MSCI Inc ($MSCI) Q3 2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the MSCI third quarter 2025 earnings conference call. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to ask one question at a time, then enter yourself back to the queue for any additional questions. We will have further instructions for you later on. I would like now to turn the call over to Jeremy Ulin, Head of Investor Relations and Treasurer. You may begin.

Thank you. Good day and welcome to the MSCI third quarter 2025 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter 2025. This press release, along with an earnings presentation and brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For 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 US GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We'll also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, Baer Pettit, our President and COO, and Andy Wiechman, our Chief Financial Officer. Lastly, we wanted to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Henry, and greetings, everyone. As you are aware, over the past year or so, I have framed my remarks on these calls through the lens of MSCI's main client segments, and I will continue to do so as we grow our footprint with newer segments and deepen our penetration of existing ones. With that in mind, as you saw in our earnings materials, MSCI recently enhanced our client segmentation strategy. Details and comparison points are available in our Q3 earnings presentation. Starting with hedge funds, MSCI delivered 21% recurring net new subscription sales growth. This was our highest Q3 ever for new recurring sales to hedge funds, with notable strength in analytics. In particular, we see ongoing strong demand from hedge funds for MSCI's equity factor and enterprise risk and performance solutions, which have become deeply embedded in many clients' investment workflows. For example, MSCI closed a seven-figure renewal deal with one of the world's largest hedge funds in which our contribution to their alpha generation and risk management is central. We also completed a global deal with a large US-based hedge fund that will expand its use of our enterprise risk and performance tools. Our analytics solutions are now fully integrated into every aspect of this client's risk management process, including its capital allocation framework for individual portfolio management teams. The common theme here is that amid elevated levels of market volatility and uncertainty, hedge funds want deeper, faster insights into key sources of investment risk and return. MSCI is fortifying our position as a trusted partner. Turning to wealth managers, we achieved nearly 11% subscription run rate growth, driven by a balanced mix of contributions from across product lines. Recently, a large independent wealth manager in the US licensed our private capital fund transparency data to enhance client reporting on private funds. This shows how MSCI is enabling both scale data gathering and the standardization of private asset data to provide the enhanced portfolio insights clients need. Indeed, wealth managers' growing demand for tools and standards in private markets creates a great opportunity for us. We also have a growing list of clients licensing MSCI wealth manager, which has allowed us to deliver unified solutions for the home office with advanced tools spanning personalized client portfolios and proposal generation along with regulatory workflow support. Shifting to asset owners, we posted 9% subscription run rate growth driven by analytics, private capital solutions, and index. In one of our biggest deals in the quarter, MSCI renewed our relationship with a major Canadian pension fund across our equity models and risk tools. We also expanded our private capital solutions relationship with a US-based asset owner as we support this client's increasing demands for total portfolio solutions and performance measurement and transparency as they grow their private markets allocations. In addition, a rising number of LPs are using MSCI private capital indexes and our newly launched frozen indexes as their policy or performance benchmark. Reflecting a shift away from public proxies and return targets and an increased alignment with MSCI standards. We are therefore confident that our investments in private capital indexes will help create significant value both for clients and for MSCI. Moving on to banks and broker-dealers, MSCI delivered 9% subscription run rate growth, including a record level of Q3 recurring sales. This was driven primarily by index, which also posted its highest Q3 ever for new recurring sales. Our most notable Q3 business win was a global index renewal deal with one of the largest banks in Europe that highlighted the mission-critical role of MSCI index data sets in their trading, index rebalancing research, and product creation capabilities. Turning finally to asset managers, we achieved subscription run rate growth of just over 6%. MSCI is working intensely to increase our growth trajectory with this segment, and our efforts had a meaningful impact in Q3. In fact, we delivered our highest Q3 on record for new recurring sales to asset managers in index, which helped drive 11% overall new recurring sales growth with asset managers across MSCI product lines. For example, we landed a seven-figure deal with one of the world's largest asset managers in support of their wealth management strategy. MSCI is providing financial advisors with ever more sophisticated analytics tools such as stress testing, which helps them grow their business and support their own clients. We also completed a large deal with a top European asset manager to help them develop a centralized program for their risk, performance, factor, and sustainability analytics across investment teams in different global locations. This was another great example of our ability to expand and deepen existing client relationships using our one MSCI integrated solutions. Looking ahead, we're encouraged by MSCI's long-term opportunities and our ability to drive growth from recent areas of innovation and investments, all of which should help us remain the mission-critical provider of choice for clients across the capital markets. And with that, let me turn things over to Andy. Andy?

Thanks, Baer. And hi, everyone. Our third quarter results highlight the momentum we are building across product lines, a dimension on which I will provide some additional color. Within index, where asset-based fee run rate growth was 17%, equity ETFs linked to our indexes captured $46 billion of inflows during the third quarter. We continue to see strong demand for ETFs linked to MSCI developed markets ex-US indexes and MSCI emerging markets indexes. And index subscription run rate growth was 9%, including nearly 8% growth with asset managers, an area where we saw some strength in the Americas. We recorded our best third quarter ever for index recurring net new subscription sales aided by our DM and EM modules and solid subscription run rate growth in the non-market cap category. We've been encouraged to see that new index products launched since the beginning of 2023 generated about $16 million of new recurring subscription sales over the last 12 months. And the index retention rate remained durable at nearly 96%. In analytics, we had subscription run rate growth of 7% driven by our highest Q3 ever for recurring net new sales. Recurring sales in analytics benefited from 29% growth in equity solutions with strength among hedge funds in the Americas and APAC. Additionally, we saw strong sales of our multi-asset class analytics, most notably with hedge funds as well. In sustainability and climate, we saw 8% subscription run rate growth for the reportable segment with roughly 6% subscription run rate growth from sustainability solutions and 16% subscription run rate growth from climate solutions. The sustainability and climate retention rate was almost 94%, slightly higher than last year's level of 93%, and reflecting the must-have nature of our tools. Additionally, we're seeing solid demand for new solutions such as our geospatial offering, which has seen traction across client segments, including in particular with banks. In private capital solutions, we closed about $6 million of new recurring subscription sales in the quarter with success across client segments, including established segments such as endowments and foundations, as well as newer areas for us such as wealth and GPs. Additionally, we continue to see strong momentum with our total plan offering. In real assets, recurring net new sales improved aided by stabilizing retention trends. We're also driving sales from newly introduced product areas, including our data center offering, which has gained traction with GP investors. Across PCS and real assets, the retention rate improved slightly to 93.3%. Finally, turning to our full year guidance as we close out 2025, the increase in the low end of our expense guidance range is consistent with our past comments and driven by the strong growth in AUM levels linked to our indexes. As a reminder, interest expense guidance reflects the previous notes issuance during the third quarter. And the increase in free cash flow guidance reflects business growth and the impact of tax benefits. In summary, MSCI's strong Q3 results are reflective of our mission-critical, durable solutions and our accelerating pace of innovation. We're seeing solid momentum in delivering new products, capabilities, and enhanced go-to-market efforts, and these are translating through to tangible results. We look forward to keeping you posted on our progress, and with that, operator, please open the line for questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. And again, participants are requested to ask one question at a time, then add yourself back to the queue for any additional questions. And our first question will come from Manav Patnaik with Barclays. Your line is open.

Thank you. Good morning, everybody. Henry, I just wanted to ask kind of a bigger picture question on your strategy in around private credit. There's clearly a scarcity of beta assets out there, which is why some of the multiples these assets are trading at seems to be very high. But just curious from your perspective, where do you feel like you have, you know, the missing, you know, white spaces or whatever you feel like you need to fill in and how integral is the Moody's partnership to your strategy there?

Thank you. And our next question will come from Alex Kram with UBS. Your line is open.

Yes, hey. Good morning, everyone. So, last quarter, one of the messages was really that you're going to start leaning in more into these other new client segments outside of the traditional asset managers. Obviously, Baer gave a lot of color already in terms of the growth rate there, but, you know, can you just talk about in the last 3 months, like what what you've been doing in terms of new products, but also I think you're you're kind of doubling down on marketing and sales. So, any any any new things that we should be excited about, and and when do you actually see this can make a material impact here on on on results?

Thank you. And the next question will come from Tony Kaplan with Morgan Stanley. Your line is open.

Thanks so much. Henry, you touched on in the prepared remarks that your teams are leveraging AI models to help develop new products, and I was hoping you could give us an update on where you see the greatest opportunities to leverage AI both on the revenue as well as on the cost sides, and any quantification would be great, but also just, you know, what those products look like and what the cost savings opportunities are. Thanks.

Thank you. And the next question is going to come from Ashish Sabu with RBC Capital Markets. Your line is open.

Thanks for taking my question. So, in the quarter we saw really strong momentum in the index and analytics net new subscription sales. They obviously talked about some big deals there also with the asset manager and one of the largest banks in Europe. My question was much more focused on the pipeline as we get into the fourth quarter. Any comment on the pipeline as well as the sales cycle as we get into one of the seasonally highest bookings quarters. Thanks.

Sure, Ashish. So, definitely, as you alluded to, encouraged by the results in the third quarter. They've been fueled by the product innovation, the accelerating pace of product development that you've heard us talking about here and so that's encouraging. In terms of the overall environment and market backdrop, I would say it's relatively stable. We've seen fairly consistent dynamics to what we've seen in the past. On the margin, the sustained favorable market momentum is constructive. And we have seen pretty good results in the Americas, most notably in index and analytics, as we talked about. And so, we are generally encouraged by the healthy product pipeline and acceleration in product development that is supporting a strong client engagement, as Henry alluded to, both across asset managers as well as the broader range of client segments that we're targeting. And so, we are seeing a relatively stable dynamic across the business. I would highlight that we do expect the dynamics we've been seeing in sustainability to continue in the near term. So, similar to what we've talked about in the past. Those dynamics that we've been seeing there, the pressures we've been seeing there, we expect to continue in the coming quarters. But overall, I'd say dynamics across the business are fairly consistent and the performance has really been fueled by and driven by our product innovation.

Thank you. The next question is going to come from Alexander Hess with J.P. Morgan. Your line is open.

Yes. Hi, guys. I hope you're all well today. Just want to touch briefly on the non-ETF and the fixed income businesses. On the non-ETF side, you know, there's been pretty rapid growth in the ETF revenues, I think about 19% year-to-date. And the non-ETF is tracking a good deal behind that. Was there any prior year sort of hurdles that are pushing down that non-ETF revenue growth? And then on fixed income, can you remind us what the AUM is there as of 3Q? And if there was any reason why if my math is right, there was a little bit of a quarterly dip in the run rate for that business. Just wanted to sort of unpack that a little bit. So, I know I threw out a lot at you, but hopefully we can...

Hey, Alex. It's Baer here. So, on the non-ETF passive front, to your point, we can have impacts from true-ups and true-downs, which can skew the period-to-period comparability. And so, as you know, there can be some lumpiness in any given period. We can also at times see some modest fee adjustments on client funds, and that can lead to some lumpiness in revenue and revenue recognition, as well as run rate. And so, wouldn't read too much into lumpiness in the growth rate there on the revenue side. This does continue to be a very important growth area for us. We've seen some very nice new fund creation on the custom side. This is an area where a lot of the efforts that we've made on our custom index capabilities and the growing focus on customization and customized outcomes manifest itself, and we're in a unique position to help these organizations that are really anchored to our frameworks and looking to achieve objectives around our frameworks. And so, wouldn't dig in too much to the revenue growth on that front. On the fixed income side, the AUM in ETFs linked to fixed income indexes, our fixed income indexes and partnership indexes, is around 90 billion dollars. And so, it's been a nice growth area for us that's continued to grow. Similarly, I wouldn't read too much into revenue growth in any one period on that category. We are heavily focused on continuing to drive adoption, new innovation there, and fueling the overall AUM growth across the fixed income category, and continues to be an important area for us.

Yeah, just to put a finer point on that, I think Henry hit a critical item here. That 90 billion of fixed income ETF AUM, the large majority of that is sustainability and climate related. If you look at equity ETFs linked to our sustainability and climate indexes, it's about 360 billion dollars. And within that, about 135 billion or so is climate-specific indexes. And on the non-ETF front, relating to your question, where we are seeing incredible focus by institutions and asset owners to develop specific climate outcomes, the non-ETF climate AUM is about 316 billion dollars. So, these are becoming meaningful contributors in helping to fuel the growth of the business.

Thank you. And the next question will come from Kelsey Zoo with Autonomous. Your line is open.

Hi, good morning. Thanks for taking my question. On active ETFs, could you just talk a little bit more about the economics of the products and services you provide in that area as well as your competitive advantages? Also, if the overall AUM continues to shift from active mutual funds to active ETFs, is that a net positive or net negative for MSCI?

Sure. So, active ETFs are a quite distributed category with things which are really just quite literally putting an ETF wrapper on a purely active fund through to things which are very rules-based and which are much more like an index or which are an indexed version of an active strategy. So, the good news is that we are able to monetize across a lot of that spectrum, not merely in the index business, but a fair amount of it also in analytics with portfolio construction, etc. So, in terms of the more specifically index-linked component, we're now up to almost 30 billion of assets in that category, and the AUM was up 10% quarter on quarter, not year on year, quarter on quarter. So, we think this is an extremely attractive category. We're very engaged in it. I think it's difficult to say exactly how that will play out over time in terms of the economics and the scale, but it's growing dramatically and it's certainly not cannibalizing at all anything we do today. It is literally new revenue, new money, new opportunity. So, I think we're very excited about it both, as I said, from a selling of tools, a selling of data and information, and also from an index construction and licensing point of view. And we believe that we're going to see those numbers become more important in the future.

Thank you. The next question is going to come from Owen Law with ClearStreet. Your line is open.

Good morning, and thank you for taking my question. I do have another question on AI, and Henry, I really appreciate your response to the previous AI questions, but I do want to ask this question from a different angle because there's been quite a lot of conversation about how AI has negatively impacted the whole sector. One concern is AI investment could compress margin if that investment couldn't bring in enough revenue. How do you get the confidence that you invest in like I think you quote like 15 to 20 AI projects, but that can maintain or accelerate your revenue growth, but at the same time you can still drive margin expansion? Thanks.

Thank you. And our next question will come from Scott Wurtzel with Wolfe Research. Your line is now open.

Hey, good morning, guys. And thank you for taking my question. I just wanted to go back to the asset manager market. It sounded like with the 11% sales growth you're seeing some momentum there. But just wondering if you can maybe characterize if this sales momentum is around incremental demand from asset managers or maybe more of a kind of release of pent-up demand in the pipeline. Thanks.

Yeah, I would say going back to my comments earlier, the environment's been relatively stable, consistent with what we've seen in past quarters. And so the strength that we saw in the quarter as we mentioned was most notable in index. We also had solid recurring net new within analytics. This was particularly the case in the Americas. And a lot of this has been fueled by us selling more to our existing clients. So we've had success upselling additional content and services, particularly within index, which has definitely been encouraging for us to see. And a lot of that's been enhanced by our product development pipeline. I would say performance with asset managers can be a bit lumpy. But generally overall we're seeing quite stable results and we were also pretty encouraged by the solid retention rate with asset managers which was about 97% across the company in the third quarter. And so I wouldn't call it a trend, but there are definitely encouraging results that we're seeing with asset managers and saw a solid quarter.

Thank you. And the next question will come from Craig Huber with Huber Research. Your line is open.

Oh, great. Thank you. Henry or Baer, I wanted to ask you there's a lot of school of thought out there with investors here the last year plus that AI will be a net negative for your company and peers out there the other information service companies in that it'll allow new entrants to come into the marketplace and take significant share over time. I hear what you're saying about what you guys can do with AI but I'd like you if you could just touch on more about the competitive moat you have about why others will not be able to come in here and take significant share across any of your major verticals business lines that you do at MSCI. Thank you.

Thank you. And the next question will come from Faisal Alvi with Deutsche Bank. Your line is open.

Yes, hi. Thank you. Just wanted to go back to the performance of net new sales in the quarter. I know obviously there can be a lot of lumpiness and you highlighted strength in Americas and index. Just curious what you're seeing in EMEA in particular because it sounded like net new sales declined. So was just curious if maybe some of the new product innovation that you highlighted is more catered to Americas or if there's something specific, maybe it's ESG related. So just some additional color there would be helpful.

Sure. Yeah, so I would say similar to the comments I gave overall, we see relatively consistent dynamics. I've mentioned in the past that we've seen a bit of sluggishness with asset managers in EMEA. We continue to see a bit of that. I think they've been a little bit slower moving on the rebound of the markets here. And so our results have been a little bit softer in the EMEA region. Our product development efforts are global in nature and so a lot of the enhancements that we're making for not only asset managers but all client segments are targeting tremendous opportunities within the European region. We actually on the index side see a growing ecosystem around our indexes within the ETF community. And so we've seen tremendous growth in assets under management ETFs linked to our indexes in Europe particularly around the World Index where we are becoming a standout in terms of largest ETFs and that's perpetuating through to a whole host of additional opportunities. And so yeah, we see some sluggishness from clients, some outsized pressure relative to the Americas, but our position there is very strong and a lot of the innovations that we have across product lines are positioning us to continue to drive growth. And as I alluded to, that's not only on the index side, but in areas like PCF, many of the innovations you heard Henry talk about and Baer talk about in the prepared remarks are positioning us well to unlock big pools of capital focused on the private asset market in Europe. And we continue to enhance our go-to-market effort across many of these additional client segments in Europe. So continue to believe it's an attractive opportunity, but we are seeing in the near term a continuation of some of the sluggishness that I've mentioned in the past.

Thank you. And our next question will come from Patrick O'Shaughnessy with Raymond James. Your line is open.

Hey, good morning. How are you thinking about the expected timeline to utilize the $3 billion repurchase authorization? And to what extent would you plan to fund that with free cash flow versus incremental debt?

And just to be clear, no change to our approach to capital allocation, no change to our leverage targets. What Henry described is more of the approach that we've consistently taken. And so, it's a continuation of what we've been doing.

Thank you. And the next question will come from George Tong with Goldman Sachs. Your line is open.

Hi, thanks. Good morning. Can you talk about how much pricing contributed to net new bookings for this quarter and what your strategy overall is around pricing?

Yeah, so I would say across the company, the contribution of price increases to net new recurring sales is roughly in line with what we've seen in recent quarters. So, no major shift in the approach. It does vary a bit across product lines and client segments. In terms of that approach that we've taken, we're generally trying to align price increases with the value that we are delivering. So, many of the enhancements and improvements that we make and innovations that we've talked about here, we will be monetizing through price increase. And so, that's a key component to enable us to continue to drive price increase. But we also factor in the overall pricing environment. We do look at client health. Our approach can vary product segment to product segment, even client segment to client segment. But importantly, we are really focused on being a strong long-term partner to our clients. And we are focused on building that relationship. And so, we want to be constructive around price increases and very mindful that we need to continue to deliver value to be able to support price increases over time. But across the organization, no major change on the contribution.

Thank you. And the next question comes from Jason Haas with Wells Fargo. Your line is open.

Hey, good morning and or good afternoon now. And thanks for taking my question. You've talked a bunch on this call about some of the improvements that you've been making to your offering. And I'm curious if you could talk about just the timeline for when we should see that show up. I know it takes time to hit revenue, but maybe in terms of the net new sales, to what extent have you been benefiting from those introductions? And it sounds like there's more coming through. So, over what time even higher level should we think about those improvements coming through? And I guess a split in a second one. Just on the AI benefits that you talked about and the efficiencies that you can gain. I'm also trying to think about the timeline there in terms of when we might see that start to show up in improved margins from here. So, if you can talk about the time there, that'd be very helpful. Thank you.

Yeah, I would say overall as you know, our financial model moves very smoothly. I touched a little bit on this in my prepared remarks. But there is strong momentum in releasing new products and that is starting to impact sales. We've seen roughly 25 million of sales year to date from recently released new products. I mentioned the 16 million on the index side in my prepared remarks. And so, we are starting to see these benefits and that pace of acceleration in product development is definitely additive and something that helps us across many parts of the company here. And allows us to continue to drive growth across not only the asset manager client segment, but all of our client segments. And so, it's one that we do believe is going to be an important driver of growth moving forward here. And it's something that you started to see, but hopefully continues to be a big contributor to our success in the future. Just on the impact on the financial model of AI, Henry touched on this but I would say overall, AI is enhancing to our financial profile. As you know, our business has tremendous operating leverage with high incremental margins. We are selling IP-based solutions that we produce once and sell to many users for many use cases and that enables us to both invest in growth and drive attractive profitability growth on an ongoing basis. And so, as Henry alluded to, AI enhances both of those dynamics even more. So, we're creating even more scale, enhanced productivity, enabling us to invest even more in the business, enhance our solutions, and drive attractive top-line growth as well as profitability growth. And as Henry alluded to, we are not going to take the margin down with some massive elevated AI spend. But it's something that will be a key ingredient to continuing to fuel that dual mandate that we have with our shareholders, which is continue to invest in the business to drive long-term growth and continue to drive attractive period-to-period profitability and free cash flow growth. And so, it's something that will be a smooth impact on the overall financial model here.

Thank you. And the next question will come from Russell Quelch with Rothschild and Company. Your line is open.

Yeah, hello. Thanks for squeezing me in. Just wanted to circle back to the discussion on active ETFs. I think Baer said you'd seen an impressive 10% quarter-on-quarter growth there. I think it'd be helpful to unpack your response to Kelsey's question and maybe give a bit more detail on exactly why growth in active ETFs does not cannibalize your revenue growth with active asset managers. And also, I wondered if you could confirm the other part of the question, which was the difference between the economics between the active asset management benchmarks and the active ETF benchmarks. That'd be helpful. Thanks.

Sure. So, I'm not being cute, but it's genuinely unintuitive to me why it would cannibalize it, right? So, there's an active fund, it's benchmarked and it's previously likely wrapped in a mutual fund or perhaps some other type in some other way. So, then that same active fund, let's say holding everything else constant, it doesn't change its investment strategy, it stays the same, goes into an ETF wrapper, it's fundamentally pretty much neutral for us, right? But, in fact, generally what occurs is the following things. One, in transferring into an ETF wrapper, it typically has a more rules-based approach, wants to be more transparent, it doesn't just want to move the fund into a... There are many occasions. I'm not saying it doesn't happen. There are a lot of funds that go straight into ETF wrapper, but in many instances the investment strategy is somewhat adjusted or you could say quantification of the strategy and we have a role to play there with our tools, factor models, etc. Then, in turn, it may go a further step and it may be turned into an index. Maybe those rules become more strict and hence the strategy becomes an index. And in turn, many such strategies are being built from scratch today. And so, we play the part in it. So, I would say that and in turn, the people who are doing this are generally not in the index or the passive, as people say. We don't like the term that much, but the index business. They're not the traditionally big... there are some major index players doing in the active space, but many of these are purely traditional active managers putting an ETF wrapper on a fund. So, honestly, it's just not a threat to the existing business and there's a lot of upside for us in the future.

Thank you. And our last question will come from Gregory Simpson with BNP. Your line is open.

Hi there. I wondered if you could share more on MSCI's product offering revenue and strategy with the GP client base given alternatives now make up over half of the revenue pool in asset management. I also wanted to ask this in the context of the 5 and 1/2% run rate growth in the private asset segment and the opportunity to get this growth rate up. Thank you.

This does conclude today's question and answer session. I would now like to turn the call back over to Henry for closing remarks.

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