, does that change your expectations for growth and investment in that business area?
Look, I don't think we're seeing increased competition. I think it's been a competitive market. It's hard to judge precisely, but for sure we feel our competitive edge is rising. We're putting significant investments into it, and I think this is both, it's on two levels. It's on strategic client relationships, of the kind that win us those sort of big index wins in climate that Henry alluded to in his prepared remarks. It's understanding the client's investment process, and it's also the methodology and the skill in the investment process. Finally, it's the technology platform behind that. I think in all of those areas, on a relative basis, we're building competitive strength, but it's a very competitive market. I think we're really focused on it and forging ahead.
Okay, good stuff. Thanks very much.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Henry Fernandez for any closing remarks.
Well, thank you for joining us today and your continued support. As you can see from the results this quarter and our prepared remarks and the answers to your questions, you know, our all-weather franchise continued to perform well despite a very significantly difficult operating environment. We truly remain excited about the very large opportunities in front of us, and we'll continue to invest significantly in those areas of significant and strategic growth. Having said that, you know, given the environment, we do remain cautious. It is in times like this in which MSCI shines, we intend to continue to do so. We look forward to a lot of your questions in the coming days or weeks or months, and please don't hesitate to reach out to our team with any thoughts or questions you have. Thank you very much.
Have a great day.
Thank you, Sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.