MSCI Inc (MSCI) — Q2 2024 Earnings Call Transcript

Thank you. Good day, and welcome to MSCI's second quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the second quarter 2024. This press release, along with an earnings presentation and brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics, such as run rate and retention rate. Important information regarding our use of operating metrics, such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. As a housekeeping item, we wanted to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the second quarter, MSCI achieved strong results, thanks to our all-weather franchise, our blue-chip client base, our wide range of mission-critical solutions, and our intense focus on execution. We delivered adjusted earnings per share growth of 12%, organic revenue growth of 10% with asset-based fee revenue growth of 18%, driven by record AUM balances in both ETFs and non-listed products linked to MSCI indices, and free cash flow growth of 21%. In our operating metrics, we delivered subscription run rate growth of 14%, including organic growth of 9%, our highest second quarter on record for new recurring subscription sales of $83 million, up 22% year-over-year, and a retention rate of almost 95% across MSCI. Through yesterday, we repurchased $290 million worth of MSCI shares at an average price of $484 per share. We have now bought back more than 50 million MSCI shares since 2012 at an average price of $122 per share for a total consideration of roughly $6.1 billion. Our combined repurchases represent almost 40% of the total outstanding shares of MSCI. These actions are consistent with our own change and relentless focus on capital allocation. Year in and year out, we are obsessively focused on creating value for our shareholders. Value creation starts with strategy, and our strategy has not changed. We are determined to capture the long-term secular trend disrupting the investment industry, such as rising demand for high-quality, data-driven models and insights, increased transparency across asset classes, and more outcome-oriented investment solutions. MSCI is commercializing these trends by providing indexed and rules-based solutions, establishing standards in private assets, delivering comprehensive climate and sustainability tools, transforming risk and portfolio management, and enabling personalized wealth management at scale. The evidence of our progress can be seen not only in MSCI's financial results but also in our high levels of client engagement. Over the past few months, Baer and I have met with clients across the United States, Europe, and Asia. Everywhere we traveled, our clients and prospects were eager to talk about new areas of collaboration with MSCI. Our recent announcements and product launches highlight our strategy in action. For example, our strategic partnership with Moody's meaningfully expands the reach of our sustainability content among banks, insurance companies, and corporates. It would also help us broaden our private company ESG coverage and expand our capabilities within private credit. Likewise, our recently launched MSCI private capital closed-end fund indices will complement our real asset fund and property indices to deliver a wider view of private markets. This can also help us achieve our goal of becoming the global leader in private market indices. Meanwhile, MSCI AI Portfolio Insights combines generative artificial intelligence with advanced analytical tools and modeling capabilities to make it easier for clients to pinpoint the most important factors shaping investment risk and performance. We see tremendous potential across our newer client segments, such as wealth managers, general partners, insurance companies, corporates, and corporate advisers. Wealth managers, in particular, have been excited to learn about our new technology platform acquired from Fabric earlier this year, which has dramatically increased our ability to support personalization at scale. This enabled us to close a large deal for these solutions during the second quarter. Meanwhile, our wealth subscription run rate across product lines grew by 12%, reaching $107 million. We had a strong quarter with asset owners and hedge funds as well, posting organic subscription run rate growth of 12% and 15%, respectively. All of this illustrates a key part of our strategy. We want to expand our footprint among large and rapidly growing client segments while strengthening our position among our more mature and traditional client segments, such as asset managers. To maximize that strategy, MSCI will continue developing mission-critical solutions powered by advanced models, data, and technology, including generative AI. All of this enables us to drive compounding growth and profitability for shareholders. And with that, let me turn the call over to Baer. Baer?

Thank you, Henry. And greetings, everyone. In my remarks today, I will discuss our second-quarter performance in greater detail with a focus on both product lines and client segments. Our performance shows how MSCI continues to balance long-term strategy and short-term execution. We designed our business plans for extended time horizons, but we also do the hard work necessary to deliver for shareholders in the short term. Looking at our second-quarter results. In Index, MSCI achieved 9% subscription run rate growth, including 10% growth in both EMEA and APAC and 17% growth in custom indexes and special packages. In addition, direct investing AUM based on MSCI indexes is now $113 billion, up 28% year-over-year. We were also encouraged by our product with custom indexes. In Q2, we supported a large asset manager client in their launch of a new custom ETF climate series linked to MSCI Transition Aware Select indexes. Meanwhile, we closed on our acquisition of Foxberry, with an enhanced custom index platform launch underway for the second half of the year. Looking at global investment flows, we are encouraged that ETF products linked to MSCI indexes captured the highest cash flows in over two years, with over $28 billion of inflows during the second quarter. In general, the depth and scale of tradable products linked to MSCI indexes continues to grow. During the quarter, we strengthened our position as a top index provider for ETF products, as the number of launches of equity ETFs linked to MSCI indexes nearly doubled year-over-year, translating to $2.5 billion in cash flows and nearly 30% share of new equity ETF fund flows. Open interest in derivatives linked to MSCI indexes is now nearly $300 billion, up 9% for the same period last year. Shifting to Analytics, we delivered another strong quarter across regions and business areas. Most notably, Analytics achieved our best ever Q2 for new recurring subscription sales at over $21 million and our best ever Q2 retention rate at close to 96%. We had a strong quarter with hedge funds, including a large win for our equity risk models to support the new client’s recent fund launch. Our offerings are supporting broad use cases, such as market risk, regulatory capital management, counterparty credit risk management, liquidity monitoring, and investor reporting. We also drove $3.6 million in new recurring sales from asset owners, up 63% year-over-year, to support their enterprise risk management. Amid an industry reimagining of risk management, risk teams and global investment firms are under pressure to find efficiencies, modernize services, all while harnessing the potential power of generative AI. We launched a new future risk product suite during Q2, including our MSCI AI Portfolio Insights tool, as Henry mentioned. This tool demonstrates how we can leverage our existing strengths and IP to drive innovation. It combines MSCI's deep history in natural language processing and machine learning with our industry-leading data and risk and factor models. Turning to ESG and Climate, we delivered 14% run rate growth for the combined segment along with 30% climate run rate growth across our product lines. Our new game-changing partnership with Moody's to offer MSCI's ESG and sustainability data to Moody's broad base of global clients reinforces MSCI as the market standard for ESG. The partnership will also help us expand our ESG and sustainability coverage for private companies. In addition, the Moody's partnership also confirms the continuing importance of sustainability considerations in global investing. MSCI continues to advance our product roadmap, including for regulatory solutions. Last month, for example, we launched a new dataset to help issuers, advisers, and corporates align with the Corporate Sustainability Reporting Directive or CSRD in Europe. In Climate, we released an important new product, MSCI GeoSpatial Asset Intelligence, which will help clients identify physical and nature-based risks on more than 1 million locations for 70,000 public and private companies. With this product, we are once again using AI for data collection and mapping so that investors and lenders can better assess climate risks in their portfolios and loan books. Initial client interest is encouraging, and we've already signed two deals, including with a large prominent private credit GP. In private assets, we're driving important products and client milestones. MSCI Private Capital Solutions subscription run rate is almost $106 million, which represents growth of 17% over Burgiss's performance in the same period last year prior to the acquisition, and the retention rate was almost 93%. On the product side, we achieved a key milestone with the launch of MSCI Private Capital Indexes, which will accelerate our push to become a standard setter in private market, supporting investors seeking standardized economies and benchmarks to measure and evaluate private asset classes consistently. Given MSCI's global leadership and track record of success in indexing and benchmarking, clients have expressed significant interest in having us create benchmark indexes for private markets. Finally, in Real Assets, we posted run rate growth of 3% and a retention rate of 90%. While the commercial real estate market remains challenging, we are encouraged by client demand for products uncorrelated with transaction volumes, including portfolio services, index insights, and climate, which enabled us to land almost $3 million of new recurring sales in Europe, growing 16% year-over-year. Looking ahead, we will continue aligning MSCI's long-term strategy with secular trends and our competitive advantages while staying laser-focused on short-term execution. And with that, let me turn the call over to you, Andy.

Thanks, Baer, and hi, everyone. In the second quarter, we delivered 10% organic revenue growth, 14% adjusted EBITDA growth, and 21% free cash flow growth. We are encouraged by the results, which reflect our unrelenting dedication to execution even in the face of market headwinds, which may persist in the short term. We are encouraged by the rebound in retention rates from the first quarter, which we did expect, and we have not seen any deterioration in conditions. Although, we expect cancels to remain elevated in Q3 compared to last year, and we expect somewhat longer sales cycles to persist in the short term. I also want to note that Q3 tends to be a seasonally softer quarter for us on the sales front. Within index, we grew our subscription run rate among asset managers and asset owners at 8% and 12% respectively. These segments collectively represent 68% of our index subscription run rate. Meanwhile, our index subscription run rate with wealth managers and hedge funds grew 11% and 24% respectively. Across index subscription modules, we saw another strong quarter from custom and special packages, growing 17%. ABF revenues were up 18% year-over-year, benefiting from $28 billion of cash inflows and about $21 billion of market appreciation and ETFs linked to MSCI equity indexes during the second quarter. ETFs linked to our indexes continue to attract flows in non-U.S. exposures, particularly in developed markets outside the U.S. and in emerging markets, as we have seen a pickup in flows into ETFs with exposures outside the U.S. Fixed-income ETFs AUM linked to MSCI and Bloomberg partnership indexes is now at $64 billion, with year-to-date inflows of over $6 billion. Given strong recent equity market performance, non-ETF revenue in this quarter included the impact of true-ups related to higher reported client AUM and newly reported product launches. We reached a significant milestone in the quarter, with AUM and ETFs and non-ETF passive products tracking MSCI indexes now surpassing $5 trillion. In Analytics, organic subscription run rate growth was 7% and revenue growth was 11%. The difference is largely attributable, once again, to the impact of recent client implementations, which continued from the last couple of quarters. As we've noted in the past, Analytics revenue growth can be lumpy because of items such as these implementations, and we expect revenue growth rates to more closely align with run rate growth in Q3. In our ESG and climate reportable segment, organic run rate growth was 13%, which excludes the impact of FX and about $5 million of run rate from Trove. Q2 new recurring subscription sales for the segment included a significant contribution from the Moody's partnership. Regionally, the subscription run rate growth for the segment was 17% within Europe, 20% in Asia, and 9% in the Americas. In Private Capital Solutions, year-over-year run rate growth was 17%, and we continue to gain traction in key markets. New recurring sales in Europe reached a record, and we also saw solid traction in sales with our GP client base. The Private Capital Solutions retention rate was approximately 93%, and we recorded almost $27 million of revenue in the quarter. In Real Assets, run rate growth was roughly 3%, with a retention rate slightly above 90%. We continue to have solid momentum in our Index Intel and our income and climate insights offerings, while we continue to see industry pressures impacting our transaction data offerings, including our RCA and property intel products, which we expect to continue to face headwinds in the near term. Our rigorous approach to capital allocation remains unchanged. Through yesterday, we have repurchased over $290 million or roughly 600,000 shares since late April. Our cash balance remains over $450 million, including readily available cash in the U.S. of more than $200 million. Turning to our 2024 guidance. We've increased our guidance for depreciation and amortization expense and operating expenses by $5 million, reflecting in part the impact of acquired intangible amortization expense from the Foxberry acquisition, which closed in April. I would note that our guidance assumes that ETF AUM levels increased slightly from June 30th levels through the end of the year. To the extent AUM levels track higher than this, we would expect to be towards the higher end of our expense guidance ranges. As of right now, we expect the quarterly effective tax rate in both Q3 and Q4 to be in the range of 20% to 22% before any additional discrete items. Before we open it up for questions, I want to underscore that we see tremendous opportunities with compelling secular trends. We see strong client engagement and tangible opportunities to drive growth. We see near-term headwinds and client pressures, but we continue to execute and drive leadership in these large addressable markets that will drive long-term growth for us. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions.

Just wanted to maybe unpack the strong sales growth in the quarter a little bit more. I mean, last quarter, obviously, fairly soft, and I think the tone even look forward still fairly somber. So maybe you could just help us what happens across the different segments. I mean, did you gain more pricing, was it just timing that a lot of these maybe longer sales cycle deals closed, or was the sales force really engaged after what happened last quarter? Just trying to understand the really strong results here after what's been a challenging environment.

So a few observations here. Firstly, I would remind you, and I think you know this, sales and cancels can both be lumpy quarter-to-quarter. I would say that we haven't seen a deterioration in conditions. And I would say the sales in Q2 were solid, as you pointed out. I would also say that we haven't seen an inflection yet. Overall, we still see pressures on clients. We still see the longer sales cycle. So we would expect the lumpiness in sales and cancels to continue here. And as I mentioned in the prepared remarks, Q3 can be a seasonally softer quarter for us. But as we've highlighted before, sustained momentum in equity markets is helpful to overall buying dynamics, although the impact on our subscription sales and op metrics more generally tends to lag the markets. I would highlight that we are seeing strong client engagement across the globe, and we see it across most product areas and client segments. I think both the momentum in the equity markets and the strong client engagement should eventually lead to some momentum on the sales front. And so we're encouraged here, but we remain cautious and expect some continued lumpiness.

I wanted to ask about the Moody's partnership, actually. It's a very interesting partnership. Sounds like a win-win. I know you alluded to a bit, Henry. But maybe just on context on why now and how the mechanics of the agreement work between the two of you? I presume there's like revenue sharing going on. And just quickly, Andy, I think you mentioned in your remarks that there was already some contribution from Moody's. I apologize, I missed that. If you could just help us with that.

The deal is that we are always looking for partnerships, and we believe this one will positively impact our business in many ways. We began discussions with Moody's on several fronts. Ultimately, Moody's recognized that our leadership in ESG would enhance various products and services for their clients. In return, Moody's has an impressive private company database, now known as Orbis, which we at MSCI have been focusing on to improve data for different use cases, particularly in ESG and Climate, where finding accurate company information can be challenging. We're excited about this partnership because we think it's advantageous for both parties. We were able to finalize this agreement in just a few months, reflecting a genuine spirit of collaboration with Moody's. We anticipate significant benefits from this partnership in the future.

And maybe if I could just touch on the second part of that question, Manav, about the economics. As I mentioned in the prepared remarks, the partnership has resulted in a significant contribution to new recurring sales in Q2. Unfortunately, I can't give more specifics. But I would highlight that we haven't seen any notable changes to the segment trends that we've been seeing in recent quarters.

In the past couple of quarters, I think one of the debates that has emerged is the cyclical versus secular debate around the asset manager end market. And you've spoken about the challenges of tight budgets, which have intensified, I guess, over the past roughly two years. It seems like it's still going to be a little bit tough in Q3. I guess what do you think the catalyst is for the change that we'll see at some point? Because I think that you are sort of alluding to this being more of a cyclical issue. And so what drives that change? And can you sustainably grow double digits in an environment that continues to be challenged, or do you need that end market to sort of pick up?

There are three main categories in the global investment industry. On one end, we have rules-based systematic index investing, which continues to expand steadily. On the other end is very active, concentrated management, with private asset classes like private equity, private credit, and private real estate being prime examples. This also encompasses concentrated and thematic portfolios. The largest segment lies in the middle, which is traditional active management with a wide diversification of shares. This segment will experience growth, albeit at a slower rate compared to the other two, and will face its own challenges. Currently, we are navigating difficulties within this segment, which has historically accounted for over 50 percent of our subscription revenues. However, we are rapidly increasing our presence in systematic rules-based index management, including quantitative investing, as well as very active management, particularly in private assets. Looking ahead, I don't anticipate a slowdown in our growth rate, as we will continue to penetrate traditional active management more deeply. Even though this sector is currently facing cyclical challenges, we expect to see significant growth in both systematic rules-based investing and private asset class investing.

Andy, I wanted to delve deeper into the Index area, specifically regarding the slowdown in subscription growth, which we understand. As we aim to return to low double-digit growth in the midterm, could you clarify your thoughts on the market cap in relation to custom and direct indexing compared to factor and thematic indices, as well as their growth profiles? Additionally, thank you for highlighting some of the wins for Fabric and the AUM for direct indexing. How should we view direct indexing? Currently, these custom indices represent only 15% of Index subscription revenue, but what are your thoughts on that over the next three to five years?

Ashish, there are several questions to address, so I’ll touch on a few points. If we look at the growth rate of Index subscriptions, we are noticing a slowdown due to a decrease in recurring net new subscriptions over the last few quarters. This reflects the challenging environment and the pressures we've discussed. However, it's worth noting that we are also witnessing resilience and momentum based on our second-quarter results, which reinforces our long-term prospects. When we examine the drivers of growth in the Index franchise, we see that they are consistent with recent trends. We recorded an 8% growth in our market cap modules, and as you mentioned, a 17% growth in our custom and special packages. This growth aligns with the shift towards rules-based systematic custom or outcome-oriented investing, where indexes serve as an effective tool for developing these strategies. We are well positioned to capitalize on this trend. Looking at our client segments, we experienced an 8% growth with asset managers, over 11% and 12% growth with wealth managers and asset owners, and a remarkable 24% growth with hedge funds. As Henry mentioned, there are significant opportunities largely driven by the move toward indexation across various large client segments, and this trend is continuing, indicating a strong secular opportunity for us. Regarding direct indexing, as you asked, it primarily appears in our non-ETF passive line. While it's still in its early stages, we are well positioned to provide solutions for both wealth managers and asset managers who serve them with direct indexing options. This includes not just the underlying indexes, which currently generate most of our revenue in that area, but also comprehensive solutions to support their customization efforts at scale. Fabric plays a crucial role here, along with our broader analytics tools, including optimizers and risk models, as well as our ESG and climate content. Therefore, we are uniquely positioned to take advantage of direct indexing, which I believe is still in its infancy and presents a substantial long-term opportunity.

There was a significant deal in the private asset space involving one of your larger clients this quarter. Can you discuss the opportunity for private indexes? MSCI is promoting your private index business and the potential for Private Capital Indexes. What are the technical challenges in creating these indexes and gathering the necessary data, and how has Private Capital Solutions addressed these challenges? Additionally, any insights on how to present the demand and opportunity for this business would be helpful.

So thanks for that question, because we're very excited about what we're doing in private assets, in private capital and real assets as we look at the differences between the two of them. So as you know, we announced yesterday the launch of 130 private capital indices: private equity, private debt, private credit, private infrastructure, etc. And we already have about 80 or so real property or real asset indices, both at the fund level and at the asset level. So we're very excited about that launch. The technical challenges and opportunities first come with the data, access to the data. So MSCI now has access to about $15 trillion worth of underlying data across all private assets. And that is the highest-quality data that exists in the plane because it comes directly from the GP at the request of the LP. So we have that enormous amount of data. So the private capital indices that we announced yesterday are built on about $11 trillion of that $15 trillion, and the other $3 trillion to $4 trillion is what the other real asset indices are built upon. So it starts with that. Then secondly is your understanding of the investment process and the methodologies that you need to create the indices. And we've written the book about index construction and index methodologies throughout the last 50 or so years. So there is no question that we're an expert on that. And the third technical challenge is, do you have the distribution associated with that in terms of the asset owners and the asset managers, the allocators and the managers of assets? And we have 1,200 people at MSCI calling on pretty much every one of those clients around the world. So that is important. I think a key part of this thing is obviously, as well independent, people want to see their indices and other tools come from an independent source. And obviously, MSCI has excelled in that in terms of quality and in terms of independence and in terms of a robust and transparent methodology, etc. So we feel pretty confident that we will be the leader in all aspects of private assets from the data to the tools. And the tools include the benchmark indices, the performance attribution, the risk models, liquidity, evaluated prices, portfolio construction, asset allocation, etc. And that's what we're setting out to do with the completion of the Burgiss acquisition on top of the RCA acquisition and on top of our position in Real Assets before that, we feel pretty good about where we are.

So the broader market was quite strong in the first half and probably better than the initial market assumption. And I'm just wondering what else you would like to see so that you can raise your full-year free cash flow guidance?

So the cash flow performance has been strong for us. It was strong in the second quarter. I think we've benefited from both high collections compared to a year ago and lower cash tax payments. I would highlight on the guidance front that there are a lot of factors that can impact free cash flow. Everything from billings and collections across both subscription and ABF. Obviously, a higher ABF environment does help us, although ABF, we tend to bill on a lag. And then cash expenses and cash tax payments can swing quite a bit. We're only halfway through the year, and we are continually focused on driving strong free cash flow growth and strong free cash flow conversion, but I would highlight that it can swing quarter-to-quarter.

Last quarter, during the call, you talked about your thoughts around margin expansion going forward, and I think the message was you expect sort of more modest expansion. As we think through the strong growth you're seeing with regards to AUM, how are you thinking about reinvesting that? Has your thoughts changed anyway from last quarter? And if you were to sort of accelerate investments, where are you most focused?

So Heather, I would say we are not focused on, and we don't target, a specific margin expansion or margin level. What we are continually doing is balancing investing for the long term while driving attractive profitability and free cash flow growth. And so that is the calibration that we are continually focused on and driving. I would highlight the comments that I made in the prepared remarks here where, as you alluded to, AUM levels have been running higher than what underlied our guidance in previous quarters. And we've assumed for the current guidance that AUM levels increased slightly from the June 30 balances. And if AUMs track above that, we will likely be at the high end of our expense guidance ranges. We would use the higher growth to invest in key areas in the business as we have in the past, and those key areas tend to cut across the big growth frontiers that we're talking about. And so from a solutions standpoint, we are very focused on the custom index front, and that's a broad topic involving everything from technology to researchers to go to market. We do have investments in the climate front. There are a number of opportunities across private assets and private capital that we are investing in. And so we are laser-focused on continuing to drive these long-term growth drivers while at the same time continuing to squeeze to run the business expenses and identify efficiencies in the business. But it's a constant calibration for us, and we are calibrating based on not only AUM levels but overall business performance, outlook, and financial dynamics more generally, and we'll keep you posted on that.

So I wanted to follow up on the environment that you're seeing out there, specifically in ESG and Climate, because it sounds like there was a pretty significant increase in new recurring subscription sales growth. And I know you alluded to the Moody's partnership that may have driven a chunk of that growth, but then I also heard you talk about sort of new products around CSRD. So give us a bit more around what you're expecting for ESG and if the underlying environment is any different or has improved.

We have observed a continuation of the trends we've been experiencing in recent quarters, with no significant changes. Regionally, run rate growth was approximately 9% in the Americas, around 17% in EMEA, and 20% in Asia, consistent with last quarter's performance. The themes in each region are similar to what we’ve seen previously. In the U.S., investors are taking a more cautious approach to integrating ESG, leading to longer sales cycles and more thoughtful purchasing decisions. EMEA presents opportunities in areas like regulations, with some early successes related to CSRD and EBA Pillar 3. However, the regulatory landscape is also introducing complexity and confusion, impacting clients' decisions. In Asia, we are witnessing strong engagement, indicating an earlier stage of ESG adoption. The industry pressures affecting the entire business are felt even more acutely in the ESG and Climate segments, affecting various client types and use cases, particularly those that are considered nice-to-have and are more susceptible to environmental pressures. We anticipate these trends will continue in the short term, but we remain optimistic about long-term prospects. There are compelling opportunities in regulation and new offerings, such as our asset-level physical risk and nature data sets, and our GeoSpatial Explorer is an exciting addition that is still in its early stages. Climate remains a dynamic area with vast potential across new solution sets and client segments. As mentioned, we see opportunities in banks, insurance companies, and corporates, and we are enthusiastic about the wide range of long-term prospects, while short-term dynamics remain unchanged.

Your Analytics business had another strong quarter, including strong new recurring subscription sales and retention rates. What are the top factors enabling this performance, and how sustainable is double-digit organic growth in Analytics?

I would say we've seen some good momentum in the results over the last several quarters, with strong client engagement across various parts of our analytical tools. The current environment has likely contributed to a heightened focus on investment risk, credit risk, and liquidity risk, and we are a leader in these areas, which has been beneficial for us. Our performance is also partially driven by the enhancements and innovations we've been implementing. We've been gaining traction with our Insights offering, which provides risk analytics through a modern data architecture and improved visualization. We have integrated AI capabilities into this offering, and we see strong client engagement and traction in new sales as a result. Additionally, we've observed solid sales in our fixed-income offerings and continue to identify opportunities there. Our equity analytics business, specifically our equity risk models, continues to show strong momentum, as we've noted in previous quarters. Many of the same factors we've discussed before remain encouraging. While we see ongoing opportunities, it's important to acknowledge that the growth may be uneven, and some pressures affecting the broader company could also impact our Analytics segment.

I wanted to stay on the Analytics segment and maybe talk about the margin that you were seeing there. Obviously, it's pretty notable expansion, both sequentially and on a year-over-year basis. So just wondering if you can maybe walk us through and maybe drill down into the drivers of that notable margin expansion in Analytics?

We've commented on this in the past. There are several factors that drive the Analytics margin and have driven it higher over the last several years. So one is we have been capitalizing software. And so the level of capitalized software has picked up a bit, which will drive the EBITDA margin. It doesn't impact the operating margin but does impact the EBITDA margin. Broader expense efficiencies and expense discipline that we have across the company tend to impact the Analytics segment, just given how we do many of our allocations. I would also highlight there are parts of the Analytics business that we have invested less in as well. We've been very strategic and targeted with the parts of Analytics that we have been investing in, but there have been some parts that we have invested less in to allow us to invest in other parts of the company that are very strategic for us. And so all those factors have contributed to the Analytics margin increasing over time. As you can tell by the growth, we do see very compelling opportunities within Analytics that are not only attractive growth opportunities in their own right but they are very strategic for driving growth across the company. And so we do have investment opportunities in Analytics that we will be putting money into and continue to invest in.

Just wanted to ask you guys a question on AI here. Can you give us some examples of where you're really excited about the uses of AI to help drive revenues long-term? And also a similar question on the cost efficiency side, where AI can really help you on the cost side, help your margins out even better.

Both areas are critically important, and we are actively working on both fronts. Firstly, regarding cost efficiency, we're also focusing on quality efficiency, particularly in our data environment. We are undertaking significant work in various aspects of data, including calculations, production, and extraction, especially in private markets and ESG and Climate, addressing challenges in acquiring hard data, like controversies. We are making progress in all these areas and have prioritized this internally and with select Board members who have expertise in these matters. We're beginning to see some encouraging results in efficiency. As Andy mentioned, this is an ongoing effort, and as we approach year-end and begin setting budgets for the next year, AI efficiencies will likely play a significant role in our budgeting process. Regarding new product development, we have made strides across the board, with two examples we introduced today that highlight our use of AI: the work on GeoSpatial data, which would not have been possible without AI, and the recent launch related to our future of risk. I encourage you to look up "Future of Risk MSCI" for an informative paper on our website discussing AI's role in this area, which is available for free download. In Analytics, ESG and Climate, and private markets, AI is integrated into every aspect of our business. We aim to provide more specific information on both new product development and efficiency advancements in the upcoming quarters and into the next year.

Congratulations on a strong Q2 result. I wanted to focus on private asset benchmarks, if I can. I wondered if you could size the current addressable market you see there and the rate at which you think that market is growing. And also, if you could talk to the competitive dynamics, is this mainly white space for you guys, or are there others that you'll be looking to displace as you grow? And finally, do you have all the data assets you need to grow now or are you looking further to sort of inorganic growth opportunities, particularly around data in this area?

There are two main sources of value from the benchmarks for us. The first is the sales generated from benchmarking for limited partners and general partners in various asset classes within private assets. Recently, I spoke with one of the largest private credit providers globally, who indicated they required a benchmark to attract more assets from both institutional limited partners and wealth management. This presents potential revenue opportunities, although we have not yet determined the extent or timing of that. The second, likely larger opportunity is that by becoming the leading provider of private asset class benchmarks, we position ourselves at the center of the ecosystem involving limited partners, general partners, and the underlying assets they invest in. Being in this central role enables us to expand our offerings to include performance attribution models, risk management models, liquidity models, valuation models, and asset allocation models, amongst others. It also allows us to supply essential data, integral to our benchmark sales, which places us in a highly advantageous position. This approach has been a part of our strategy over our 50-year history, originating from the company I established 30 years ago, leveraging market cap indices developed by the Capital Group and Morgan Stanley. We are optimistic about our potential in the private capital and private asset investment realm. Ultimately, this effort promotes transparency, comprehension of purchases, risk identification, sources of risk and return, and a unified understanding of asset allocation across private and public assets. Therefore, it should be easy to identify and compare a unit of risk in a building, bridge, private credit, or venture capital firm with a unit of risk in a public company, public bond, or hedge fund. This is our target.

Can I just quickly check in on the latest contribution of pricing to new sales across Index and the other segments, and if there's any client behavioral changes around pricing?

So I would say across the company, the contribution of price increases was slightly smaller than last year, so very consistent with what we said last quarter. We have been slightly moderating our price increases in many places, given the pricing and economic environment, which is very much in line with what we said last quarter. I'd say importantly, and I want to underscore this, we are focused on aligning price increase with the value that we are delivering. And so we do factor in the overall pricing environment and client health, but we also are focused on ensuring that we're capturing the value for the enhancements that we make to our solutions and our service, and balancing that as well with the long-term relationship with our clients. So most of our growth is going to come from existing clients. And so we are very focused on being a strong long-term partner to our clients. And that means adding value; that means selling more to them, providing enhanced services to them, and that will translate through to enhanced price increases, but also translates through to additional services that we can deliver to them. And so we're continually balancing that value with price increases.

Just a quick follow-up on the sales environment, as I asked about earlier. When you think about the second half, and I know it's maybe a little bit too specific. But if you compare to last year's, maybe sales in dollars, are you still comfortable that you can do more sales this year in the second half or anything specific to Q3 or Q4?

So as I mentioned, Q3, and I know you're aware of this, Alex, Q3 is typically a softer quarter for us, seasonally softer quarter for us from a sales perspective. Q4 tends to be a seasonally strong quarter for us. I don't want to be too specific or prescriptive about what can happen. As I mentioned, sales and cancels can both be lumpy, and we do see some challenging dynamics out there. But as I alluded to earlier, we are seeing strong client engagement. We see opportunities out there. And as we've seen in past cycles, if there is sustained momentum in the equity markets, that tends to translate over time into more favorable buying dynamics for clients. But as I said earlier, we are cautious. We still see some pressures on clients, but overall, we do see opportunities as well.

So as you heard in our commentary, we're intensely focused on executing our grand strategy and compounding growth quarter-to-quarter, year-to-year, and that's what we do. We're not an entity, as you know well, that flares up and flares down. We are consistently executing and executing. And there'll be some quarters that are going to be very strong relative to expectations, some of the quarters that are going to be weaker. But the longer trend horizon of this company is extremely powerful compounding of growth and compounding on profitability. We're very excited by the very large growth opportunities in front of us, as you heard in the commentary and answers to your questions, and are encouraged by a very high level of client engagement that is typically a leading indicator of sales in the future. So we look forward to engaging with all of you over the next few months. And thank you again for joining us, and I hope you all enjoy the summer and take some time off.