MSCI Inc. (MSCI) Earnings Call Transcript & Summary

Great. I'm Alex Hess, Vice President on Andrew Steinerman's Business and Information Services Equity Research team. Thank you all for joining us this afternoon at the Ultimate Services Investor Conference. It means a ton to have you all. And especially Andy, who is making his fourth consecutive appearance at Ultimate Services. Andy, a warm welcome to USIC 2025...

Thank you. Thank you. Thank you. Very happy to be here. Always a great event, didn't disappoint this year. So thank you for having us.

Okay. Great. Awesome. Andy, I want to start with the recent guidance update for a higher interest expense following your bond issuance. Investors are likely to draw a line between this update and a potential return of share of capital to shareholders. How should MSCI be -- sorry, how should investors be thinking about your recent capital allocation actions. And so maybe why has MSCI been a little bit uniquely aggressive this year?

Yes, I would say we have been aggressive. We've been opportunistic, but it is in line with our historical approach. And so that historical approach starts with available cash. And so given the attractive financing markets that we've seen or at least attractive credit spreads that we've seen, we've taken advantage. Our leverage was running below the targeted range of 3 to 3.5 for some time. And given the financing we did in August and then again a few weeks ago, we've now moved to be within that targeted range. And so we're solidly right in the middle of that targeted range of 3 to 3.5. That has given us a higher amount of cash. And we use that as an input, along with two other factors in our share repurchase approach. One is volatility in our share price. And so we tend to set up repurchase programs that tend to buy more when there's more volatility in the stock. And then we do put some overlay of value. We are very bullish on the long-term prospects of the company, but we think in the short term and the near term, we can create value by putting some degrees of, I'll call it, conviction around price levels on our repurchases. And so you've had in recent periods, particularly recent months, you've seen our cash jump. You've seen some volatility in the share price, and we've been aggressively taking advantage, and it's been a tremendous source of value creation for us over the last 13 years, and we believe will continue to be a key ingredient of the formula value creation for us.

Great. Great. So now let's -- normally, you end with capital allocation, we get started there today. So let's talk about the momentum that you guys have been seeing, at least as the third quarter in the net new subscription sales with new products seem to facilitate that improvement. What solutions are really on the net new side moving the needle most for MSCI at this juncture? What should investors be watching and be really training their eyes on?

I think you've heard us talk about a lot of them. I think across the organization, we have accelerated the pace of new product development. We've released a whole host of capabilities that are valuable and sellable in their own rights, and we've also released a whole host of capabilities that help support price increases and are adding -- continually adding more value to clients. And so it's not one specific area. It's across the business, and it's really across all product segments. But on the Index side, we have seen traction in areas like our custom index capability, an area where we've continued to innovate and enhance that capability. We've come out with data sets in recent periods that are readily monetizable with the trading ecosystems, so hedge funds, trading firms, broker-dealers around things like our sustainability methodology, index methodology, factor index methodology, our constituent AUM data set. You have seen us release additional insights into parts of the investment ecosystem that allow our clients to understand better what's going on around index-based products. And you've seen us come out with things like the venture index that we've recently released. And so those are all products that we think are very impactful to many different client segments. They're continuing to fuel not only the value we can bring to -- and I forgot to mention what we're doing on the active ETF side, which I know it's gotten a lot of attention. But those are all things that are being helpful and adding value to our existing clients, but also continuing to fuel that outsized growth with additional client segments. Just to provide a few other examples across product segments. On the Analytics side, we've had tremendous traction with our next-gen factor model. You've heard us talk obviously about some of our fixed income capabilities. You've heard us talk about AI insights or AI insights offering and in areas like Private Assets, arguably the area where we probably had the most innovation and new product development, everything from our PACS, sort of private asset classification standard that we've recently rolled out. I think everybody is familiar with them, and we've talked about the Moody's partnership and the private credit scoring service that we can provide are providing a whole host of benchmarks and content sets, a self-extraction tool that is allowing clients to get even more value out of the transparency service that we deliver to them today, where they can not only look at the information that we pull out and present to them in a structured fashion with kind of the standard classifications and analysis around it, but they can actually interrogate and extract information on their own. And so very, very rapid pace of innovation, which is helping to fuel growth across the business.

Yes. That's helpful. So you flagged that about 20 -- on the earnings call that about $25 million of year-to-date bookings come from newly released products for the first 9 months of the year. That's about 13% of the total. How do you calculate that number? And how does that compare to years past?

Yes. So that reflects new recurring sales from products that have been released since 2023. And so we think that's generally a good time period to start to quantify the impact of new products. That does not pick up, as I alluded to, capability enhancements that are helping to drive price increases, other benefits for clients, but really focused on those new products that we've come to market and are selling discretely. What's fueling that is those products I mentioned in your prior question. And so that's what comprises that $25 million. And it is across many parts of the business that is a pickup from what we've had in the past. And so new products are definitely contributing more and more to sales and growth of the business.

Got it. And so in the past, you were able to lean more on capability enhancements to exist extent products. So taking -- let's for -- just for an easy example, ESG ratings, taking that from 1,000 equities to 10,000 equities. And now it's another -- an analytical overlay on the...

I think that's -- yes, that's one way to think about it. That's probably a little bit oversimplified in certain areas. But I would say we are -- and another over simplification here is in the past, we have monetized products that were developed for asset manager use cases within other client segments where we've seen applications and opportunities across a wider range of use cases and client segments. A lot of the product innovation that I alluded to is actually developing products and solutions or services that are geared to non-asset manager client segments as well. And so it is an important contributor to and driver of this outsized growth that you've seen us have and we'll continue to see us have across the non-asset manager client segments.

Got it. And then it seems like you sort of answered this question already, but I'm going to ask it anyway, 3Q '25, 3Q in general, is generally or seasonally quiet period for you guys on new sales. It's not a signal rich as 4Q. We're going into 4Q. How do -- should investors expect 3Q's performance to translate well into 4Q?

So we have not given any specific guidance on Q4 here. We -- to your point, Q4 tends to be a higher period of sales and cancels for us. It is a period where we tend to have a higher portion of contract renewals and around renewals, we can oftentimes have up sales. On the flip side, we can also have elevated cancels. And so you will oftentimes see elevated cancels and a lower retention rate in the fourth quarter. But we also see sometimes some client budget dynamics that feed into stronger sales in the fourth quarter. And our sales incentive plan and plans oftentimes are geared towards annual targets. And so all those reasons translate through to Q4 being an important and often a constructive quarter for us. You heard our commentary about -- we are encouraged, Henry is definitely encouraged about the momentum that we've seen in new product development. I think we've indicated that we've seen a fairly consistent end client environment here. On the margin, we've seen some favorability in certain pockets from the momentum in equity markets. But a lot of our bullishness and excitement has been around your prior questions on the new product development and traction we're getting in certain client segments. And so we continue to hope that continues.

I want to drill into the private capital segment because I think Index is understood and Analytics, everybody knows as a view, and I certainly do. I think it's well understood as well, though. On private credit -- private capital, excuse me, how do you -- you're launching private market data with index applications. You're launching solutions for the private markets with Analytics, more Analytics like use cases. How do you decide which segment something gets put into? And it seems like that maybe is a little blurrier than it used to be.

It's a fair question, and I can understand the blurriness. And like Analytics, like sustainability and climate, Private Assets, the content we have there, the unique access to data and IP that we're creating benefits all segments of MSCI. And so you're absolutely right. You are seeing us launch things like that venture index I alluded to earlier. That shows up in our Index segment. You're seeing us launch our private credit risk model. It shows up in our Analytics segment. And so we are seeing innovation happen across all segments related to the private asset capability and franchise that we are building. Typically, it is -- the way that we determine where -- which product segment it will show up in is around use case and product dynamics. And so if it is something that is a equity index/liquid-index ETF-type product like that venture-backed index, it's going to sit in the Index segment. If it's an index that is used for private asset benchmarking and specific private asset use case that will be within our Private Assets segment. When it's an analytic risk tool, it's typically used by a risk office. So our private credit risk model is primarily used in a CIO or a CRO type of capacity to understand risk of a private asset portfolio relative to the risk of the entire organization, that shows up in our Analytics segment. And so if it is -- generally, if it's something geared towards private asset investment process, private asset investors, it's going to show up within our Private Assets segment. But there will be -- continue to be a lot of instances where that IP is fueling opportunities across the business.

That's super helpful. And I want to touch on a comment that your colleague, Baer Pettit, who's retirement was just announced, all the best to Baer. He noted on the last earnings call that more and more LPs are using MSCI Private Capital Indexes for performance benchmarking, and this is a shift away from traditional public market proxies, absolute return hurdles, whatever. What's driving this transition? And it sounds like you expect this to benefit your business. Is that fair?

Yes. Yes, for sure. To oversimplify here again, there has not been a good alternative. The most common benchmark for private asset allocations, private asset portfolios among many asset owners, has been a public market equity index. And I think [indiscernible] in a private asset portfolio, particularly because a lot of -- the reason people invest in private assets is the perception that it is uncorrelated and has different dynamics fueling its performance. And so we are on that journey to create fit-for-purpose, much more robust, standards, including for indexes and benchmarks that will benefit and be a much more effective tool for investors in private asset classes, and that's not only for private equity. We've been on that journey in real estate, but also for private credit and infrastructure. And so there's all sorts of considerations around making sure you have robust data to be able to develop an index that is a sufficient cross section of the market, which I think there have been a few providers that have had that data, reliable enough marks and value information, cash flow information on the funds themselves that ultimately feed into and comprise the indexes, standard -- classification standards, as I alluded to before, there haven't been clear definitions a lot of times between what is VC versus growth equity versus LBO within private credit, what are the different instruments and instrument classes? How do I think about the dynamics of those? And then related to that, what are the risk factors and attributes that I need to think about in each of those? What is the importance of liquidity, when valuations are reported, thinking about things like frozen indexes, which are much more important for things like governance, and compensation versus unfrozen indexes that will -- actually historical results will change over time. And so these are all problems that we are actively solving and coming out with solutions that will make for much better tools for the investors who are investing in the private markets.

So by frozen index, do you mean like a cohort analysis? Or like vintage analysis, vintage...

Well, there is that. So we can do that. So yes, one, when you're thinking about performance benchmarking, there can be the measure of how did this manager perform relative to other funds, say, this LBO manager, how did their 2017 LBO fund perform relative to other LBO funds launched in 2017. And so we do that performance benchmarking. But then there is also -- if you will, like the return on all of the funds you've invested in, how has that performed relative to the market? And one of the nuances with private assets is that there are reporting lags. So not all managers report on the same time horizon. And so if you're reporting the return for Q3 2025, by the way, you haven't done that yet because most of the managers have not reported. Typically, it's with a significant lag after the quarter end. But when you report that, you might only have some subset of the funds reporting to you. And so the next time when you report on Q4, 2025, you're getting the numbers for Q2 -- Q3 '25, and so you have to restate the historical results, which is important to do, but it's also important to have a frozen index over time, and they serve different use cases. And so that's not a trivial thing to do. You need to have the right granularity of data in the right form and format and the right infrastructure and there have not been good sources for that.

Yes. Spoken like somebody who knows a little bit about reporting lags when it comes to AUM. So I want to talk on AI [indiscernible] Henry, called a precondition of employment. It's a big deal for you guys. You're injecting it into your products, you're using it in your back end. But like -- there's also a narrative out there that information services companies, some of them could be AI losers. Not saying you, not seeing something else, but just saying generally. Does MSCI's most AI-enabled cohort of customers, define that however you want, do they consume more data and do they buy more MSCI solutions than, say, the less AI forward?

So obviously, early in there is a wide range of AI applications and use cases out there. I'd say, in general, yes, the punchline is yes. Those organizations that are being super proactive in analyzing data, training an agent, incorporating our analytic engines into their processes are bigger consumers of more content sets, and that cuts across most of our product lines and product areas, particularly the case in Index and Analytics as well. And then they are bigger users, so consuming more, which oftentimes can lead to -- depending on analytics, sometimes can lead to upsell opportunities, at the very least that gives us an input into the pricing equation in the future. And so yes, we definitely view our tools, our content, our unique IP as a key ingredient into a [indiscernible] and we do see those AI forward organizations as very hungry consumers of more and more content and more and more usage of that content from MSCI.

That's really helpful. Speaking of consuming more content from MSCI, let's look at Europe for a second. And you noted in October, your words always come back to you, that the MSCI World Index has become a standout in terms of leading European ETFs. What makes the World Index in particular, stand out? And how do you define that qualitative comment?

Yes. I mean at the simplest level, we've seen extraordinary growth and market share capture of cash flows into European listed ETFs. So that's the thing that is ultimately a reflection of our strong position in that market. And one thing that is particularly exciting around that is, we are almost the de facto measure of international investing in Europe. So a very slightly country-to-country. But generally, when European investors think about investing outside Europe, they think in MSCI terms, and that is a big market. And we are the leader anytime an investor is allocating assets internationally. And so even when they want to get U.S. exposure, we pick up a large part of that with the world franchise. You're also seeing similar to what you see in the Americas, both institutions and even the wealth-driven investment process, become more model-driven, systematic, and similarly, our index frameworks lend themselves very nicely to getting those model-driven exposures. And so yes, we are very excited about the traction we've seen in Europe, we're capturing every quarter, a significant portion of the new flows into European listed ETFs. That market is quite a bit smaller than the Americas. There have been favorable trends. There are some dynamics that have led to it being smaller, but it seems to be on a trajectory where it could be quite bigger in the future.

That's great. And that's aligned with your -- with, let's say, with some public comments from your largest customer. But their view and possibly maybe it is not yours, is that the market for European ETFs is sort of primed to grow and sort of really hit its stride. But why hasn't it yet? Like we're in 2025, ETFs are not new.

Right. So as I alluded to, there have been in the past certain dynamics around how people save, if I can generalize even at the highest level. So you have seen in many markets, heavy use of deposit cash products, you've seen heavy use of insurance products. And so there are norms that have led to less usage of ETFs and other index products. You have just seen a less liquid and less evolved market as well. And so you've started to get critical mass in many ETFs now listed in Europe. You've seen fees that are in a realm that they are attractive to many wealth driven investors and individuals. And then as I alluded to, you are seeing this move towards more systematic-type investing, and you've seen certain UCITS products that make it easier to put individuals into investment vehicles. And so there's a confluence of factors that are now leading to ETFs being a more palatable and useful tool for investors looking to save, invest, achieve specific outcomes. Related to achieving specific outcomes, you also have seen a strong growth in a wide range of indexes. So it's not just one index there. We are seeing tremendous traction and new launches around climate indexes, other factor dynamics, geographic sector exposures and all those things help fuel ETFs as a useful investment product.

Great. I want to just briefly touch on the two of your other businesses, which is Analytics and then -- or let's say -- and then maybe the client segment hedge funds. On the Analytics side, obviously, it's had very nice growth and very nice margin expansion in recent years. I know the way you typically break this out is about 2/3 multi-asset class -- of run rate as a multi-asset class, about 1/3 of run rate is equity analytics. Help investors get a little bit more flavor for what sits inside that Analytics portfolio.

Sure. Sure. So yes, the -- as you said, about $490 million of run rate in what we call MAC analytics or multi-asset class analytics. The large majority of that is associated with enterprise risk and performance solutions. So these are services, analytic services and analytic content that are used by a typically a central investment or central risk office to look across multiple portfolios often involving multiple asset classes. That is encompassing -- those analytics do everything from factor analytics to market-based risk. So factor risk and market risk, market risk being things like value at risk, Monte Carlo, simulation scenario analysis. If I put my organization through a scenario of financial crisis, what's it going to do to my portfolio. And so that is the largest portion of that MAC analytics piece. We do have a growing -- meaningful and growing, call it, in the very rough orders of magnitude, like $50 million, $60 million of run rate fixed income and wealth offerings there. And so you hear us talk about those as big growth drivers for us. And so we've continued to get good traction with our fixed income analytics, which sits within that multi-asset class category and our solutions for wealth organizations. On the equity analytics side, it is largely a franchise built around our factor content and applications and services that feed into that factor content. And so we will license a big portion of our content directly. So the factor models factor content directly. But oftentimes, clients will also license applications like our Barra PortfolioManager or specific application services like our Optimizer to allow them to do things like, obviously, portfolio construction optimization, but also back testing, risk and performance attribution on their portfolios. But it's largely you can think of built around the factor content for us. Just quickly, we're on the topic of Analytics, I did want to flag one modeling point. The -- as you know, there is some lumpiness in the Analytics revenue growth rate, which relates heavily to timing of implementations. And so if we have a large number of implementations completed in a certain period, that will lead to elevated revenue. Likewise, there can be periods where we have a lower level of implementations that are completed. In Q4, here, we expect revenue growth to be a little bit lower than run rate growth -- revenue growth to be in, call it, the mid-single-digit range as a result of a lower contribution from implementations taking place in the fourth quarter.

Got it. So maybe in the last moment that we have, on the hedge fund space, that's obviously been a an area of strength for the Analytics business, seems to be predominantly the equity factor model products. Can you just walk through investors how deeply you're ingrained in these multi-manager complexes and how strong of a runway that is for you still?

Yes. So it is -- we are integral to how they manage their organizations and their investment process. Obviously, vary slightly depending on their tilt and focus and where their assets are. But generally, these large multi-strategy, multi-manager hedge funds are using our risk models to assess exposures and risk across the organization. And also manage that risk as well. And so oftentimes looping back to some of my earlier commentary feeds into creating baskets using other tradable products to hedge risks that they have. But it is their core measure of risk. And as you all know, risk is at the epicenter of how they generate outsized returns, uncorrelated returns over time. And as a result of it being the backbone of kind of how they manage their investment process, it feeds into -- increasingly into the portfolio managers and the portfolio level as well where risk is oftentimes used to assess the idiosyncratic versus systematic components of a portfolio and ultimately, something that the portfolio manager is heavily focused on as a result because that is how they are adding their alpha at the end of the day. And so that's -- we are critical to how they invest, but a lot of these innovations that we're coming up with are making it much more effective for them to manage that risk, assess that risk and then ultimately achieve better outcomes on top of that risk over time. So it's, yes, a big opportunity for us.

Great. That's super helpful. Thank you, guys, all for joining us.

Thank you. Thanks so much.