MSCI Inc. (MSCI) Earnings Call Transcript & Summary

Hello, everyone. Thank you very much. I'm Alex Kramm, Senior Research Analyst at UBS, covering exchanges and business services. With me here to kick off my portion of the program is Andy Wiechmann, CFO at MSCI. Thanks for being here. got set for the first time.

Great to be here. Amazing event. Thank you for having us.

Yes. A lot of interest in tech and AI these days. But look, in the interest of time, why don't we just jump in with the conversation here. And from my perspective, always helpful for the audience to start very big picture. So look, MSCI has had some pretty impressive long-term targets out there, double-digit subscription revenue growth and low double digits -- sorry, low to mid-teens EBITDA growth, correct me if I'm there. We'll get into the business details here in a minute. But maybe in very broad strokes, why don't you outline? Why the business is positioned for that type of growth in particular, given the results in the last couple of years have not been quite there?

Yes, sure. So I think you hit the there the , which is a big picture. And I think to understand the opportunity set that fuels that growth trajectory, it's important to start with the big picture. As you know, we are a provider to the investment management industry, more broadly, the capital markets. . And if you look at the biggest trends taking place within investing, you're seeing a move towards rules based or systematic, if you will, customized portfolios and customized solutions. That is one of the biggest trends you are seeing across the investment industry, all parts of the investment industry. That's manifesting itself in things like multi-asset class solutions portfolios, model portfolios, direct index portfolios, structured products, basket trades, all those are some manifestation of that more systematic personalized type of investment strategy. And across all those areas, the necessary ingredients are frameworks to define the investment opportunity set. So how do I think about sector, sizes, geographies, styles, factors in a systematic way, that is what MSCI does. That's the core of what we do. And then on top of that, you need consistent ways to think about the drivers of risk and return that is what our factor models do. You need multi-asset class risk management and performance management solutions. That is what our multi-asset class risk and performance analytics tool do. And you need these frameworks to span all asset classes. And we are unique in having everything from benchmarks, but through to risk models, risk frameworks and risk management tools across all asset classes. And so we are uniquely positioned to help drive this transformation towards customization. And so the exciting thing for us is not only does that mean we can do more for asset managers that are pivoting their business model, and that's our largest client segment, but we are seeing tremendous opportunities in client segments where we've historically been small and that is there is like wealth management, areas like broker-dealers, hedge funds, the trading community more broadly, insurance companies, corporates directly. These are outsized growth areas for us. And we have been ramping up our innovation geared towards those use cases and those client segments. And though we are quite bullish about that opportunity set. And the way we are going to get there is, as I alluded to, doing more with our existing well-established asset manager client bases, asset owners that are also pivoting in this direction. But ramping up and we've been doing this, the solutions geared at helping wealth managers, insurance companies, hedge funds broker-dealers, the corporates directly, the trading community banks and we're seeing that traction. So we are quite encouraged and see that trajectory to drive those long-term results. And then you alluded to the profit long-term EBITDA targets that we have. It's important to keep in mind that everything we do is we're developing IP-based solutions that we generally develop once and sell many times to many users. So there is inherent operating leverage, and that gives us the ability to both reinvest in the business significantly. And that is particularly the case with AI today while driving attractive profitability growth. And so we are confident in that dual mandate that we have to drive sustained strong top line growth, but also reinvesting in the business. sufficiently to fuel that growth while delivering attractive profitability growth.

Okay. Perfect. Thank you. Great overview. But now, obviously, we need to think a little bit more short term. So sales improved a bit or very nicely actually. And you certainly sound more optimistic on the call. Now with less than a month left in the fourth quarter or the year actually, and given that you hear a Reg FD event, how are things tracking at the moment? And how should we be thinking about 2026?

Yes. Yes. So you're right. We had solid Q3 results. We had record Q3 levels for recurring sales and recurring net new or close to in index and analytics, our 2 largest client segment -- or our 2 largest product segments. And that was fueled by not only traction in many of these newer client segments with the newer solutions I alluded to. And so that's something that gives us a lot of confidence, but we also got strong traction with asset managers. And so there have been a number of factors at play that have contributed to the slowdown in overall growth over the last few years, everything from some of the noise we've seen in sustainability and climate. We've seen some noise in the commercial real estate space, some pressure particularly a year or 2 years ago with active asset managers. And so that has led to some slowdown, but we're in a position now where we have been rolling out solutions. We've been getting traction enhancing our go-to-market with many of these client segments that I alluded to earlier, and at the same time, enhancing our value proposition to active asset managers to help them, as I alluded to in the last question, transform their business model. And so there's going to continue to be some noise in there. But overall, we remain very encouraged I think you heard Henry's comments on our third quarter earnings call that we are seeing traction on many of these new solutions. And those are going to help fuel momentum and sustained growth well into the future. Obviously, we're not -- we don't provide guidance or commentary specifically on Q4, 2026 around operating metrics. But I will say, we're bullish and we're encouraged about the momentum we're seeing across the business.

I had to try. But -- and then quickly on the other side, you touched upon it a little bit already, but where do you think we should still be worried about maybe sales being a little bit slower or retention declining? So do we actually think retention has normalized after the last couple of years of a little bit of more shop?

So listen, we've been engaging more holistically and strategically with our largest clients. That's something we've talked about in the past, but a big part of our go-to-market, but also our product road map has been delivering holistic solutions to these organizations. And by doing that, we have a much broader relationship where we can add value across many different frontiers. And so that is inherently helpful to retention rates and helps us to help clients grow in certain areas where they might be looking to rationalize in other areas. And so we do think we're in a pretty good place across most of our client base, particularly our largest clients. As I alluded to, we'll continue to see some lumpiness in results in places like sustainability and climate. I think there's still going to be some noise related to like commercial real estate, and we'll see. And I've alluded to this before, potentially some of the elevated cancels with asset managers in Europe, particularly in the near term here. But as I alluded to in the last question, we're encouraged by the momentum, and we remain bullish about the trajectory of recurring net new and recurring sales where we do see strong engagement and strong demand for our solutions.

Okay. Good. Last one from a big picture across the business kind of perspective. But pricing, obviously always a topic that people are interested in. Seems like following a period of higher inflation a few years ago, things are a little normalized. Do you think this is a good way to think about 2026 as well?

So as you alluded to, I would say our -- the contribution to recurring sales from price increases has been pretty consistent overall at the firm level over the last couple of years. That was slightly lower than it was in 2023 when we were in a slightly higher inflationary environment. . But overall, across the business, there are differing dynamics at play and the contribution has fluctuated a bit in each product area and across client segments. But on whole, the contribution has been relatively consistent. And our approach to price increases has been relatively consistent. So we do focus on beyond just the overall pricing environment. We are heavily focused on client usage. So how much are our clients using our tools, where they're using them for client health that is an input and then probably most importantly, the value that we are delivering to clients. And so it is important to underscore that many of the enhancements, the innovations that we're making to our products and solutions. The way we monetize those is through price increases in certain parts of the business. And that increase in innovation enhancements that I alluded to earlier, that's something that will continue to help support price increases. And so price is going to be an important part of the growth going forward. It's one where we remain quite confident. We've got the opportunity sets and the ability to deliver value to clients such that we can generate more value for them and even the price increase that we're pushing through to them. But I'd say across the business, there will be varying dynamics. But overall, I'd say the approach is going to be pretty consistent, looking forward here at this point.

Okay. Fantastic. All right. Then getting a little bit more into the segments, starting with the largest segment, which is index. So look, the business has been growing double digits for a long time as I was following the company, but things have softened, I guess, last year or last couple of years. And now people worry that will not grow that fast anymore in the double digits. So can you maybe just unpack how we get back to that double-digit range?

Yes. So it is important to keep in mind -- yes, to your point, the index subscription growth has slowed over the last several years gradually. If you look at probably the biggest driver of that slowdown, it has been the sustainability modular or ESG index module. That's something that was growing back in probably 5 years ago or so, that module was growing in the 40%, 50% type subscription run rate growth area. And so that was a huge driver of helping us drive elevated subscription growth within index. That has gradually slowed down, and we don't break it out discretely, but you can see in the ESG and factor category within that index run rate bar that we report that, that has slowed meaningfully down into the single-digit growth range. And so that fluctuation alone has been a meaningful driver of the slowdown. The other thing I would highlight is, we've seen a growing contribution from those other client segments that I alluded to in your first question. And so we have seen more and more of not only the overall subscription run rate, but the growth coming from those areas like wealth management, broker-dealers, hedge funds, the trading ecosystem. So these are our client segments. As I alluded to before, we've been historically small. We've generally in the past taken tools that we developed for that active management process and license them to those client segments. There's still a long way to go on that front. But what we have been doing is developing toolkits, data sets, solutions that are a little bit more geared towards those specific use cases. And so we are very excited on the heels of many of the new solutions that we've been rolling out around things like the custom index ETF module, our sustainability and factor methodology module, AUM constituency data or venture-backed index offering. And so we're rapidly releasing data sets that are geared towards some of these other use cases. And we know there is demand there. And so we continue to have confidence about the long-term trajectory within index subscription. We see tremendous opportunities across many dimensions, both on the product side but also the client segment side. And so we're definitely looking forward to the future.

Okay. Good. Can you -- so can you go into the opportunity in custom indices statistically? I don't think you just mentioned it, but I know it's the number one investment area that you guys have. So maybe just talk about what seems like you're winning there, why are you winning? And how do we think about this opportunity in general, which I think you think it's still pretty early?

It is. It is without a doubt. And going back to your first question, when I talked about that big picture view of what's driving the industry and our business, systematic, personalized portfolios and strategies, you can very efficiently implement a personalized systematic strategy being an index. An index is effectively a basket of securities with weights or some systematic algorithm on top of it that determines the portfolio. . And so we are seeing tremendous opportunities around that bigger trend, and I alluded to this earlier, manifest themselves in all parts of the industry. So you're seeing broker-dealers creating things like over-the-counter derivatives like a total return swap. You're seeing banks develop structured products with customized outcomes or personalized views on the market. You're seeing direct index portfolios. You're seeing wealth organizations develop models that implicitly and sometimes explicitly bring in customized views reflecting their house views and research views or even the personal views of the end client. And you're seeing the institution increasingly put money against custom mandates. And so for all those use cases, our content can be an integral ingredient. And so that's why we get so excited about what we call custom indexes and custom indexes is a bit of an over simplification. Yes, a lot of it is fueled by our development of custom indexes, but some of it is custom data sets, some of it is services that we can deliver. But we have -- you alluded to actively investing in this category to fuel that demand and we think we are uniquely positioned to drive that opportunity set. We're uniquely positioned because at the core of what MSCI indexes are, they are a framework to do a systematic asset allocation. So how am I going to allocate my assets across geographies, sectors, countries, sizes, styles, factors, climate considerations. We give those ingredients that are already used for an asset allocation exercise that can naturally be used to pick overweight, underweight bets, custom outcomes. We were also the standard in things like factors with the standard in things like climate objectives in sector classification. And so the combination of being that common language being embedded in the policy benchmarks and that asset allocation of the world's large investors, makes us a natural complement, natural provider of tools for custom indexes. You throw on top of that what AI is enabling us to do. And so creating things like custom buckets, together with the investments we've made in our custom index construction capability, not only doing simulations, but ultimately productionizing indexes, we are very, very excited about the opportunity on custom indexes. And that's not only on the subscription side, but it's also importantly fueling a lot of the growth on the asset-based fee side.

Okay. Very good. Another topic. As you kind of alluded to already, so I'm not sure what else to add here, but it's really about what you said about new customer sets and it's still kind of an index for the most part. But obviously, new customer segments like wealth hedge funds, banks have helped on the index side, I believe. And -- but the question really is, is it enough to offset maybe some of the challenges that we all see on the asset management side?

Yes. So there are big opportunities. We're early on those opportunity sets. They will, over time, as I alluded to, contribute more and more. So they will be outsized growth areas. And just from a weighted average basis, will contribute more and more to the overall growth, but we do need to continue to fuel the growth with asset managers. And yes, there are pressures on active managers. There's structural change taking place but we are in a position to help these organizations transform their businesses. So you're seeing them move into more of these systematic strategies, more solutions. We're seeing them raise active ETFs, many of which are systematic in nature. And so for sure, we need to continue to add value to those organizations in a world of AI. There's also a growing demand and thirst for all that content that we deliver on the index side, and that's definitely the case with active managers. And so we are looking to grow not only in these newer client segments that are going to be higher growth but continuing to fuel growth with asset managers, and that is an important part of the -- not only our growth algorithm, but the broader investment ecosystem, and we can play a meaningful role there.

Fair enough. All right. Shifting gears to analytics for a minute here. That's been -- I want to say, maybe I shouldn't say that. It's been very strong. I was going to say surprisingly strong. But over the last couple of years. So the question really is, is it sustainable? Where is it coming from? I think some people worry that hedge funds, in particular, and the growth we've seen there has really fueled the growth. So is that right? Are you seeing any slowdown in any trends there? So what should we be aware of here?

Yes. So we've been encouraged by the growth on analytics. We've had now several years of higher growth than we had seen in the past, and it's been quite resilient. It's been quite stable. Listen, a big part of it is from hedge funds, but we don't view that as a bad thing. Hedge funds have been our highest growth client segment. That has been heavily driven by success with our factor models. And so when you look at the -- our investor presentation and look at the analytics subscription base, we have been seeing solid double-digit growth with our equity analytics and a lot of that is fueled by traction with headwinds. It is also traction with broader investors, broker-dealers, asset managers, and so we're seeing strong demand for our factor content, beyond just hedge funds. But we've been very successful in licensing more and more content and continuing to innovate in solutions that are helping and are at the backbone of how many of these large multi-strat hedge funds actually manage risk and manage their portfolios. More broadly, we see more and more opportunity to do that. So we don't view that as a bad thing. But it's not only that. We have been seeing strong traction with things like our AI insights. We've been seeing strong traction with many of the enhancements we've made to our fixed income analytics capabilities. We've been benefiting from our enhanced APIs and modern data distribution and access to our analytic engine that's making it easier for clients to consume more and more content. And so we continue to be quite excited about the opportunity in front of us on the analytics and think there is definitely sustained momentum even beyond hedge funds, although we do continue to see attractive opportunities to do more hedge funds.

Okay. All right. Then unfortunately, moving back to the things that have not been so stellar is obviously sustainability and climate. You mentioned it earlier. That business has continued to slow from the peaks in 2021, '22. Any turn on the horizon? And then on the flip side, could that actually go negative? And how should we think a little bit more shorter term into 2026?

Sure. So there are varying dynamics at play across sustainability and climate. If you remember, we renamed the segment from ESG and climate to sustainability and climate and that was driven in large part to reflect that we are doing a lot more than just ESG and ESG rating. ESG rating that's always going to be a very important part of our social set. But we are increasingly delivering solutions to clients to help them understand other sustainability factors and the financial risks associated with other considerations. And so as I alluded to, there are parts of what we are doing, where we're seeing tremendous engagement. So areas like our GeoSpatial asset location data set, some of our broader physical risk insights and physical risk solutions that we're delivering. You see tremendous traction across many other climate considerations and it's not only in the Sustainability and Climate segment, but also in the Index segment. We're still seeing pretty robust growth of new climate indexes, climate index-based products out there, strong interest there. And so the approach to sustainability is evolving over time. And so that manifests itself differently in different client segments, different locations. As we've talked about before, in the U.S., you are seeing a little bit of hesitancy around launching new sustainability strategies, broadcasting how you as an organization are integrating sustainability for a whole host of reasons. And so we have seen more pressure within the Americas, in Europe. We've seen evolving views on how to incorporate sustainability from -- in large part, a regulatory standpoint, where you're seeing different regulations focused on everything from missions to physical risk to broader sustainability objectives. And those can be competing between country, region, different regulators, different organizations. And so I think that has created some hesitancy. And so I think we're going to continue to see the dynamics that we've seen in recent quarters play out in the near term here. There's going to be choppiness in the growth rate. The important thing to keep in mind is, this is an integral part of the investment process. We are hearing loud and clear from our clients that this is something that is important to them. It is a financial risk they know they need to focus on. They have demand to see broader views of sustainability beyond just traditional ESG. They are looking at things like resiliency and transition, energy transition, they're thinking holistically about physical risk. These are all areas where we can help them, and we are helping them. And I think given the breadth of our solution, our leadership position, we are actually solidifying our position as a leader in the space. And we're doing more and more for clients in what we believe is a big long-term opportunity set. And so we do believe we are well positioned for the long term. We're solidifying our position even stronger today. But in the short term here, we do expect the dynamics we've been seeing in recent quarters to continue.

Okay. And then maybe to round it out, that's quickly touch on the, I guess, the other segment, which is mostly real estate by private markets. Clearly, there's a lot of enthusiasm on private markets, in particular, and we've seen some big deals in the space recently. We could probably talk for 30 minutes about all the dynamics here in this evolving market. But maybe just can you sum up what you're doing here if you need to have more assets or capabilities in the space and if and when we should actually see a bigger contribution to the growth of the overall company. The private market, in particular, like we can skip real estate probably, but go ahead.

And by the way, we do see very active and attractive opportunities on the real asset front. And it goes hand in hand with what we're doing across broader private markets here. But yes, to your point, we could spend a long time on this front. This is an area where we are heavily focused. We remain very excited. We think we have the capabilities right now to deliver those must-have solutions that the industry needs. And we are uniquely focused on and uniquely positioned to deliver them. And so we are -- and you've seen us announce a lot of these very actively rolling out everything from our family and suite of benchmarks across the private asset space to more recently our PAC, our private asset classification standard. You've seen us roll out private credit risk scoring types of tools that are out there, deeper transparency insights workflow solutions that help our clients extract more information from the rich data that they are getting and that we have on their behalf and then helping deliver solutions that are going to underpin are critical for thing like liquid products out there, better risk management, targeted climate type solutions. And so we have been, for the last several quarters, actively rolling out this wide range of tool sets that we've been working on since we acquired Burgiss. And we are actively ramping up our go-to-market or we have been ramping up our go-to-market to strongly position ourselves to deliver those frameworks, we know what the industry needs. So they need a systematic way to think about the addressable opportunity set. How do I think about the total universe of private markets? How do I think about the risks that I take by allocating to real estate versus private equity within private equity growth versus LBO versus VC. How do I think about private credit and the risks I take there? How do I think about the liquidity risk I'm taking? And importantly, the value that the manager is providing to me where I'm paying significant fees. And so we're very bullish about this opportunity set. We've been actively rolling up the tools and ramping up our go-to-market in areas like wealth managers and GPs in addition to our established client segment of LPs, such that we're at a point where we are very excited about the outlook there and very excited about our positioning and establishing these standards.

Okay. All right. We have just over one minute left. So I want to give you maybe a final type question on both expenses and capital allocation. So maybe, again, as we think about next year, just remind us how we should be thinking about expense philosophy in general. And then, of course, on capital allocation, you've been very selective. But anything that -- any capabilities you feel like you need to add -- you picked up -- you stepped up repurchases recently. So again, just maybe with 1 minute left, expenses and capital allocation that we should be taking away from a financial picture perspective.

Yes. So just I'll hit the second question first quickly. No change to our approach to capital allocation. I think we continue to selectively look at bolt-on accelerator acquisitions. I think we generally feel like we have the capabilities that we need to pursue these very attractive growth opportunities I alluded to earlier. . And so we don't need to do any acquisitions. We're not looking to do anything big or transformative, but there can be areas where we can bolster the content set that we have, the solution we deliver to our clients around areas like private markets, maybe pieces of the client ecosystem. But generally, our focus is going to be on continuing to repurchase shares because we are big believers in the long-term opportunity set here. On the expense side, again, no change to our approach here. We very actively financially manage the business, and we are going to deliver on that dual mandate of driving long -- investing to drive long-term growth, while delivering attractive profitability growth. And I think Henry used the term Godson when he was talking about AI. AI touch is so much of what we do, and it is very CFO friendly. I can tell you that AI is already starting to deliver very attractive efficiencies, productivity benefits for us. But our intent is to invest -- reinvest that into the business to fuel these attractive growth opportunities. And so we're very confident about our ability to drive attractive growth and profitability and invest in these critical investment areas for us.

Excellent. Good way to end it. Andy, thanks very much for coming, and hope to have you back next year.

Thank you for having us. Thank you.

Appreciate it. .