MSCI Inc (MSCI) — Q4 2025 Earnings Call Transcript

Thank you, and good day, and welcome to the MSCI Fourth Quarter 2025 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2025. 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'll 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; Andy Wiechmann, our Chief Financial Officer; and Baer Pettit, our President. Lastly, 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.

Thank you, Jeremy. Good day, everyone, and thank you for joining us today. MSCI is generating impressive momentum across product lines and client segments. Our leadership in the global investment ecosystem and relentless focus on innovation has enabled us to drive a strong financial performance. In the fourth quarter, we achieved organic revenue growth of over 10%, adjusted EBITDA growth of over 13% and adjusted EPS growth of almost 12% for the quarter and almost 14% for the full year. Our attractive all-weather franchise, client centricity and alignment with favorable long-term secular trends have positioned us to deliver on the long-term growth targets we have set for MSCI. Since MSCI's IPO a little over 18 years ago, we have achieved a compound annual growth rate of nearly 13% for total revenue, nearly 15% for adjusted EBITDA and over 16% for adjusted EPS. In addition, we have now delivered 11 consecutive years of double-digit adjusted EPS growth. We intend to continue with all these records at MSCI for the years and decades to come. In the fourth quarter and through yesterday, we also bought back nearly $958 million of MSCI shares at an average price of about $560 per share. Over the last 2 years, we have repurchased almost $3.3 billion of our shares at an average price of $554. As you can see, we have a very strong conviction on the prospects and potential of MSCI, and we believe our franchise remains undervalued. In Q4, MSCI's operating metrics included net new subscription sales of $65 million and nonrecurring sales of $31 million, bringing total net sales to over $96 million. Q4 was, in fact, our second best quarter ever for recurring net new subscription sales, and we grew a growth rate of 18%. Across MSCI, our retention rate was over 94% for the full year. All of this resulted in a total run rate of over $3.3 billion, growing 13% and comprised of total ABF run rate of $852 million, growing 26% and recurring subscription run rate of over $2.4 billion, growing over 9%. Q4 showed how MSCI is using our deep rooted competitive advantages to drive growth. With newer client segments, in particular, we are doubling down on key opportunities while reinforcing our position as the essential intelligence layer of global investing. So for example, our index flywheel is helping clients form thematic baskets, gain global exposures, unlock new distribution channels, launch tradable products and hedge exposures. In Q4, we delivered our best quarter ever for new recurring subscription sales in Index. Meanwhile, total ETF and non-ETF AUM linked to MSCI indices reached approximately $7 trillion, driven by record inflows into our clients' ETF products linked to MSCI indices, particularly listed ETF products in Europe. In general, asset-based fees remain a consistently strong contributor to our top line with a durable track record of positive annual cash inflows into ETFs linked to MSCI indices every year stretching back more than a decade. We also had a strong quarter in Analytics, where we posted our second best Q4 on record for new subscription sales. In Private Capital Solutions, we drove recurring sales growth of 86%, supported by our rollout of innovative new products and landing new client relationships. In Sustainability and Climate, our new subscription sales were lower than last year's levels, with particular softness in the Americas. In Sustainability, MSCI is expanding our solutions across all client segments and asset classes to address emerging risks and opportunities that go beyond environmental, social and governance matters. Examples include AI and supply chain disruptions on companies and fixed income instruments in people's portfolios. In climate, MSCI is emphasizing physical risk and energy transition tools that promote consistent standards and a common language across companies, industries and regions. Physical risk is just one area where we have been leveraging AI to enhance our capabilities with tools such as geospatial asset intelligence. We're also harnessing AI to enhance our solutions in custom indices, risk insights, ESG controversies and private assets. For example, MSCI has decades worth of historical data on private markets, and we're now using AI to process this data in significantly larger volumes and then feed it into our total portfolio insights. Our company-wide total embrace of AI represents a technology power transformation that will increase the value of our tools for clients across the board. I will now review our Q4 performance among individual client segments. In general, MSCI is unlocking significant opportunities across high-growth client segments. With hedge funds, MSCI delivered 13% subscription run rate growth and 26% recurring net new sales growth. One prominent deal in the quarter was the index rebalancing team at a top global hedge fund for MSCI's new extended custom index module, which spans almost 5,000 custom indices. This highlights the growing appeal of our index product ecosystem and the need for more tools from MSCI. Moving on to wealth managers. MSCI achieved nearly 11% subscription run rate growth, including 15% recurring sales growth. As we drive further adoption of our index and analytics tools among home offices and wealth platforms of large investment managers. For example, in Asia, we closed 2 major CIO office deals for our multi-asset class factor models, which helped make 2025 our best year ever in new recurring subscription sales in the wealth segment in APAC. Among asset owners, MSCI posted close to 11% subscription run rate growth along our strongest recurring net new sales growth in 5 years, driven by private capital solutions and analytics. For example, we are seeing rising demand across regions from pension and sovereign wealth funds for our total portfolio solutions spanning public markets, multi-asset classes and especially private markets as clients increase their private asset allocations. Shifting to banks and broker-dealers, MSCI delivered subscription run rate growth of over 9% with large deals from index and analytics. The expansion of basket trading among banks has created new opportunities for us given our capabilities in quantitative investment strategies and custom indexing. In Q4, this trend helped MSCI secure a landmark deal for our new basket builder solution with a prominent bank in the Americas. Using our tool, traders can rapidly create a standard and custom index baskets across client and internal workflows with MSCI index content and IP forming a fundamental basis of these baskets. Turning finally to active asset managers. MSCI achieved recurring net new sales growth of 13%, primarily driven by index, along with subscription run rate growth of over 7%. Our Q4 results bode well for the gradual recovery of our performance with this important client segment. Active ETF products remain an exciting opportunity for active asset managers and for MSCI. In 2025 alone, MSCI supported our clients' launch of over 50 new fee-generating active ETF products in the market. As Q4 demonstrated, we are well positioned to benefit from AI, accelerate innovation and drive adoption of new and existing products for established and emerging client segments while still delivering compounded EPS growth for shareholders. And with that, let me turn things over to Andy.

Thanks, Henry, and hello, everyone. It's great to see the strong momentum across the business. This momentum is supported by our pace of innovation that is fueling growth across client segments and product areas. Index subscription run rate growth accelerated further to 9.4%, including 16% growth in custom indexes with some key wins among banks and hedge funds, as Henry highlighted. We also had success with asset managers, where index recurring subscription sales growth was nearly 10% and index subscription run rate growth was slightly above 8%, reflecting the expanding usage of our content. Index retention remained strong at nearly 96% for the full year and 95% for the quarter. The acceleration in index subscription run rate growth was complemented by asset-based fee run rate growth of 26%. Equity ETFs linked to our indexes captured a record $67 billion of inflows during the quarter, totaling $204 billion for the full year. This growth is driven by extremely strong inflows into ETFs linked to MSCI developed markets ex U.S. indexes, including EFA and World and MSCI Emerging Markets Indexes, where we see large and rapidly expanding ecosystems being established around our indexes. We see extraordinary runway to fuel those franchises well into the future, and we are extending the ETF agreement with BlackRock through 2035 to solidify that tremendous future growth. To enable this growth, we will lower the fee floors impacting certain superscale ETFs on which we have been capturing a larger share of the overall economics. The aggregate impact will translate to be roughly 0.1 basis points based on year-end 2025 AUM levels with roughly a 0.05 basis point decrease on January 1 of this year and another 0.05 basis point decrease on January 1 of next year. Outside of the timing of these adjustments, we expect the fee dynamics to remain consistent with the trajectory we have seen before with respect to our overall ETF basis points. Our close partnership with clients like BlackRock and the shared success we've achieved together position us well to drive enormous upside. In Analytics, we had subscription run rate growth of over 8%, driven by our second highest Q4 ever for recurring sales and higher retention. Recurring sales in Analytics benefited from strong sales of our enterprise risk and performance tools, notably with banks and asset owners in addition to continued momentum with our risk models. In Sustainability and Climate, one of our largest Q4 new subscription deals was with a large European wealth tech firm, positioning MSCI to be the embedded provider of Sustainability Solutions for small- and medium-sized wealth managers in Europe aided by our clients' distribution network. This win drove a meaningful contribution to the product line's new recurring subscription sales in Q4. In Private Capital Solutions, we saw growth accelerate on the back of closing almost $8 million of new recurring subscription sales in the quarter, an increase of 86% from the prior year. We've seen strong traction with our total plan offering and our transparency data, both of which have benefited from numerous enhancements and new capabilities. In Real Assets, run rate growth was almost 6% with improving retention as well as sales of new solutions. Turning to our 2026 guidance, which we published earlier this morning, our expense outlook reflects the powerful operating leverage benefits of our business with continued investment initiatives fueling future top line growth. I would highlight that CapEx reflects the anticipated build-out of a new London office space as well as increases in software capitalization related to key business investments across products. Our full year tax rate guidance reflects an expected Q1 tax rate of 18% to 20%, which is higher than past years as we will likely have a slight stock-based compensation headwind this quarter. Free cash flow guidance reflects the expectation of approximately $100 million of higher expected cash taxes in 2026 compared to 2025 due to various onetime discrete tax benefits in 2025 and the timing of cash tax payments between '25 and '26. Our capital position remains strong with an ending cash balance of over $515 million at the end of December. Subsequently, we have paid down $125 million on our revolver, which now stands at $175 million. We will continue to pay down and draw the revolver in modest amounts from time to time to support our capital uses and optimize interest expense. In summary, MSCI's strong Q4 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 are focused on meeting client needs and enhancing value across client segments by delivering increasingly integrated solutions. As we've said in the past, the goal of MSCI is to have a fully integrated company in which each product line benefits from and contributes to every other product line. This will amplify the powerful compounding financial algorithm that has fueled our business, and we remain committed to delivering the firm-wide long-term targets of low double-digit revenue growth, excluding ABF, adjusted EBITDA expense growth of high single digit to low double digit and adjusted EBITDA growth of low to mid-teens, enabled by the powerful operating leverage of our business. And we expect ABF to be an outsized double-digit grower through cycles and a key driver of the financial algorithm. However, we will no longer maintain product line-specific long-term targets to better reflect our focus on managing our investments across integrated product lines and delivering outsized growth across the company. Lastly, this change will not impact our current reporting, and we will continue to provide the same level of transparency and disclosure with continued reporting along product lines. As you can tell, we are very excited with the strong pipeline and opportunities in front of us, and we look forward to keeping you posted on our progress. Before we open the line for questions, I'll turn it back to Henry, who wants to take a moment to recognize Baer as he approaches retirement.

Thanks, Andy. I want to take this moment to recognize my business partner and friend of 26 years, Baer Pettit, who has played a critical role in turning MSCI into the standard setter we are today. Baer announced his retirement in November, and he will formally step down as President on March 1. I know I speak for the entire senior leadership team at MSCI when I say that we will miss him tremendously. Looking ahead, I'm now excited to work with Alvise Munari and Jorge Mina, who many of our shareholders and the analysts that follow us already know very well as we seek to build on MSCI's momentum and deepen our relationships with both newer and more established client segments. And with that, over to you, my very good friend and business partner of many decades, Baer Pettit.

Thank you, Henry, and greetings to you all on this my final earnings call. As you may doubtless imagine, this is something of a difficult moment for me and one about which I have mixed emotions. Serving as MSCI's President and a member of our Board of Directors has been a tremendous honor and privilege that I could not have imagined when I joined the firm's Head of EMEA coverage over 25 years ago. Not many people get the chance to impact the global investment ecosystem, and I'm grateful to have had the unique opportunity to help lead MSCI's growth and influence on the investment industry. As a long-term owner operator, I was clearly delighted by the Q4 results, which show the resilience of that all-weather franchise, which we have spoken about on numerous occasions on this call. If there's one thing that has characterized MSCI in the quarter of a century that I've been here, it is the firm's constant ability to reinvent itself and to seek new opportunities in a variety of market and industry contexts. Many of those opportunities have proven to be extremely resilient and will remain a source of shareholder value for many decades ahead. The highly creative and client-focused teams at MSCI are wired to always keep looking for new opportunities and to drive client value and hence, the growth of the firm. The evolution of MSCI into a truly multi-asset class provider of insight and actionable content for investors and other market participants has not happened overnight. The content and capabilities have grown both through organic investments and the variety of acquisitions with which you are familiar. The great power of the MSCI franchise is rooted in our talented people, who I know will continue to set new standards and drive innovation. It is also grounded in the value that our clients and shareholders derive from the growing number and variety of solutions MSCI deploys. This is what in the past I have referred to as 1 plus 1 equals 3. Notably, it is clear that the efforts that have been put into private markets are really starting to pay off and that this strong combination of public and private markets capabilities will be a key driver of our franchise. And these capabilities create opportunities in a variety of client segments across the globe. I have no immediate plans ahead of me. It truly has been an amazing journey for which I thank all my colleagues at the firm. I'm certain that as a shareholder, my retirement savings are in good hands and that this great franchise will continue to create value for clients, shareholders, and employees for a long time to come. Thank you very much. And with that, operator, please open the line for questions.

Baer, I really wish you all the best. Henry, I wanted to talk about AI. You talked about some of the launches that you made. Which do you think are going to be sort of the most meaningful for adoption in the near or medium term, however you want to frame it? Which clients are showing the most interest? And I guess, what could this mean for your growth rate both in maybe '26, but also even beyond that?

Thank you, Toni. The journey with AI started 3 to 4 years ago for us and initially has been extremely focused on creating AI agents to help us with the day-to-day operations of the company. We use AI extensively in applying to understanding controversies, for example, on ESG ratings. We've been using AI very deeply in the gathering of a tremendous amount of data in the private markets and private assets and the like. So those are 2 big examples, but there are about 120 to 140 projects that cut across the company in using AI to augment the capacity of our smart and talented employees to leverage their skills and capabilities. Then halfway through it, we started focusing intensely on using AI for products. The first application of it was in our Analytics business in terms of incorporating AI insights into the portfolios that are running in our servers for our clients, AI insights to understand the performance, the risk, and the correlations. So in a way, it's like adding hundreds of digital agents to understand what's going on in the performance of our portfolios and the activities of our clients' portfolios. And therefore, that has taken off. We've had a lot of embrace of what we call AI insights in the Analytics product line, so that's been a big benefit. Then we look at AI in terms of automating the custom index creation capability. As you know well, we've been working for a couple of years on designing a software application integrated with our production environment to create a large number of very fast custom indices and custom baskets for trading, for investment, for investment products and the like. One of the things that we realized was that a slowdown in that process was being caused by the human interaction of understanding the methodology, backtesting the methodology, and all of that. So we've been training AI agents to do that process much faster than humans with, of course, a lot of human supervision. So that is something that is already in place and it's already being rolled out as another example of that. I think that most of our product lines will benefit enormously from AI agents in terms of either servicing the client, giving insight to the portfolio of our clients, or being able to much faster create intellectual property and the like. But I just wanted to highlight 2 examples on the efficiency side in terms of controversies and data capture and private assets, and 2 examples on the product side. But I could give you 20 other examples in each category, but I just wanted to exemplify the enormous potential. The last thing that I would say is it is still early days in our application of AI across the board in MSCI. And we're extremely excited. The company is turning into a total AI machine, and we think it's a godsend to us, as I've said in the prior call.

I wanted to come back to a topic that I think I asked about a couple of times last year, which was this whole idea of international flows picking up and flows moving away from the U.S. I think we've started to really observe this in the marketplace now. I heard there was a recent asset management conference in Europe where the sentiment was better than it's been in years. So it seems like there's excitement growing in your customer base. So wondering if this is actually starting to drive new sales, better conversations? And maybe most importantly, is it giving you better opportunities for maybe pricing a little bit more aggressively?

Thank you, Alex. I agree with everything you mentioned. As you know, we operate as a subscription business, which means that changes don’t happen instantly, both in terms of growth and decline. It all takes time. A significant portion of our clientele consists of long-term asset owners, including pension funds, sovereign wealth funds, endowments, foundations, and family offices. These entities typically make decisions based on long-term trends, taking their time rather than making quick moves. The immediate impact we've seen is related to the devaluation of the dollar, which has fallen out of favor, leading to increased selling of dollar-denominated assets. This shift has resulted in substantial inflows into MSCI equity indices outside the U.S., particularly in developed markets. We've also observed a resurgence in emerging markets, with Korea recently reaching an all-time high for several days. The flows exceeding $200 billion into ETFs linked to MSCI indices reflect this trend of investing in non-dollar assets. On the subscription side, we've noticed a significant increase in activity in Europe and the EMEA region. Surprisingly, our run rate in EMEA for our Index business, including subscriptions and asset-based fees, is now higher than that in the Americas, which is quite an achievement considering the U.S. capital markets. This growth stems from both the demand for our products in EMEA and the large influx of assets into EMEA-listed ETFs. We've also had a robust quarter in the Asia Pacific region, where performance can vary from quarter to quarter. Nevertheless, our franchise in APAC is strong, and we're starting to see noteworthy activity there, especially as investors in the region look beyond dollar assets. However, it's still early to determine whether the trend of moving assets away from dollar-denominated investments in the U.S. will persist in the long term or if it is just a temporary shift due to current geopolitical and economic factors. Regardless, we are well-positioned to adapt to either scenario.

This is Brendan asking on behalf of Manav. I wanted to inquire about the private assets, which seem to have had their best net new quarter. You appear to be enthusiastic about the opportunity there, but it has been taking some time to develop. Can you share what drove this performance? Additionally, do you believe this is the beginning of a trend, or is it more of a one-time event? What is your perspective on this?

Thank you, Brendan. It's great to see the PCS run rate improve, and we've also noticed some growth in the real asset run rate. We're experiencing positive trends in several key areas where we've invested over the past couple of years. Focusing on PCS, we've had strong sales in our total plan offering and our transparency offerings, both showing significant momentum and growth. We observed good growth in the Americas, a vital region for the PCS franchise, and we've also had noteworthy success in EMEA. We've dedicated attention to enhancing our go-to-market strategies there, and we're encouraged by the initial signs of traction. We see this as a substantial opportunity, supported by a solid product development pipeline. We continually introduce unique capabilities and content that fulfill existing market demands, such as our new Document Management and SourceView offerings, which are generating considerable client interest and allowing us to increase our value to them. AI is playing an essential role in this process, enhancing both data sourcing and our ability to provide clients with a broader range of insights and solutions. Additionally, we're pushing forward with our asset and deal level metrics and our suite of indexes, including private credit indexes, positioning ourselves to promote adoption and standardization. The strong performance in the fourth quarter is encouraging, and we see plenty of promising opportunities ahead. We're gaining traction with various partners and distribution channels, making our content and solutions more accessible across different sectors, including the wealth channel. On the real asset side, we're seeing hopeful signs in the industry, with investment increasing across nearly all commercial real estate sectors in the U.S. Some areas, such as office and retail, are experiencing double-digit growth. We've noted a return of private capital, not just from institutions but also from private investors, which is positive. We're beginning to see early movement with our Index Intel offering and new products like our data center product. While it's still early, the signs are promising, and we're excited about the potential within the PCS sector.

Andy, I wanted to ask you about the factors affecting free cash flow. You mentioned the $100 million in cash taxes that are impacting free cash flow. While I know you don't provide guidance, could you discuss some other elements like capital expenditures and interest expenses? We often use free cash flow as a proxy even though you don’t provide guidance on adjusted net income and earnings per share. Should we consider that alongside cash taxes and the reduction in share count, we are still on track for low to mid-teens EPS growth in 2026 in accordance with long-term targets?

I want to emphasize a few key points beyond the cash taxes, which are significant. We have several timing-related factors that are impacting free cash flow in 2026. However, we are anticipating robust double-digit growth in collections along with stable working capital conditions. The underlying fundamentals of the business remain healthy. Regarding cash taxes, they are expected to be about $100 million higher than in 2026, partly due to tax payment deferrals from 2025 to 2026, totaling around $30 million, and approximately $50 million from one-time discrete benefits in 2025. Additionally, we had two debt issuances in the latter half of 2025, and because of the interest payment schedules for those, we had no cash interest payments in 2025. Therefore, we expect a significant increase in cash interest expense in 2026, around $90 million, which will affect period comparisons. Lastly, as reflected in the CapEx guidance, we are constructing a new office space in London, one of our major locations, which will involve approximately $25 million in occupancy-related CapEx. Beyond that, we are actively investing in software solutions, particularly in custom index and basket builder capabilities that we are enthusiastic about, along with several other capabilities mentioned earlier. These three items are contributing to some comparison fluctuations when looking at 2025 versus 2026. However, the top line and cash collections are continuing to show strong health, and we remain confident in a positive trajectory for free cash flow growth going forward, especially on a per-share basis.

First of all, Baer, congratulations on your retirement. And yes, congratulations again. I want to maybe ask about the reiteration of the medium-term targets and then some comments, Andy, that you said that about the strength of the pipeline. Can you give us a little bit more color on how you break down that pipeline strength into sort of a cyclical uplift, the megatrends that have been discussed on the call versus new product innovation? I know that you called out sort of a number that, that was last quarter on new sales. But just sort of any color on what's driving that pipeline would be really helpful and how that might convert into the low double-digit target.

Sure. Yes. So as I mentioned, we're definitely encouraged by the pipeline. Henry alluded to this earlier, but there is an environmental dynamic here on the margin. I think we've seen constructive buying behavior across many client segments. On the margin, we've seen a good degree of confidence on a number of fronts. I think the sustained favorable market momentum is something that does feed into that confidence. And as we mentioned, we saw pretty good results and some improvement in sales and growth with asset managers, which is an area where, listen, we continue to see the secular pressures, and we'll continue to see some of those secular dynamics at play. But we've seen on the margin a slightly healthier environment across asset managers. But I would highlight, most importantly, as you alluded to, a lot of the momentum we see and the pipeline opportunities are related to the actions that we are taking. And so it does relate to the innovations that we are releasing across the company, our enhancements to client service and go-to-market and our orientation around client segments. I think on all those fronts, we're opening opportunities up in many of these new big client segments, as well as within our existing well-established client segment areas. So we're seeing decent momentum on both fronts here. Just to specifically hit your question about new product contribution to sales. Listen, we saw in 2025, roughly a 20% increase in the contribution to recurring sales from recently introduced products. We continue to see a strong and building pipeline of opportunities related to those new products, and those cut across almost every part of the company, but it's something that is definitely creating pipeline opportunities for us. So we're definitely excited.

On ESG, I guess, a while ago, we talked about the regulatory headwinds or regulatory uncertainty in Europe and how that's impacted growth. What are you seeing in that market more recently? And when should we expect ESG to recover in Europe?

The recovery in Europe is already underway, though not as quickly as we would like. It's important to recognize that not everything regarding performance and portfolio construction needs to be solely focused on ESG, especially considering that the emphasis may have swung too heavily in that direction. Our main priority is on financial materiality within portfolios. We're also benefitting from a consolidation of suppliers of ESG data, ratings, and analytics in the European market. One notable sale in Sustainability was a wealth technology platform where we have positioned ourselves as the preferred supplier compared to others who have been eliminated. This has provided us with a significant advantage. I am optimistic, and our pipeline suggests that we will continue to see growth in Sustainability across Europe. However, I believe we haven't yet hit the bottom in the American markets, particularly in the U.S. because of certain political dynamics at play. While we are maintaining our position and aggressively displacing competitors in the market, it will remain a significant challenge. In the APAC region, business growth has been slower than expected due to global issues, but we are implementing new management and sales strategies. This may not lead to immediate strong sales contributions in Sustainability. More strategically, it has become clear that the beginning of the ESG movement was just the start of recognizing nontraditional risks and opportunities in security analysis and portfolio development. Over time, we will leverage our expertise, data, and client relationships to enhance our ESG/Sustainability franchise by analyzing the impact of other risks within portfolios. This includes factors like tariffs; we have sufficient data to assess where companies produce and sell their products. We are also developing our capabilities to analyze the impact of AI on companies, determining whether it serves as a benefit or a detriment. Climate remains the foremost emerging risk in clients' portfolios, and we are transitioning our focus not only to transition risks but also to physical risks, where demand is currently significant, particularly among entities with shorter-term capital like banks and insurance companies, in addition to long-term investors. We're excited about this sector of our business as it undergoes transformation. Though progress has slowed, we are hopeful that with the insights I've shared and our focus on emerging risks, this will emerge as a strong long-term growth area for us.

Baer, I wish you all the best moving forward. I thought you did an excellent job. Andy, I have a few quick questions regarding costs. Over the past four years, from 2021 to 2024, your Analytics costs were largely stable. However, in the last two quarters, particularly in the latter half of last year, they increased by 11% to 12%. Could you provide some insights into what you are investing in within the Analytics area? What should we anticipate in 2026? Additionally, I have a minor question about Sustainability and Climate. Your costs in the fourth quarter were down about 6% year-over-year. Was this due to an adjustment, such as on bonus accruals, or was there another reason for this? I’d like to better understand this going forward in terms of Sustainability.

Certainly. In the Analytics sector, we experience some natural fluctuations in both revenue and expenses. Factors influencing EBITDA and overall operating costs include the level of capitalization in any specific period and expenses like severance, which we've noticed varied, particularly in the fourth quarter. Foreign exchange also plays a role, particularly as we have significant non-USD employee costs in Analytics. A declining dollar can increase expense pressure in this area. Additionally, we've seen higher costs related to our infrastructure investments, though this isn't something to dwell on. As for our AI insights, we're making various enhancements, including capabilities for dynamically building baskets and analyzing signals in real time. We're exploring exciting projects and expanding our analytics in different domains. We don't aim for specific margins or expense growth rates in any one segment but rather allocate funds where we identify promising investment opportunities. Regarding Sustainability and Climate, we manage expenditures dynamically and allocate resources based on perceived opportunities and market conditions. We focus on areas that promise quick returns and high returns on investment. While we are investing significantly in key sustainability initiatives highlighted by Henry, there are areas where our investments have decreased. Overall, for the year, we observed approximately flat expenses, with a 2% growth noted, and a decrease of 6% in expenses for the fourth quarter. There is variability due to lumpiness in other costs, but generally, we are seeing a slower growth in expenses within Sustainability and Climate.

For private assets, you highlighted a number of opportunities there. One of the key themes in this space is tokenization. How does this tokenization trend impact your world or you don't see much of an impact at this point?

I believe this could be a significant catalyst for us in various ways. While it hasn’t been impactful so far, I genuinely think it could greatly influence markets and financial products in several areas where we see considerable potential. Regarding private assets, we recognize that there's substantial opportunity here, which is why we are investing in this area. Investors are increasingly delving into their portfolios to understand their risks, returns, and the value that managers bring, while also reconsidering traditional asset allocation in private assets. There is a growing trend, especially with more flexible investment structures like open-ended vehicles and continuation funds, leading to a more dynamic approach in investing across private assets. The current process can be quite cumbersome, but we've noticed significant growth in the secondary markets, including both secondary funds and transactions of limited partner interests. As the industry shifts towards tokenization, which streamlines ownership transfers, sales, and purchases of private assets, this will create a demand for the tools we are investing in, such as evaluated prices, credit risk assessments, and portfolio management tools. Therefore, we see tokenization as a potential major accelerator for private markets and the solutions we offer.

Just wanted to go back to some of the remarks you made on the active asset manager end market. I mean it sounds like there's been a little bit of a shift in tone towards kind of more positive outlook on that end market. So just wondering if you can kind of share a little bit more color on some of the trends you're seeing there and what's driving maybe a little bit more positive sentiment on the outlook there.

Yes. Active asset management is facing challenges in a landscape dominated by concentrated indices, particularly with superscalers and technology, leading to ongoing outflows and cost pressures. In 2025, we have been assessing how best to support this industry, which is in urgent need of assistance to regain high growth and profitability. One initiative involves transitioning active portfolios to an ETF structure, where MSCI can play a significant role. We are also focused on helping clients develop investment products to shift MSCI's role from a cost center to a profit center and a center for new product development. While not all managers may seek a proactive partnership, we are providing that option. Additionally, we are assisting clients in consolidating their supplier base with us as their reliable partner, allowing them to streamline from multiple index and analytics suppliers. This is part of our strategy to gradually replace competitors in this area. Though it's a slow process, we dedicated the first half of 2025 to changing our approach in this segment. We recognize that we can't just be another cost burden for them, and this shift is already showing positive results. It’s still early in this journey, but we believe we can help them return to higher growth.

I wanted to ask about the AI efficiencies that you referenced earlier in the call and have referenced previously. So sorry for the 2-parter. But one, I'm curious if you're able to potentially quantify some of the benefits from the efficiencies that you're expecting this year and how much incrementally you're able to reinvest in the business? And then I guess, longer term, I know you haven't changed sort of your longer-term outlook around profitability, but I'm curious if at some point, this can result in better profitability over time? Or do you think there's just going to be continued reinvestment, whether it's in the form of new products or potentially some pricing give back to your clients?

Yes, this is a question that requires a detailed response, but we will keep it brief. The first strategic point to note is that AI is incredibly beneficial for us in two key ways. Firstly, by implementing AI, we can reduce our operating expenses in the current business. These savings can then be redirected towards investments in what we term "changing the business," including new innovations and areas of growth. MSCI has significant opportunities, yet our ability to pursue these is limited by the size of our investment funds. We've been very disciplined in not drawing on the company’s profits for these initiatives; funding must come from reallocating internal costs. This approach will start to affect our expenses in 2026, with some impact beginning in 2025. The effect will increase in 2027 and further in 2028, allowing us to potentially double the growth rate of our organic investments. This presents a substantial opportunity for us. Secondly, AI will significantly speed up the pace of product introductions. For instance, we've leveraged AI to gather more comprehensive and detailed data on private assets. This has enabled us to establish terms and conditions for credit in private credit and analyze fund holdings, ultimately allowing us to create holdings-based private asset indices. This acceleration is noteworthy. Additionally, since we haven't historically focused on workflow software applications, AI will enhance how clients engage with our content. At MSCI, we analyze how clients consume our offerings, and AI will facilitate a much more user-friendly and extensive consumption experience compared to traditional workflow applications. These are just a few examples, and we should discuss this further offline so our team can provide more details on the quantification of these developments.

This is Anna Wu on for George Tong. I wanted to start by extending our congratulations and best wishes to Baer. My question is on cancellations. Can you give us some color on conditions you believe that needs to occur before we might see a sustained reduction in cancellations? And how do you see those underlying dynamics across segments?

We are noticing some overall improvement in client dynamics, particularly among asset managers and in regions like EMEA. However, we are experiencing lower retention rates in Sustainability and Climate, as mentioned earlier, particularly due to challenges in the Americas. Real assets have also seen a slight decline in retention, though there are improvements in some areas. Despite these challenges, client engagement seems to be strong, and overall health is improving. Enhancements in client service and product innovations, many aimed at supporting price increases, are contributing to higher retention rates. While we expect continued pressures in the Sustainability and Climate area, as well as in some parts of the asset management market, we believe we are building good momentum and taking the right steps to enhance engagement and retention.

Andy, in the past, you had mentioned some potentially elevated cancels for asset managers in Europe. I'm wondering if that played any impact on the retention levels this quarter and how you're thinking about that in 2026?

Yes, building on the previous question, it has been one of the dynamics we've observed over the last couple of years. We've noticed a slightly lower retention rate in EMEA. In Q4, the retention rate in EMEA was slightly below 93%, whereas in the Americas, it was slightly above 94%. This fluctuates from quarter to quarter, but generally, the Americas have had a higher retention rate over the last couple of years due to certain pressures on asset managers and various M&A transactions that have taken place. We do not expect any improvement in the future. If anything, we are seeing some marginal improvement in client dynamics. However, the situation in EMEA remains fairly consistent, with the lower retention rate evident across most product lines, except for Sustainability and Climate, which enjoys a higher retention rate in EMEA compared to the Americas. Overall, there are no notable changes in dynamics, with perhaps a slight improvement on that front.

I'm curious if you could help reiterate what's driving the strength in index recurring subscription revenue outside of asset managers. Is there any way to help like stack rank what those drivers are and just your level of confidence in those continuing?

We are observing a significant shift in the investment industry towards personalization and customization. This trend is enabling the creation of tailored portfolios and outcomes. Indexes serve as efficient tools to embody specific investment views or strategies. This underlying dynamic is driving our new product launches and our focus on particular client segments. The fastest-growing client segment has been hedge funds, particularly in the fourth quarter. We've discussed the opportunities within the trading ecosystem that includes hedge funds, broker-dealers, and trading firms. Their growth is largely due to a strong demand for content that aids in market comprehension and understanding of our indexes, facilitating their navigation of market opportunities. In the fourth quarter, hedge funds experienced a 19% growth, while broker-dealers saw a 10% increase. Broker-dealers are also developing various tools like over-the-counter derivatives and structured products to help their clients, whether institutional or high net worth, meet specific investment objectives. For asset managers and asset owners, there has been an 8% growth in index utilization, reflecting an improved use of our content and tools across their organizations. The demand for customized outcomes is driving this growth, supported by both our established Index intellectual property and new custom indexes. We are introducing new capabilities like our Basket Builder and advancements in custom indexing, allowing clients to interact directly with portfolios and develop outcomes. This presents substantial opportunities moving forward. In the short term, we are witnessing strong growth as the trading ecosystem increases its content purchasing, and we are seeing enhanced prospects throughout the investment ecosystem for utilizing our index offerings. This represents a highly promising opportunity, contributing to our optimistic outlook for the future.

Sounded like you wanted some follow-ups, so hear this. Now this is a quick one, and it's actually a follow-up to my earlier question. I think Henry suggested that you are having a little bit more pricing power as the environment has gotten better. So maybe for you, Andy, any more meat you can put around this? I think in the past, you've talked about contribution from pricing, et cetera. So maybe a little bit more in terms of 2026, what are you expecting across the different segments?

Yes. I would say, generally, the contribution from price increase has been relatively stable. There are puts and takes across the business based on innovations, enhancements we make to existing services, client health and usage of our tools. And as I've alluded to before, there are certain areas or Henry talked about it in areas like S&C where the health does vary in different geographies. But overall, we've seen a relatively stable contribution from price increases. As you're asking about, and I think I alluded to this back in December, and we've mentioned before, the enhancements we are making on many fronts, we are monetizing through price increases. And so that's something that's not only supporting up sales, but price increases. So I would say there's some nice sustainability and durability to our ability to continue to increase price because we are significantly enhancing the value that our clients get from our tools. And this is an area where AI is particularly exciting, where it's allowing our clients to do more with the services we provide and be more efficient in how they operate. And those should allow us to continue to unlock commercial value through price increases over time.

So thank you, everyone, for joining us today. As we have described this morning, MSCI's all-weather franchise helped us complete another strong year of underlying business performance and attractive margins. We are also building momentum in the company in terms of creatively and aggressively selling across all client segments what we currently have. And the new product machine and the new innovation mode of MSCI is getting into high gear, and that will help us continue the momentum that we have generated in the last 2 quarters. It feels like we kind of bottomed out in the second quarter of last year. Obviously, too early to tell at this point, but we feel pretty confident and pretty encouraged by the pace of innovation, the pace of selling, the dialogue with clients, the market drop and for sure, the level of innovation and product launches that we are achieving. I'd like to take this opportunity one more time to thank my long-time friend and business partner, Baer. MSCI would not be what it is today without Baer, your contributions, your leadership, your dedication, your owner-operator mentality. We wish you great happiness and fulfillment and good health in your retirement. And we, for sure, will be taking care of your retirement dollars here and make them multiply. So with that, again, I'd like to thank everyone.

And thank you, Henry, for your partnership, an incredible leadership, which I'm very confident will continue.

Thank you. Thank you all.