MSCI Inc (MSCI) — Q3 2025 Earnings Call Transcript

Thank you. Good day, and welcome to the MSCI Third Quarter 2025 Earnings Conference Call. This morning, we issued a press release announcing our results for the third quarter of 2025. This press release, along with an earnings presentation and brief quarterly update, is available on our website, msci.com, under the Investor Relations tab. Please note that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You should not place undue reliance on these forward-looking statements, as they are based on current expectations and economic conditions and are subject to risks and uncertainties that may cause actual results to differ significantly from those anticipated. For more information about risks and uncertainties, please refer to the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and our other SEC filings. During today's call, in addition to results presented based on U.S. GAAP, we will also refer to non-GAAP measures. A reconciliation of our non-GAAP measures to the equivalent GAAP measures can be found in the appendix of the earnings presentation. We will discuss operating metrics such as run rate and retention rate, and important information regarding these metrics is available in the earnings presentation. On the call today are Henry Fernandez, President and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Jeremy. Good day, everyone, and thank you all for joining us. In the third quarter, MSCI delivered strong financial and sales performance that highlighted many of our underlying competitive advantages. We had organic revenue growth of 9%, adjusted EBITDA growth of 10% and adjusted earnings per share growth of over 15%. Since the beginning of the third quarter, we repurchased $1.25 billion worth of MSCI shares. This brings our year-to-date share repurchases to over $1.5 billion, which demonstrates very strong conviction in the value of our franchise. Moreover, MSCI's Board of Directors has authorized $3 billion worth in additional share repurchases for the next few years. Our third quarter operating metrics included total run rate growth of over 10%, which includes asset-based fee run rate growth of 17%. Our asset-based fee performance was driven by record AUM levels in both ETF and non-ETF products linked to MSCI indices. In my remarks today, I will discuss a few of the biggest themes from our third quarter results, starting with our Index franchise. Q3 underscored the depth and versatility of our Index franchise. MSCI achieved recurring net new subscription sales growth of 27% in Index, including 43% growth in the Americas. Total AUM in investment products linked to MSCI indexes reached $6.4 trillion globally, including $2.2 trillion in ETF products and $4.2 trillion in non-ETF products. There are now 4 ETF products linked to MSCI indices that have more than $100 billion in AUM. This helped our ABF run rate hit a new record high of nearly $800 million. The ongoing adoption of MSCI indices showcases the investment community's confidence in using our indices as a foundational element of their portfolios and to help them attract capital. In Analytics, MSCI delivered recurring net new sales growth of 16%, driven by strong adoption of our risk tools and equity models by multi-strategy hedge funds. Our growth in Analytics increasingly supports our growth in Private Assets and vice versa. Last month, for example, MSCI launched a private credit factor model, powered by data from more than 1,500 private credit funds in our proprietary database. This factor model will provide investors with improved transparency and a consistent, integrated view of market risk for a fast-growing asset class. Elsewhere in private assets, we recently launched a new global taxonomy, known as MSCI PACS, the private asset classification standard. This proprietary asset classification framework aims to bring consistent comparable standards to private markets. Powered by artificial intelligence, this new taxonomy covers a wide range of private assets, including private companies, real estate and infrastructure. The new framework builds on MSCI's long history as a standard setter in public equities. And investors can use it to benchmark, analyze and communicate portfolio strategies and performance. As the last example illustrates, MSCI's innovation teams are rapidly leveraging AI models, especially on our large proprietary databases, to enhance existing products and develop new capabilities. AI is allowing us to unlock significant value for clients, which will also lead to meaningful value creation for our shareholders. In addition to rapid expansion in new products, MSCI is significantly expanding our presence with newer client segments, while deepening our penetration of more established segments, which Baer will discuss. And with that, let me turn things over to Baer.

Thank you, Henry, and greetings, everyone. As you are aware, over the past year or so, I have framed my remarks on these calls through the lens of MSCI's main client segments, and I will continue to do so as we grow our footprint with newer segments and deepen our penetration of existing ones. With that in mind, as you saw in our earnings materials, MSCI recently enhanced our client segmentation strategy. Details and comparison points are available in our Q3 earnings presentation. Starting with hedge funds, MSCI delivered 21% recurring net new subscription sales growth. This was our highest Q3 ever for new recurring sales to hedge funds, with notable strength in Analytics. In particular, we see ongoing strong demand from hedge funds for MSCI's equity factor and enterprise risk and performance solutions, which have become deeply embedded in many clients' investment workflows. For example, MSCI closed a 7-figure renewal deal with one of the world's largest hedge funds in which our contribution to their alpha generation and risk management is central. We also completed a global deal with a large U.S.-based hedge fund that will expand its use of our enterprise risk and performance tools. Our analytics solutions are now fully integrated into every aspect of this client's risk management process, including its capital allocation framework for individual portfolio management teams. The common theme here is that amid elevated levels of market volatility and uncertainty, hedge funds want deeper, faster insights into key sources of investment risk and return. MSCI is fortifying our position as a trusted partner. Turning to wealth managers, we achieved nearly 11% subscription run rate growth, driven by a balanced mix of contributions from across product lines. Recently, a large independent wealth manager in the U.S. licensed our private capital fund transparency data to enhance client reporting on private funds. This shows how MSCI is enabling both scaled data gathering and the standardization of private asset data to provide the enhanced portfolio insights clients need. Indeed, wealth managers' growing demand for tools and standards in private markets creates a great opportunity for us. We also have a growing list of clients licensing MSCI Wealth Manager, which has allowed us to deliver unified solutions for the home office with advanced tools spanning personalized client portfolios and proposal generation, along with regulatory workflow support. Shifting to asset owners, we posted 9% subscription run rate growth, driven by Analytics, Private Capital Solutions and Index. In one of our biggest deals in the quarter, MSCI renewed our relationship with a major Canadian pension fund across our equity models and risk tools. We also expanded our Private Capital Solutions relationship with a U.S.-based asset owner as we support this client's increasing demands for total portfolio solutions and performance measurement and transparency as they grow their private market allocations. In addition, a rising number of LPs are using MSCI private capital indexes and our newly launched frozen indexes as their policy or performance benchmark, reflecting a shift away from public proxies and return targets and increased alignment with MSCI standards. We are, therefore, confident that our investments in private capital indexes will help create significant value both for clients and for MSCI. Moving on to banks and broker-dealers. MSCI delivered 9% subscription run rate growth, including a record level of Q3 recurring sales. This was driven primarily by Index, which also posted its highest Q3 ever for new recurring sales. Our most notable Q3 business win was a global index renewal deal with one of the largest banks in Europe that highlighted the mission-critical role of MSCI Index data sets in their trading, index rebalancing, research and product creation capabilities. Turning finally to asset managers. We achieved subscription run rate growth of just over 6%. MSCI is working intensely to increase our growth trajectory with this segment, and our efforts had a meaningful impact in Q3. In fact, we delivered our highest Q3 on record for new recurring sales to asset managers in Index, which helped drive 11% overall new recurring sales growth with asset managers across MSCI product lines. For example, we landed a 7-figure deal with one of the world's largest asset managers in support of their wealth management strategy. MSCI is providing financial advisers with ever more sophisticated analytics tools such as stress testing, which helps them grow their business and support their own clients. We also completed a large deal with a top European asset manager to help them develop a centralized program for their risk, performance factor and sustainability analytics across investment teams in different global locations. This was another great example of our ability to expand and deepen existing client relationships using our One MSCI integrated solutions. Looking ahead, we are encouraged by MSCI's long-term opportunities and our ability to drive growth from recent areas of innovation and investments, all of which should help us remain the mission-critical provider of choice for clients across the capital markets. And with that, let me turn things over to Andy. Andy?

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

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

Thank you, Manav. We are very optimistic about our work in private credit. If you take a step back, new banks in America and other parts of the world are essentially private credit funds; the function of providing private credit is transitioning from banks to these funds. This is a long-term trend that may experience fluctuations, but it is fundamentally structural. These private credit funds need to bring in investors to support the provision of credit, as there isn’t enough institutional capital globally to meet the demand for assets in these funds. They must attract not only institutional investors but also significant portions of the wealth management sector, the retail sector, and now the 401(k) market. For this to be viable and sustainable, these funds require tools to show what they contain, evaluate creditworthiness, assess market risk, determine valuations, and clarify the terms and conditions of the underlying loans. Over the last nine months, we have been innovating intensively in this area. Initially, we developed terms and conditions based on our proprietary private credit database, identifying 2,800 private credit funds that lack asset backing. We established terms and conditions for 80,000 loans across 14,000 borrowers within these funds. We then collaborated with Moody's to create credit assessments for these funds, utilizing their credit risk models, applying them to the MSCI database, and launching the credit assessments that are essential in today's volatile credit environment. We also developed a taxonomy for private credit to create market risk measurements and introduced factor risk models. Now, we are focusing on developing evaluated pricing in private credit to provide a reliable and independent valuation resource that can facilitate liquidity. Although these innovations have not yet resulted in significant revenue, we are confident they will. Our role as a trusted source of information regarding benchmarks is increasingly vital in this landscape. Additionally, we launched approximately 60 to 80 different private credit indices in recent months to help people understand private credit funds in relation to market benchmarks. We remain very optimistic about this sector and aim to be the leading provider of transparency tools.

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

Thanks for that question, Alex. The strategy is really two-pronged. We believe strongly that the active asset management industry needs us in this difficult time. But it needs us not as a cost center to them but as a company that can help them create new products. So we're very focused on creating that, especially in the active ETF space, so we can help clients do that. You saw the recent launch with Goldman Sachs Asset Management of the Private Equity Tracker Fund, which is a very innovative approach to look at our database of private equity, to understand the returns and the risk of all of that, and then replicate that through public equities in a way that provides liquidity. So that's an example of something that can generate revenues for the active asset management industry. And we saw early signs of that recovery for us. The industry continues to be challenged. But if we can help them develop products and generate revenues, we're going to do very well with them. The second part, Alex, as you know, is the expansion into other client segments. And that's the reason we presented in these slides the two pages of the redefinition—not the redefinition, but the breakdown of the client segments at MSCI on the subscription part. And you can see that we can benefit significantly by helping the asset management industry because we have 46% of our subscription run rate on that and we can benefit if we make it grow. Hedge funds are a very significant spot for us and other parts of what we call the fast money, which is market makers and broker dealers and all of that. We've done very well there. And one of the reasons is not only the risk tools that we sell, but what we have begun to realize is MSCI has a huge ecosystem of trading around its indices. It's an $18 trillion benchmark to MSCI, of which $6.5 trillion or $6.4 trillion is passive. And that has a huge ecosystem that needs liquidity. So we're developing data sets and products for all these market makers and broker dealers to help fuel that liquidity. So we believe that we have a lot of opportunities with that segment, more than we even estimated in the past. So that's an area that we're focused on. Obviously, asset owners, it's always been our sweet spot in Index and Analytics, and now very intensely in what we call PCS, Private Client Solutions, because these are big investors in private assets, and they need more and more transparency, understanding of performance and risk and pacing models and all of that. So we're stepping up significantly our PCS efforts. And we believe that we've seen some softness in PCS. We are going to turn the corner, particularly with the institutional asset owner space. And then there's wealth management. The wealth management part, as I said before, needs us very significantly because a big part of the allocations into wealth management is into private assets, particularly in private credit, but they need to do it in a way that is responsible and compliant. And they don't run afoul of selling products that the individual investors don't understand. So we are gearing up significantly for a major expansion in private assets and wealth management, in addition to helping them build portfolios through what we call MSCI Wealth Manager. So that's a little bit of a rundown of where we are. So we're very optimistic that with the significant revving up and ramping up of the new product machine at MSCI in the last 9 months, the softness that we highlighted in the prior quarter is beginning to turn, not necessarily because the investment industry is extremely bullish, the markets are bullish, but the budgets may not be as bullish, but it's because we can create a lot of new solutions that are going to help these people solve a lot of problems. And that's the strategy: deepening and helping become a revenue center for the active asset management industry and obviously sell a lot of the things into the other client segments.

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

Thank you for that question, Toni. And let me start by saying that we in the past haven't really talked a lot about AI because our style at MSCI is not to talk about intentions but to talk about actions and real tangible things. So that's one of the reasons you haven't heard us talk a lot about AI. But since ChatGPT was launched 3 years ago, we've been feverishly looking into and permeating every aspect of MSCI with AI. And the punch line is, AI is a godsend to us. Let me repeat that, AI is a godsend to us. Because what MSCI is, it's a company that collects large amounts of data, proprietary, unique data. AI is going to help us scale up dramatically, 1,000x more in the next 5 to 7 years in data sets. Secondly, we then build proprietary and unique investment and risk models to apply to that proprietary data. You can only imagine how much AI is going to help us do that. And then three, we're going to deliver all of that content to our clients in a way that they can consume in any way they want. So MSCI has never been a workflow software solution vendor. A lot of our proprietary sort of workflow systems like Risk Manager, BarraOne and all that, they're there to sell the content that we got. And it's almost like a necessary evil, right? So if we get the world to create every way, every type of access into our content by themselves, we don't have to spend any time on that or any money on that, and that's going to propel those to much higher levels. So we've been very busy in permeating every part of what we do. So if you start with the whole employee base, 6,250 people, almost 100% uses AI every single day. I actually made it a year ago a condition of employment that everyone needs to use AI tools every single day like using a phone, using word processing or Excels and things like that. So we're very proud of that. Then, we have permeated AI into all of our operations, especially data capture. We have basically saved hundreds and hundreds of employees — new hires of employees by using AI in private assets, for example, in Private Capital Solutions, in Sustainability, in Climate. For example, this geospatial product that we have is all based on AI and the like. We are — so that has created incredible efficiency for us, tens of millions of dollars, that are not yet — that are just the beginning of what we can do. And then lastly and most importantly is that we have used AI to build products. So a lot of our custom index factory is built by AI-driven methodologies, that is not a human in research with — as an artisan trying to build an index and it takes 6 months and all of that. No, we want to do this instantaneously using AI. So a lot of what we're launching in custom indices is AI-powered. As an example, the geospatial data sets that are being popular now that were built — that we're selling, it's all AI-driven. And of course, a lot of the data that comes out of private assets and sustainability is AI-driven. So again, we haven't really talked a lot about this. We did — we answer questions, but since you asked and there is so much focus on this, we might as well tell you exactly what we're doing. And in terms of products, I think there's somewhere between $15 million and $20 million of products that were sold this year out of 25 new products, that are all AI-powered. So that's the way where we are. So if anybody — this is going to be a godsend to us. Now I cannot tell you enough that the biggest problem MSCI has is that we've got so many opportunities and so little investment money and we want to keep the profitability of the company the same. So that's not an easy thing to square. But if we apply AI dramatically and we can lower our operating run-the-business expenses by 5%, 10%, 15%, all of that money can go into investing into the change in the business, and that will create an incredible upsurge in product development for us. That's a goal that we have for '26.

In the quarter, we experienced significant momentum in new subscription sales for Index and Analytics. You mentioned some major deals involving an asset manager and one of the largest banks in Europe. I wanted to focus more on the pipeline. As we approach the fourth quarter, can you share any insights on the pipeline and the sales cycle as we enter a peak bookings period?

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

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

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

What I would add is that, obviously, we see the challenges in Sustainability and Climate in the segment of Sustainability and Climate at MSCI, as you see it. But a meaningful part of the monetization of all of that is happening in equity and fixed income indices. And it's in both, but in fixed income indices, the percentage is even more as a total. So we've been very successful in — especially in Europe, in having clients come to us, and we've helped them design climate — lower climate risk, fixed income indices that they can use as a portfolio either to give it to an institutional index manager or to turn it into an ETF. And we see that continuing. And a lot of our investment in climate is not only climate in its own, in order to sell it directly, physical risk, transition of energy and transition risk and all of that. But it's because we believe there would be a large monetization of a lot of this climate intellectual property in the form of indices and index investing. So yes, when you look at the totality of Sustainability and Climate, it's a little challenged. But you also have to look at the One MSCI Sustainability and Climate franchise and see where the monetization is happening.

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

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

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

Yes. And as I said prior, I just want to emphasize this point, which is over the last year or so, we've been seriously analyzing the active asset management industry and how do we help the industry recover? How do we help the industry build competitive advantage and add value? And how do we benefit from that in increasing our growth? And therefore, one of the components, not the only one, but one important component of that is helping that industry go from mutual funds and other forms of investment vehicles to active ETFs. And we play a large role in there, as Baer indicated. So this will be one of the things we'll talk some more about in the future, which is how do we regain significant growth by MSCI in the active asset management industry? This is one of the components. Not the only one, but one of the components.

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

The key takeaway is that AI will significantly enhance our margins because it allows us to develop many new products and scale them quickly across various client segments, while also lowering costs by using AI agents instead of human resources. Much of our work at MSCI is systematic, and AI can be integrated into methodologies for data capture, performance tracking, risk assessment in client portfolios, and model and software development. This will greatly reduce our operating expenses. The challenge lies in how we reach this goal. Fortunately, we are not required to build large language models ourselves; we can acquire and train existing ones to fit our data needs, avoiding those associated costs. Additionally, we don’t need large data centers since our clients handle much of that. This means we won’t have to invest heavily in hardware or energy. Consequently, we will benefit significantly from applying AI within our data-driven industry, which encompasses investment and risk models, and technology. This will enable us to generate more data, create additional models, and leverage technology further. As a result, the investments needed to realize these opportunities are minimal. It mainly involves adjusting our operations to be AI-compatible, allowing us to integrate large language models with our data efficiently. We will need to recruit AI experts, and we have already brought on board two managing directors with expertise in developing AI-based investment risk and performance models. I do not expect a decline in margins due to our AI investments. However, I advise against assuming that the future margin increases from AI will be fully realized, as we plan to reinvest these gains into the company for accelerated growth.

I just wanted to go back to the asset manager end market. It sounded like it would be 11% sales growth, you're seeing some momentum there. But just wondering if you can maybe characterize if this sales momentum is around kind of incremental demand from asset managers or maybe more of a kind of release of pent-up demand in the pipeline.

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

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

No, thank you for that, Craig. One way to analyze this is by dividing it into three main processes. The first is data capture. The second involves applying investment and risk models to that data. The third is distributing content to clients. Let's begin with the last point. We are not a conventional workflow software solution provider. In fact, we have faced criticism for not having a cutting-edge workflow front end, unlike platforms such as BarraOne, Risk Manager, and ESG Manager. We have been cautious about investing heavily in this area because we recognize that the industry is developing various methods for data access, like Databricks and Snowflake. We prefer to let them invest in those technologies while we focus on supplying the content and allowing clients to build their own internal workflows, which is common in wealth management. Consequently, we are not at risk of disruption in this area, as that is not our focus. On the other hand, as AI creates more ways to access content, we will be involved. At the opposite end of the spectrum is data capture. It’s important to remember that much of the data we collect is proprietary, and it must be accurate, trusted, and well-branded. The process begins with client data. For instance, clients managing over $50 trillion in assets utilize our MSCI analytics platform for risk and performance analysis, which means we have access to that data stored on our servers. Few firms can match this capacity because clients will not distribute their portfolios widely; they prefer a secure, trusted place for computations. Another example is that our clients have entrusted us with $15 trillion in private assets, also stored on our servers, which we can use to build models while maintaining confidentiality. This is a key example of our proprietary data. In the middle of this framework are the investment and risk models we apply to the data before delivering the content. While it’s possible to use tools like ChatGPT for information gathering, the reliability of that information can vary. Our clients are not seeking data to form opinions; they require accurate data, models, and performance metrics. They won’t just trust any source, nor will they rely on a large language model without thorough backing. They need a trusted, reliable, and recognizable product that stands behind its name and reputation, which creates significant barriers to entry for competitors. These are the examples I wanted to highlight.

I wanted to revisit the performance of net new sales for the quarter. I realize there can be fluctuations, and you mentioned strong results in the Americas and Index. I'm interested in understanding how things are looking in EMEA specifically, as it seems like net new sales have decreased there. Are the new product innovations you mentioned primarily targeted at the Americas, or is there a specific issue, perhaps related to ESG, that is affecting this region? Additional insights would be appreciated.

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

How are you thinking about the expected time line to utilize the $3 billion repurchase authorization? And to what extent would you plan to fund that with free cash flow versus incremental debt?

Thanks, Patrick. First of all, we love MSCI, and we love it even more when it's undervalued franchise. Clearly, we hit some soft spots in the last couple of years, and the undervaluation of the company has increased. And therefore, we've been pretty active in buying the stock, $1.5 billion year-to-date. And we got the Board, obviously, to authorize another $3 billion to do that. We would like to be as aggressive as we can if the company continues to have undervaluation in the franchise and take advantage of that. And we are strong believers in the medium—and more importantly, in the long-term prospects of the company. I, for one, have done the same, not just with the assets of the company, but personally. In the last 18 months, I bought $20 million worth of MSCI shares for me and my family. It's not because of pride of authorship. These are rational decisions that, given our opportunities, given the new product development machine this company can create, we will remember this period as a period of undervaluation that is a good opportunity to load up. So we're going to do the same with the assets of the company. Now I think that in terms of the split, yes, in order to do the $3 billion over some reasonable period, we'll have to do both, free cash flows and continue to lever up to 3.5x or close to 3.5x. That will provide us, hopefully, over $1 billion a year or something like that, and then we'll be opportunistic like we have always been. If the stock runs up way too much, we'll sit it out, not because we don't believe it's attractive, but because, tactically, we can buy it cheaper. So that's our plan.

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

Can you talk about how much pricing contributed to net new bookings growth this quarter, and what your strategy overall is around pricing?

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

You've talked a bunch on the call about some of the improvements that you've been making to your offering. And I'm curious if you could talk about just the time line for when we should see that show up. I know it takes time to hit revenue. But maybe in terms of the net new sales, to what extent have you been benefiting from those introductions, and it sounds like there's more coming through? So over what time frame, even high level, should we think about those improvements coming through? And if I could slip in a second one, just on the AI benefits that you talked about and the efficiencies that you can gain. I'm also trying to think about the time line there in terms of when we might see that start to show up in improved margins from here. So if you could talk about the time, that would be very helpful.

Yes, overall, our financial model operates very smoothly. I touched on this in my prepared remarks, but there is strong momentum in launching new products, which is beginning to impact sales. We have generated approximately $25 million in sales year-to-date from recently launched products, including the $16 million from the Index side I mentioned earlier. We are starting to see these advantages, and the pace of product development is definitely beneficial and contributes to our growth across all client segments. We believe this will be a key growth driver moving forward and will continue to be a significant contributor to our success. Regarding the impact of AI on our financial model, while Henry mentioned this, I would say that AI is enhancing our financial profile. Our business has significant operating leverage with high incremental margins. We sell IP-based solutions that we produce once and distribute to many users across various applications, allowing us to invest in growth and maintain attractive profitability. As Henry noted, AI further enhances these dynamics, creating more scale and improved productivity, which enables us to invest more in the business, enhance our solutions, and drive both top-line and profitability growth. As Henry indicated, we do not plan to lower margins due to increased AI spending; instead, it will have a smooth impact on our overall financial model.

Let me add that the virtuous circle we are aiming for is one where we increase the operating leverage of the company to free up resources. This means we want to push our operating leverage higher while maintaining profit margins, which will enable us to reinvest significant resources back into the business. We have vast opportunities in private assets, index investing, physical risk and climate, wealth management, general partners, faster money segments, hedge funds, broker-dealers, and creating new data sets. We aim to make these investments without reducing our profit margins, but we do require investment dollars. The larger the investment, the more we can achieve in terms of growth for the company, and we believe this will primarily come from AI. That is our goal.

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

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

I just want to emphasize this point, which is over the last year or so, we've been seriously analyzing the active asset management industry and how do we help the industry recover? How do we help the industry build competitive advantage and add value? And how do we benefit from that in increasing our growth? Therefore, one of the components, not the only one, but one important component of that is helping that industry go from mutual funds and other forms of investment vehicles to active ETFs. We play a large role in there, as Baer indicated.

So thank you very much for attending. Obviously, a different tone from last quarter. I normally say to people, it's darkest before it's dawn. And we feel that the dawn has arrived and we're turning the corner here. It's not going to be a straight line. It's going to be lumpy. We're not in the kind of business that flares up and flares down. It's a consistent buildup and it could be a little lumpy, but we're very optimistic about our prospects now. So thank you, everyone, for joining. As you can see, we have an all-weather franchise, delivering significant performance and attractive margins. We're a mission-critical tool. Our footprint has largely been product-driven. And now we are very expanding more strategically in a lot of different client segments to link the ecosystem and benefit from that. So — and that will bear value creation over time. We're a long-term compounder. We're not a flare-up, flare-down company. So our goal is to continue to build higher growth, higher profitability on a year-in, year-out basis to be a long-term compounder of EPS and growth. Thank you very much, everyone.