MSCI Inc.

Good day ladies and gentlemen and welcome to the MSCI third quarter 2024 earnings conference call. As a reminder this call is being recorded. At this time all participants are in 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 to 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 Yulin, head of investor relations and treasurer. You may begin.

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

Good day, everyone, and thank you for joining us. MSCI's third quarter results highlight the underlying strengths of our business model and client footprint, as well as the essential role that our solutions play in global investing. Financially, we achieved total revenue growth of 16%, adjusted earnings per share growth of 12%, and free cash flow growth of 46%. We repurchased $199 million worth of MSCI shares, bringing our total share repurchases for the year to $440 million. In our operating metrics, we deliver asset base fee revenue growth of nearly 20%, subscription run rate growth of 15%, and a retention rate of 94%. Looking at our overall performance, we show significant strength in ABF revenue driven by record AUM balances in both ETF and non-ETF products linked to MSCI indices, including third quarter ETF cash flows of $18.6 billion. Index and analytics new recurring subscription sales grew 5% and almost 11% respectively. Among asset owners and hedge funds, organic subscription run rate growth was 11% and 15% respectively. New, met new recurring sales in our ESG and climate segment were down meaningfully from last year's levels. We think the subdued demand in ESG and climate is cyclical and may be prolonged. But the need for all investors to integrate ESG financial materiality and to decarbonize portfolios are real and secular. On asset managers, New recurring subscription sales were down 5% year over year, reflecting cyclical pressures, although retention is excellent at 96%. As our Q3 results show, MSCI's product lines are diverse and increasingly complement each other. We are a growth company with enormous addressable market for our products, which serve a vital function across the investment ecosystem. Today, I would also like to comment on three key drivers of our long-term strategy. First, our growth among wealth managers and how it reflects both the increasing use of indices and the benefits of our new technology platform. Second, our progress in developing private capital solutions that cut across product lines. And third, our commitment to providing climate solutions that clients need to measure, report, and act on the carbonization of investments. Starting with wealth. In Q3, MSCI achieved a major index win. with the private banking arm of one of the world's largest banks. We also achieved direct indexing run rate growth of 22%. Meanwhile, our MSCI Wealth Manager technology platform, formerly known as Fabric, continued driving robust client engagement for analytics. Looking ahead, we believe this platform can help us deliver content for wealth managers that expands multiple product lines, including index, ESG, climate, and private assets. In private capital solutions, we believe that our work there can enhance our capabilities in many areas. We have already seen this with products such as MSCI private capital fund indices, which are catalyzing important new client wins and prospects since their launch in July. Our private capital fund indices cover more than 13,000 funds that represent more than $11 trillion in AUM, and we believe they can help us become a standard setter in private assets. Our partnership with Moody's positions as well to expand our ESG coverage of private companies, while also providing more ESG content for segments such as banks, insurance companies, and corporates. As we announced last week, I am pleased to welcome Luke Flemer to MSCI as our new head of private assets, to further build and scale our business to new heights. Luke joins us from Goldman Sachs. Regarding climate solutions, as the risks and negative impacts of climate change become ever more apparent, all institutional investors and capital market participants will need high quality data, models, and research to adapt. This is inactivable and just a matter of time for this demand to accelerate. MSCI already supplies carbon emission data on more than 60,000 private companies and more than 7,500 private equity and private debt funds. MSCI is well positioned to be the provider of choice for this large-scale reallocation of capital and repricing of assets. With that in mind, we're also constantly seeking to upgrade both our talent and our solutions. Last week, we announced that Richard Madison has joined MSCI as head of ESG and climate. Richard comes to us from S&P Global and is also the founder and former CEO of True Cost. We know that MSCI will greatly benefit from his expertise and knowledge. Meanwhile, on the climate product side, MSCI has responded to the emerging consensus that voluntary carbon markets are critical to achieving net zero. Just last month, we introduced MSCI carbon project ratings which offer comprehensive and independent assessment of more than 4,000 carbon credit projects around the world. All of this demonstrates MSCI's single most important competitive advantage, the global, diversified, and integrated nature of our franchise. We have always tried to capture the biggest trends reshaping the global investment industry. We are now better equipped than ever to capitalize on these trends while supporting both traditional and new client segments. And with that, let me turn the call over to Bert. Bert?

Thank you, Henry, and greetings, everyone.

In my remarks today, as I review our third quarter results, I'll focus on our progress and opportunities with individual client segments across the investment ecosystem. Let us start with asset owners who are accounted for some of MSCI's most notable Q3 business wins. Overall, we delivered 11% organic subscription run rate growth with asset owners, showing particular strength in analytics. In Asia, for example, a large public pension fund made MSCI their primary risk analytics provider, leveraging our highly competitive mix of applications, sophisticated algorithms, specialized data, and managed services. We closed another significant deal in analytics with a U.S. public pension fund who selected MSCI as their analytics platform of choice for the entire investment process, from planning and asset allocation through to performance attribution and measurement. In each case, MSEI displaced a major competitor. Deals like these helped us achieve our best third quarter on record for recurring sales in analytics, with particular strength in both Europe and the Americas. Despite the softness that Henry mentioned, asset managers remain the largest contributor to our subscription run rate, adding over $60 million of organic run rate in the past 12 months alone. Our firm-wide retention rate among asset managers has stayed high, and it was close to 96% in the third quarter. Our asset manager clients still face fee compression, leading to tighter budgets, though there are some signs of stabilizing redemption pressures and improving inflows. In MSCI index-linked ETFs, year-to-date inflows were nearly $68 billion, which helped our ABS revenues grow nearly 20%. As Henry mentioned, our work in index increasingly reinforces our work in climate, and MSCI is leveraging this integration to help asset managers navigate the low-carbon transition. In the third quarter, one of our pension fund clients in Europe seeded a $1.6 billion ETF linked to an MSCI climate custom index, launched by one of our asset manager clients. Turning to other client segments, MSCI also did well with hedge funds, wealth managers, and banks and broker-dealers, who have collectively added $60 million in organic subscription run rate over the past 12 months and grew by 10% combined in Q3. For example, we completed a large ticket deal with a global quantitative investment firm who will use our index content and analytics risk data to enhance their overall research and alpha generation strategy. Shifting to wealth managers, they have added about $11 million to MSCI's organic run rate, subscription run rate over the past 12 months. Our wealth subscription run rate now stands at $112 million, growing 11% organically, and we have a wealth retention rate of over 97%. MSCI's wealth solutions have become a key differentiator with clients, taking firm-wide investment tools that support the home office while enabling optimization and alignment across leverage, risk, rebalancing, taxes, and securities and fund selection. We are well positioned to build on this momentum, leveraging the MSCI Wealth Manager platform in different business areas. Wealth represents a key opportunity for MSCI, and we will continue growing our wealth-focused investments across product, client coverage, and research. As you can see, MSCI remains determined to increase our wallet share with both established and newer client segments throughout the investment ecosystem. All of this has enabled our consistent delivery of attractive top-line growth and profitability. And with that, let me turn the call over to Andy.

Andy? Thanks, Bear, and hi, everyone. In the third quarter, we delivered 11% organic revenue growth, 17% adjusted EBITDA growth, and 46% free cash flow growth. Within our index segment, subscription run rate growth with asset managers and asset owners was 7% and 11%, respectively. These large established client segments represent nearly 70% of our index subscription run rate. Index subscription run rate growth with hedge funds and wealth managers was 23% and 13% respectively in the third quarter. Global cash inflows into equity ETFs linked to MSCI indexes was $18.6 billion in the quarter. We saw robust cash inflows into non-U.S. exposures, particularly in developed markets outside the U.S. These flows, together with strong market appreciation, helped to power another quarter of record balances with the ending AUM and equity ETFs linked to MSCI indexes of $1.76 trillion. Additionally, AUM and non-ETF passive products linked to MSCI indexes reached $3.65 trillion, also a record balance. The combined record AUM balances of $5.4 trillion across ETFs and non-ETF index products linked to MSCI indexes drove nearly 20% year-over-year growth in ABF revenue and reflect momentum in the long-term trend of indexed investing. In analytics, subscription run rate growth was 8%, reflecting the traction we see across several key growth areas such as our factor models, our insights offering, and our fixed income analytics offerings. Organic revenue growth was slightly below 12% in the quarter, benefiting from another quarter of strong non-recurring revenue and some large implementations coming online faster than anticipated. We still expect recurring revenue growth rates to more closely align with run rate growth in the upcoming quarters, especially as we begin to compare to prior year periods that included large implementation-related revenues. As a reminder, the timing of implementations is lumpy, and revenue growth will fluctuate for several reasons, as it has in the past. In our ESG and climate reportable segment, organic run rate growth was 11%, which excludes the impact of FX and about $5.3 million of run rate from Trove. Regionally, the subscription run rate growth for the segment was 22% in Europe, 18% in Asia, and 7% in the Americas. Client engagement remains strong and we continue to see clients looking to grow with us on a number of fronts. We have seen successes from clients looking to consolidate providers, solidifying our position as a leader. We remain competitively differentiated and we continue to believe our ESG and climate solutions are a mission-critical part of the investment process, representing a massive opportunity across ESG integration, regulatory compliance, and climate. We also recognize that the recovery of this product line to higher growth rates may take some time, and therefore we continue to evaluate the through-the-cycle growth trajectory of this product and what the ultimate long-term growth target should be. In private capital solutions, run rate growth was 17% over the same period last year, with new recurring subscription sales of over $6 million. Since the end of 2023, over one-fourth of our incremental private capital solutions run rate growth has originated from new client relationships. The private capital solutions retention rate was almost 94%, and we recorded almost $27 million of revenue for the quarter. In real assets, run rate growth was roughly 5% in the third quarter, with a retention rate slightly above 92%, improving both sequentially and versus the same period last year. During the quarter, we closed a few large ticket deals in the Americas. One of these large deals was for our transaction data offering and was enabled by our open integration, which allows clients to access our large content sets on platforms like Snowflake. We see very early signs of improving market activity, although the commercial real estate industry continues to see significant pressure. Across the company, we saw the resilience of our financial model and our ability to generate strong free cash flows. In the third quarter, we repurchased over $199 million of MSCI shares at an average price of roughly $522. This brings our year-to-date repurchases to $440 million, or 879,000 shares at an average price of about $501. Our cash balance at quarter end was over $500 million, and we continue to be focused on opportunistically repurchasing our shares. I would highlight that we paid down $125 million of our revolvers subsequent to quarter end. Moving forward, we may pay down and draw the revolver in modest amounts from time to time to support our capital uses and optimize interest expense. Turning to our 2024 guidance, consistent with our previous comments, if markets remain at current levels or higher, we expect to be towards the higher end of our expense guidance range for full year 2024. We've increased our CapEx guidance range by $10 million, reflecting our plan to purchase a larger amount of hardware for our data center in the fourth quarter. We are enhancing our data center environment to more effectively and efficiently support the growth of several of our new solutions in a hybrid cloud and data center approach to infrastructure. We've increased our free cash flow guidance range by $80 million, which reflects some strengthening of cash collections and some tax timing benefits. This year, we are seeing a $40 million discrete tax timing benefit and a roughly $30 million deferral on certain cash tax payments. It's worth noting that the $30 million cash tax deferral will be paid in early 2025. The lower interest expense guidance primarily reflects the previously mentioned revolver pay down. We also narrowed the forecasted range for the effective tax rate to 18 to 19.5%. based on refined estimates of discrete items we expect to be finalized in Q4. In summary, we remain encouraged by the dialogue with clients, and we see very attractive long-term opportunities. While we are beginning to see some gradual signs of improvement in the sales pipeline, we still expect some degree of elevated cancel activity and longer sales cycles to continue in the near term.

We look forward to keeping you posted on our progress, and with that, operator, please open the line for questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. As a reminder, please ask one question at a time and re-queue your line for any additional questions. Your first question comes from the line of Manav Patnaik from Barclays. Please go ahead.

Thank you. Good morning, Henry. I just wanted to ask about the recent management changes you made in both ESG and private credit. Those are obviously two areas that you've talked a lot about having a lot of long-term, massive So just trying to understand if that's signaling any change of strategy or any nuances that you might want to point out to us.

No, thank you for that question, Manav. This is just a continuation of strengthening and deepening our senior management team, especially in areas that we see incredible runway into the future. As we have said before, the global investment process and the global investment community is increasingly focused on the investment in private assets. Obviously, private credit is in a revolution right now and will transform finance in many parts of the world. with the continuous strength in private equities. And private infrastructure is obviously developing into a major asset class. And even though private real estate is a little bit, parts of private real estate are in some difficulties. Overall, the world will need a lot more physical assets in that space. So, So with that, we were fortunate to attract Luke to come to us from Goldman Sachs as a management to help us lead this effort. We have traditionally been very strong in LPs and are looking to develop new products to be very strong also with GPs. ESG and climate, you can obviously divide it into two. ESG is still going through its own process. its own issues around the world, although we've stabilized and think that we'll do well. And on a long-term basis, ESG investing is here to stay. And we're really focused on developing the climate part, which given the distractions in the global economy and global politics in the last couple of years, we have seen an incredible increase in physical risks the hurricanes in Florida, the floods in Europe, the droughts in Brazil, the fireplaces in Brazil. So there's no doubt that the world is changing as it relates to climate. And the capital industries of the world, investment, finance, insurance, will require massive amounts of data, especially carbon emission estimates, a lot of models, valuation models, risk models, and the like. And we're very fortunate to have Richard joining us, effective today, actually, you know, to do that. And he comes from being founder and CEO of Trucos, you know, a major company in climate. And we're very fortunate that he can help us lead that effort and develop new capabilities and new tools and new client segments.

Your next question comes from the line of Tony Kaplan with Morgan Stanley.

Please go ahead.

Hey, thanks so much. Now that we're getting closer to the end of the year, I was hoping you could share any early read on the budget environment at your clients and maybe in particular how you're thinking about pricing in 2025. Thanks.

Sure. Hi, Tony. It's Andy here. I would say across MSCI and across our client base, speaking generally, we are beginning to see some gradual signs of improvement in dialogues, which we hope will translate through to some building of sales pipeline over time. I would highlight that we do expect elevated cancel activity and longer sales cycles to continue in the near term here. As you know, asset managers are our largest client segment by run rate. And while redemptions and outflows, as Bear mentioned, are stabilizing, asset managers are still managing with tighter budgets. So we do see that pressure in our dialogue day to day. Although, given the run in AUMs, we are seeing more constructive dialogues and thinking around clients, which we hope translates through to improve budgets. On the pricing front, listen, the message is consistent with what we've said in recent quarters here, where we have been Moderating our price increases and the contribution from price to overall recurring sales is down slightly from a year ago. I would say we are very focused on not only the overall price and environment and client health, but the value that we're delivering. And even where we can increase price more, and there probably are those opportunities, we are really taking a long-term view and a long-term approach here. And we want to be constructive partners to our clients. I think there are places where some of our competitors are being more aggressive on price, and I think this positions us well to build a relationship for the long term here.

Your next question comes from the line of Alex Cram with UBS.

Please go ahead.

Yes. Hey, good morning, everyone. Just wanted to stay on the same topic, and sorry if I'm being too nitpicky about the super short term here, but... I think, Andy, previously you had suggested that things should get better in the 4Q, in particular on retention. So if I'm hearing you correctly, it sounds like things are still pretty soft. So maybe you can be a little bit more specific how you think cancellations should be on a year-over-year basis in the 4Q, which is obviously the most important quarter. And then maybe same comment on the sales. And if you want to be specific on the segments, given that you should have some line in sight by now, that would be helpful. Thank you. Yep.

Yep. Sure, Alex. And I don't want to be too specific. Obviously, things can move quarter to quarter here. And as you've seen, we can have some lumpiness quarter to quarter. But on the cancel side, we are expecting Q4 cancels to continue to be elevated relative to the fourth quarter of last year. And as you alluded to, Q4 typically tends to be a period of higher cancels for us seasonally. I'd say we are continuing to work through the impacts of the elevated level of client events that we've seen over the last year and the impacts of many of the pressures that we've discussed on industry participants. I would say consistent with our past comments, we do expect retention rates to be closer to the levels in the fourth quarter of last year. relative to the size of the drop we saw in retention rates in Q3 compared to a year ago. On the sales side, as I alluded to, we continue to see tighter budgets. It really does vary across client segments. We are seeing earlier signs of constructive dialogue, I think, as I alluded to in the prior question. With the run in AUMs, many of our clients are seeing their revenue improve, and so we have seen some encouraging signs. But these things take time to work through the system and work into resetting a budget with our clients. And so we are cautious here, but hopefully see some early momentum.

Your next question comes from the line of Alexander Hess with J.P.

Morgan. Please go ahead.

Yes. Hi, gentlemen. You know, we've had quite a few quarters now with discussion around sort of the sales cycle in the asset manager channel specifically. But, you know, how do you guys, in about one, look internally and make sure that it's not, say, a product gap within MSCI or an execution gap within MSCI? And then two, you know, as we as analysts look externally, what would you say are the biggest gaps? you know, metrics or external to MSCI factors that the community can track and assess when that pivot might happen on client budgets.

Yeah, thanks for the question, Alex. Bear here. So, look, clearly when we are making that sort of assessment, as you alluded to, the competitive situation is a critical one. And we don't have enough time here to go product by product or subproduct, but certainly where we tend to view it as a more of a industry thing, it's either where we may not be doing that great ourselves, but the competition is doing significantly worse. And there are some cases of that. You may have seen that in some of the announcements of earnings that have come out from some of our competitors. So that's an important indicator. We're also clearly looking at the amount of cancels that may arise from client events as opposed to, you know, so it may be a consolidation of the kind that we've seen during the course of this year. So that's an important distinction in the category of, you know, are we doing something, you know, right or wrong, et cetera. And I think generally, you know, we have a pretty good track record of a high level of transparency on this call in terms of both indications relating to, you know, the product pipeline, the competition. And in terms of the external numbers, you know, we give a pretty high level of granularity in terms of, you know, both at the SEC segment level, but even below that in some of the combined segments. combined categories that we have created to analyze the market. So I think that when we look at the sum of all of those things, I think it does help us to differentiate precisely what might be a more challenging competitive situation from one which is more driven by the economics of the industry and what's happening more broadly within a given client segment.

Your next question comes from the line of Ashish Sabhadra with RBC Capital Market. Please go ahead.

Thanks for taking my question. I just wanted to drill down further on the Asian climate. There was a reference to a cyclical but prolonged subdued demand there with strong secular trends. When do we start to see some of those cyclical headwinds moderate? What are the things that we should continue to track? And that this leadership change and a greater focus on climate, does that also help with the sales momentum and ability to bundle climate with ESG? So any color on that front, thanks.

So look, I think it's important to differentiate the secular and the cyclical here. On a secular basis, if you analyze the world, the economic and social world we live in today, it's extremely hard to believe that societies around the world are not going to be focused on social issues, environmental issues, and governance issues of the entities that are accountable to society. It's just extremely hard to believe that in a highly interconnected, highly interrelated world that, and we're seeing a lot of that in terms of tensions, social tensions between the core population and the immigrant population of countries. We see tensions in the governance of companies and a week doesn't go by without some issues in a company or a non-for-profit or a university. And of course, it's very hard to believe that the climate change is not going to affect the strategies and the winnings or losing of companies and societies and countries around the world. So right now, the world is extremely short-term focused on monetary policy and inflation and the war in Europe and potential war in the Middle East, and it's taking its eyes off many of these issues, we believe very strongly at MSCI that that focus will come back, will come back. If you look at all the underlying trends that I was mentioning, we are in a cyclical drought, in a cyclical downturn here, given the reset of regulation in Europe, given some of the political events in the U.S., But, you know, we are a company that focuses on the long term and invests for the long term. And I think that, you know, climate is gradually going to recover, probably sooner rather than later, given all the physical events that are taking place in the world. And ESG may take a little more time, but it will recover, and it will return to higher growth rates. So therefore, we are not abandoning that philosophy because MSCI is totally predicated on long-term trends that are going on in the global investment industry. So all the people may disagree with our assessment, but we have been pretty good and having a good track record of pointing out to long-term trends and how these trends will come back. And we don't manage the company on a quarter-to-quarter basis or year-to-year basis. We are a long-term compounder of earnings growth and revenue growth, and we believe that these two areas of ESG and climate will provide a meaningful uplift in our revenues over time. That is all predicated on an analysis of global economics, global social issues, global environmental issues, and all of that. And I think that as the world begins to received from the focus on inflation and monetary policy and soft landing or hard landing or the war in Europe, the focus will come back to a lot of the social issues in our multicultural societies and what companies are doing to attract the best talent in an environment like that and what companies are doing to navigate the low carbon transition So all of that, it will come back. And we're beginning to see some of that already in climate. Maybe it takes a little longer in ESG, but we're going to see that happening.

Your next question comes from the line of Scott Wurzel with Wolf Research.

Please go ahead.

Hey, good morning, guys. Thank you for taking my question. I wanted to ask on the fixed income and multi-asset side of the business. I mean, I think when you look at the emerging growth opportunities, it was one of the stronger growers on an organic basis. So I was really just wondering if you can kind of share with us maybe where we are, you know, in your journey on the fixed income, multi-asset class analytics side and how much more room there is for that side of the business to, you know, continue to sort of grow at these elevated rates. Thank you.

Sure. So thanks for the question. You know, as you heard in the prepared remarks, I think it was Andy mentioned that, you know, fixed income has been an important, very important component of our sort of strength and credibility generally across analytics. So there are quite a number of sales where, you know, in very simple terms, I don't think we would have had the same success, you know, let's say three, five years ago. with the capabilities that we had then. So it's both an important component of the multi-asset class sales, and we're looking for increasing ways of delivering those fixed income capabilities directly on a standalone basis to the front office and seeing some success with that. So, you know, as we go forward into next year, If we can continue to enhance important areas like fixed income performance attribution, which are critical to both sales and retention in analytics, which I think we have very much the intention and capability of doing, then we will believe that this will continue to be a really solid part of our growth story. It's not a fast, in quote, sexy thing that moves quickly. But I think, you know, we're developing a reputation for delivering high quality, clearly mostly in fixed income analytics, but also increasingly in fixed income index. So I think in both of those areas, you know, we can expect to the trend to continue for sure.

Your next question comes from the line of Kelsey Chu with Autonomous Research.

Please go ahead.

Hi, good morning. Thanks for taking my question. So on private assets, I think with the new leadership in place, you kind of want to circle back to your medium-term strategy to expand in that market. So previously, I think during the Burgess acquisition call, you talked about three buckets of private asset benchmarking data providers. and MSCI has plans to expand into from and compiling transaction benchmarking data. So just kind of curious to hear your latest thoughts on that topic, as well as, you know, the kind of investment that you plan to devote to that area, the timeline of this expansion.

Hi, great question. Thank you.

So look, first of all, You know, what I'm most excited about is we intend to continue to collect much deeper and broader data in private markets, which will enrich our analytical capabilities quite extensively. And the things that we're doing there also with AI to scale up the breadth and depth of the data we collect is very exciting. I had some really exciting demos even in the last week, and I think in the coming year we will see significant expansion of that. That means both we can continue to serve the LP client base, where I think we have significant demand. We're growing in the high teens now, but we would hope to do better there. I'm not changing the guidance, but we've got a lot of opportunities. But equally, by taking all of that new data that we're bringing in, we can do more in specific sub-asset class analytics, for example, in private credit or other categories of private equity, et cetera. And then in turn, we believe that this can help us create a bridge between the LPs and the GPs and serve greater GP use cases. You also alluded to benchmarking and indexes in private markets. So it's relatively early days since we have taken over those benchmarks and we're redoing them. I think with our expertise there, there are quite a number of enhancements related to specific use cases that we're in the process of improving. So I think that, again, in the coming year, our role in benchmarking and measurement in private markets will extend beyond real estate into the other asset classes. So I think overall, I'm very excited about the opportunity we have there. And bringing Luke on board, I think will also help to drive that strategy even for a

Your next question comes from the line of George Tong with Goldman Sachs.

Please go ahead.

Hi, thanks. Good morning. I wanted to revisit net new recurring subscription trends. So net new recurring subscription sales flipped from positive growth in 2Q to a decline in 3Q. You talked about tighter client budgets, cancel rates in the quarter, which was also the case in 2Q. Can you talk a bit more about what happened in this quarter to drive this flip and what external conditions you would need to see for trends to improve?

Sure.

Hey, George, Andy. So I would highlight that the sales remain pretty strong. We saw particularly in areas like index and analytics are two large franchises, pretty good sales. We've just seen an uptick in cancels in the third quarter compared to a year ago. Cancels, as you know, can be lumpy quarter to quarter, and we've seen that this year. We do expect some of that lumpiness to continue in the near term, but overall, as I alluded to, we are seeing early signs of improvement in the space. Some of the cancels that we've been seeing are a reflection of the client events that we've seen over the last year, so we're still working through those. And so the combination of improvements in client dialogue, translating through to enhanced sales pipeline, with us continuing to just work through these lingering cancels, we believe should translate through to more encouraging recurring net new for us moving forward here.

Your next question comes from the line of Faiza Alwi with Deutsche Bank.

Please go ahead.

Yes, hi, thank you. I wanted to ask about competitive displacement. I think there in your commentary, I think you were referring specifically to the analytics business and you mentioned several deals where you displaced the competitor. Curious if you can give us more color around the sustainability And are there any, is there a specific product that's leading to these displacements? Just any additional color there would be helpful.

Sure. So look, I think that if you look at ESG and climate, I think there's a lot of data showing that we're displacing competitors, notwithstanding some of the headwinds. You know, and we had, for example, still 22% run rate growth in EMEA. So I think that there's plenty of evidence there. I think that our, you know, our position in index is very strong in analytics. You know, and we, you know, we have a longstanding policy that we don't go into any competitors by name here. But, you know, these are often quite formal situations. where there may be an RFP or there's a significant decision by the client. So it's pretty clear what the competitive framework is. And generally a bit less so in private markets where, again, depending on what part of the woods you're in, the competitive situation is more fluid. So I would say that, you know, overall, we are confident that we are executing well in a competitive framework. Now, clearly, you know, there's always new functionality. There's always new capabilities being brought into the market by both ourselves and our competitors. But allowing for the information available to us, I think we feel –

solid about what we're doing, you know, vis-a-vis the competition.

Your next question comes from the line of David Matamadjian with Evercore.

Please go ahead.

Hey, thanks. Good morning. Andy and Bear, you guys both spoke about seeing early signs of constructive dialogues with clients just given the run in AUM. which is helping the revenue at your clients improve and also some stabilization and flows. I'm just wondering, from your perspective, what else do you think you need to see before we reach an inflection point on the new sales? And is there anything that makes you think the historic relationship between AUM and client activity will not hold in the future?

Yeah, and it's important to underscore that we do see varying dynamics across the business. We are a diversified franchise that has many different aspects to growth here. And so it's more complex than we are making it. But listen, we know our largest client segment is active asset managers. We know they've worked through a couple of tough years here where they've seen very strong outflows. We have seen those outflows stabilize, as you alluded to, and we've seen the AUM increase year over year. These are organizations that are looking to grow and they want to grow with us, and the tools that we provide them are tools that can help them grow. And so that is encouraging for us. And as you alluded to, and as we've mentioned here, those are things that should translate through to additional demand. The clients aren't yet, I'd say, in expansionary mode. But they are in early days of constructive mode, and hopefully that translates through to the more constructive budget setting for 2025. For us, I do also want to highlight that we see strong momentum in other client segments. So we're seeing outsized growth in many of those big markets where we are of smaller size today. So we're seeing strong momentum in wealth. We see big opportunities there. We've seen strong momentum in areas like insurance companies, asset owners, as they increasingly internalize and become as much managers themselves. We are seeing big opportunities to grow with them, and that comes through both on the subscription side as well as on the ABF side. And so we have a number of avenues of growth across the franchise today. that should continue to drive elevated growth on top of what we hope is some rebound on the active asset managers here over the coming quarters.

Your next question comes from the line of Quensim Lau with Oppenheimer.

Please go ahead.

Yeah, it's Owen Lau from Oppenheimer. Thank you for taking my question. So on analytics, I want to better understand the message here. Many of the peers talked about tight budget and vendor consolidation, and I think you also talked about it. But both of your recurring subscriptions and non-recurring revenue were pretty strong in the third quarter. So was it driven by implementation revenue or episodic large deal? And if you can talk about the outlook of analytics, that would be great. And then just quickly on run rate, when I do the math by adding your beginning analytics subscription run rate to the net new sales, I got $685 million. But the reported number was $691. It would be great if you can explain the delta here. Thanks.

Sure, sure. Yeah, and there's a few dynamics in there that I'll call out separately. So just on your last question about the beginning run rate plus net new, being different than the ending run rate. There are some technical items that can cause it to be different, one of which most notably is FX. So FX movements impact the overall run rate base and so can cause that run rate to move by different amounts than the net new addition. In terms of the growth in analytics, I'll talk first about the overall business momentum and what that means for the run rate growth. But then I will touch on the revenue growth, which has been elevated for the last several quarters here. And I'll talk about what's been driving that. But listen, across analytics, as Bear alluded to earlier, we've really had strong success on a number of fronts. I think much of that is driven by an environment that is more dynamic, where there's heightened risk. And so we've seen strong demand for our equity risk models as clients are looking to understand what is driving their portfolios and have a better understanding of the bets that they are taking. We see our equity risk models being integrated into many different parts of the active management industry, and we've had tremendous success with hedge funds, but even with active managers. We also have seen some wins on the back of the improvements we've made in the fixed income offering. And that also includes things like liquidity analytics, which are areas that tend to get more attention and higher risk environments and environments that are a bit more volatile. And then we've also been an enabler for our clients to be more efficient. So things like our insights offering or risk insights offering are something that not only allow our clients to glean more insights from our risk services that we provide, but it makes it more efficient for them to work with us. And so it can be a win-win for them where they're not only improving their analytics, but they are also operating more efficiently. And so all those things in these environments are helpful and have been encouraging for Now, on the revenue side, we did have a large implementation come online in Q3, which was earlier than we expected. And as a result, we had a sizable revenue catch up. We have seen a number of large implementations coming online over the last several quarters, which have caused the revenue growth to be higher than a run rate growth. As we've said before, we expect revenue growth to drop to be closer to run rate growth. or even in some periods below that as we begin to compare to the periods where we've had these large implementation catch-up revenues over this past year.

Your next question comes from the line of Craig Huber with Huber Research Partners.

Please go ahead.

Yeah, hi there. Maybe just talk a little bit further about the environment here. I know you went on and talked about this a lot, though, but Given how well the stock market has done here, not only this year, but last year, given what the Fed is finally lowering rates here, inflation seems like it's much more under control. People, as we all know, a year, year and a half ago, two years ago, were very worried about the recession in the U.S. at least. That has not happened. Most managers you talk to feel better about the U.S. economy and stuff. But definitely with better AUM numbers out there and stuff, why do you guys keep talking about and thinking and sensing and hearing from your clients that What a tough operating environment here. I mean, is it still just too early to talk about 2025 and having those discussions? Because I would think that those discussions in November, December, January that set the budgets for next year are probably going to be a lot more positive than they were a year ago. My question is, what am I missing here? Why are things so negative out there, what you're hearing from clients? With a little bit of green shoots, but nothing great you're saying. Thank you.

That's a very insightful question, Paul. and it cuts across the core of what we've been talking about here. Basically, when you look at the totality of MSCI, we have a number of very strong areas of performance. You have the asset-based fee business coming out of PASI, which is hitting records of AUM in ETF and non-ETF linked products linked to MSCI. You have significant sales into asset owners, into hedge funds, into wealth managers, incipient sales into the insurance client segment. And on the product side, clearly significant sales of analytics, very strong sales of analytics and into many of those segments, et cetera. I think that in this call and overall, maybe there is an overemphasis on the weaker areas or the softer areas of the company. And the first one for sure is 50 plus percent of our subscription run rate is to active asset managers. who are a segment that, you know, is not fully recovered yet from, you know, they definitely have had a price increase, so to speak, with the global equity market setting records. And the fund flows are getting better, you know, significantly better in the last few quarters. So we should see, you know, major recovery of the active asset management segment going into 25, given that, as you rightly pointed out, their budgets are going to be better, given the return of growth in revenues and in profitability. But that hasn't happened yet. And we always call a spade a spade. So that hasn't happened yet, and it may or may not happen in the fourth quarter. But we're cautiously optimistic that if logic indicates And precedent indicates that that will begin to happen in 2025. So that's one area of softness. The second area of softness is clearly the ESG and climate sales, which, as I alluded to earlier, have been in a cyclical downturn. We feel that we have reached bottom in ESG. We're recovering in climate, but it's hard to predict. on a quarter-to-quarter basis, there are major consolidation plays that we have achieved in ESG away from competitors that is likely to continue. We have significant sales in ESG into non-asset management client segments like corporates, for example, and GPs and the like. And climate, It has slowed down, but, you know, it's temporary. We believe that given the physical and transition risks that are going on in the world and potentially with the focus of the climate, you know, COP by the UN in Brazil next year, there's going to be a renewed effort in all of that. So I think that, I don't think you'll get, I think you're absolutely right. I mean, I think you are, there's no mystery to what is happening here. We have a major reliance on the active asset management segment that has gone through some of these issues for the last year or two. We should expect that to get better. We should expect climate sales maybe to get better. ESG will depend on what happens in 2025. But the rest of the company, we're setting records in ABF. We're setting records in sales and index. We're setting records in sales and analytics. So there's a little bit of too much emphasis on the glass half empty, obviously, in this call. And I understand why. And we're always true to pointing out what works and what doesn't. And sometimes we point out a little more to what is not working to what is working. But you've got to look at the balanced approach of what we're having here.

Your next question comes from the line of Jason Haas with Wells Fargo.

Please go ahead.

Hey, good afternoon, and thanks for taking my question. I'm curious if you could talk about why you didn't decide to raise the expense guidance range for the year, recognizing you're saying that higher AUM levels, you know, could lead you to the higher end of the range. But, yeah, just given how the market's performed this year, why not take that up? Are you seeing offsetting savings, or, you know, is it the environment that keeps you – We're cautious to invest more. Any further would be helpful. Thank you.

Sure. Yeah. So listen, we're always looking for opportunities to invest more in key growth areas in the business. And as you alluded to, the AUM levels are higher than those that we'd assumed underlying our guidance at the beginning of the year. And so, as we mentioned, if they stay at this level or higher, we are likely to be towards the higher end of our expense guidance range, which is a reflection of a pickup in our level of investment. And we are using it as an opportunity to continue to drive growth in those compelling secular opportunities like rules-based index portfolios, private markets. enhancing our position with the front office and analytics, investing in our architecture and interfaces, including AI capabilities that not only drive internal efficiencies, but are powering growth. And so those are all things that we are focused on and doing and will continue to do. But we are continually balancing, you know, driving stable and continued profitability growth with investing for the long term. And it's a constant calibration The other thing I would highlight is there can be some lag as well. And so there are some investments that come through quickly, but there are some that take some time to work through. And so it's just a nuanced dynamic on our cost base, and there are several factors at play that can cause expenses to swing quarter to quarter here. So I wouldn't read too much into one quarter and our expense guidance for the year. As I said, it's a constant calibration, and we are continually looking for opportunities to invest in the business.

Your next question comes from the line of Russell Clout with Redburn Atlantic.

Please go ahead.

Yeah, good morning. Thank you for having me on. You reported another strong quarter of mid-teens run rate revenue growth in the custom and specialized index solutions. I think that now accounts for close to 10% of index segment run rate revenue. I'm wondering how big you see the opportunity here to be and what's differentiated about MSCI's proposition versus competitors that are also talking about growth here. And as a kind of second part to that question, can you sort of explain to what extent if any growth in this business sort of cannibalizes opportunities in other parts of the index business and how it affects the overall segment index margin?

Hi, Russell. Thanks for the question. Yes, so look, we remain very excited about this, and I would say that it's not merely a capability question, which is important, but it also plays itself out across very different use cases in different client segments. So we're integrating the FoxBerry acquisition into our custom index capabilities, and that will be coming online in roughly the next few quarters. that should give us significantly greater speed and flexibility in terms of what we can do, whether that's by different types of calculations, combinations of different asset classes eventually, et cetera. So then in turn, I think where we have some competitive advantage is precisely because of both the models, the capabilities, the research that we have from analytics for portfolio construction and risk, factor exposures, all of the enormous topic of climate and indexes adjusted on that basis, which we had in some of our prepared remarks today, the opportunities that those are creating. There's quite literally not a client segment that we work with. that doesn't need more of these capabilities, whether they be asset owners, either at the mandate or the plan, the entire plan level, and clearly even specific use cases, depending on the type of asset owner, you know, the asset management industry, both for products and benchmarks, the sell side for structured products, which is a huge opportunity for us that we can do a lot more in, you know, in wealth, the capabilities of both doing mass customization with index, linking that to ETFs, building that into the wealth manager platform for wealth management firms to control, you know, the risk at scale while customizing portfolios. So all of this is, you know, really, really critical and exciting part of our growth story. And as I said, we're at an inflection point where we're just bringing on new capabilities in this area, which in the next few quarters and going into next year will become much more significant and will increase our speed to market and will allow us to do a lot more in all of this. So delighted to take the question, and this will remain a very large opportunity for us.

Your next question comes from the line of Gregory Simpson with BN Paribas. Please go ahead.

Hi, Beth. I just wanted to check in on how the RCA business is performing within the context of the 2% private assets organic run rate growth this quarter. I think when you originally acquired it, you talked about a double-digit growth aspiration. So what do you see as key to accelerate this back up? Is it mainly a cyclical issue around real estate transaction activity, or is there anything you'd call out on the competitive side you're seeing? Thank you.

Yeah, thanks for the question. So look, I think the simple and major challenge we've been seeing in this is transaction volume. It's a pretty straightforward answer. So there was clearly a significant drop in transaction volume, which is a major part of the revenue drivers here. Now we're starting to see that pick up. And there are, you know, there's definitely evidence of the, you know, we have various research measurements of the spread between basically buyers and sellers in the real estate market. That has compressed significantly. We're starting to see the beginning of more transactions. You know, we believe we're likely to see that more in the coming year. You know, maybe in keeping with the overall tone of this call, where I think we're trying to be sober and maybe a little bit more the under-promise and over-delivered department. We didn't put that in our prepared remarks, but I think we have good grounds to believe that we could be turning the corner in that area in the coming year.

Your next question comes from the line of Alex Cram with UBS.

Please go ahead.

Yes, hey again. Just one very quick one on the custom opportunity that you just discussed. Maybe I'm being, again, too nitpicky on the numbers or glass half empty, but if I look at the run rate that they just closed for custom and specialized, I think it actually went down a couple hundred thousand dollars quarter over quarter. Again, it's a small number, it's a small quarter, but Just wondering if there were some elevated cancels to call out or why that didn't grow quarter over quarter. Thanks.

Yeah, Alex, nothing to call out right now. If anything, I would just say some of the broader pressures impacting the business are also impacting custom special packages. They're impacting all of our modules. But everything Bear said holds true. This is a massive opportunity for us, and we see strong engagement across many different client bases and use cases. The other thing to underscore here is custom indexes is a key growth driver for us in ABF as well. And so clearly it's something that's helping on the subscription side, but it's something that's helping to fuel many different avenues within the asset-based fee line as well. And we see that across institutional passive mandates. We see it in the wealth channel with direct indexing. And we see it even with ETF providers.

So it's one that is excited for us on a number of levels.

That concludes our Q&A session. I will now turn the conference back over to Henry Fernandez for closing remarks.

Well, thank you very much, everyone, for joining us today and your continued interest in MSCI. As you can see from all the publications we have today and the prepared remarks and the Q&A, we're intensely focused on delivering innovative products and capabilities to support our clients and grow our wallet share with them. Our steadfast execution is what enables us to deliver on a very ambitious strategy and to be a long-term compounder of shareholder value creation. Obviously, we always try to moderate our enthusiasm, moderate our optimism and our positivism, because we like to show delivery of actual results rather than talk about potential results. And you saw some of that in this call. So please be mindful of that. We look forward to engaging with all of you during the quarter and update you on all the exciting things we're doing.

This concludes today's conference call. Thank you for joining. You may now disconnect. Please wait. The conference will begin shortly.