Good day, ladies and gentlemen, and welcome to the MSCI third quarter 2026 earnings conference call. As a reminder, this call is being recorded. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to ask one question at a time, then add themselves back into the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.
Thank you, operator. Good day, and welcome to the MSCI third quarter 2026 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter of 2026. This press release, along with an earnings presentation, are available on our website, msci.com, and 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 the 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 US GAAP, we also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation.
We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, Andy Wiechmann, our Chief Financial Officer, and Alvise Munari, our Chief Product Officer and Head of Client Segments, who will be joining for the Q&A session. With that, let me now turn the call over to Henry Fernandez. Henry.
Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the third quarter, MSCI delivered strong financial and operating metrics, including historic net new sales in Index, Analytics, and Private Capital Solutions, plus another record quarter for asset-based fees. We have built impressive momentum across these three product lines. While sustainability and climate continue to face challenges, we believe that our recent acquisition of First Street will help accelerate a return to higher growth in climate.
These results show that MSCI is expanding our mission-critical role in global investing, even as we transform our business to an AI-first company. Since our IPO 19 years ago, MSCI has demonstrated a strong and consistent track record of execution. This foundation positions us well to capture expanding opportunities both across client segments and a growing range of solutions.
We have multiple dimensions of growth and a compelling opportunity to compound over the long term. Financially, our strong Q3 performance included total revenue growth of 12.4%, ABF revenue growth of 25%, subscription revenue growth of 8%, adjusted EBITDA growth of 12%, and adjusted EPS growth of 14%. From July 1st through October 19th, we repurchased $627 million of MSCI shares at an average price of $562 per share.
Since the beginning of 2024, we have opportunistically repurchased nearly 8 million shares for $4.4 billion. During the same period, I have personally purchased an additional 57,000 shares for $30.1 million. These purchases unequivocally demonstrate our strong belief in the potential of the MSCI franchise. Operationally, in Q3, MSCI achieved total run rate growth of 12%, fueled by a record ABF run rate of almost $1 billion.
Our ABF performance reflected record AUM levels in ETFs and non-ETF products linked to MSCI indexes, including inflows of $76 billion. There are now nearly $23 trillion of AUM benchmarked to MSCI indices. Of that $23 trillion, roughly $15 trillion is actively managed, while $8 trillion is indexed. We also posted subscription run rate growth of 9%, after adding nearly $55 million in recurring net new sales.
We delivered a retention rate of 95%, an improvement of 30 basis points from Q3 of last year. MSCI is a long-term compounder driven by both ABF and subscription growth. On the overall subscription side, Q3 was our best ever quarter for recurring net new sales in nalytics and Private Capital Solutions, along with our best ever Q3 for recurring net new sales in Index.
Compared with a year earlier, recurring net new sales grew by 88% in PCS, 63% in Analytics, and 40% in Index. Notably, MSCI saw robust demand by both our traditional and newer solutions. In fact, we continue to see consistent growth in recurring sales from our newer products. Importantly, our higher pace of innovation is strengthening sales of our existing products as we continue to deliver greater value to clients.
Virtually all those newer products are powered by artificial intelligence. Q3 also showed our diversified strength across regions. Recurring net new sales grew by 74% in EMEA, 36% in APAC, and 26% in the Americas. Indeed, we achieved our best ever quarter in APAC, driven by Analytics. MSCI is unlocking additional growth layers through our recently announced partnerships and acquisitions. In Q3, for example, we formalized the landmark agreement with UBS that we first announced back in July.
This agreement will extend the reach of our private asset solutions, strengthen connections between GPs and wealth managers, and promote greater transparency across private markets. Similarly, our acquisition of the AI-native platform, Vantager, now the MSCI Private Assets Diligence Platform, enabled us to complete a major deal with a large U.S. bank.
At the client segment level, MSCI achieved a record quarter with asset owners, more than tripling our recurring net new sales from a year earlier, driven by demand for our total portfolio solutions and our integrated risk and portfolio management analytics. Our largest deal of the quarter moved MSCI from a vendor relationship to a strategic portfolio analytics partner for one of Asia's biggest and most sophisticated sovereign wealth funds. We also closed a number of major Analytics and Index deals with top hedge funds, including deals for our equity models and custom Index modules.
Finally, we maintain our steady performance with asset managers globally, while achieving a strong quarter in EMEA, where we posted 35% recurring net new sales growth. Despite the ongoing retention pressures in sustainability and climate, we enter Q4 with solid momentum and a strong client engagement across the whole MSCI franchise.
We are incredibly excited about the expansion of MSCI's offering through new use cases for newer client segments, such as wealth managers, banks as lenders, GPs, and insurance companies in their underwriting processes. We are delivering and expanding MSCI by leveraging what we already do for our more traditional clients, such as asset managers, asset owners, traders, and hedge funds. MSCI truly is a one-of-a-kind company that is uniquely positioned to benefit from the biggest transformations reshaping the global investment and finance industry. With that, let me turn things over to Andy.
Thank you, Henry. Hi, everyone. Our strong results reflect our rapid pace of innovation, our effective go-to-market execution, and the growing ecosystem around our tools. We believe this momentum is sustainable, and we continue to have an attractive pipeline of opportunities. MSCI is a powerful compounder, and the run rate algorithm was on full display with continued double-digit subscription growth in Index, high single-digit growth in Analytics, accelerating growth in private assets, and outsized secular growth in asset-based fees.
Across client segments, we saw double-digit growth with non-asset manager segments and mid to high single-digit growth among asset managers. This algorithm, combined with inherent operating leverage and ongoing capital optimization, allows us to fuel consistent compounding value creation. The momentum in the business is evident, with LTM recurring net new subscription sales up 26%. Drilling down into Index, organic subscription run rate growth accelerated further to 11.7%.
Powerful indexation trends drove double-digit subscription growth across hedge funds, banks and brokers, wealth managers, and asset owners of 32%, 15%, 10%, and 10%, respectively. The retention rate was over 97% across Index, including a retention rate of 98% with asset managers. Additionally, asset-based fees were fueled by $76 billion of equity ETF cash inflows concentrated in developed markets, ex-U.S., and emerging markets.
This was our second highest quarter of inflows, behind only the first quarter of this year. Within Analytics, we had organic subscription run rate growth of 7.5%, driven by several large strategic client wins with asset owners and wealth managers. These clients are seeking to modernize their investment platforms, integrate risk and portfolio management workflows, and enhance investment decision-making, alongside sustained demand for our factor content.
As we have mentioned, Analytics operating metrics will be lumpy quarter to quarter, but the trend has been encouraging, with LTM recurring net new up 18% over the prior LTM period, driven by strong momentum in key areas. In private capital solutions, subscription run rate growth accelerated to 19%. We see growing demand across existing solutions like our transparency, Private Capital Intel, and total plan offerings, and we are building momentum in newer offerings like our data and diligence platforms.
Additionally, we are seeing good traction in landing benchmark wins across asset owners. In real assets, organic subscription run rate growth was 2%, supported by improving client retention and clients seeking broader data access through Snowflake. In the sustainability and climate reportable segment, we executed over $5 million of new recurring sales in sustainability and over $2 million of new recurring sales in climate.
We saw elevated cancels with one sizable down sale related to a client rightsizing its sustainability spend. Meanwhile, in climate, run rate growth across MSCI product lines was 8%, excluding the impact of First Street. Demand for our physical risk solutions, including from recently acquired First Street, is growing.
The integration of First Street remains on track, and client engagement has been very strong. As we mentioned last quarter, the pressures on parts of the sustainability franchise are expected to continue through the fourth quarter. We expect the sustainability and climate reporting segment to have recurring net new sales that are roughly flat to slightly positive in the fourth quarter.
Turning to our guidance, adjusted EBITDA expenses in the third quarter were in line with the level we indicated in September, driven by the impact of recent acquisitions, higher performance stock-based compensation, and higher severance as we unlock efficiencies ahead of schedule.
Given these items, which enhance the franchise heading into 2027, and the strong top-line momentum this year, we expect to be at the top end of our expense guidance ranges for 2026. To provide more color on the elevated expense items in 2026, acquisitions are expected to add roughly $20 million of additional expenses this year.
The incremental accruals of performance stock options, which are mostly driven by higher than expected AUM growth in products linked to our indexes, and the strong business momentum are expected to add roughly $15 million-$20 million of non-cash expenses, and severance is expected to be roughly $10 million-$15 million higher than originally planned, reflecting the acceleration of efficiencies and the AI transformation across the organization.
Despite our high level of investment and the addition of four acquisitions, headcount has remained roughly flat compared to a year ago. This reflects our ability to leverage AI to transform the company for the future, accelerate the pace of innovation, and drive faster growth. Additionally, we increased the interest expense guidance as a result of higher revolver balances to support our opportunistic share repurchases. We also narrowed the tax rate guidance for the full year to 18%-19.5%.
Overall, we remain well-positioned for and committed to delivering very attractive profitability growth while investing for the long term. In summary, our Q3 results show consistent execution across product lines and client segments. We are pairing continued investment in growth areas with strong financial discipline, and we have the flexibility to adjust as conditions evolve. We look forward to keeping you posted as we deliver on our priorities. With that Operator please open up the line for questions.
Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press star one one on your telephone and wait for your name to be announced. As a reminder, to accommodate all participants in the queue, please limit yourself to one question per person. You may re-enter the queue as time permits. One moment for our first question. Now first question coming from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Thanks so much. Henry, I wanted to ask a longer-term question on Analytics. I was wondering how you're thinking about the future in terms of the product platform and distribution, just given the advancements in AI. How do you think customers will be interacting with your data, with your platform? Just trying to think of from a long-term perspective over the next few years, how you think that this is going to change. Thanks.
Thank you for the question, Toni. The first thing to keep in mind that you know well is at MSCI, we run a fully integrated company in which each product line feeds off and feeds into other product lines. In the past, maybe more distant past, we viewed Analytics, especially a risk management platform, risk and performance management platform, as one of the more important product lines.
In the recent past, we have began to develop a strategy that help us take this extremely important product line and make it much more strategic and much more value-added. So for example, in our risk management platform, we get enormous amount of portfolio data that, in general, we have rights to anonymize and aggregate and things like that could develop new products.
Secondly, in a risk management and performance platform, we know what the clients are doing every single day by them having their portfolios and running reports in our platform. We are developing plans to propose to the clients, "Why don't you do this? Why don't you look at this? Why don't you think of this new product, this new idea, this new this, new that?" AI is going to help us do that, because otherwise we will have to have humans do that.
The last point that I will make, therefore, is MSCI is an analytics company. In totality, by history, we are a modeling company, therefore an analytics company. Models, the Index methodologies are models, the factor models, the risk model, the other risk models, the ESG ratings are models, all of that.
We are in the process of integrating the company into a more holistic analytics shop with proprietary data and very advanced new AI technology to gather the data, process the data, and help our clients consume the content, the data, and the models much more effectively. That's the vision of Analytics at MSCI.
Thank you.
Thank you. Our next question in the queue coming from the line of Alex Kramm with UBS. Your line is now open.
Yes. Hey, good morning, everyone. You talked about strong momentum in the business continuing, so maybe you can be a little bit more specific. I know we're only 20 days into the quarter, but if you think across the bit, talked about sustainability being weak again in the fourth quarter. But where are you seeing strong momentum, as it relates to maybe last year? Because the fourth quarter is the strongest sales quarter usually in the year. Just any more color around pipelines to give us some comfort for the momentum into year-end, please. Thanks.
Sure. Hey, Alex, it's Andy. As I mentioned in the prepared remarks, we see an attractive pipeline here. We've got tremendous momentum across the business. If you look at where that momentum is, we saw an acceleration in Index, saw an acceleration in PCS, we saw a pickup in Analytics, and we've seen it across non-asset manager client bases.
Those are all things that are sustainable trends, and we see good momentum. Obviously, the third quarter was a very solid quarter. We continue to expand and do more for clients, and as a result of that, we're having many large deals. These types of deals are reflective of repeatable types of strategic sales that I think we're going to see more and more across the business are going to be a key component of growth into the future.
There will be some inherent lumpiness related to the timing of these deals, and as we've alluded to, I wouldn't overly focus on one quarter, but I would say the overall pipeline is quite robust. The momentum is there. Q4, as you said, is a very strong quarter for us for a number of reasons. Notably, there are things like concentration of contract renewals, client budgets.
It's a year-end for our sales organization. We're looking at an important fourth quarter here, and we've got the opportunities and the momentum to deliver. I think we're seeing good momentum, not only into the fourth quarter, but heading into next year across those key growth engines for the firm.
Thank you. Our next question in queue coming from the line of Manav Patnaik with Barclays. Your line is now open.
Thank you. I guess I just wanted to follow up on that in terms of the big. You called out a bunch of large contracts this quarter. It sounded like, Andy Wiechmann, you just said you expect more of those to continue, so we shouldn't treat these as timing, perhaps, just trying to get a level check on the growth rate there. Then I just wanted to clarify your comments around how First Street is going to help the growth on the sustainable side, please.
Hey Manav . Look, I think that as we expand MSCI into new use cases, new client segments, there is an incredible amount of innovation and new product launches at MSCI. As we engage with clients, the number of large deals is going to increase.
Now, each quarter, we're going to have a lot of large deals, and it will make it a great quarter like this one, and some deals will slip to the next quarter. It may appear that the quarter wasn't that great. It would be a mistake to interpret it that way. The best way to analyze our performance is on a multi-quarter basis because these large deals are going to create differences quarter by quarter. Therefore, when we have a great quarter, everyone is going to get really excited.
When the quarter is a little less, it's a little softer because a few deals, large deals flip to the next quarter, it's going to look less exciting, and everyone is going to start worrying. The trend here is very positive. The trend is that we're picking up growth, a little bit in asset managers. We're stable in asset managers with slightly higher growth, but importantly in the non-asset manager segments.
Of course, asset-based fees within Index and ETF and all that, but in traders and in hedge funds, in GPs, for sure in asset owners as you saw in this quarter, et cetera. I think that my best advice to all of you is to evaluate not the financial metrics. The financial metrics get smoothed out by the accounting process.
But the operating metrics in recurring new sales and retention and cancels, you need to evaluate them on a multi-quarter basis. Otherwise, you are going to go crazy. You are going to feel very good one quarter and going to feel not as good the next.
Thank you. Our next question in queue coming from the line of Alexander Hess with JPMorgan. Your line is now open.
Yes. Hi. Hi, Henry. Hi, Andy. Hi, Alvise. Just wanted to see if we could get you both to elaborate on the qualitative and the quantitative in something in your prepared remarks in the press release. You noted robust demand for both traditional and newer solutions.
Maybe we could have Andy start off with dimensioning how much are newer solutions contributing to the net new number? And then maybe from Alvise or Henry, how we should think about what is resonating in market right now, and yeah. And then also, if you do not mind me tacking on, any comments you can offer on the largest deal you closed and what was different about that specific transaction. So I know
Sure.
you want to talk about it.
Yep. Hey, Alex. Let me give some color on the quantitative side, and as you said, I'll turn it over to Alvise to give some color on types of products, where we're getting traction. He can comment on that big win we had, which is very exciting for us. As you know, we have seen not just this quarter, but this year, we've seen a meaningful increase in the contribution from new products to sales.
That is something that is a key driver of growth, and we expect that to continue. In the third quarter here, that contribution to new sales from new products increased more than 50% compared to a year ago. We have seen a significant step-up in new products launched this year, but importantly, the monetization of those new products.
I would also highlight beyond just the monetization of the products themselves, that innovation, that development, the enhancements that we're making are also critical in driving improved retention. They also help to support price increases, and they are key enablers for broadening the relationship with many clients.
This innovation is a key part of our growth algorithm on many fronts, not just the new sales contribution, but it's something that we think is really helping to fuel the repositioning of the company and opening up additional use cases and new client segments, new parts of the market, and new solutions for us. With that, why don't I turn it to Alvise to give some more color?
Thank you, Andy, and thank you, Alex, for the question. We see a continued sustained demand for new solutions for portfolio construction. The demand from all angles of the market for more customized, more bespoke portfolio solutions continues, and that allows us to continue accelerating the success of our custom Index franchise. We're also helping accelerate our model franchise. We launched a custom model service. We're also building new factor models at pace. We also are accelerating the new specialized datasets we are making available to our clients in the market.
These are on a range of different aspects for portfolio constructions. There are some very specific new type of signals that we're putting out through our SignalLab effort on crowding, on specifics of factor models, and there is also new solutions to help people build the objects of the past, they build the solutions. This is all driving this continued growth of the portfolio ecosystems and is offering us, frankly, a very positive environment for the next several quarters to continue this expansion.
The other area that I would highlight is portfolio solutions. On the one hand, a significant appetite for new total portfolio solutions, and we have very successfully gone to market in Q3 with a new total portfolio of management offering for asset and wealth managers and also a new offering specifically for wealth managers. These, again, are solutions which we see getting more traction in the quarters to come and will continue supporting our growth.
We also delivered a substantial innovation in the multi-asset class risk space, namely by enabling a substantially lower latency intraday capability that will transform how complex multi-asset class investment organization can bring risk to the front office to inform decision-making.
Finally, I want to highlight what we're doing in the PCS space, the private market solutions, where, as it was alluded in the introductory remarks, thanks to the Vantager acquisition, we've brought to market a highly differentiated and valuable fund diligence and document management solution that is getting a lot of traction. We also see that continuing and massively expanding its appeal to investors.
Thank you. Our next question in queue coming from the line of Scott Wurtzel with Wolfe Research. Your line is now open.
Hey, good morning, guys. Thank you for taking my question. Similar question on the product side, maybe switching to more of a kind of AI-focused topic. Wondering if, in your conversations with customers or in the deals that you're seeing with customers who are adopting AI products, are you seeing any uplift in deal size associated with that? Any color on that would be great. Thanks.
Yeah. The solution I alluded to in my earlier answer, especially in the private market space, these are all natively agentic solutions. It is not that people are buying them more because they are agentic. It is that they couldn't be delivered and built without the support of latest-gen LLMs technology.
Simply because the amount of syntactic analysis that has to be done, it's only possible thanks to the usage of latest-gen LLM technology with the right training in the right context, specifically for the analysis and understanding of private asset objects. Additionally, in the portfolio construction space, all the newest data sets we are releasing, again, are only buildable and can be delivered at scale and with the right consistency because of a massive use of agentic capabilities. Clients understand that.
They see that this is intel, it's IP with a transformative value that we couldn't have created beforehand. Look, there is another step, which is that we also are agentifying the way the clients can actually use some of these capabilities. We delivered within our solution, agents that are specialized in actually doing some of this portfolio construction capabilities for clients. We see this as being a game changer. The biggest limit, frankly, will be not our ability to build, but it will be the ability for the clients to accept this solution in their environment given that we are building the agents.
Thank you. Our next question coming from the line of Faiza Alwy with Deutsche Bank. Your line is now open.
Yes. Hi, thank you. Good morning. I actually wanted to ask about operating leverage and profitability going forward. I know you've historically talked about reallocation of expenses and maybe AI-related efficiencies that are being reinvested in the business. I'm curious if your thoughts have evolved around, is there a time where we can start to see higher operating leverage, maybe more margin expansion, and potentially a decline in expenses?
The answer is no margin expansion. MSCI is a company with incredible opportunities in a new world, which is a world of large amounts of data, huge number of models to help people understand portfolios, either investment portfolios, loan portfolios, insurance risk portfolios, and of course, the use of technology to do all of that. In the past, one of the biggest problems of MSCI is that we've had an enormous number of very attractive organic investments.
That we haven't been able to fund because we didn't want to touch the margin. Now with AI, which I call it a godsend, we have an incredibly positive algorithm, which is we divided up MSCI into running the existing business and the enhancement of the existing business, and what we call growing the business. A lot of the new innovations, the new products.
In the running of the existing business and the enhancement of the existing business, we're applying AI significantly to gradually lower the growth rate of EBITDA expenses, from mid to high single digits to the low single digits and eventually to negative growth.
Then we want to put all that money into the growing of the business with all these opportunities that I mentioned earlier, in order to expand into new use cases, new client segments, of course, new solutions powered by more data, more models, and more technology. So we believe that we're going to have probably a triple benefit of AI.
The first benefit is the ability to free up capital to invest. The second benefit is that the products that we're creating, as Alvise described, we couldn't do them without agentic processes. Therefore, we can now do that, and we can expand faster, and the payoff is going to be larger per product. That's the second benefit.
The third benefit is that we think that eventually we'll be able to disrupt the SaaS software, the SaaS industry, by which our clients consume content from us, content meaning data and models and analytics, with agentic processes, rather than this incredible investment in SaaS software that needs to be made.
Allow me an analogy here. I used to be a media investor in my private equity firm, and in media, the transformations went from over-the-air transmission of media to cable transmission of media to streaming media. So the SaaS industry is the equivalent of cable. It's an incredible investment to wire every house, every building, everything with copper wires and fiber optic wires, et cetera. So there came a streaming technology that for anybody who has access to an internet connection, you can have access to all the content in the planet.
So we believe that the cable TV type of industry is the equivalent of SaaS, and the streaming technology is the agentic technology that could bypass all of that, and we could get a big benefit as well and increase the number of users of our content all over the world. Instead of having hundreds, we now have maybe tens of thousands of users in our client organization. We could have hundreds of thousands and eventually millions of users of our content and significantly expand our white space.
Thank you. Our next question coming from the line of Kelsey Zhu with Autonomous Research. Your line is now open.
Hey, good morning. Thanks for taking my question. Could you talk a little more about your investment into agentic-based AI solutions? I know you've just talked a little about that in the private market space earlier, but what new products and features are you building in the other segments, and how do you see that changing the competitive landscape for you? Thanks a lot.
Yeah. Thank you for the question. As I alluded to, another area that is being completely revolutionized by agentic capabilities is our model creation factory. It used to take us several weeks to build and fully calibrate a new model. We can now do it in the space of a couple of hours. At some point, we'll be able to do it in the space of minutes.
That transforms what these models can do, because we will be literally capable of creating models on demand, targeted exactly to the needs of a specific user in a way that it was never possible before. This done with the same level of quality, integrity, and dependability that the MSCI factor model has had for decades. Another area is the creation of new specialized data sets.
The ability to do fundamental analysis of not even companies, assets, both assets pointing to public companies and private companies, through the use of different artificial intelligence technology is completely transformational. This allows us to create product offerings that are completely different from what we used to do before.
For instance, our geospatial offering is an example of that. We have just launched a few specialized data sets to help understand the AI Value Chain. All of this depend on the agentic ability to basically map company's characteristics, company's revenues, company's assets, to very specific characteristics that it would be impossible to do just with humans.
Thank you. Our next question in the queue coming from the line of Owen Lau with Clear Street. Your line is now open.
Good morning, and thank you for taking my question. I have a question about your free cash flow guidance. It's being maintained even though you beat the results by quite a bit. I saw the interest expense raised by $6 million.
Andy, you also mentioned higher investments, and we had lots of conversation about this investment already. I'm just wondering, are these the main drivers of maintaining the free cash flow guidance, or there are some conservatives, some baking into your guidance? Also, do you expect some kind of incremental revenue or maybe lower expense in 2027 or beyond because of this investment? Thank you.
Sure. Yeah. I would highlight a couple things. Free cash flow, as you know, can be a little lumpy quarter to quarter. What we saw in the third quarter was heavily driven by one factor in particular, which was interest payments. We had a significant increase, so $50+ million of additional interest, cash interest payments in the third quarter related to the financings that we did last year.
There can also be lumpiness related to tax payments, even timing of collections, other payment items. I wouldn't focus too much on any given quarter. The reason why we keep the full year guidance and we're confident about the outlook is the collections have been strong. Business growth to put it front and center.
As we continue to grow the top line, as we continue to expand with clients, that translates through to cash collections, and that is what's powering the overall free cash flow for us, even though we do have, as you alluded to, higher expenses in areas.
I would highlight one of those items that I called out that's leading to higher expenses this year, namely the performance stock options and the additional accruals related to those as our financial performance improves. That's a non-cash item. There are some non-cash items in those expenses that aren't going to impact cash flows. Punchline is, as I said, there will be some lumpiness quarter to quarter.
The timing of some of those items can push swings, but we continue to be confident about the momentum of the business and the top-line growth, and that will over time translate through to better cash flows for the business. As you know, that's a key part of our financial algorithm. We are always focused on driving very compelling EPS growth and free cash flow growth, and particularly free cash flow per share growth over time.
Thank you. Our next question coming from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, thanks. Good morning. You mentioned double-digit growth across your non-asset manager segments. Can you put a finer point on where within the double-digit range that growth is running, and whether that year-over-year growth accelerated from the prior quarter?
Yeah. Listen, I do not want to get too specific because the amounts can move around a little bit quarter to quarter here. But if you look on an organic basis across the organization, we saw solid double-digit growth with asset owners, as we alluded to, so north of 12%. Hedge funds, we continue to see as our highest growth client segment.
So I think it was roughly 18% growth with hedge funds. See roughly 10% growth in areas like broker-dealers and banks, and elevated growth in other pockets as well. That collection of opportunities is being fueled by innovations that we have been making. As we have alluded to before, we have continued to develop new products and solutions that are fit for purpose for many of these client segments. We are also enhancing our go-to-market efforts around many of these client segments.
Those are translating through to elevated growth, and that is going to be a key part of our financial algorithm driving that overall double-digit top-line growth is continuing to fuel the opportunities across these client segments.
Thank you. Our next question in queue coming from the line of Curtis Nagle with Bank of America. Your line is now open.
Great. Maybe a two-parter. Just going back to how to think about sort of the expense structure. So appreciating you are not making any changes to the, I guess the net savings, right? Because you are going to be reinvesting, and it sounds like an accelerating rate.
But in terms of the timeline, Henry, to your point, getting to a rate closer to low singles, right, and maybe even negative on a growth basis, is that something we should be contemplating for next year? Or is that perhaps a longer timeline? Just trying to think through, again, how to think through the reinvestment cadence and when that starts to maybe even accelerate further.
Yeah. Just to be specific on Henry's comment, I think you got this, but to be totally clear, the low single digits and potentially negative in the future referred to our run the business expenses. These are the expenditures in the business that are supporting the existing franchise and existing products as they are today.
That is an area where AI is being transformative for us. So in our production environments, within our data operations, our technology organization, these are areas where AI is dramatically enhancing productivity and efficiency, and that is what is enabling us to take down the rate of growth on the run the business expenses. As Henry alluded to, we intend to reinvest those savings.
Those productivity enhancements are going into fueling these very attractive organic opportunities that we have in front of us, and so we do intend to reinvest. The overall expense trajectory and the financial algorithm is not changing per se. It is just AI is enabling us to invest more, and that is, if you will, I guess I could say supercharging that algorithm.
So it allows to invest more, which is going to fuel more top-line growth, as Henry said, with the same inherent operating leverage or inherent margin dynamics. That is going to fuel, over time, higher profitability growth for us. It is kind of supercharging what we have done in the past. As we head into next year, there are some items that are positioning us well. So things like the severance, which is running higher than we anticipated at the beginning of the year.
A lot of the transformations that we have talked about are happening quickly and will continue to happen. Those are things that will help position our expense base for next year. There are also a number of broader initiatives that are positioning us well for next year. Now we do intend to, as I said, reinvest a lot of those savings and productivity enhancements. But we have got the levers in our business to make sure in all environments, all dynamics, we have got the ability to flex up and down and continue to drive not only those investments, but also fuel very attractive profitability growth going into next year.
I do not want to comment specifically on expenses or any targets for next year other than to say we are very confident in our position and the momentum we have in the business, and we think we are setting up well nicely for next year.
Thank you. Our next question in queue coming from the line of David Motemaden with Evercore ISI. Your line is now open.
Hey, thanks. Good morning. I just had a question on the MSCI connectors and what you guys are seeing so far as clients are building agentic workflows with embedded MSCI data. I am just wondering if you have any insight into MSCI data consumption by agents and how that compares to human users. Then maybe how we should think about that playing out as agentic use cases continue to gain traction here.
Thank you for the question, David. Look, it is early stages. We have built connectors for all the main LLM providers, and we have also identified the experience through our own applications. For the time being, the evidence is the clients prefer to use our content through our own directly trained and curated capabilities.
Look, there are two reasons for that. Reason number one is that the conversion rate is actually higher, not massively higher, but it is a few points higher, and so you get the better experience going directly via the MSCI application. The other one is that the client space only has, by and large, limited capabilities at this point. Look, most of our clients only have access to Microsoft Copilot, right?
This will naturally make for a relatively slow rate of adoption via the mainstream connectors and a faster rate of adoption for the directly controlled connectors because you are just connecting to MSCI as you have always done historically. That said, that will change, and so look, we are doing three things. On the one hand, we are accelerating our connectivity to all the main platforms where there are large LLM companies or large cloud data provider company like Snowflake and Databricks.
We are also, as I explained, continuing to invest in our direct agentified access capabilities, and then we are also building own agent capabilities to enable the content on the client side, as Henry alluded to transform the experience. Look, we do not know which one of these three will prevail, but we are preparing to support all three, and then gradually the market will show us what works best. As I said, it's very early stages right now for the reason I said the MSCI connectors are the most prevalent.
Thank you. Our next question in queue coming from the line of Craig Huber with Huber Research Partners. Your line is now open.
Great. Thank you. I want to talk about Index recurring subscription run rate growth. It's obviously accelerated here in recent quarters, I guess 10.7% the first quarter this year, 11.5% second quarter, now it's 12% here in the third quarter. Obviously up from the 8.5%-9.5% the prior eight quarters. Can you talk about what's going on there in terms of how much AI is potentially helping those revenue growth numbers there? It's quite impressive acceleration there. Thank you.
Yeah. Craig, so it has been encouraging. We've got good momentum there. As you said, we continue to see an acceleration. I'd say that the themes at this point are consistent with what we've talked about recently. We have a huge focus on building the trading and liquidity ecosystem around our indexes. Correspondingly, we have very strong traction with hedge funds and traders. Within Index, we saw 32% growth with hedge funds.
On the subscription run rate side, we saw 15% growth with banks and brokers. A lot of that success was on the heels of many of the new modules that we have released. As Alvise indicated earlier, our ability to develop these modules, these content sets, is enabled by AI. Our ability to get to market faster is enabled by AI.
AI is definitely helping on the piece of innovation, the productivity front, and that is helping to enable the sales. I would say more generally across Index, we are seeing good momentum, including areas like asset owners and wealth managers. We're seeing 10%+ growth, and so we're seeing momentum across the board.
Asset managers have been reasonably steady for us, but they are licensing more content from us. We're helping them by licensing solutions that help them in, as you know, active ETFs, help them move to be more systematic in their investment processes. We've seen pretty steady momentum with asset managers. A lot of that is fueled by innovation, better services, access to more content that is fueled by underlying AI. I would say looking forward here, there are dynamics that can even enhance that further.
I know we've talked about this a little in the past, but many clients are starting to want to have access to our content to be able to train models, to use more content involved in an agentic investment process. This is very early days, and so the impact has been small to us at this point. But those are things that can create additional demand on top of all the great things we're doing today.
The last thing I would highlight, and we've talked about this a lot in the past, custom indexes, which are a reflection of that move towards systematic investing, and we are best positioned to be able to help clients make that transition. We saw 26%+ growth in custom Index run rate, subscription run rate. We continue to have very strong momentum on that front.
Our capabilities there are enabled by AI, and we continue to broaden our ability to do more custom indexes with a faster turnaround, and that's something that's enhanced by AI. Listen, we're very encouraged overall by the momentum in Index subscription. It is fueled by the innovations we've been making, and AI is an accelerant on that. All good things for us on that front.
Let me add one other comment. When we sort of sit back and look at the totality of our Index subscription business, in addition to the significant growth that we see in the focus on indexes on the assets, a lot of our business on Index has been focused on monetizing the amount of assets that are in the ecosystem of our Index, $23 trillion, of which more than $8 trillion is passively managed.
In addition to that, we have found huge white space in developing products on the trading of the assets. The trading of the assets. Not just the assets, but the trading of the assets. What data sets are going to help traders, market makers, broker-dealers, exchanges, help facilitate the flow of trading of those assets? That's why you see this significant growth in Index in traders and hedge funds, for example.
We are not even yet penetrating the market makers. We are working on that, but that is not yet even on the numbers. We believe that this white space is going to create another layer of growth in our Index subscriptions.
Thank you. Our next question in queue coming from the line of Ashish Sabadra with RBC Capital Markets. Your line is now open.
Thanks for taking my question. I just wanted to circle back to an earlier question from Faiza on operating leverage. Henry, if I understood your comment that no margin expansion, did I hear that right? I was just wondering if you could provide some timeline around that no margin expansion. Maybe just a follow-up there, obviously, you have had a great track record of these investments. How should we think about the ROIC on these investments, but also how quickly do these investments translate into revenue growth? Thank you.
That is a great question, Ashish. Look, as one of the largest shareholders in the company, I would love to see high valuations today and the next couple of years. But I would rather see a company double or triple the size in 10 years compared to what it would otherwise be if we let the margin rise. So we for sure have a huge inherent pressure, if you want to call it, in the operating leverage increasing.
It is not easy when you see that and having to mobilize to invest the additional sort of revenues, additional cash flows coming from the operating leverage. When we sit down every year to analyze all the investments that we have, we have to stop. We have to draw the line on organic investments in places that have sometimes triple-digit returns.
High double- digits, high double- digits IRRs with relatively short payoff, because we don't have the organic capital to do that. Meaning, we do have the capital, it's just that you got to expense it first before you get generated revenues, and we do not want to lower the margin. That's for sure. But what we can do is not let it increase.
There will probably be a marginal increase in the margin because every time we budget something, we build a cushion, and the cushion typically doesn't get eaten, and therefore there is 20, 30, 50 basis points of increases. But that is just because of the nature of our budgeting process and our conservatism, not because we're targeting an increase in the margin.
The end result is our strategy is that we're going to like this company a lot better if it's 2x, 3x bigger than it would otherwise be if we let the margin rise because of the opportunities we have. That's the process of doing all of this. As I mentioned to you, we have a huge installed base of customers. We're gradually moving into new customers and new client segments. Everything we've built is on top of an already existing infrastructure.
The larger the infrastructure, like an index, the higher the payoff relative to a lower infrastructure. The profitability of these organic investments are huge because as the sort of sum cost of the infrastructure is built, the incremental money required, or capital, for a particular amount of payoff, the incremental capital goes down for the same payoff. It's going to increase the operating leverage even more than before.
Thank you. Our next question in the queue coming from the line of Alex Kramm with UBS. Your line is now open.
Oh, hey again. Just a quick follow-up from my part. On the asset manager customer base, first of all, Andy, I do not think you gave a specific number about the run rate growth. You usually do that, so it would be great to have that. But then more importantly, it sounds like a lot of the momentum, and this is a good thing, is coming from some of the new products and the newer customer bases.
I think in the past, you may have talked about some of these newer products also applying to asset managers. I am just wondering, are sales cycles longer there? Are you still confident that some of these newer products can at some point also click into gear? Do you have to change anything to maybe do a better job on the sales front with that customer base? Thanks.
Sure. Just for reference, asset manager organic subscription run rate growth was around 6%. I mentioned within Index, it was around 8%. As I alluded to, that has been reasonably steady for us. Retention is pretty steady as well, maybe slightly up, very slightly up from a year ago. Listen, there has been some benefit from several years of equity markets rising.
We see reasonably healthy dynamics in many areas with asset managers, and you can tell from the metrics and solid retention rates. There are still those secular pressures on asset managers, and those are likely to continue. But as you alluded to, we are in a position to help them, and so we are innovating. We are enhancing our servicing model. We are helping them transition to those areas where they see asset growth and see stability. We are in a good position to help them overall.
We think asset managers are going to be an important part of our client base. They are an important part of the investment ecosystem. But they are going to be more of a steady grower, and we are expecting outsized growth from other areas. If you look at the environment and the backdrop for other client segments, we see it being pretty constructive in areas like hedge funds, banks, traders, asset owners, wealth managers. It is a pretty constructive backdrop with them.
Obviously, Index managers have been doing exceptionally well, and we have been doing well with them. Overall, it is a pretty good environment. We have seen steady progress with asset managers, and we think we are in a good position to help them continue to evolve and adapt to changes in the investment process and the investment industry.
Thank you. Our next question in queue coming from the line of Jason Haas with Wells Fargo. Your line is now open.
Hi, this is Keegan Antico on for Jason. Thanks for taking my question. I am curious what you are seeing from your hedge fund end market, and particularly quant funds that have been consuming more of your data and new product launches. Do you think that there is a potentially cyclical component to this and some of this growth could moderate in FY 2027? Are you seeing these funds remain highly profitable with continued inflows that could potentially lead to more funds emerging that you can sell into? Thanks.
Thank you. Very important questions. We see this as being a structural trend in the market especially in the equity market, but we believe that the fixed income market at some point will also follow the same path, and the path is the following. The unit of conversation in the market has gone from being the single stock to being the portfolio. The portfolio in all possible ways, possible logics, possible definitions.
This is something which intrinsically requires a heightened ability to make market in complex objects at scale, at speed. This is why in the face of capital limitations from the traditional players, i.e., the broker-dealers, and the massive increase of the demand from this portfolio ecosystem is making a very big opportunity get even bigger for the most sophisticated market makers and the hedge funds that effectively play the role of market-makers to create an investment function.
Because this primacy is supported by very significant investment in the technology capabilities and superiors access to the market, I think this is a trend that is there to stay. Now, can there be a short-term reversal? Yeah, of course, there can be, right? Market never goes in just one way all the time, but this is a structural transformation. Because, as I said, the unit of conversation is the portfolio and we are the portfolio guys, we are going to be a massive beneficiary of this continued trend.
Thank you. Our next question coming from the line of Alexander Hess with JPMorgan. Your line is now open.
Hey, guys. Maybe just a quick follow-up on two initiatives that were pretty prominent for you in the story maybe a year ago. I would like to hear a bit more about the latest on active ETFs, and then has anything changed with respect to the Moody's private credit ratings partnership? I know they had an announcement out there with a third firm, so I would be interested to know on latest updates on both those fronts. Thank you.
Yes. So on the active ETF front, as Andy alluded, we've seen significant growth because essentially the vast majority of asset management firms or traditionally active asset management firms are converting many of the products at an accelerated pace into ETFs. The process of doing so entails a couple of ingredients. One, most of the time, the conversion takes the products to be closer to being systematically built products, which of course creates a lot of opportunities for our tools and capabilities to help the managers do the transition.
So Alex asked Andy earlier if some of the tools we built for the broker-dealer trading and hedge fund and market-making communities at some point will be usable for asset managers. The answer is absolutely yes, because the growth of this active ETF market will entail these objects being managed more systematically at greater scale, with greater level of customization.
The platforms we built to help traders, hedge funds, broker-dealers, market-makers to do that will absolutely be fungible for asset managers. We see that continuing and being a trend which we also facilitate. Same for a lot of capabilities we're building in portfolio creation, basket creation, and the specialized data set that can be used to create specific flavors for these new active ETF objects. As I said, I see the trend continuing, and I see the trend being very positive for us.
Thank you. I am showing there are no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Henry Fernandez for any closing remarks.
Thank you, operator. Before we sign off, I would like to share that this is the final earnings call in which Jeremy Ulan will be serving as MSCI's Head of Investor Relations. At the end of this month, Jeremy will move to a new and exciting role at MSCI as the Lead Finance Director for our client segments, our solutions.
As we expand into a variety of new client segments, we need better financial management for that, and Jeremy will provide that leadership, in addition to his current role as treasurer of the firm. Craig Carter, currently our Head of Corporate Development, will take over as Head of IR. I want to thank Jeremy for all his incredible contributions to the IR team, and welcome Craig to his new position.
Looking ahead, MSCI continues to expand our footprint with client segments, traditional client segments, and newer client segments across the investment ecosystem as we accelerate our product innovation using AI and other advanced modeling and technologies.
We have a great franchise for the age of AI. AI is the most useful in places where you have large amounts of data, big number of modeling, and the use of a lot of technology, and that's what MSCI is. We remain intensely focused on delivering long-term compound growth and long-term value creation for our shareholders. Thank you for listening, and we will keep you posted throughout the quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.