All right. Hi, everybody. Are we live? Good to go. Great. I'm Alex Hess, Vice President on Andrew Steinerman's Business and Information Services Equity Research Team. Thank you all for joining us this afternoon at the Ultimate Services Investor Conference. It means a ton to have you all, and especially Andy, who is making his fourth consecutive appearance at Ultimate Services. Andy, a warm welcome to USIC 2025.
Thank you.
Let's dive right in.
Thank you. Thank you. Very happy to be here. Always a great event. Did not disappoint this year. Thank you for having us.
Great. Awesome. Andy, I want to start with the recent guidance update for higher interest expense following your bond issuance. Investors are likely to draw a line between this update and a potential return of share of capital to shareholders. How should MSCI be thinking? Sorry. How should investors be thinking about your recent capital allocation actions? And maybe why has MSCI been a little bit uniquely aggressive this year?
Yeah, I would say we have been aggressive. We've been opportunistic, but it is in line with our historical approach. That historical approach starts with available cash. Given the attractive financing markets that we've seen, or at least attractive credit spreads that we've seen, we've taken advantage. Our leverage was running below the targeted range of 3-3.5 for some time. Given the financing we did in August, and then again a few weeks ago, we've now moved to be within that targeted range. We are solidly right in the middle of that targeted range of 3-3.5. That has given us a higher amount of cash. We use that as an input along with two other factors in our share repurchase approach. One is volatility in our share price.
We tend to set up repurchase programs that tend to buy more when there is more volatility in the stock. We do put some overlay of value. We are very bullish on the long-term prospects of the company, but we think in the short term and the near term, we can create value by putting some degrees of, I'll call it, conviction around price levels on our repurchases. You have had in recent periods, particularly recent months, you have seen our cash jump. You have seen some volatility in the share price. We have been aggressively taking advantage. It has been a tremendous source of value creation for us over the last 13 years. We believe it will continue to be a key ingredient of the formula of value creation for us.
Great. Great. Now it's normally you end with capital allocation. We're getting started there today. Let's talk about the momentum that you guys have been seeing, at least as of the third quarter, in the net new subscription sales, with new products seeming to facilitate that improvement. What solutions are really on the net new side moving the needle most for MSCI at this juncture? What should investors be watching and be really training their eyes on?
Yeah, I think you've heard us talk about a lot of them. I think across the organization, we have accelerated the pace of new product development. We've released a whole host of capabilities that are valuable and sellable in their own right. We've also released a whole host of capabilities that help support price increases and are continually adding more value to clients. It's not one specific area. It's across the business, and it's really across all product segments. On the index side, we have seen traction in areas like our custom index capability, an area where we've continued to innovate and enhance that capability. We've come out with data sets in recent periods that are readily monetizable with the trading ecosystem. Hedge funds, trading firms, broker-dealers around things like our sustainability methodology, index methodology factor, index methodology, our constituent AUM data set.
You've seen us release additional insights into parts of the investment ecosystem that allow our clients to understand better what's going on around index-based products. You've seen us come out with things like the Venture Index that we've recently released. Those are all products that we think are very impactful to many different client segments. They're continuing to fuel not only the value we can bring to, and I forgot to mention what we were doing on the active ETF side, which I know has gotten a lot of attention. Those are all things that are being helpful in adding value to our existing clients, but also continuing to fuel that outsized growth with additional client segments. Just to provide a few other examples across product segments. On the analytics side, we've had tremendous traction with our Next-Gen Factor Model.
You've heard us talk, obviously, about some of our fixed-income capabilities. You've heard us talk about AI insights or AI insights offering in areas like private assets, arguably the area where we probably had the most innovation and new product development. Everything from our PACS, so our private asset classification standard that we've recently rolled out. I think everybody's familiar with them.
We've talked about the Moody's partnership and the private credit scoring service that we can provide or are providing, a whole host of benchmarks and content sets, a self-extraction tool that is allowing clients to get even more value out of the transparency service that we deliver to them today, where they can not only look at the information that we pull out and present to them in a structured fashion with kind of standard classifications and analysis around it, but they can actually interrogate and extract information on their own. Very, very rapid pace of innovation, which is helping to fuel growth across the business.
Yeah, that's helpful. You flagged that on the earnings call, that about $25 million of year-to-date bookings come from newly released products for the first nine months of the year. That's about 13% of the total. How do you calculate that number, and how does that compare to years past?
That reflects new recurring sales from products that have been released since 2023. We think that's generally a good time period to start to quantify the impact of new products. That does not pick up, as I alluded to, capability enhancements that are helping to drive price increases, other benefits for clients, but really focused on those new products that we've come to market and are selling discreetly. What's fueling that is those products I mentioned in your prior question. That's what comprises that $25 million. It is across many parts of the business. That is a pickup from what we've had in the past. New products are definitely contributing more and more to sales and growth of the business.
Got it. In the past, you were able to lean more on capability enhancements to extant products. Just for an easy example, ESG Ratings, taking that from 1,000 equities to 10,000 equities. Now it's another analytical overlay on the sustainability.
I think that's, yeah, that's one way to think about it. That's probably a little bit oversimplified in certain areas. I would say we are in, another oversimplification here is in the past, we have monetized products that were developed for asset manager use cases within other client segments where we've seen applications and opportunities across a wider range of use cases and client segments. A lot of the product innovation that I alluded to is actually developing products and solutions or services that are geared to non-asset manager client segments as well. It is an important contributor to and driver of this outsized growth that you've seen us have and will continue to see us have across the non-asset manager client segments.
Got it. And then it seems like you sort of answered this question already, but I'm going to ask it anyway. 3Q 2025, 3Q in general, is generally a seasonally quieter period for you guys on new sales. It's not as signal-rich as 4Q. We're going into 4Q. Should investors expect 3Q's performance to translate well into 4Q?
We have not given any specific guidance on Q4 here. To your point, Q4 tends to be a higher period of sales and cancels for us. It is a period where we tend to have a higher portion of contract renewals. Around renewals, we can oftentimes have upsales. On the flip side, we can also have elevated cancels. You will oftentimes see elevated cancels and a lower retention rate in the fourth quarter. We also see sometimes some client budget dynamics that feed into stronger sales in the fourth quarter. Our sales incentive plan and plans oftentimes are geared towards annual targets. All those reasons translate through to Q4 being an important and often constructive quarter for us. You heard our commentary about we are encouraged. Henry's definitely encouraged about the momentum that we've seen in new product development.
I think we've indicated that we've seen a fairly consistent end client environment here. On the margin, we've seen some favorability in certain pockets from the momentum in equity markets. A lot of our bullishness and excitement has been around your prior questions on the new product development and traction we're getting in certain client segments. We continue to hope that continues.
I want to drill into the private capital segment because I think index is understood and analytics, everybody knows as a view, and I certainly do. I think it is well understood as well, though. On private credit, private capital, excuse me. You are launching private markets data with index applications. You are launching solutions for the private markets with analytics, more analytics-like use cases. How do you decide which segment something gets put into? It seems like that maybe is a little blurrier than it used to be.
It's a fair question. I can understand the blurriness. Like analytics, like sustainability and climate, private assets, the content we have there, the unique access to data and the IP that we're creating benefits all segments of MSCI. You're absolutely right. You're seeing us launch things like that Venture Index I alluded to earlier. That shows up in our index segment. You're seeing us launch our Private Credit Risk Model. It shows up in our analytics segment. We are seeing innovation happen across all segments related to that private asset capability and franchise that we are building. Typically, the way that we determine which product segment it will show up in is around use case and product dynamics.
If it is something that is an equity index/liquid index ETF -type product, like that venture-backed index, it is going to sit in the index segment. If it is an index that is used for private asset benchmarking and specific private asset use case, that will be within our private asset segment. When it is an analytic risk tool, it is typically used by a risk office. Our private credit risk model is primarily used in a CIO or CRO type of capacity to understand risk of a private asset portfolio relative to the risk of the entire organization. That shows up in our analytics segment. Generally, if it is something geared towards private asset investment process, private asset investors, it is going to show up within our private asset segment. There will continue to be a lot of instances where that IP is fueling opportunities across the business.
That's super helpful. I want to touch on a comment that your colleague, Baer Pettit, whose retirement was just announced, all the best to Baer. He noted on the last earnings call that more and more LPs are using MSCI private capital indexes for performance benchmarking. This is a shift away from traditional public market proxies, absolute return hurdles, whatever. What's driving this transition? It sounds like you expect this to benefit your business. Is that fair?
Yes. Yeah, for sure. To oversimplify here, again, there has not been a good alternative. The most common benchmark for private asset allocations, private asset portfolios among many asset owners, has been a public market equity index. I think it's in a private asset portfolio, particularly because a lot of the reason people invest in private assets is the perception that it is uncorrelated and has different dynamics fueling its performance. We are on that journey to create fit for purpose, much more robust standards, including for indexes and benchmarks that will benefit and be a much more effective tool for investors in private asset classes. That is not only for private equity. We have been on that journey in real estate, but also for private credit and infrastructure.
There are all sorts of considerations around making sure you have robust data to be able to develop an index that is a sufficient cross-section of the market, which I think there have been few providers that have had that data, reliable enough marks and value information, cash flow information on the funds themselves that ultimately feed into and comprise the indexes. Standard classification standards, as I alluded to before, there have not been clear definitions a lot of times between what is VC versus growth equity versus LBO within private credit. What are the different instruments and instrument classes? How do I think about the dynamics of those? Related to that, what are the risk factors and attributes that I need to think about in each of those? What is the importance of liquidity when valuations are reported?
Thinking about things like frozen indexes, which are much more important for things like governance and compensation versus unfrozen indexes that will actually historical results will change over time. These are all problems that we are actively solving and coming out with solutions that will make for much better tools for the investors who are investing in the private markets.
By frozen index, do you mean like a cohort analysis or vintage analysis, vintage year?
There is that. We do that. Yeah, when you're thinking about performance benchmarking, there can be the measure of how did this manager perform relative to other funds. Say this LBO manager, how did their 2017 LBO fund perform relative to other LBO funds launched in 2017? We do that performance benchmarking. Then there is also, if you will, like the return on all of the funds you've invested in, how has that performed relative to the market? One of the nuances with private assets is that there are reporting lags. Not all managers report on the same time horizon. If you're reporting the return for Q3 2025, by the way, you haven't done that yet because most of the managers have not reported. Typically, it's with a significant lag after the quarter end.
When you report that, you might only have some subset of the funds reporting to you. The next time when you report on Q4 2025, you're getting the numbers for Q3 2025. You have to restate the historical results, which is important to do, but it's also important to have a frozen index over time. They serve different use cases. That's not a trivial thing to do. You need to have the right granularity of data in the right form and format and the right infrastructure. There have not been good sources for that.
Yeah. Spoken like somebody who knows a little bit about reporting lags when it comes to AUM.
Yes.
I want to talk on AI. Henry, you called it a precondition of employment. It's a big deal for you guys. You're injecting it into your products. You're using it in your backend. There's also a narrative out there that information services companies, some of them, could be AI losers. Not saying you, not saying somebody else, just saying generally. Does MSCI's most AI-enabled cohort of customers, define that however you want, do they consume more data and do they buy more MSCI solutions than, say, the less AI-forward?
Obviously, early in, there's a wide range of AI applications and use cases out there. I'd say, in general, yes. The punchline is yes. Those organizations that are being super proactive in analyzing data, training an agent, incorporating our analytic engines into their processes are bigger consumers of more content sets. That cuts across most of our product lines and product areas, particularly the case in index, in analytics as well. They are bigger users, so consuming more, which oftentimes can lead to, depending on analytics, sometimes can lead to upsell opportunities. At the very least, it gives us an input into the pricing equation in the future. Yeah, we definitely view our tools, our content, our unique IP as a key ingredient into an [audio distortion].
We do see those AI-forward organizations as very hungry consumers of more and more content and more and more usage of that content from MSCI.
That's really helpful. Speaking of consuming more content from MSCI, let's look at Europe for a second. You noted in October, your words always come back to haunt you, that the MSCI World Index has become a standout in terms of leading European ETFs. What makes the World Index in particular a standout and how do you define that qualitative comment?
Yeah. I mean, at the simplest level, we've seen extraordinary growth and market share capture of cash flows into European-listed ETFs. That's the thing that is ultimately a reflection of our strong position in that market. One thing that is particularly exciting around that is we are almost the de facto measure of international investing in Europe. It varies slightly country to country. Generally, when European investors think about investing outside Europe, they think in MSCI terms. That is a big market. We are the leader anytime an investor is allocating assets internationally. Even when they want to get U.S. exposure, we pick up a large part of that with the World franchise. You're also seeing, similar to what you see in the Americas, both institutions and even the wealth-driven investment process become more model-driven, systematic.
Similarly, our index frameworks lend themselves very nicely to getting those model-driven exposures. Yeah, we are very excited about the traction we've seen in Europe. We're capturing every quarter a significant portion of the new flows into European-listed ETFs. That market is quite a bit smaller than the Americas. There have been favorable trends. There are some dynamics that have led to it being smaller, but it seems to be on a trajectory where it could be quite bigger in the future.
That's great. That's aligned with, let's say, with some public comments from your largest customer. Their view, and possibly yours, maybe not yours, is that the market for European ETFs is sort of primed to grow and sort of really hit its stride. Why hasn't it yet? We're in 2025. ETFs are not new.
Right. As I alluded to, there have been in the past certain dynamics around how people save, if I can generalize, even at the highest level. You have seen in many markets heavy use of deposit and cash products. You have seen heavy use of insurance products. There are norms that have led to less usage of ETFs and other index products. You have just seen a less liquid and less evolved market as well. You have started to get critical mass in many ETFs now listed in Europe. You have seen fees that are in a realm that they are attractive to many wealth-driven investors and individuals. As I alluded to, you are seeing this move towards more systematic type investing. You have seen certain usage products that make it easier to put individuals into investment vehicles.
There is a confluence of factors that are now leading to ETFs being a more palatable and useful tool for investors looking to save, invest, achieve specific outcomes. Related to achieving specific outcomes, you also have seen a strong growth in a wide range of indexes. It is not just one index there. We are seeing tremendous traction and new launches around climate indexes, other factor dynamics, geographic sector exposures. All those things help fuel ETFs as a useful investment product.
Great. I want to just briefly touch on the two of your other businesses, which are analytics and then, or let's say, and then maybe the client segment hedge funds. On the analytics side, obviously, it's had very nice growth and very nice margin expansion in recent years. I know the way you typically break this out is about two-thirds multi-asset class of run rate is multi-asset class, but a third of run rate is equity analytics. Help investors get a little bit more flavor for what sits inside that analytics portfolio.
Sure. Sure. So yeah, as you said, about $490 million of run rate in what we call MAC analytics or multi-asset class analytics. The large majority of that is associated with enterprise risk and performance solutions. These are analytic services and analytic content that are used by typically a central investment or central risk office to look across multiple portfolios, often involving multiple asset classes. That is encompassing, and those analytics do everything from factor analytics to market-based risk. Factor risk and market risk, market risk being things like value at risk, Monte Carlo simulation, scenario analysis. If I put my organization through a scenario of financial crisis, what's it going to do to my portfolio? That is the largest portion of that MAC analytics piece.
We do have a meaningful and growing, call it in the very rough orders of magnitude, like $50 million-$60 million of run rate fixed income and wealth offerings there. You hear us talk about those as big growth drivers for us. We have continued to get good traction with our fixed income analytics, which sits within that multi-asset class category, and our solutions for wealth organizations. On the equity analytics side, it is largely a franchise built around our factor content and applications and services that feed into that factor content. We will license a big portion of our content directly.
The factor models, factor content directly, but oftentimes clients will also license applications like our Barra Portfolio Manager or specific application services like our Optimizer to allow them to do things like, obviously, portfolio construction optimization, but also back testing, risk, and performance attribution on their portfolios. It is largely, you can think of, built around the factor content for us. Just quickly, while we're on the topic of analytics, I did want to flag one modeling point. As you know, there is some lumpiness in the analytics revenue growth rate, which relates heavily to timing of implementations. If we have a large number of implementations completed in a certain period, that will lead to elevated revenue. Likewise, there can be periods where we have a lower level of implementations that are completed.
In Q4 here, we expect revenue growth to be a little bit lower than run rate growth, revenue growth to be in, call it the mid-single digit range as a result of a lower contribution from implementations taking place in the fourth quarter.
Got it. Maybe in the last moment that we have on the hedge fund space, that's obviously been an area of strength for the analytics business. Seems to be predominantly in the equity factor model products. Can you just walk through, investors, how deeply you're ingrained in these multi-manager complexes and how strong of a runway that is for you still?
Yeah. We are integral to how they manage their organizations and their investment process. Obviously, it varies slightly depending on their tilt and focus and where their assets are. Generally, these large multi-strategy, multi-manager hedge funds are using our risk models to assess exposures and risk across the organization and also manage that risk as well. It oftentimes, looping back to some of my earlier commentary, feeds into creating baskets, using other tradable products to hedge risks that they have. It is their core measure of risk. As you all know, risk is at the epicenter of how they generate outsized returns, uncorrelated returns over time.
As a result of it being the backbone of kind of how they manage their investment process, it feeds increasingly into the portfolio managers and the portfolio level as well, where risk is oftentimes used to assess the idiosyncratic versus systematic components of a portfolio and ultimately something that the portfolio manager is heavily focused on as a result because that is how they are adding their outfit at the end of the day. We are critical to how they invest, but a lot of these innovations that we're coming up with are making it much more effective for them to manage that risk, assess that risk, and then ultimately achieve better outcomes on top of that risk over time. It's a big opportunity for us.
Great. That's super helpful. Thank you guys all for joining us.