MSCI Inc (MSCI) — Q3 2019 Earnings Call Transcript

Thank you, operator. Good day, and welcome to the MSCI third quarter 2019 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter. This press release, along with our earnings presentation and a brief third quarter update, are available on our website, msci.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including but not limited to, 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 on pages 21 to 29 of the earnings presentation. We will also 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 Linda Huber our Chief Financial Officer. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. With that, let me turn the call over to Henry Fernandez.

Thank you, Salli. Hello, everyone, and thank you for joining us today. Before I start, I would like to say that we're very pleased to have Salli with us on her first earnings call at MSCI. So congratulations to you, Salli, and we're fortunate to have you. In the third quarter, we again saw strong performance across our franchise. With year-over-year growth of 10% in revenue, or 12% on an organic basis, 13% in adjusted EBITDA and 24% in adjusted EPS. In addition to these exceptional financial results, we achieved several significant milestones. We struck new long-term agreements with BlackRock, Intercontinental Exchange, Deutsche Börse and Charles River Development and we acquired Carbon Delta. These agreements aligned with key strategic partners and provide us with important capabilities that will continue to enhance our growth and competitive differentiation. On BlackRock, we extended our successful strategic relationship with them for another 10 years through March of 2030. As you are well aware, there are strong secular drivers of assets into ETFs and this new agreement creates a tremendous opportunity for MSCI. Our renewed contract with BlackRock aims to maximize long-term revenue growth by further balancing and aligning the price-volume mix in our arrangement with them. More specifically on the deal, the current licensee rates that BlackRock pays to MSCI will be reduced for ETFs with total expense ratios below certain levels according to our phased implementation period. In these ETFs, our current fee rates have become a much larger percentage of total fees than originally anticipated. Therefore, the new agreement corrects for that. The aggregate reduction to our total asset-based fee run rate as of September 30 of this year associated with this adjustment is not material. Based on the AUM as of September 30 and based on the most recently confirmed total expense ratios of these ETFs that are subject to recent adjustment. Any potential future reductions in total expense ratios of licensed BlackRock ETFs may reduce the license fee rates payable to MSCI for those ETFs. These fee reductions are balanced by the potential for incremental assets to flow into licensed BlackRock ETFs. As you know well, we have seen substantial growth in ETFs over the past decade, with global ETF assets up again thus far in 2019 by approximately 20%. Our continued aim with BlackRock has been to more closely align our mutual opportunities and successes in the ETF marketplace, and this agreement fully reflects that approach by them and by us. We're very excited about the path we see in front of us, and we believe we're extremely well positioned to benefit from MSCI's ongoing innovation and product development, as well as the underlying trends that support the continued flows into ETFs. We also recently expanded our strategic relationship with the Intercontinental Exchange or ICE, which is a leading operator of global derivative exchanges and clearing houses and a provider of fixed income data. In addition to extending the existing license agreement for a list of futures based on MSCI Indices, we licensed to ICE our ESG data for their fixed income index construction, and we licensed from ICE fixed income pricing and reference data to use across MSCI, including for MSCI fixed income indices. We just renewed our strategic relationship with Eurex, one of the world's leading derivative exchanges and part of Deutsche Börse Group in Germany. We've not only extended the terms of our license agreement for the existing MSCI index listed futures in Europe, but also expanded the agreement to include futures on MSCI ESG indices to capitalize on the growing interest in sustainable investment. These types of strategic relationships are mutually beneficial. They drive innovation and deliver increased value for our clients and the industry as a whole. Similar to our focus on driving value through close strategic relationships with a wide variety of leading industry players, we continue to selectively pursue highly strategic bolt-on acquisitions of companies like Carbon Delta, which enhance our capabilities in key growth areas, generate attractive returns, and drive long-term growth and differentiation for MSCI. We're extremely excited by the opportunities that will result from all of these developments. I will now turn the call over to my partner, Baer Pettit, who will provide more color on our continued progress in those two areas of index derivatives and ESG, including the Carbon Delta acquisition.

Thank you, Henry. We spoke about index derivatives on our second-quarter earnings call, and I'd like to briefly update you on our ongoing progress. Index derivatives, including futures and options, continue to gain traction as the investment community uses them as effective tools to implement hedging and other strategies. The extension of our contracts with ICE and Eurex that Henry mentioned will strengthen our footprint in this area of our index franchise. In the past quarter, we saw asset-based fee revenue or ABF from futures and options more than triple, and the notional value created in listed futures and options linked to MSCI indexes reached a record level of $1.5 trillion. Listed futures and options based on our flagship indexes continue to gain traction with open interest in futures and options linked to our emerging market and EAFE indexes together growing 31% year-over-year. Henry also referenced ESG, a topic of significant interest not only to the investment community but also to governments, corporations, and various other constituencies. We've seen significant growth in interest in MSCI's ESG ratings research and other products. We continue to enhance our offerings and recently announced the release of ESG ratings for over 34,000 funds and ETFs in the equity and fixed income universe. ESG considerations are relevant not only to traditional asset owners and asset managers, but also to wealth managers, retail investor platforms, hedge funds, broker-dealers, and corporations. Within all these institutions, we continue to see demand from a growing variety of user types including CIOs, portfolio managers, risk officers, government teams, compliance teams, and ESG specialists. ESG factors also impact a range of asset classes extending from equity to fixed income to private assets like real estate and private equity. One area where we're seeing significant demand for new product capabilities is climate risk as various market constituencies look to understand and evaluate potential climate change. We intend to be the largest provider of tools for evaluating the impact of climate risk on investment portfolios. To that end, you saw us acquire Carbon Delta, which is a Zurich-based environmental fintech and data analytics firm. Together, MSCI and Carbon Delta will offer climate value at-risk, an innovative and pioneering climate-risk metric that calculates the impact of clients' climate change on a company's market value and helps investors understand and quantify these risks within their portfolios. MSCI's growing set of climate change offerings together with our research allows investors to more effectively achieve specific climate objectives including avoiding or diversifying carbon risks, gaining exposure to clean technologies, and engaging with companies. We will keep you apprised of our ongoing progress in ESG, which is very clearly becoming an integral part of portfolio construction. And with that, I'll turn it over to Linda to take us through the financial highlights and discuss our current guidance for 2019.

Thanks, Baer, and hello to everyone on the call. MSCI continued its momentum with an eighth straight quarter of organic subscription run rate growth around 10%. This growth was driven by strength across both our geographic regions and our major client segments. Looking first at geographic regions, our organic subscription run rate was up 8% in the Americas, 11% in EMEA, and 13% in Asia. For asset owners and asset managers, which collectively comprise about two-thirds of our subscription run rate, we saw organic subscription run rate growth of 12% and 10%, respectively. MSCI continues to provide its clients with mission-critical products and superior customer service, leading to healthy mid-90s retention rates across our segments. For recurring net new sales, nine months 2019 was up 8% with the third quarter specifically up 3%, while index and ESG saw growth of 12% and 31%. Analytics had lower growth as it lapped a strong third quarter in 2018. I'd like to draw your attention to non-recurring sales, which were up 32% year-over-year to $14 million, primarily driven by increased sales in our BarraOne and RiskManager product offerings and in our index derivative product offerings. This was the sixth straight quarter of non-recurring sales greater than $8 million. On a year-to-date basis, total non-recurring sales were up 27% including Analytics up 45% and Index up 26%. Turning to our performance in ABF, we continue to benefit from our focus on derivatives with listed futures and options revenue tripling as Baer referenced earlier. We also note that ABF revenue from futures and options was up over 100% year-over-year even excluding approximately $5 million of additional fees associated with prior periods attributed to retrospective price increase from a renegotiated contract. ETFs ABF revenue was up 5% with a 7% increase in year-over-year average assets under management or AUM and equity ETFs linked to MSCI indexes, partially offset by year-over-year decline in average basis points. Finally, non-ETF passive funds revenue was up 11%, driven by increased contributions from higher fee products. Equity ETFs AUM linked to MSCI indexes ended the quarter at $815 billion, up 6% versus the prior year. Average fees continue to gradually decline as lower fee products capture a disproportionate share of new flows into equity ETFs. With regards to geographic market exposure, there were $13 billion of inflows into funds based on U.S. exposure indexes, with more than half in ETFs based on MSCI's Factor indexes, primarily in the low volatility and quality products and about one-fifth in ETF space on MSCI ESG Indexes. MSCI's operating revenue continued the pace in the third quarter, with growth across all product segments, as we described in our earnings release published this morning. Our strong execution in the quarter resulted in high-quality earnings growth, mainly driven by operating momentum. We had no share repurchases during the third quarter, but our earnings continued to benefit from the significant share repurchase activity in late 2018. Free cash flow from the third quarter was $174 million, up $43 million year-over-year, primarily driven by higher cash collection and lower income tax payments, partially offset by higher payments of cash expenses and higher capital expenditure costs. Turning to our capital position, our cash balance at the end of the third quarter was $881 million. Our approach to capital allocation remains the same with no changes to, first, our dividend policy of 40% to 50% payout of adjusted EPS; second, our leverage target of three times to 3.5 times total debt to adjusted EBITDA; and third, our approach to mergers partnerships and acquisitions and share repurchases, both of which remain very opportunistic. I'd like to now provide an update on our guidance for the remainder of the year. As we remain focused on driving growth, we will keep investing in a number of high-return opportunities. We continue to expect adjusted EBITDA expenses and CapEx will be towards the high end of our guidance range of $685 million to $705 million for adjusted EBITDA expenses and $45 million to $55 million for CapEx. With regard to our tax guidance, we are lowering the range of our full-year effective tax rate and now expect it to be between 6% and 9%. As you're aware, this rate includes an income tax benefit, related to divesting of certain multi-year performance stock units in the first quarter, which has been excluded from adjusted EPS. Excluding this benefit of approximately 11 percentage points, we now expect the effective tax rate used for our adjusted EPS to be in the range of 17% to 20%. And with regard to free cash flow, we expect to be at or slightly above the high end of the guidance range of $545 million to $585 million. And before we move to Q&A, I'd like to turn the call back over to Henry.

Thank you, Linda. I wanted to highlight a press release we issued this morning announcing the promotion of Alvise Munari to Global Head of Client Coverage, effective January 2 of next year. As well as the retirement of Laurent Seyer, MSCI's Chief Operating Officer and Chief Client Officer. I would like to reiterate my deepest appreciation and gratitude to Laurent for his leadership and dedication to MSCI and to our clients. Laurent has led the transformation of our global client coverage organization and positioned us well to realize the many growth opportunities we have across our businesses. We'd also like to congratulate Alvise on his promotion. Alvise spent a great deal of time in the last few years with Laurent visiting clients. I can attest that he will further develop and expand our global client relationships as we continue to focus on powering better investment decisions made by those same clients. We will now open the line to take your questions.

Thank you. This is probably a five-part question. But I want to start with the BlackRock contract extension. So, just assuming expense ratios keep coming down in the industry. Would this sort of enable your fee rates to move more quickly? Also you mentioned the fees implementation period. How long will that be? You mentioned the first adjustment in March, but how many phases are there? And then the license fee rates MSCI and that will be reduced for certain steps in March, how much of an impact will this be to the average fee rate at that time? And then I want to ask about the $5 million if that's related to the $15 million addition to run rate? And just because you're putting it in the asset fee-based run rate, are you expecting that this $15 million recurs over time? I'll leave it at that.

Yes. So, obviously, we will give you some directional comments on what our arrangement with BlackRock is, but we will not be able to comment on very specific details given our policy of not commenting on specific matters pertaining to one client. So, it's important to understand the comment under the disclosure that we have made in the following sense. The agreement calls for a series of fees that appear depending on the total expense ratio of each one of these funds. The adjustment that we mentioned that is phased in over about a 10-month period from March of next year relates to those ETFs that, as I mentioned in my remarks, had abnormally high percentages of their fee being the MSCI fee. So, that takes care of those things and that adjustment based on current AUM and current dollar expense ratio is relatively immaterial to the asset-based fees. The second part of what we’re trying to do is for the next 10 years prepare the relationship with BlackRock to be totally aligned with market dynamics so that to the extent that there are meaningful changes in the total expense ratio of each fund, in this case obviously coming down, that our fees then get to be commensurate to the level of split that we were intending from the very beginning in many of those funds. And therefore it appears down depending on the total expense ratio associated with that. The goal in full alignment with BlackRock is to ensure that they have this flexibility in their own ETFs to trade off the volume versus price to gain market share and acquire new assets, and that MSCI's fees are not in the way of creating a disproportionate amount of our fees to the total expense ratio.

And Toni, it's Linda. You further asked about the $15 million addition to asset-based fees in the run rate that we spoke about and as you're probably aware, we're open to working with a wide range of partners so that we can best help clients achieve their investment objectives. As we have noted, we recently renegotiated a few of our agreements as Henry spoke about. Based on the third quarter 2019 trading volumes, we expect that those will add approximately $15 million to our asset-based fees run rate. Now, some of these additions are already in the third quarter ABF run rate and the rest will come into play in the next six months. That is separate from the impact of the amended BlackRock agreement, and we are not able to provide more detail on which companies any of that relates to given confidentiality agreements. So, hope that's helpful and that's all that we can say.

Very helpful. And then my second question is very short. Trying to ask about the agreement with ICE. I thought it looked really interesting and just wanted to understand sort of long-term where that relationship would go?

We have a great relationship and increasing one with ICE in two major areas, a lot of other areas, but in two major areas. One is clearly the listed futures and options part, which we have had for quite some time. So we renewed that agreement and we renewed our commitment to create new indices for them or license existing indices to them so they can continue to launch listed futures based on our intellectual property. The second part of the agreement has to do with their fixed income data business, the former IDC or Interactive Data Corporation business in which they have evaluated prices and terms and conditions on an extremely large universe of funds around the world. So we are going to be licensing from them. That relevant data for us to use across a lot of our products on MSCI including potentially MSCI's fixed income indices. Likewise, they're licensing from us our ESG data, which is the ratings, the indicators, and all that so that they can incorporate ESG criteria into the construction of their own fixed income indices so they can create ICE branded ESG fixed income indices.

Thanks very much.

Thank you. My first question is just around the flows and I think there are a lot of numbers out there, so correct me if I'm wrong, but yesterday I think S&P talked about how $70 billion of inflows were there into the non-U.S. space. I think you guys said there was $5 billion of inflows, and I believe in the commentary you also said there was positive U.S. inflow. So does that mean non-U.S. was negative, or am I just not comparing the right number there?

Manav, it's Linda. I don't think we want to comment on what other companies have quoted in their earnings release. I think what you have pointed out that's correct. The bulk of inflows was into U.S. funds in the third quarter and a smaller share into emerging market funds. For us, we're stronger in the emerging markets. So the balance was less helpful to us frankly. So can't comment on the other specific numbers, but you certainly have the trends right, and just wanted to make sure that you understood the emerging markets fees which have been weaker.

As Linda was speaking, I was retrieving the data, which is challenging while conversing. For the third quarter, regarding MSCI-linked ETFs, our figures indicate that the total inflows into equity ETFs related to MSCI were approximately $5 billion. This consisted of increased inflows into U.S. exposure ETFs of around $13 billion, while there were slight outflows of about $13 billion from developed market exposure excluding the U.S., as well as outflows to emerging markets.

Okay. Got it. And then just a quick follow-up. Congrats on renewing a lot of the contracts that you mentioned. Are there any other notable moving ones coming up that we should be aware of?

Nothing on the scale of the ones that we mentioned. I mean clearly, we are in continuous discussions with many of our clients and we don't eventually discuss specific contracts on this call as you're aware. So I think generally we've got a lot of things going on, but nothing that's noteworthy or that stands out.

What I would add Manav is that just to add some strategic commentary is that as you have heard those talk about in the past, we are intensely focused on developing the index licensing franchise over MSCI into derivatives across all forms of derivatives and across the world. So it's obviously that's made up of listed derivatives, listed in exchanges, futures and options. And therefore, we have a number of partners in the world, the major ones are ICE and Eurex and the Singapore Exchange in Asia. And the second point, we're very focused on over the quarter or structure products derivatives market with broker-dealers and all of those things are significant areas of incremental growth for MSCI, because on the structure product side we haven't been that sort of presence, and on the derivatives side we're getting excited because the market for multi-country and multi-currency index futures is developing fast and we are obviously the largest provider of indices in that space.

Got it. Thank you very much.

Good morning. Thanks for taking the question. Had one on the cost savings given the hiring you made on the head of LEAN practices. I know it’s early days and then it’s a hire, but if you could just give us some insight on kind of the expense savings opportunities that you foresee maybe in 2020? And any key areas that you see as an opportunity to focus on?

The way I would characterize that opportunity in that hire is really part of our ongoing business management, which we've discussed on this call over a number of years. So I don't think that there is any particular area that we view as sort of particularly a target if you like. The one thing I would say is that, we have been consistent in saying that our one MSCI strategy, which brings together a lot of our intellectual property as a benefit to our clients, is also an efficiency story. So as we reduce duplication of different technologies, as we consolidate databases, as we align standards and technology, all of those things will create efficiencies over time. And we're very focused on that day-in day-out in the management of the business. So it's not really a specific category, it's just a culture of efficiency and a culture of removing duplication and creating better standards across the firm.

One other comment that I would make on that is that we categorize our EBITDA expenses into expenses that are to run the current business and continue to see the revenues of the current business and expenses that are much more investment type, which are to create new things and to change the business and change the direction of the business. So what we're trying to as we said in the Investor Day, what we're focused on is we have enormous opportunities to invest at MSCI on very high-return projects given the nature of what we're doing and the demand for what we have. So, with the investment dollars to achieve that, what we're constantly doing as Baer indicated is creating high levels of efficiencies in what we do day-to-day to run our existing operations to free up resources so that we can invest in those new things and continue to have a gradual margin expansion in the business. So we believe that is a very strong discipline over MSCI and it helps us grow the revenue line over time and continue to deliver high levels of profitability in the company.

Great. Thank you for the detail. Very, very helpful. And then I guess a follow-up question on the tax rate side. I understand that we're not giving guidance for 2020 overall, but given the improvement we've seen this year, can you just give us a sense of how we should be thinking about the run rate that's realistic for 2020?

Yeah. It's Linda. I think we would prefer not to get into that. There's a world of tax changes happening right now and with a lot of discrete items in motion, I think we would prefer to wait until we move into the first quarter of next year to give our views on tax guidance for next year. But please rest assured we will do it when we get to our first quarter earnings call.

Understood. Thank you.

Hi, everyone. Good morning. Regarding the BlackRock agreement, your fees decrease as BlackRock lowers its expense ratios. How will this differ from your current agreement structure? I understood that you currently charge a percentage of the expense ratio, possibly on a tiered basis, is that not correct?

The difference is that there were fixed minimums applied to all the funds. Now, there are a variety of tiered minimums across different categories of total expense ratios.

Okay. So you said more tiers basically, that's the way to think about it?

Yes. Yes. There was always a percentage of the total expense ratio, but there was a set minimum below which it couldn't go, regardless of what the total expense ratio was. Now, we have established several categories of tiers, each with its own percentage and minimum, reflecting the fact that market pricing and total expense ratios for ETFs are much broader than they were ten years ago. There is now a wider array of products and different price points catering to various needs.

For sure makes sense. And then the other question I had was regarding the commentary in the press release around the leverage. The current target is 3 times to 3.5 times growth to EBITDA. I think you're in the middle of that range today. It sounds like you're considering taking on more debt. Where would you expect to take leverage target, or could you take it? And what would you do with that extra capital?

Sure. As we had said at the quarter end we had $2.6 billion of debt outstanding, which is 3.2 times our trailing 12-month adjusted EBITDA and our stated gross leverage target to adjusted EBITDA is 3 times to 3.5 times. We do monitor the market and will be opportunistic as we think about potential financing. We also note that the Board has added another $750 million to our share repurchase authorization to bring us to $1.456 billion and we're going to think about those things very opportunistically.

All right. Thank you.

Good morning, everyone. And hello and welcome to Salli. Question for you on the ETF side. There's been some recently announced highly publicized reductions in retail trading fees. And I just wanted to ask what you saw the impact of that would be on ETF demand and pricing for MSCI?

Well I think anything that reduces the friction for trading of financial instruments creates a lot more ability by investors to invest larger amounts in those instruments because they now have less friction to come in or to come out of them. So that bodes well for ETFs because ETFs are much more trading instruments than mutual funds, for example. And therefore we anticipate that it will continue to be more asset coming to ETFs over and above what is currently coming.

And for my follow-up question, I wanted to ask about the megatrend in fees, specifically what you are currently observing in terms of assets under management related to those trends. How quickly are they growing, and when do you think they will start to have a significant impact?

We are definitely still in the early stages, and these indexes have just been launched. I don’t want to speculate on the specific categories just yet. However, many of the newer categories of position exposure type indices, like factors or ESG, have demonstrated very strong growth. There is certainly a market for individuals looking to achieve precise market exposures through indices. We would be thrilled if they were to mirror the success of our other specialized indices. As for speculation, we prefer to refrain from making any predictions. We’ll keep you updated on those developments in the upcoming quarters, but from the client response and discussions we’ve been having, the outlook is very positive.

What I would add, Bill, is that, again sort of whether the more strategic emphasis is that we're moving into MSCI in addition to the flagship market cap indices, the flagship Factor indices, the flagship ESG indices that are more benchmark-related to large portfolios. We are rapidly also moving in the direction of creating more narrow, more thematic exposures based on research that we do that translates into these indices and those could be significant demand by ETF providers, by wealth managers, by structured products, over-the-counter derivatives and the like. And therefore, this is a whole new growth area for MSCI over time, in which we're just building the underlying indices that will be the basis of portfolios of every kind in the world.

Got it. Thank you very much.

Yes, thank you. My first question I guess for Linda. Now you've been there a few months, Linda, just curious what your brief observations have been so far. What do you think investors might be interested in that you might be working on perhaps trying to make the company even more efficient. And I realize it's a very high bar to say that.

Thanks, Craig. Coming up on six months here, and it's been an amazing transition. My colleagues are all very impressive, very smart and we moved fast here, mainly driven by Henry's blistering pace. But we continue to work on efficiencies as Baer had described, because we want to be very sure that we're able to continue to make investments in what we call our Triple Crown investments, which will be the ones that have short payout periods, high returns, and are in our fastest growing businesses, which would be index and ESG, and then our other businesses are also performing really, really well. So there's an incredible focus on where we're going to put our dollars as Henry has indicated this is my primary focus. And I think the program we have to do that is moving very nicely. And as we move into next year, we'll have more to tell you about that, but I think that's the most important thing.

Then my second question. I guess Henry maybe just update us on the numbers you look at in the U.S. active versus passive. What's the breakdown right now that you're looking at? And what's your best sense of where you think that might be? I know it's tough to ask, I would say in two years out here. Where do you think it sort of tops out here if you had to guess?

On a structural basis, passive management is clearly growing significantly. It offers easy exposure for investors at a low cost, and research shows that these portfolios have outperformed many active portfolios. We see this trend reflected in various ways, albeit with some cycles. Passive investing can sometimes resemble momentum investing since it involves following successful trends. While I do not have the latest statistics, I believe that the current limitations on passive investment are not well defined, as there could be a substantial amount of passive assets without reaching a point where it dominates, subsequently creating opportunities for passive investment. This serves as a solid run rate for us. Additionally, it's important to note that more than half of our revenues come from active managers. Therefore, we dedicate significant effort to assist them in developing tools and portfolios that outperform passive strategies and enhance their business operations to gain a competitive advantage in the industry.

Thank you.

Good morning everyone. I have a question regarding ESG. I know there are some trends affecting assets with ESG mandates in both the U.S. and Europe. Considering that many data providers are focusing on ESG, it appears that MSCI is performing particularly well. I'm curious about what makes MSCI's ESG data particularly appealing to investors or managers compared to other datasets.

So let me first say that because you read all of these reports, all these newspaper articles and all of that about how many data providers succeed and how competitive the market is and so on and so forth. It is very misleading. Obviously, data is a completely necessary condition for success. We have now data, you can't create anything, but on top of that what you need to build is what use this data for end investment process, the mission criticality of, let's say, the materiality of the data. You create a lot of data, but what's material to the investment process and what's material to the impact of a particular company or not. So, when we consider ourselves as the leading provider of those mission-critical tools and the investment process that are taking a lot of ESG into account, whether it's data per sequential, whether it's research, whether it's ratings, whether it's indices, whether it's risk models or whatever. And there are not too many providers in that space. There are not. We have an incredible amount of runway to continue to lead in that space and that's where we want to be. So, Baer maybe...

Yeah. And just maybe to add on that so, and maybe reinforcing the point from both the broader point that Henry made and then the narrower example. The broader point is the topic of ESG needs to be intelligently incorporated into the overall portfolio construction question, whether it's at the total plan level for an asset owner or within a given fund. And so I think it's the combination of the quality of our research and ratings, but also our ability to address the broader context. The second thing I would say is, and I'm drawing on my observations about the Carbon Delta acquisition, I was in Tokyo for the task force for climate-related financial disclosure, which the government of Japan sponsored a few weeks ago, and there is a dramatic change in the way that both governments and corporations are looking at that. One of the goals of that task force is precisely to look at portfolio impact of climate change, which I was alluding to in my scripted comments earlier. Quite frankly there is no one providing adequate solutions in this area. No one. And so I'm sure there are others attempting to do so. We believe we are ahead of that and we're able to do so. The term that they use is climate value at-risk. Again, this just plays into all the other expertise that we have an understanding of portfolio risk, understanding portfolio construction, and the broader context in which investors operate. So, yes, there are many disparate enclosed data providers, but I think MSCI's both leading there, but we were able to help with investors at the broader context of their asset allocation and portfolio construction. And I think it's in that that we have unique competitive advantages.

Got it. That helps a lot. Thank you.

Hi. I wondered if you could give us an update on your wealth management product. We haven't talked about that I think yet in the call. And any progress you're making, any quantifiable metrics you could put around that?

Yes, to clarify, we offer a variety of products and services in the wealth segment. Of our total sales in that segment, we have one product that has historically defined it, and the sales of that product are aligned with our overall growth. Our growth in the wealth segment has been above average over the past year or two. This quarter is somewhat weak due to a comparison with last year, which featured a significant sale to a large broker-dealer in Asia. We are making steady progress and would like to see growth remain above average, although this quarter it is slightly below. There is no breaking news to report; we remain focused on this segment and are continuing to allocate more resources to it.

Got it. And then my follow-up. Linda you've been there for a while. What's missing? What are you looking for in the M&A front or what are you working on outside of the efficiency side of things?

Sure. We continue to look at bolt-on acquisitions. We continue to look in the private asset class base, Henry's talked quite a bit about that. I think we look at database sets which are attractive. That might be useful to us. And we also are looking in the fixed income space to see if there's anything that might be helpful to us there. This is a very time-intensive network. My colleague, Andy Wichman, spent a lot of time focusing on the partnership part of things. You can probably see from what we've announced this quarter. We've worked very hard on these partnerships and they're clearly of great importance to us. But I'm quite open in terms of potential acquisitions and we'd like to stress we don't need to buy the entirety of companies. We're very happy to look at partnership structures and maybe I'll turn it over to Henry to see if there's anything else he would like to add.

I believe we are expanding MSCI into various areas. A significant part of our efforts on the product side involves private asset classes and fixed income, particularly in Asia. We have seen strong performance in Asia lately, and we are focusing heavily there due to the wealth generation, including large pension funds and sovereign wealth funds. Wealth management is a client segment where we need to invest more, and there are other areas like life insurance where we currently have low engagement. Once we finalize our fixed income products, we plan to invest more in life insurance since these companies tend to purchase substantial amounts of fixed income.

Thank you.

Good morning, guys. Just a little bit clarification on the non-recurring revenues, specifically in the futures and derivatives indexes section. I notice you guys obviously talk about the agreements with ICE and Eurex, but the growth in the futures and listed options was it relative to those agreements this quarter, or was there a one-time nature that we should be thinking about the growth that you saw this quarter?

So the question is whether the ABF category is fundamentally a recurring characteristic. The areas where one-time revenues are typically the largest are mostly related to Analytics, which pertains to the implementation of our deals and related services. In Index, it can involve certain sales of specific intellectual property, and occasionally in the over-the-counter derivatives areas with brokers. We have various catch-up fees, but we won't delve into the mechanics of those here. Essentially, it's important to note that we typically don't have one-time fees in the listed derivatives area, as that is overwhelmingly a recurring revenue business.

To elaborate on Baer's comments about the business segments, we have previously discussed the quarter-to-quarter variability in Analytics sales. This quarter was particularly challenging due to a tough comparison with last year's strong third quarter. As Baer noted, we secured a significant contract with a major Asian securities firm for our WealthBench offering last year, which made the comparison even harder. However, regarding our pipeline, we observe a healthy outlook and a relatively low cancellation rate. Overall, our cancellation rate is running at about 95% concerning our subscription revenue, which gives us confidence. I hope this answers your question.

You was, thank you.

Sure.

I apologize for that. In light of your new agreement with BlackRock, I was curious to what extent you think that the fees or ETF partners have had to pay in the past. I've concluded them from computing those aggressively in prices they might have otherwise?

I don't believe so. Previously, many of these points I mentioned were simply about making minor adjustments that are not significant. More importantly, this agreement is aimed at preparing for the next decade. Considering the market dynamics over that period, I don’t think there is any current intention to alter fees or similar aspects. The focus is on positioning ourselves for a competitive advantage over the next ten years regarding price and volume, ensuring that BlackRock's ETF can continue to attract substantial assets and gain significant market share. To accomplish this, they need to evaluate their own expense ratios and management fees. As a provider of intellectual property to them, we cannot represent the majority of their expenses in our fees. Our fees need to align proportionally with theirs, but that hasn’t hindered anyone from competing effectively in the market. The previous agreement was very successful, and we are now laying the groundwork for the next phase of competition in asset growth.

Great. Thanks. And then, I seem to be hearing more about direct indexing these days and firms like Charles Schwab are talking about it. Do you look at direct indexing as an opportunity thread, or really a non-event for you guys?

I think it's important to put this in the context of the earlier question about passive versus active management. We typically refer to our strategies as indexed, and we have a variety of approaches, some aimed at total markets, others at factors, ETFs, or the megatrends we mentioned. Direct indexing is essentially a collection of securities tailored for individuals. At this point, I would not consider it either an opportunity or a threat to us. The key question is whether this approach is fundamentally different from previous ways individuals have accessed a universe of stocks. There may be potential opportunities for us in terms of overlays in portfolio construction and index methodology, but for now, I see it as relatively neutral for our business.

Great. Thank you.

Before we close, I'd like to make one last just quick housekeeping note for everyone who's looking to model fourth quarter. You might have noticed that it's implied that our expenses might be a bit higher in the fourth quarter than they were in the third quarter. That would be correct. It might be a number that's even around approximately $10 million higher. We wanted to really stress, this first quarter we're picking up expenses for our Carbon Delta acquisition. We just wanted to make sure that everyone understands that. Also, we continue making very selective investments in our strong businesses and we have had a slight increase in headcount, most of that in the emerging markets. And as we're having a pretty good year, we do look towards compensation to probably be quite reasonable given the strong financial results we've seen this year. So just thinking about expenses for the fourth quarter, please note those areas and just please be aware as we had spoken about before we have closed Carbon Delta and we're picking up those expenses in the fourth quarter. I hope that's helpful to everyone. And I think that about concludes what we have in terms of our remarks.