Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2021 Earnings Conference Call. At this time, all participants are in a 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 Sallie Schwartz, Head of Investor Relations and Treasurer. You may begin.
Thank you, operator. Good day, and welcome to the MSCI First Quarter 2021 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the Q1 2021. This press release, along with an earnings presentation we will reference on this call, as well as a brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains 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 ks and in our other SEC filings. During today's call, in addition to results presented on the basis of U. S. GAAP, we will also refer to non GAAP measures, including, but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, The actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenue. Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are Henry Fernandez, our Chairman and CEO Baer Pettit, our President and COO and Andy Wischman, our Chief With that, let me now turn the call over to Henry Fernandez. Henry?
Thank you, Sally. Hello, everyone, and thank you for joining us today. When we spoke at our Investor Day in February, I pointed to our 50 plus year track record of building standards and our continued role in transforming the global investment world. MSCI's mission remains to enable investors build better portfolios for a better world. Our excellent first quarter performance demonstrates the financial benefits of our mission and the ongoing strategic and disciplined investments we have made in the client experience in our client segments and in our solutions and capabilities.
For the quarter, we achieved total revenue growth of 15%, Adjusted EBITDA growth of 21% and adjusted earnings per share growth of 30%. We also generated free cash flow of $205,000,000 doubling year over year. At Investor Day, my colleagues and I spoke about MSCI's strategy to support the investment process needs of various client segments with highly differentiated solutions supported by best in class capabilities. I would like to highlight recent selected advancements within each of these areas. Within clients, I would like to emphasize the Wealth Management segment, where industry trends toward digitalization, Designing of model portfolios and incorporated sustainability criteria Continue to drive significant demand for MSCI's offerings.
A growing interest in direct indexing in wealth management is creating opportunities for MSCI. And ESG and Climate Data. Staying on clients, let me also touch on corporates, Our newest segment, where we now serve 53 corporate issuers, 42 corporate advisor entities and 2 distribution platforms. We continue to see strong corporate interest related to our ESG and climate offerings. Corporate needs range from benchmarking against underlying ESG and I would like now to highlight our progress expanding and deepening our solutions in climate change, which is increasingly recognized as an existential threat to our planet and a major investment and portfolio risk.
Put simply, we believe that addressing the impacts of climate change will require the largest Capital Markets are an essential and critical force to drive the transition to a net zero world with concerted actions from all participants. These actions range from a reallocation of capital by asset owners, Effective channeling of funds by asset managers and banks to greener investments and innovation to decarbonizing operations by companies. Last week, My colleagues and I all participants in the global investment community to support a net zero revolution. We urge asset owners and asset managers to decarbonize their portfolios, Effect change on companies through voting and shareholder engagement and transition to investment policy benchmarks that reflect a path to net 0. Providers, users and intermediaries of capital have a fundamental responsibility to reduce their impact on the planet and join the journey to a decarbonized economy as quickly as possible.
Failure to identify the investment opportunities and risks related to climate change will result in missed opportunities and avoidable losses. We're also holding ourselves to the same high standards. MSCI as a company recently committed to reach net zero carbon emissions before 2,040. This commitment is in addition to our Prior pledge to reduce by 2,035 our Scope 1 and Scope 2 emissions by 50% and our Scope 3 emissions by 20%. This past quarter, we also became an official supporter OTT CFD.
We integrated climate risks into our internal risk management framework and announced our commitment to the UN Sustainable Development Goals. As we said in our call to action, the time to act is now. Regulators, Asset owners and managers and societies are all encouraged to adopt and adapt and net zero emissions targets, especially before the COP 20C conference later this year. Supporting the investment industry as it undertakes this enormous paradigm shift makes investing in our climate franchise a critical Triple Crown investment priority. At MSCI, we have an enormous opportunity to help all capital market participants accelerate this significant economic transformation.
Let me now turn to our critical capabilities, where I would like to highlight at recent strategic development. Last week, we announced a strategic collaboration with Royalty Pharma PLC, The largest buyer of biopharmaceutical royalties and a leading funder of innovation across the life sciences industry. Together, we will develop thematic indices for the biotech and biopharma megatrend. Royalty Pharma will provide MSCI with expertise on various medical conditions, clinical trials, transformative therapies and technologies that may lead to breakthrough medical treatments. This knowledge and expertise will assist MSCI in the design of our classification framework and in index methodologies.
Joseph's MSCI has become a standard in market cap weighted indices. We are building a strong brand in non market cap weighted indices, including ESG, climate and Factor Indices and now thematic indices, capturing the major megatrend opportunities in the world. If you consider the sizable business we have built in market cap weighted indices and the significantly larger and broader range of applications for non market cap indices, you can quickly see why we are so excited about these opportunities. You already have a sense for the potential for ESG, climate and factor indices. Let me therefore take a minute to describe what we believe is possible with thematic indices.
Our somatic indices provide investors already made way to tap into societal megatrends that are creating both disruption and Opportunities. The 3 most significant megatrends we have identified include Hi Tec, for which we have partnered with Ark Invest, Biotech, for which we have now this new partnership with Royalty Pharma and clean energy, an increasing area of focus for investors and therefore for MSCI. Museo's continue to build partnerships in these areas and others to ensure we have access to best in class subject matter expertise. Before I turn the call over to Baer and Ambi, I'll take a few moments to describe our observations on our global operating environment. Notwithstanding the ongoing risks associated with the Unprecedented pent up economic activity starting in the U.
S. Many financial markets are already reflecting this expectation. MSCI is very well positioned to benefit from We need to continue to scale MSCI to ensure we appropriately capitalize on this Significant opportunities ahead of us. As we continue to 2021, We remain deeply committed to investing responsibly in Tripland opportunities in order to leverage We are confident we can continue to create long term value for all of our various stakeholders. With that, I would now like to turn the call over to Bert.
Bert?
Thank you, Henry, and greetings, everyone. I'll echo Henry's enthusiasm for the Strong momentum with which we've started the year. Total subscription sales across MSCI reached a 1st quarter record high. Asset based fees also achieved a milestone, serving $500,000,000 in run rate. As I highlighted during our Investor Day presentation, our very client relations are central to our Full commercial model.
With the 20 clients' survey, MSCI's global Net Promoter Score, The leading indicator of client retention and loyalty increased to 45 points, up 6 points compared to 2019 and above the average scores for the Financial Services, Enterprise Software and SaaS Industries. In the Q1 of 2021, Net new recurring subscription sales were nearly $34,000,000 only 46% year on year This included a remarkable 42% increase or nearly $44,000,000 in ESG and Climate's run rate, as well as a more than $60,000,000 increase in Index's subscription run rate. Quarter was 96.3 percent, up 130 basis points year over year. Henry noted our efforts with wealth managers. As you are aware, this is one of our very promising client segments.
In the Q1, we had a $64,000,000 run rate from wealth managers, up 28% year over year. We also continue to see strong growth and continued momentum in our more established client segments. For example, subscription run rate from asset managers and asset owners, which together comprise about 2 thirds of total subscription run rate, were up 11% year over year. Let me make a few observations about this quarter from a regional point of view. In EMEA, MSCI generated 16% subscription run rate growth, driven by strong growth across product segments, But with particular success in ESG and Climate, as the forthcoming COP26 conference, the need for TCFD reporting and the significant increases in net zero alignment spurred strong client activity.
In APAC, new subscription sales are regaining momentum and grew 36% year over year in the Q1. Business activity is returning to normal subsequent to the pandemic. In Japan, opportunities were created by new regulations on liquidity. Total subscription run rate growth was strong across the regions, growing 16%, 9% and 8% year over year in EMEA, APAC and the Americas respectively. On the back of a great start to the year, our global Sales pipeline remains healthy across both products and regions as well as above last year.
As Henry noted, the rapidly growing attention to climate risk has been a significant contributor to our sales pipeline as MSCI's expertise is well recognized. To that end, we continue to enrich our suite of climate data, models Let me provide a few examples. Following our successful introduction of MSCI Climate Scenario Analysis Models, We also continue to enrich our datasets, including for Scope 3 emissions and to strengthen our TCFD reporting solutions. We have completed TCFD reporting projects for some of the world's most prominent asset owners and institutions, ranging We recently launched MSCI Climate and ERS aligned fixed income indexes. Following our successful Launches MSCI Fixed Income Client Indexes and MSCI Climate Terrified Equity Indexes.
Finally, and coming soon, we plan to introduce cloud native climate risk focused application that showcases MSCI client models and data. This offering leverages Microsoft tools and AI technology in connection with our broader efforts to deliver Investment Solutions as a Service. As Henry referenced, we are investing to capitalize on the sizable, addressable opportunities in climate, including in areas like bank stress testing and corporate needs to capture climate stress tests. Both have the to become mandatory requirements in the future. Overall, MSCI's run rate from Climate now totals over $20,000,000 across the franchise.
We expect this part of the business to continue to grow rapidly as we help investors evaluate, manage and address climate risk in their portfolios.
Before I move on
from solutions, I'll provide a brief update on our progress in fixed income. In analytics, Our fixed income portfolio management run rate has expanded nearly 60% off a small but very rapidly growing base. We are gaining traction by bringing to market fresh solutions that improve upon the quality of models, work flows and usability of legacy solutions. We're also benefiting from the investments we've made over the years to improve our single security analytics, Factor Models and Performance Models. In ESG and Climate, we're developing physical risk climate scores for U.
S. Municipal bonds. We're also building new applications for our climate valued risk tool, including for sovereign bonds. In index, we have seen our clients continue to attract AUM in those ETFs reached more than $20,000,000,000 at the end of the Q1 of 2021, growing more than 200% year over year. As you can see, our strategy in fixed income is to differentiate ourselves by providing high quality products that play to our specific areas of strength.
Our ability to integrate offerings Across the MSCI franchise also continues to be an important differentiating factor and driver for clients To turn to MSCI for fixed income solutions. Across asset classes, products and data, We continue to prioritize an open architecture approach to enhance the client experience and flexibility across MSCI. Recently, we integrated MSCI's ESG research into our hedge platform such that we can now provide ESG and payment metrics calculated on position level holdings, allowing hedge funds to support asset owner net zero goals. We're also further enhancing climate data integration capabilities in our risk management platform within analytics. Given the strong momentum with which we've begun this year, we have accelerated the pace of our investments in key growth areas such as ESG and Climate, Fixed Income and Private Markets to enhance our data, research, technology and client coverage.
As always, we will make these investments in the context of our rigorous Triple Crown framework. Let me now turn the call over to Andy. He will speak more to our outlook as part of his review of our guidance as well as further discuss our recent financial performance. Over to you, Andy.
Thanks, Baer, and hi, everyone. As Henry and Baer noted, we are and the momentum we have developed across the business. In index, we recorded subscription run rate growth of nearly 11%, now marking the 29th consecutive quarter of double digit growth. And as Baer noted, asset based fee run rates surpassed $500,000,000 In analytics, we saw a nice improvement in the retention rate to a record level, underscoring the leading and mission critical nature of our solutions. Furthermore, analytics continues to be the enabler of our integrated franchise by helping build and distribute products in index, ESG and Climate and Private Assets ranging from calculation tools to modeling engines and flexible content delivery.
This was the Q1 we presented ESG and Climate and all other private assets as separate reportable segments. ESG and Climate experienced a further acceleration in growth, growing 38% in revenue and 42% in run rate. Run rate in all other private assets, which currently consist of our real estate business, grew 15% as we are seeing strong traction with our revamped enterprise analytics offering in Europe. We showed operating leverage across all segments during the quarter. In Index and ESG and Climate, revenue growth outpaced investment spending.
And in Analytics and Real Estate, we Within our asset base fee revenue, we saw solid performance across all components with 27% growth year over year, fueled by exceptional growth in ETFs linked to our indexes. Assets under management and ETFs linked to our indexes reached a record level of more than $1,200,000,000,000 at quarter end, compared to approximately $1,260,000,000,000 as of last Thursday. The exceptional growth in AUM during the quarter was driven by cash inflows of nearly $62,000,000,000 into equity ETFs linked to MSCI indexes, Representing 23% of all cash inflows into equity ETFs with continued strength in both developed markets outside the U. S. And Emerging Market Exposures, where we captured more than 30% 50% of all inflows during the quarter respectively.
At the level, ETFs linked to MSCI, ESG and Climate Equity Indexes experienced cash inflows of nearly $25,000,000 during the quarter, representing 70% market share of all global ESG and Climate Equity ETF flows. We are pleased to see the broader adoption of With $10,000,000,000 of inflows into value and momentum factor ETFs linked to our indexes, which more than offset the lows we saw out of minimum volatility Products. Our strong commercial and top line success during the quarter translated into strong financial results. Our 30% adjusted earnings per share growth year over year was primarily driven by the significant revenue growth with additional benefits from operating leverage and share repurchases at attractive prices. Turning to our balance sheet.
We ended the quarter with a cash balance In mid April, we used the offering proceeds along with cash on hand to redeem all $500,000,000 of our 2026 notes that had on the 4.75%. Per form a for the redemption, we had about $1,200,000,000 of cash With our leverage in the middle of our targeted range, I want to highlight that we continue to monitor the market and may raise additional debt and we see an attractive opportunity. We need to be highly confident in our capital position and our capital allocation priorities have not changed. And share repurchases with a strong focus on maximizing our shareholders. This quarter we were more than $200,000,000 to shareholders through dividends as well as share repurchases at an average price per share of $407.70 I'll now turn to our guidance.
We mentioned last quarter and at Investor Day, our pace of investment may Up or down based on the trajectory of our asset based fees. We highlighted that our initial expense guidance was based on the expectation of relatively flat market levels for the year. This is our trajectory year to date with AUM up nearly 15% as of last Thursday, Together with the favorable outlook gives us confidence that we are
in a position to continue to
grow our upturn playbook. We are currently in the range reflecting our intent to continue to invest in Triple Crown Investments for future growth. As you know, Continued investment in terms of loan areas remains a top priority for us. At the same time, we remain committed to putting large and modest margin expansion. We also reduced our tax rate guidance, taking into account the low rate in the Q1, in large part driven by a windfall benefit from the vesting of stock based compensation, as well as our current view on a number of discrete items.
Increased our free cash flow guidance primarily to reflect our strong base fees and Collections in the Q1. In summary, the overall operating environment within many parts of the investment industry is healthier than it has been in recent quarters. MSCI remains uniquely positioned to help investors across their most mission critical needs. The Q1 was a very strong start to 2021 for MSCI. While the environment is likely to remain somewhat volatile, we believe we are well positioned for the longer term with our attractive all weather business model,
Our first question comes from Manav Patnaik with Barclays. Your line is open.
Henry, I was hoping just on your comments on the thematic side of your priorities. Can you just perhaps how big that is for you guys and how we should think about the potential there really?
It's fairly large, Manav. And when we sit back and look at the great business That we have built in market cap indices for equities. And then we look at what we can build with more market cap indices ranging from ESG and Clients and Factors and And thematic, the combination of all of that in equities and we translate all of that to fixed income and eventually translate all of that to equity and fixed income better in balance indices, The opportunity is massive. And if you were to think about the ultimate goal is every investor has a portfolio and every portfolio It's an index of some sort. So we believe that the opportunity for market cap indices should be much bigger than for what we have built in the opportunity for non market capitalization should be much bigger than the opportunity for market capitalization that we've created.
Okay, got it. That's helpful. And then just on capital allocation, right, it sounds like obviously Triple Crown Investments I mean, 1, the partnerships obviously continue to be a focus to you guys. I was just curious like in terms of just outright M and A, like is that how much of the pipeline or priorities that even for MSCI at the moment?
So we continue to be extremely focused on organic investment opportunities. We have A very wide, deeper and higher range of investment opportunities that we have ever seen. Honestly, I think the set of opportunities in all of what we do are accelerating From climate to no market cap indices to fixed income to with more technology So the data, especially in SG and A and climate, etcetera. So very, very focused on organic investment. Accelerator of the Clearly the partnerships.
We cannot do it all together. So we look for partnership with people that have data, that have models, that have Technology that have distribution, etcetera. Some of those partners investment on our part in their capital structure, That hasn't traditionally been the case, but we may we're open to that. Now we reviewed the overall sort of M and A landscape Always, it's a fiduciary duty to do that, both small and large companies. And obviously, we look at it, we analyze it, but we continue to remain very focused on our strategy of building 1 MSCI With organic investments and selected bolt on acquisitions.
All right. Thank you very much. That's good to hear.
Our next question comes from Alex Kramm with UBS. Your line is open.
I think you may have addressed some of the, but the strength in ESG and Climate sales, can you sound a little bit more? You obviously mentioned some of the regulatory changes in Europe and seems like those have benefited. But can you maybe isolate those? Was that a very big contributor? Do you That's sustainable for the near term as I guess more people have to get ready to comply or is it really just more of the same when it comes to ESG sales?
So Just a little bit more color would be helpful.
Sure, Alex. So look, I think that in terms of ESG, it is an acceleration of the that everything we've discussed previously on these calls. What was really striking is we had an asset owners survey in the last quarter and It's actually in the North America and the U. S. And Canada that ESG and Climate is the number one concern of asset owners.
So that is for sure an important, I would say, change or acceleration, in addition to the things you mentioned, the regulatory context In Europe, etcetera. I think the other thing that's clearly happening is the weight of climate increasing in the ESG and mix. We've had extraordinary amount of interaction with clients related to climate adjusted portfolios, Transition risk, 1.5 degree alignment, etcetera. So the ESG trend is Strong and is continuous and the conversations and the client interest related to climate are going up even more dramatically in tandem.
All right, great. And then secondarily also coming back to the thematic points that you made this quarter, I guess One of the things I'm curious on the market cap weighted indices, you've done a great job obviously establishing network effect. That's why you have great economics there. And in some of those areas of thematic factor in ESG, it seems like you're establishing that network effect and it's very small. But in some of those new areas like, I don't know, high-tech and pharma that you talked about, seems to me a little bit more like Retailish, maybe I'm taking the wrong approach here, but I just wonder how easy it is to really establish network effect and actually extract good pricing, that kind of stuff gets competed away as there may be like 25 different pharma indices and So the tech team really cares what they do.
So I guess talk to that a little bit more of Why you think you would also be interested in those areas? Thanks.
Yes. No, that's Alex, because we asked ourselves that same
question over
and over again. And the first thing to note is that they have seen significant Institutional Investor in these areas. The way that I normally would explain that is that there are Compared to maybe 10, 20 years ago or so, there are very large Structural changes going on in the global economy and the global investment universe That are not totally reflected in market cap indices, for example. So the traditional way that an institutional investor invest The benchmark to our market cap index, for example, on their equity portfolios. But those New areas of clean energy and bio more high-tech and all of that are not Yes, reflected in the asset allocation of those indices because they're on the comp.
So what we are seeing is a lot of those institutional investors Are looking to put a segregated amount of their assets into those themes and those areas In order to sort of anticipate what is going to come in the future. So a lot of what we're doing In this area is largely for institutional investors, not necessarily for retail investors. Hopefully, we'll get that as well, But that's the direction of travel. And therefore, do we believe that we can build a large network effect As it relates to that, because it's similar to ESG and Climate, a lot of investors are taking parts of their portfolio institutional investors
are taking part of their portfolio
and allocating to ESG, Taking part of their portfolio and allocating to ESG biased investment products with our indices Or climate bias portfolios, so and the network effect associated with that. So we think we can continue to build that this powerful franchise across the board. Now the other part of the ecosystem is how do we build benchmarks for active, indices And then the construction also of the development of derivative products, whether it's structured products or whether it's Over the counter options and swaps and listed options and listed futures, the dialogue that we're having With our partners in the broker dealer community and the investment banking community and the exchange community with respect to ESG and climate and thematic are it's always been in the past market cap weighted indices. The majority of the discussion today is about thematic indices and it's about SG and Climate indices.
All right. Very helpful. Thank you.
Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thank you. Hopefully this isn't too much of a repeat of a prior question. But Henry, you mentioned the with climate, we're looking at a paradigm shift. And so maybe you can just expand on how you see this sort of playing out. So is this a significant Bump in the next couple of years as people integrate Climate and ESG into their thinking on investing or Is it that over time you can keep building new solutions and what you do best?
Like Just trying to understand how sustainable this is or if this is just a massive like couple of year growth
Well, it is fairly front loaded, But it's not floated and then it peters out or slows down. We're going to be talking about this for the next 10, 20 years In a big way, 0.1 to 20.2 is that it cuts across everything we do From indices to analytics, we're repositioning a lot of our analytics for climate impact Climate risk in the portfolios, climate reporting and all that, it clearly affects the private asset classes. We talked about real estate and how do we decarbonize how do we look at climate change in the Properties in coastal cities and all of that, and of course, in the ESG climate segment as well. So it cuts across everything that we do. And this is if you were to think of what is the number one largest Opportunity of MSCI in the next few years and going on for a decade or 2, it will be climate.
And therefore, we want to position MSCI as the leading provider or a leading provider of Climate Solutions to the whole global investment industry as a whole. And we also have an opportunity To expand significantly into the issuer market, which has not been traditionally a place where we have been with corporates and other forms of issuers to help them in this incredible transition that will take place. So this is a massive opportunity for us and it's not like backdated, it's not like back And it's now and you're seeing the dialogue that is going on, you're seeing the momentum in our sales from obviously a very small base, But it's going to be a massive opportunity for us and it's now.
That's great. And Maybe Andy, this might be for you. Just looking at the guide for a second, you raised free cash flow by about 5% at the midpoint for the full year. I don't know what your 1Q expectation was, but I'm guessing that 1Q came in better. So just is the higher guide a reflection of Like why wouldn't the trends that you saw do really well in 1Q continue for the rest of the year?
Thanks.
Yes. Thanks, Tony. So maybe I can spend a second on Q1 and answer your question about the strong performance and then I can extrapolate to the full year. As you alluded to, we did have very strong cash flow performance in the Q1. The story was really around collections for us on two fronts.
1, business growth was stronger, so very strong growth across the business, But to also very strong collection performance for us. The Q1 also we did benefit from some shifts in interest payments, which was affected by the recent financings that we've done, but those will normalize throughout the full year. The biggest impact for the full year, To your point is that the picked up business growth, I think the collections activity will normalize quarter to quarter, but the bigger impact It's really just the stronger business growth, which we tried to reflect in the guide.
Thank you.
Our next question comes from Craig Huber with Huber Research Partners. Your line is open.
Thank you. My first question, can you Henry or Can you maybe touch on this, your commentary? Just give us an update there, if you would, please, in terms of going forward, what we should expect there? Are there new Additional exchanges, for example, you're looking to get involved with there. What's the game plan here to get this area moving?
Because one of your major competitors obviously gets Lot more revenue being north of 15% of the revenues from this area and you guys are much smaller, but it's a heck of an opportunity for you as I view it. Thank you.
Yes. So let me give
you the business answer and then Andy can provide some commentary on the sales. This is an area of significant expansion in all of MSCI with our exchange partners around the world. As we have noted before, most of the market for listed options and futures in the world is a Single country, single currency index futures. And in some cases, when it is multi country, it's single currency futures and options. So this is an area of prime for innovation, prime for expansion and creativity, which is what we're doing with our exchange partners in all regions of the world.
And we're now also increasingly doing certain partnerships in emerging markets. We announced obviously our partnership with the Colombian Exchange, for example. We've had a partnership with the Saudi Exchange and the like. So So that's something that we'll continue and innovate. While we're now talking to a lot of our exchange partners, as I said in the prior My prior comments are how do we go from market cap weighted indices to ESG index futures and options to We recently launched a China Tech Index, for example, that we're in the process of life You want to change for listed futures and options, that would be an example Also, banks and broker dealers and their activities in the structured products And in over the counter options and all of that, which that's also expanding significantly, we are becoming a large provider Of basket trading basket building indices for broker dealers and banks for them to then do their over the counter structure products.
So it's a whole ecosystem that we're building. Andy, on the financials?
Yes. So Craig, as we've talked about in the past and Henry just on the board, continue to be very bullish about the opportunity for us longer term in both listed and over the counter derivatives. In the current quarter, there was some points to flag here. Importantly, the comp, it's a tough comp. So when you look at the Q1 of last year, that was a period of highest volatility and as a result, highest volume in derivative Contracts traded.
And so when you just give that comparison, there was a drop in year over year volumes. And given that we price and get paid based on the contract volume that will impact the revenues that we receive. It is worth noting The run rate did pick up, which you probably noticed. That was as a result of some of the repricings of agreements with Arch Partners. It's worth noting this is the last quarter where you will see that benefit.
So that was baked in as of Q2 of last year. So going forward, you won't see that pricing benefit in our run rate and will be much more tied to the contract volumes. I would highlight that specifically one area where you're seeing contract volumes pick up, but it's still behind is The addition from SGX to Hong Kong Exchanges, seeing the franchising complex on Hong Kong Exchanges are to build up, But relative to where the volumes were on SGX, it's lighter today. And so when you start to do historical comparisons, volumes will look a bit lower. But over the long term, we We continue to be very bullish in this area and that will translate not only through to the asset based fee component, but also helping to drive some of the index subscription revenue as well, which is where we see the over the counter piece.
Then also guys, if I could ask you institutional Passive products direct indexing, can you resize that for us as a percent of your revenues? How big of an opportunity Right now, and is the game plan in Europe, how is that evolving versus the U. S? Thank you. Yes.
I mean, non AF passive, as we call it, which it's really comprised of a few areas, what we call institutional passive. There's also index based mutual funds, which are more retail oriented, generally. And then increasingly there are areas like direct indexing, which will show up or could show up in that revenue stream. It's an area that's been strong growth and extremely resilient, which you can see by the growth rate, which we've seen actually delta growth in each of the last six quarters within the non ETF passive line Despite the market volatility, relative to ETF, we actually see fewer redemptions in periods of volatility. And as we've mentioned in the past, the fees have been quite resilient in this area as we're seeing tremendous growth in non market cap Mandates and non market cap, non ETF launches and products there, where the fees tend to be a little bit more resilient In certain areas, actually, we get higher fees.
Just to dimension it for you, there's now about $2,700,000,000,000 of assets Under management, the non ETF index funds linked to our indexes. And just you can tell by the run rate continues to be a strong growth area for us And it's a big focus for us, an increasing focus for us and we're seeing opportunities across all regions. And one of the big drivers here really is the transition to ESG And so we're seeing tremendous growth in the non ETF AUM bucket in ESG and Climate indexes. So overall, area we're focused on and should continue to grow for us.
Great. Thank you.
Our next question comes from Owen Lau with Oppenheimer. Your line is open.
Thank you. Thank you for taking my question. So MSCI continues to gain traction in corporate and we mentioned some numbers on the prepared remarks. Could you please talk about what specific products driving the growth there and also the outlook? Thank you.
Yes. So a lot of what we're doing there so far is selling The underlying data and ratings, which as you know, are organized along industry lines, Sector lines to the corporate. So if you're a corporation and you want to know what your rating is And you want to compare that rating and the underlying sort of the underlying information in the reports to other Participants in your sector, in your industry and if you want to do cross sectoral comparisons, for example, Then that's what you're getting. So that's the corporate themselves. Now we also, as As I noted, sell the information and the ratings to the corporate advisers, that could be accounting firms, Could be investment banks, could be strategy consulting firms, etcetera, could be specialized advisers that are Trying to help those entities figure out how to deal with all their ESG disclosures, their ESG They have abilities and increasingly, we'll see as time goes by, there are net 0 pledges that they need to make, etcetera.
So this is a very fair call for us. As you know, just in ACWI IMI, There are 9,000 companies, and therefore calling on or having 50 Very small penetration. Now increasingly, we're also going to believe we're not there yet, but we're also going to begin to help Many of these communities think through with respect to climate, what their data projection should be, what Their position with respect to admission should be with data, models, analytics, that was what And Obert was referring to on that platform that we're building on top of Microsoft. So again, another area of fertile growth for us.
That's very helpful. And then for the first EBITDA expense guidance, Andy, you were Guidance by around $15,000,000 to $20,000,000 Could you please talk about how much of that was driven by Top line growth and how much of that is driven by the reopening of the economy like higher T and A and maybe healthcare cost? Thank you.
Well, the few are related. It was definitely driven by the top line growth And most notably an acceleration in the ETF growth rate and AUM And ETFs linked to our indices as well as accelerations in key parts of our business like climate and ESG, As you can see by the tremendous success that we're having there. Just as a reminder, when we set our guidance at the beginning of the year, we said that was based on the assumption Relatively flat market levels. Clearly markets have improved thus far this year and we feel pretty bullish about the outlook for the balance of the year. And so those 2 inputs feed into our calculus in terms of how much we want to go to our upturn playbook.
And so the increase in guidance is really reflecting the momentum we're seeing in our business, but also the more bullish outlook that we see In the economy, in the markets and our clients more broadly. And so we are turning our upturn playbook to invest in the Triple Crown areas we've talked about in the past And the areas that are driving our growth. So it's in areas, non market cap weighted indexes, areas like magnet and ESG, as well as the data technology that supports both of them, in areas like research and go to market that are going to help continue to fuel these growth engines for the company. And so we're, as we said we would do and as we've done in the past, accelerating our investments when we see the opportunity to do it. We think this environment lends itself to it.
Got it. That's it from me. Thank you.
Our next question comes from Simon Klintz with Bank Equity. Your line is open.
Thanks for taking my question. I was wondering if I could follow on from the opportunity on the corporate customer side. Just kind of curious as to how to think about how those customers are coming sort of entering this business with you In terms of size, so when you take on a new core customer, are they tiptoeing in? And is the ultimate opportunity for the individual customer to spend multiples of what they spend today, is that very much Present and the real opportunity for you as well is just growing the number of customers. Another follow on to that as well.
So the Clearly, since we are this
is a new client segment for us, we're trying to start with a very direct And value added, a narrow set of offerings, which is the ESG ratings And all the information and the data that goes with the ratings of that corporate and the comparison of that ratings to others in their industry and across the street. And we have established a full live sales force of a handful of people around the world To do that and as we build momentum and more success, we're going to reinvest out of the incremental revenues into And the sales force and the client coverage of that. On top of that, there are Significant opportunity and have multiples, large multiples of the revenue that we're getting As we go into other products and services that we can provide those companies, So just what I was talking about in climate, but we're not there yet. We're trying to make sure we go on a systematic approach To this, one step at a time in a new area that we are covering, But I would anticipate that there will be a fairly rapid expansion of our products out there, our sales force And our run rate and our sales and our run rate and obviously more to report on that in coming quarters.
That's great. And just to follow on with that, I mean, when you talk about the advisory entities that You're selling to as well and the distribution platforms. Do you are you viewing those as effectively Opportunities to expand much faster without given the limitations of your existing sales force? Or do you view them as completely new separate customer sets to those corporate customers, the direct corporate customers that you're targeting as well?
No, we clearly view those as separate, Right. So I think when you refer to the advisory firms, that's in the wealth segment overwhelmingly. So that's discrete from the corporate segment. And it's really we believe it's a pretty large opportunity for us, if that's
what you meant by
the Sorry, yes, I'm sorry. Yes, that makes sense.
Thank you. Let me just clarify, if you don't mind. I think what you were referring to, which is the comment that I made is, there are advisors to companies Such as the accounting firm, such as the investment banks, such as and all of that, that are they're advisors To the CEO, to the CFO, the Treasurer and the Board of Directors of those companies in trying to understand The ESG landscape, their ratings, their disclosures, what data they need to provide, etcetera, etcetera. So what we view This corporate advisory entity is in 2 categories, is the category of augmenting our sales force into the corporate and secondly, for them to provide advice With the data and the tools to the companies that we're not in a position to be advising them as to what to do to enhance the ratings or change or enhance their disclosures and things like that. So that's the we have different type of advisor networks Like financial advisors and investment advisors and whatever in the corporate advisory segment, we're talking about the advisors to the companies And it's in both categories.
We're augmenting what we're doing using them as a channel and therefore, hopefully relying on them to be providing advice To the companies as to what to do with the data and the ratings,
right? That's exactly what I was thinking. Thank you.
Our next question comes from Keith Housum with Northcoast. Your line is open.
Good morning, guys. Amy, just trying
to unpack the upturn playbook a little bit more and try to understand The $15,000,000 to $25,000,000 in additional expenses, as you think about the rest of the year, how does that compare to, I guess, what your original plan was in terms of, I guess, Yes, 100 percentage growth. And then what are thoughts taking consideration, I guess, a return to a more normalized work environment, if any?
Yes. So it, just to dimension that, as I said before and we've mentioned, The original guidance was based on the assumption of relatively flat market levels. ETF AUM is up nearly 15% on the year. Non ETF passive is up strongly and we expect to continue to rally strongly. And so just those two line items alone are driving Some pickup in our revenue above kind of that baseline assumption when we set the guidance back at the beginning of the year.
And then we're seeing strong growth in areas like ESG and Climate. And so when you look at the growth, the increase in expense guidance, the midpoint going up about $20,000,000 to your point, That's an increase in expense growth rate of 2.5%, which is relatively modest in the grand scheme of the impact on revenue that the pickup in ABF has for us. And so we continue to be able to drive strong positive operating leverage, but really continue to Drive investment in these key growth engines for the firm and continue to accelerate these Triple Crown opportunities. To your second question about the return to kind of a pre COVID world. I would highlight in the Q1, there was About a $3,000,000 benefit from COVID related expense benefits.
Obviously, that starts to go away in future quarters where a year ago we were getting those benefits as well. But we do have some Assumption about a return to normalization, but it's not a full return. So just to give you some numbers to dimension that.
Got you. And then coming back
to that $20,000,000 increase in the upturn playbook, as you look at your operating expenses, how much of your operating expenses are currently invested Future growth of the data centers and new solutions, new products.
Yes. I brought in it to our and we talked about this at Investor Day to our investment portfolio or change of business expenses, which is about $150,000,000 of expenditures. And so that's against our total expense base plus CapEx. We define our expenditure pool. So of that total pool, call it about $150,000,000 is in these kind of change of business triple crown areas and these are the areas that we're going to really be accelerating.
Okay, great. Thank you.
What I would add also is that the expense growth In our business as usual, right, maintain the business is not very high. It's relatively muted. And therefore, our game plan in the context of continuing to have modest leverage, operating leverage expansion or margin expansion, right, is to increasingly squeeze the operating expenses Of the running the business in order to transfer more and more of investment of money into the investment plan. So therefore, the investment numbers are growing clearly much more rapidly than The overall expenses in running the existing business. And as all of you know this, but I'd just like to clarify One more time is that sometimes we talk about expenses, and I just want to be very pointed that The large majority of this incremental EBITDA expenses are investment in Triple Crown investment types.
And as you know, the Triple Crown is in areas of high growth like index and ESG and climate with high rates of return and fast paybacks And hopefully in areas that have high multiples of valuation prices.
Great. Thank you.
Our next question comes from Sameer Kalucha with Deutsche Bank. Your line is open.
Hi, thanks for taking my question. The thing I wanted to get some color on was the Investment Solutions as a service initiative that you announced on the Analyst Day, you announced there were 4 services that were going to be launched in 2021. Just wondering if the launch was on track. That's 1. And number 2, would the pricing be any different When customers use your solutions as a service versus regular contracts that they have right now, would there be any difference In pricing and margins?
So to alert to some extent, some Of that is a relabeling of what we currently do, investment solutions as a service, data management as Service, data as a service, and in some cases, it's a new product So for example, ESG data as a service is definitely a major expansion of what we're trying to do. During the lead up to Investor Day, as you know, we had a number of discussions with shareholders and analysts as to What they would like us to consider and work on and the number one category was for us to Post our ESG and climate data way beyond the ratings products and the screening products and the index products, right. So that will be an expansion. Another area of expansion is data management as a service To many of our clients, including our analytics clients in which data management in their internal workflow is one of the biggest pain points. We're very good at that.
So we are expanding that capability to do that not only as a support To selling of our products and services like analytics, risk and performance analytics, but also on a stand alone basis. So that will be an expansion. So when you think about that totality, what is a relabeling, obviously, the pricing will be About the same as before and what is a new service, we will definitely be looking at a new pricing on that. All of this falls into the category of some And that we had talked about before, which is what we call colloquially at MSCI is renting the kitchen, right? We have a great kitchen that creates great food, Great experience.
We want to expose that kitchen to people as well, right.
Got it. Thank you.
Our next question comes from Greg Simpson with BNP Paribas. Your line is open.
Hi, Jeff. Thank you for taking my question. Is it possible to find out if you have any updates on the partnership with Burgess? I think you've said you've Got quite a few products and solutions you've been working on. So I'm wondering if you have any more color on the time line around any launches?
It seems the Industry trends towards private markets seems to really be intensifying right now. Thank you.
Sure. So I think the same thing we've been focusing on is just working with Burgess on running and optimizing their business day to day. We there's a new President at Burgess as we've mentioned Before Jay McNamara, he used to be at MSCI. So a lot of our emphasis is just as working with them as a partner to grow the business every day, every week. Additionally, this quarter, we've been doing a lot of work on our private market strategy, And that has a variety of different avenues in it related to both Working together on their data platform, working on plans for ESG and climate for private companies and our future path in areas such as real estate, which span across both assets that we have at MSCI and those at Virgil's.
So
there's a
lot of work coming on there and we'll likely have more products coming out during the second half of the year that come out of the work that we're doing at present.
Thank you. And then just Quickly, on the firm wide ESG and climate run rate, which I think is now €254,000,000 is it possible to have some color on how this splits by geography,
I'm going to we'll have to follow-up on that question. I'm not going to provide the exact breakdown right now by the 2 components. As you would imagine, on the index side, there is a heavy component that is asset based fee related and a lot of that tends to be U. S. Listed products and very attractively a lot of that is flows in the U.
S. Exposure funds, which as you know is a place where we Historically, haven't had a strong presence, but it continues to be a driver of us capturing market share on flows into U. S. Exposure products. Overall, I'd say that the run rate is pretty well spread across geographies with a heavy emphasis on EMEA and Americas, But they're all growing at a nice clip.
And as Baer mentioned in his prepared remarks, the EMEA run rate on the climate and research side has been growing at an incredible clip.
All right. Thank you.
Our next question comes from Patrick O'Shaughnessy with Raymond James. Your line is open.
Hi, good afternoon. Just one question from me. Is there an opportunity for MSCI to develop crypto indices and other crypto solutions? And how might the massive energy consumption of the crypto economy impact your decision making on that front?
Yes. So we have been studying that deeply investigating all of that And they are, as you know well, at the top of the house, at the top of the thing is, if there are 2 types of currencies, there is the Central Bank And digital currencies and which China obviously is leading the pack there and we're evaluating what impact That will be in the pricing of financial assets, for example. And then there is the cryptocurrency, which is a little more like gold type of investing. So we're definitely looking into that to see what impact we haven't come up yet with the right products or the right indices. We're analyzing that I understand that importantly.
And then the second part, yes, cryptocurrencies have a role to play in climate change because of the energy consumption there. So that's another area that we're looking into is how do we combine the topic of cryptocurrency with the topic of climate change. So more to come on that in the future.
Thank you.
There are no further questions. I will turn the call back over to Henry Fernandez for closing remarks.
Well, thank you everyone for listening. As you can see, we have enormous opportunities in front of us. We are very relatively bullish on the operating environment And therefore, we'll step up our pace of investing and continue to do that at the same time as Having some modest margin expansion. So thank you very much and we'll look forward to your question, your comments also To Sally and the team.
Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.