Q3 2025 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would like now to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Thank you. Good day, and welcome to the MSCI Third Quarter 2025 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter of 2025. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S.

GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation.

On the call today are Henry Fernandez, President and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. [Operator Instructions] With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Jeremy. Good day, everyone, and thank you all for joining us. In the third quarter, MSCI delivered strong financial and sales performance that highlighted many of our underlying competitive advantages. We had organic revenue growth of 9%, adjusted EBITDA growth of 10% and adjusted earnings per share growth of over 15%.

Since the beginning of the third quarter, we repurchased $1.25 billion worth of MSCI shares. This brings our year-to-date share repurchases to over $1.5 billion, which demonstrates very strong conviction in the value of our franchise. Moreover, MSCI's Board of Directors has authorized $3 billion worth in additional share repurchases for the next few years. Our third quarter operating metrics included total run rate growth of over 10%, which includes asset-based fee run rate growth of 17%.

Our asset-based fee performance was driven by record AUM levels in both ETF and non-ETF products linked to MSCI indices. In my remarks today, I will discuss a few of the biggest themes from our third quarter results, starting with our Index franchise. Q3 underscore the depth and versatility of our Index franchise. MSCI achieved recurring net new subscription sales growth of 27% in Index, including 43% growth in the Americas. Total AUM in investment products linked to MSCI indexes reached $6.4 trillion globally, including $2.2 trillion in ETF products and $4.2 trillion in non-ETF products.

There are now 4 ETF products linked to MSCI indices that have more than $100 billion in AUM. This helped our ABF run rate hit a new record high of nearly $800 million. The ongoing adoption of MSCI indices showcases the investment community's confidence in using our indices as a foundational element of their portfolios and to help them attract capital. In Analytics, MSCI delivered recurring net new sales growth of 16%, driven by strong adoption of our risk tools and equity models by multi-strategy hedge funds.

Our growth in Analytics increasingly supports our growth in Private Assets and vice versa. Last month, for example, MSCI launched a private credit factor model, powered by data from more than 1,500 private credit funds in our proprietary database. This factor model will provide investors with improved transparency and a consistent, integrated view of market risk for a fast-growing asset class. Elsewhere in private assets, we recently launched a new global taxonomy, known as MSCI PACS, the private asset classification standard.

This proprietary asset classification framework aims to bring consistent comparable standards to private markets. Powered by artificial intelligence, this new taxonomy covers a wide range of private assets, including private companies, real estate and infrastructure. The new framework builds on MSCI's long history as a standard setter in public equities. And investors can use it to benchmark, analyze and communicate portfolio strategies and performance.

As the last example illustrates, MSCI's innovation teams are rapidly leveraging AI models, especially on our large proprietary databases, to enhance existing products and develop new capabilities. AI is allowing us to unlock significant value for clients, which will also lead to meaningful value creation for our shareholders. In addition to rapid expansion in new products, MSCI is significantly expanding our presence with newer client segments, while deepening our penetration of more established segments, which Baer will discuss. And with that, let me turn things over to Baer.

Thank you, Henry, and greetings, everyone. As you are aware, over the past year or so, I have framed my remarks on these calls through the lens of MSCI's main client segments, and I will continue to do so as we grow our footprint with newer segments and deepen our penetration of existing ones. With that in mind, as you saw in our earnings materials, MSCI recently enhanced our client segmentation strategy. Details and comparison points are available in our Q3 earnings presentation.

Starting with hedge funds, MSCI delivered 21% recurring net new subscription sales growth. This was our highest Q3 ever for new recurring sales to hedge funds, with notable strength in Analytics. In particular, we see ongoing strong demand from hedge funds for MSCI's equity factor and enterprise risk and performance solutions, which have become deeply embedded in many clients' investment workflows. For example, MSCI closed a 7-figure renewal deal with one of the world's largest hedge funds in which our contribution to their alpha generation and risk management is central.

We also completed a global deal with a large U.S.-based hedge fund that will expand its use of our enterprise risk and performance tools. Our analytics solutions are now fully integrated into every aspect of this client's risk management process, including its capital allocation framework for individual portfolio management teams. The common theme here is that amid elevated levels of market volatility and uncertainty, hedge funds want deeper, faster insights into key sources of investment risk and return. MSCI is fortifying our position as a trusted partner.

Turning to wealth managers. We achieved nearly 11% subscription run rate growth, driven by a balanced mix of contributions from across product lines. Recently, a large independent wealth manager in the U.S. licensed our private capital fund transparency data to enhance client reporting on private funds. This shows how MSCI is enabling both scaled data gathering and the standardization of private asset data to provide the enhanced portfolio insights client need.

Indeed, wealth managers' growing demand for tools and standards in private markets creates a great opportunity for us. We also have a growing list of clients licensing MSCI Wealth Manager, which has allowed us to deliver unified solutions for the home office with advanced tools spanning personalized client portfolios and proposal generation, along with regulatory workflow support. Shifting to asset owners, we posted 9% subscription run rate growth, driven by Analytics, Private Capital Solutions and Index. In one of our biggest deals in the quarter, MSCI renewed our relationship with a major Canadian pension fund across our equity models and risk tools.

We also expanded our Private Capital Solutions relationship with a U.S.-based asset owner as we support this client's increasing demands for total portfolio solutions and performance measurement and transparency as they grow their private market allocations. In addition, a rising number of LPs are using MSCI private capital indexes and our newly launched frozen indexes as their policy or performance benchmark, reflecting a shift away from public proxies and return targets and have increased alignment with MSCI standards. We are, therefore, confident that our investments in private capital indexes will help create significant value both for clients and for MSCI.

Moving on to banks and broker-dealers. MSCI delivered 9% subscription run rate growth, including a record level of Q3 recurring sales. This was driven primarily by Index, which also posted its highest Q3 ever for new recurring sales. Our most notable Q3 business win was a global index renewal deal with one of the largest banks in Europe that highlighted the mission-critical role of MSCI Index data sets in their trading, index rebalancing research and product creation capabilities.

Turning finally to asset managers. We achieved subscription run rate growth of just over 6%. MSCI is working intensely to increase our growth trajectory with this segment, and our efforts had a meaningful impact in Q3. In fact, we delivered our highest Q3 on record for new recurring sales to asset managers in Index, which helped drive 11% overall new recurring sales growth with asset managers across MSCI product lines. For example, we landed a 7-figure deal with one of the world's largest asset managers in support of their wealth management strategy.

MSCI is providing financial advisers with ever more sophisticated analytics tools such as stress testing, which helps them grow their business and support their own clients. We also completed a large deal with a top European asset manager to help them develop a centralized program for their risk, performance factor and sustainability analytics across investment teams in different global locations. This was another great example of our ability to expand and deepen existing client relationships using our One MSCI integrated solutions. Looking ahead, we are encouraged by MSCI's long-term opportunities and our ability to drive growth from recent areas of innovation and investments, all of which should help us remain the mission-critical provider of choice for clients across the capital markets.

And with that, let me turn things over to Andy. Andy?

Thanks, Baer, and hi, everyone. Our third quarter results highlight the momentum we are building across product lines, a dimension on which I will provide some additional color. Within Index, where asset-based fee run rate growth was 17%, equity ETFs linked to our indexes captured $46 billion of inflows during the third quarter. We continue to see strong demand for ETFs linked to MSCI developed markets ex U.S. indexes and MSCI emerging markets indexes.

And index subscription run rate growth was 9%, including nearly 8% growth with asset managers, an area where we saw some strength in the Americas. We recorded our best third quarter ever for Index recurring net new subscription sales, aided by our DM and EM modules and solid subscription run rate growth in the nonmarket cap category. We've been encouraged to see that new Index products launched since the beginning of 2023 generated about $16 million of new recurring subscription sales over the last 12 months. And the Index retention rate remained durable at nearly 96%.

In Analytics, we had subscription run rate growth of 7%, driven by our highest Q3 ever for recurring net new sales. Recurring sales in Analytics benefited from 29% growth in Equity Solutions, with strength among hedge funds in the Americas and APAC. Additionally, we saw strong sales of our multi-asset class analytics, most notably with hedge funds as well. In Sustainability and Climate, we saw 8% subscription run rate growth for the reportable segment, with roughly 6% subscription run rate growth from Sustainability Solutions and 16% subscription run rate growth from Climate Solutions.

The Sustainability and Climate retention rate was almost 94%, slightly higher than last year's level of 93% and reflecting the must-have nature of our tools. Additionally, we are seeing solid demand for new solutions such as our geospatial offering, which is seeing traction across client segments, including in particular with banks. In Private Capital Solutions, we closed about $6 million of new recurring subscription sales in the quarter, with success across client segments including established segments such as endowments and foundations as well as newer areas for us such as wealth and GPs. Additionally, we continue to see strong momentum with our total plan offering.

In Real Assets, recurring net new sales improved, aided by stabilizing retention trends. We're also driving sales from newly introduced product areas, including our data center offering, which has gained traction with GP investors. Across PCS and real assets, the retention rate improved slightly to 93.3%. Finally, turning to our full year guidance as we close out 2025. The increase in the low end of our expense guidance range is consistent with our past comments and driven by the strong growth in AUM levels linked to our indexes.

As a reminder, interest expense guidance reflects the previous notes issuance during the third quarter, and the increase in free cash flow guidance reflects business growth and the impact of tax benefits. In summary, MSCI's strong Q3 results are reflective of our mission-critical, durable solutions and our accelerating pace of innovation. We are seeing solid momentum in delivering new products, capabilities and enhanced go-to-market efforts, and these are translating through to tangible results. We look forward to keeping you posted on our progress.

And with that, operator, please open the line for questions.

[Operator Instructions] And our first question will come from Manav Patnaik with Barclays.

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

Thank you for that, Manav. We are very bullish in our work on private credit. If you step back a little bit, the new banks in America and parts of the world are the private credit funds, the provision of private credit is moving, in addition to banks, to private credit funds. That is a secular trend.

There may be some ups and downs, but that's a secular trend. It's structural. And those banks -- I mean, those private credit funds need to attract investors to fund the provision of credit. There is not enough institutional capital in the world to fuel the funds that are needed, the assets that are needed in this private credit funds.

So they need to attract, in addition to institutions, large parts of the wealth management industry, the retail industry and now the 401(k) industry. In order for that to be viable and achievable in a sustainable and responsible way, they need the tools for these funds to demonstrate what's inside the fund, what's the credit worthiness of it, what's the market risk of it, what is the valuation of them, and so what are the terms and conditions on the underlying loans, et cetera, et cetera. So in the last 9 months, we've been very feverishly innovating on this. The first one was we created terms and conditions on -- we looked at our database, proprietary private credit database.

We found 2,800 funds, private credit funds, that are not asset-backed. And we developed terms and conditions on 80,000 loans that are -- represent 14,000 borrowers, in these 2,800 funds. Then we moved on to create credit assessments of these funds with the Moody's. We licensed the Moody's credit risk models.

We applied it to the MSCI database and we have launched the credit assessments of a lot of these funds, which are highly needed in this volatile environment in credit that we've been listening to in the media recently. Then we created a taxonomy of private credit in order to develop market risk measurements of these private credit funds, and we launched the factor risk models on them. So that's been another innovation. And now we're looking into how we develop evaluated prices in private credit in order to provide an independent, trusted source of valuation that can be basis of liquidity.

So none of those things are yet translated meaningfully into high revenue, high sales, but they will. And we are incredibly needed in this space as the trusted source of information about the benchmarks. I forgot to mention that we launched, I don't know, 60, 80 different private credit indices as well in the last few months to basically make people understand the private credit fund relative to a market benchmark. So that's another innovation that we did.

So we are very bullish in this space and we intend to be the leading provider of all these transparency tools.

And our next question will come from Alex Kramm with UBS.

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

And when do you actually see this can make a material impact to you on results?

Thanks for that question, Alex. The strategy is really two-pronged. We believe strongly that the active asset management industry needs us in this difficult time. But it needs us not as a cost center to them and put more pressure on their financials.

They need us as a company that can help them create new products. So we're very focused on creating that, especially in the active ETF space, so we can help clients do that. You saw the recent launch with Goldman Sachs Asset Management of the Private Equity Tracker Fund, which is a very innovative approach to look at the -- at our database of private equity, to understand the returns and the risk of all of that, and then replicate that through public equities in a way that provides liquidity. So that's an example of something that can generate revenues for the active asset management industry.

So -- and we saw early signs of that recovery for us. The industry continues to be challenged. But if we can help them develop products and generate revenues, we're going to do very well with them. The second part, Alex, as you know, is the expansion into other client segments.

And that's the reason we presented in these slides -- at the end of the slides, the 2 pages of the redefinition -- not the redefinition, but the breakdown of the client segments at MSCI on the subscription part. And you can see that we can benefit significantly by helping the asset management industry because we have 46% of our subscription run rate on that and we can benefit if we make it grow. Hedge funds are a very significant spot for us and other parts of what we call the fast money, which is market makers and broker dealers and all of that. We've done very well there.

And one of the reasons is not only the risk tools that we sell, but what we have begun to realize is MSCI has a huge ecosystem of trading around its indices. It's $18 trillion benchmark to MSCI, of which $6.5 trillion or $6.4 trillion is passive. And that has a huge ecosystem that needs liquidity. So we're developing data sets and products for all these market makers and broker dealers to help fuel that liquidity.

So we believe that we have a lot of opportunities with that segment, more than we even estimated in the past. So that's an area that we're focused on. Obviously, asset owners, it's always been our sweet spot in Index and Analytics, and now very intensely in what we call PCS, Private Client Solutions, because these are big investors in private assets, and they need more and more transparency, understanding of performance and risk and pacing models and all of that. So we're stepping up significantly our PCS efforts.

And we believe that we've seen some softness in PCS. We are going to turn the corner, particularly with the institutional asset owner space. And then there's wealth management. The wealth management part, as I said before, needs us very significantly because a big part of the allocations into wealth management is into private assets, particularly in private credit, but they need to do it in a way that is responsible and compliant.

And they don't run afoul of selling products that the individual investors don't understand. So we are gearing up significantly for a major expansion in private assets and wealth management, in addition to helping them build portfolios through what we call MSCI Wealth Manager. So that's a little bit of a rundown of where we are. So we're very optimistic that with the significant revving up and ramping up of the new product machine at MSCI in the last 9 months that this -- the softness that we highlighted in the prior quarter, last quarter, is beginning to turn, not necessarily because the investment industry is extremely bullish, the markets are bullish, but the budgets are -- may not be as bullish, but it's because we can create a lot of new solutions that are going to help these people solve a lot of problems.

And that's the strategy: deepening and helping become a revenue center for the active asset management industry and obviously sell a lot of the things into the other client segments.

And the next question will come from Toni Kaplan with Morgan Stanley.

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

Thank you for that question, Toni. And let me start by saying that we in the past hasn't really talked a lot about AI because our style at MSCI is not to talk about intentions but to talk about actions and real tangible things. So that's one of the reasons you haven't heard us talk a lot about AI. But since ChatGPT was launched 3 years ago, we've been feverishly looking into and permeating every aspect of MSCI with AI.

And the punch line is, AI is a godsend to us. Let me repeat that, AI is a godsend to us. Because what MSCI is, it's a company that collects large amounts of data, proprietary, unique data. AI is going to help us scale up dramatically, 1,000x more in the next 5, 7 years in data sets.

Secondly, we then build a proprietary and unique investment and risk models to apply to that proprietary data. You can only imagine how much AI is going to help us do that. And then three, we're going to deliver all of that content to our clients in a way that they can consume in any way they want. So MSCI has never been a workflow software solution vendor.

A lot of our proprietary sort of workflow systems like Risk Manager, BarraOne and all that, they're there to sell the content that we got. And it's almost like a necessary evil, right? So if we get the world to create every way, every type of access into our content by themselves, we don't have to spend any time on that or any money on that, and that's going to propel those to much higher levels. So we've been very busy in permeating every part of what we do.

So if you start with the whole employee base, 6,250 people, almost 100% uses AI every single day. I actually made it a year ago a condition of employment that everyone needs to use AI tools every single day like using a phone, using word processing or Excels and things like that. So we're very proud of that. Then, we have permeated AI into all of our operations, especially data capture.

We have basically saved hundreds and hundreds of employees -- new hires of employees by using AI in private assets, for example, in Private Capital Solutions, in Sustainability, in Climate. For example, this geospatial product that we have is all based on AI and the like. We are -- so that has created incredible efficiency for us, tens of millions of dollars, that are not yet -- that are just the beginning of what we can do. And then lastly and most importantly is that we have used AI to build products.

So a lot of our custom index factory is built by AI-driven methodologies, that is not a human in research with -- as an artisan trying to build an index and it takes 6 months and all of that. No, we want to do this instantaneously using AI. So a lot of what we're launching in custom indices is AI-powered. As an example, the geospatial data sets that are being popular now that were built -- that we're selling, it's all AI-driven.

And of course, a lot of the data that comes out of private assets and sustainability is AI-driven. So again, we haven't really talked a lot about this. We did -- we answer questions, but since you asked and there is so much focus on this, we might as well tell you exactly what we're doing. And in terms of products, I think there's somewhere between $15 million, $20 million of products that were sold this year out of 25 new products, that are all AI-powered.

So that's the way where we are. So if anybody -- this is going to be a godsend to us. Now I cannot tell you enough that the biggest problem MSCI has is that we've got so many opportunities and so little investment money and we want to keep the profitability of the company the same. So that's not an easy thing to square.

But if we apply AI dramatically and we can lower our operating run-the-business expenses by 5%, 10%, 15%, all of that money can go into investing into the change in the business, and that will create an incredible upsurge in product development for us. That's a goal that we have for '26.

And the next question is going to come from Ashish Sabadra with RBC Capital Markets.

So in the quarter, we saw really strong momentum in the Index and Analytics net new subscription sales. There, obviously, you talked about some big deals there also with the asset manager and one of the largest banks in Europe. My question was much more focused on the pipeline. As we get into the fourth quarter, any comment on the pipeline as well as the sales cycle as we get into one of the highest -- seasonally highest bookings quarter?

Sure. Ashish, it's Andy. So definitely, as you alluded to, encouraged by the results in the third quarter. They've been fueled by the product innovation, the accelerating pace of product development that you've heard us talking about here.

And so that's encouraging. In terms of the overall environment and market backdrop, I would say it's relatively stable. We've seen fairly consistent dynamics to what we've seen in the past. On the margin, the sustained favorable market momentum is constructive.

And we have seen pretty good results in the Americas, most notably in Index and Analytics as we talked about. And so we are generally encouraged by the healthy product pipeline and acceleration in product development that is supporting a strong client engagement, as Henry alluded to, both across asset managers as well as the broader range of client segments that we're targeting. And so we are seeing a relatively stable dynamic across the business. I would highlight that we do expect the dynamics we've been seeing in sustainability to continue in the near term.

So similar to what we've talked about in the past, those dynamics that we've been seeing there, the pressures we've been seeing there, we expect to continue in the coming quarters. But overall, I'd say dynamics across the business are fairly consistent and the performance is really being fueled by and driven by our product innovation.

The next question is going to come from Alexander Hess with JPMorgan. Alexander Eduard Hess.

I just want to touch briefly on the non-ETF and the fixed income businesses. On the non-ETF side, there's been pretty rapid growth in the ETF revenues, I think, about 19% year-to-date. And the non-ETF is tracking a good deal behind that. Was there any prior year sort of hurdles that are pushing down the non-ETF revenue growth?

And then on fixed income, can you remind us what the AUM is there as of 3Q, and if there was any reason why, if my math is right, there was a little bit of a quarterly dip in the run rate for that business? I just wanted to sort of unpack that a little bit. So I know that it's a lot to ask you, but hopefully, we can...

Yes. Alex, it's Andy here. So on the non-ETF passive front, we -- to your point, we can have impacts from true-ups and true-downs which can skew the period-to-period comparability. And so as you know, there can be some lumpiness in any given period.

We can also, at times, see some modest fee adjustments on the client funds, and that can lead to some lumpiness in revenue and revenue recognition as well as run rate. And so I wouldn't read too much into lumpiness in the growth rate there on the revenue side. This does continue to be a very important growth area for us. We've seen some very nice new fund creation on the custom side.

This is an area where a lot of the efforts that we've made on our custom index capabilities and the growing focus on customization and customized outcomes manifest itself, and we're in a unique position to help these organizations that are really anchored to our frameworks and looking to achieve objectives around our frameworks. And so wouldn't dig in too much to the revenue growth on that front. On the fixed income side, the AUM and ETFs linked to fixed income indexes or fixed income indexes and partnership indexes is around $90 billion. And so it's been a nice growth area for us that's continued to grow.

Similarly, I wouldn't read too much into revenue growth in any one period on that category. We are heavily focused on continuing to drive adoption, new innovation there and fueling the overall AUM growth across the fixed income category and continues to be an important area for us.

What I would add is that, obviously, we see the challenges in Sustainability and Climate -- in the segment of Sustainability and Climate at MSCI, as you see it. But a meaningful part of the monetization of all of that is happening in equity and fixed income indices. And it's in both, but in fixed income indices, the percentage is even more as a total. So we've been very successful in -- especially in Europe, in having clients come to us, and we've helped them design climate -- lower climate risk, fixed income indices that they can use as a portfolio either to give it to an institutional index manager or to turn it into an ETF.

And we see that continuing. And a lot of our investment in climate is not only climate in its own, in order to sell it directly, physical risk, transition of energy and transition risk and all of that. But it's because we believe there would be a large monetization of a lot of this climate IP in the form of indices and index investing. So yes, when you look at the totality of Sustainability and Climate, it's a little challenged.

But you also have to look at the One MSCI Sustainability and Climate franchise and see where the monetization is happening.

Just to put a finer point on that, I think Henry hit a critical item here. That $90 billion of fixed income ETF AUM, the large majority of that is Sustainability and Climate related. If you look at equity ETFs linked to our Sustainability and Climate indexes, it's about $360 billion. And within that, about $135 billion or so is climate-specific indexes.

On the non-ETF front, relating to your question, where we are seeing incredible focus by institutions and asset owners to develop specific climate outcomes, the non-ETF climate AUM is about $316 billion. So these are big, becoming meaningful contributors in helping to fuel the growth of the business.

And the next question will come from Kelsey Zhu with Autonomous.

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

Sure. So active ETFs are a quite distributed category with things which are really just quite literally putting an ETF wrapper on a purely active fund, through to things which are very rules-based and which are much more like an index or which are an indexed version of an active strategy. So the good news is that we are able to monetize across a lot of that spectrum, not merely in the Index business, but a fair amount of it also in Analytics with portfolio construction, et cetera. So in terms of the more specifically Index-linked component, we're now up to almost $30 billion of assets in that category, and the AUM was up 10% quarter-on-quarter, not year-on-year, quarter-on-quarter.

So we think this is an extremely attractive category. We're very engaged in it. I think it's difficult to say exactly how that will play out over time in terms of the economics and the scale, but it's growing dramatically and it's certainly not cannibalizing at all anything we do today. It is literally new revenue, new money, new opportunity.

So I think we're very excited about it, both, as I said, from selling of tools, selling of data and information and also from an index construction and licensing point of view. And we believe that we're going to see those numbers become more important in the future.

Yes. And as I said prior, I just want to emphasize this point, which is over the last year or so, we've been seriously analyzing the active asset management industry and how do we help the industry recover? How do we help the industry build competitive advantage and add value? And how do we benefit from that in increasing our growth?

And therefore, one of the components, not the only one, but one important component of that is helping that industry go from mutual funds and other forms of investment vehicles to active ETFs. And we play a large role in there, as Baer indicated. So this will be one of the things we'll talk some more about in the future, which is how do we regain significant growth by MSCI in the active asset management industry? This is one of the components.

Not the only one, but one of the components.

The next question is going to come from Owen Lau with Clear Street.

I do have another question on AI. And Henry, I really appreciate your response to the previous AI questions. But I do want to ask this question from a different angle because there has been quite a lot of conversation about how AI has negatively impacted the whole sector. One concern is AI investment could compress margin if that investment couldn't bring in enough revenue.

How do you get the confidence that you invest in, I think you called about 15 or 20 AI projects, but that can maintain or accelerate your revenue growth, but at the same time, you can still drive margin expansion?

The punch line, believe it or not, is that AI will dramatically increase our margins, really dramatically, because we'll be able to create a lot of new products, scale them faster to a lot of various participants and the various client segments, and it will significantly reduce costs to us as we use AI agents rather than humans to run. A lot of what we do at MSCI is systematic, and therefore, you can systematize that with an AI agent, in terms of methodologies, capturing data, running performance, running risk in our clients' portfolios, building models, building software. So it's literally going to chop off a lot of our operating expenses.

The question is, how do we get there? And the benefit that we have is that we don't need to build large language models. We need to buy them and train them to apply to our data. So we don't have that cost.

Secondly, we don't need massive data centers or any data centers. We have our own -- our clients are the ones that are running a lot of this. So we don't have to invest in chips or in data centers or in electricity, power and all of that. So we are going to be a major beneficiary of what is called apply AI to an industry, and our industry is made up of data, investment models, investment and risk models, and technology.

And therefore, AI for us is we can build a lot more data, we can build a lot more models, and we can use a lot more technology and distribute it. So that's very important. And therefore, the investments required for us to achieve that are not significant. Let me repeat that.

The investments for us to achieve that are not very significant. It's a question of retooling what you do to be AI compliant so that you can put a large language models on a data set that is already AI-friendly, so to speak. We need to hire AI people, AI experts that can help us. We just hired 2 managing directors in our research operation that are AI experts in helping us build AI agentic models, investment risk and performance models and all of that.

So I do not see a reduction in margins in order to accommodate the investment that we need to make in AI. But having said that, I don't want you all to bank the increased margins that we're going to use, that we're going to gather in AI, because we want to put them back into investments in the company to grow faster. So that's the punch line, right?

And our next question will come from Scott Wurtzel with Wolfe Research.

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

Yes. I would say, going back to my comments earlier, the environment has been relatively stable, consistent with what we've seen in past quarters. And so the strength that we saw in the quarter, as we mentioned, was most notable in Index. We also had solid recurring net new within Analytics.

This was particularly the case in the Americas. And a lot of this has been fueled by us selling more to our existing clients. So we've had success upselling additional content and services, particularly within Index, which has definitely been encouraging for us to see, and a lot of that's been enhanced by our product development pipeline. I would say performance with asset managers can be a bit lumpy.

But generally, overall, we're seeing quite stable results, and we are also pretty encouraged by the solid retention rate with asset managers, which is about 97% across the company in the third quarter. And so I wouldn't call it a trend, but there are definitely encouraging results that we're seeing with asset managers and saw a solid quarter.

And the next question will come from Craig Huber with Huber Research.

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

No. Thank you for that, Craig. I think, look, the -- one way to look at it is to split it into the 3 kind of processes, right? The first process is capturing data.

The second one is applying investment and risk models on that data. And the third process is distributing the content to clients. So let's start with the last one. We are not a traditional sort of workflow software solution provider company.

If anything, we've been criticized in the past that our workflow, the front end that we have is not as cutting-edge, not as advanced in BarraOne and Risk Manager and ESG Manager and all of that. And we've been hesitant to put a lot of money into that because we see that the industry is creating different ways of accessing the data like Databricks and Snowflake and people like that. So we let them invest the money in that, and then we provide the content to them and then the content -- or let the client develop their own workflow internally, which a lot of wealth management do, and we sell them the content.

So that's that part. So we're not going to be disrupted there because we're not -- that's not where we are. On the contrary, to the extent that there are more ways that AI can help somebody access content, we are going to be there, right? So that's that part.

At the other end of the spectrum is the capturing of the data. Remember, a lot of the data we capture is proprietary. It's -- and it has to be accurate, and it has to be trusted, and it has to be branded and the like. So it starts with client data.

So today -- just to give you 2 examples, today, clients with over $50 trillion of assets use our MSCI analytics platform to run the risk and performance, right? So that is data that is sitting in our servers, that is data that we can access. There are not going to be too many firms that are going to be able to have that because these people are not going to put their portfolios everywhere. They have to put them in a trusted place that they believe it's secure, that they can do their computations safely and all of that.

That's one example. Another example is our clients have given us $15 trillion of their portfolios in private assets. That's sitting in our servers. We have access to that to put models on top of that.

Now we cannot disclose client A has the following portfolio, but we can use it to create products and we can use it to anonymize it and all of that, just like we can use the other one, the other -- the clients that have $50 trillion in assets. So that is proprietary data. Now that's in the back end. In the middle is the investment and risk models that we need to put on top of that data and then deliver that content.

Yes, you could use ChatGPT to go look at something, and maybe the answer is right, maybe the answer is not as right. At the end of the day, we're not in the gathering information in order to have a political opinion, for example. We are -- our clients are in the business of getting accurate data, accurate models, accurate performance and all of that. They're not simply going to trust anybody.

They're not simply going to get a large language model sitting on the side and go do that. They need a thorough, trusted, reliable branded product that puts its name and reputation behind it. That will be huge barriers to entry to a lot of people. So those are examples that I will give you, right?

And the next question will come from Faiza Alwy with Deutsche Bank.

I just wanted to go back to the performance of net new sales in the quarter. I know, obviously, there can be a lot of lumpiness. And you highlighted strength in Americas and Index. Just curious what you're seeing in EMEA in particular because it sounded like net new sales declined.

So I was just curious if there's -- if maybe some of the new product innovations that you highlighted is more catered to Americas? Or if there's something specific, maybe it's ESG related? So just some additional color there would be helpful.

Sure. Yes. So I would say similar to the comments I gave overall, we see relatively consistent dynamics. I've mentioned in the past that we've seen a bit of sluggishness with asset managers in EMEA.

We continue to see a bit of that. I think they've been a little bit slower moving on the rebound of the market here. And so our results have been a little bit softer in the EMEA region. Our product development efforts are global in nature.

And so a lot of the enhancements that we're making for not only asset managers, but all client segments are targeting tremendous opportunities within the European region. We actually, on the Index side, see a growing ecosystem around our indexes within the ETF community. And so we've seen tremendous growth in assets under management and ETFs linked to our indexes in Europe, particularly around the World Index, where we are becoming a standout in terms of largest ETFs, and that's perpetuating through to a whole host of additional opportunities. And so yes, we see some sluggishness from clients, some pressure -- outsized pressure relative to the Americas, but our position there is very strong and a lot of the innovations that we have across product lines are positioning us to continue to drive growth.

And as I alluded to, that's not only on the Index side, but in areas like PCS. Many of the innovations you heard Henry talk about and Baer talk about it in the prepared remarks are positioning us well to unlock big pools of capital focused on the private asset market in Europe. And we continue to enhance our go-to-market effort across many of these additional client segments in Europe. So continue to believe it's an attractive opportunity, but we are seeing in the near term a continuation of some of the sluggishness that I've mentioned in the past.

And our next question will come from Patrick O'Shaughnessy with Raymond James.

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

Thanks, Patrick. First of all, we love MSCI, and we love it even more when it's undervalued franchise. Clearly, we hit some soft spots in the last couple of years and the undervaluation of the company has increased. And therefore, we've been pretty active in buying the stock, $1.5 billion year-to-date.

And we got the Board, obviously, to authorize another $3 billion to do that. We would like to be as aggressive as we can if the company continues to have undervaluation in the franchise and take advantage of that. And we are a strong believer in the medium -- in the short, but more importantly, medium and long-term prospects of the company. I, for one, have done the same, not just with the assets of the company, but personally.

In the last 18 months, I bought $20 million worth of MSCI shares for me and my family. It's not because of pride of authorship. These are rational decisions that, given our opportunities, given the new product development machine this company can create, we will remember this period as a period of undervaluation that is a good opportunity to load up. So we're going to do the same with the assets of the company.

Now I think that in terms of the split, yes, in order to do the $3 billion over some reasonable period, we'll have to do both, free cash flows and continue to lever up to 3.5x or close to 3.5x. That will provide us hopefully over $1 billion a year or something like that, and then we'll be opportunistic like we have always been. If the stock runs up way too much, we'll set it out, not because we don't believe it's attractive, but it's because, tactically, we can buy it cheaper. So that's our plan.

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

And the next question will come from George Tong with Goldman Sachs.

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

Yes. So I would say across the company, the contribution of price increases to new recurring sales is roughly in line with what we've seen in recent quarters. So no major shift in the approach. It does vary a bit across product lines and client segments.

In terms of that approach that we've taken, we're generally trying to align price increases with the value that we are delivering. So many of the enhancements and improvements that we make and innovations that we've talked about here, we will be monetizing through price increase. And so that's a key component to enable us to continue to drive price increase. But we also factor in the overall pricing environment.

We do look at client health. Our approach can vary product segment to product segment, even client segment to client segment. But importantly, we are really focused on being a strong long-term partner to our clients, and we are focused on building that relationship. And so we want to be constructive around price increases and very mindful that we need to continue to deliver value to be able to support price increases over time.

But across the organization, no major change on the contribution.

And the next question comes from Jason Haas with Wells Fargo.

You've talked a bunch on the call about some of the improvements that you've been making to your offering. And I'm curious if you could talk about just the time line for when we should see that show up. I know it takes time to hit revenue. But maybe in terms of the net new sales, to what extent have you been benefiting from those introductions, and it sounds like there's more coming through?

So over what time frame, even high level, should we think about those improvements coming through? And if I could slip in a second one, just on the AI benefits that you talked about and the efficiencies that you can gain. I'm also trying to think about the time line there in terms of when we might see that start to show up in improved margins from here. So if you could talk about the time, that would be very helpful.

Yes. I would say, overall, as you know, our financial model moves very smoothly. We -- I touched a little bit on this in my prepared remarks, but there is strong momentum in releasing new products, and that is starting to impact sales. We've seen roughly $25 million of sales year-to-date from recently released new products.

I mentioned the $16 million on the Index side in my prepared remarks. And so we are starting to see these benefits and that pace of acceleration in product development is definitely additive and something that helps us across many parts of the company here and allows us to continue to drive growth across not only the asset manager client segment, but all of our client segments. And so it's one that we do believe is going to be an important driver of growth moving forward here. And it's something that you started to see, but hopefully continues to be a big contributor to our success in the future.

Just on the impact on the financial model of AI. Henry touched on this, but I would say, overall, AI is enhancing to our financial profile. As you know, our business has tremendous operating leverage with high incremental margins. We are selling IP-based solutions that we produce once and sell to many users for many use cases, and that enables us to both invest in growth and drive attractive profitability growth on an ongoing basis.

And so as Henry alluded to, AI enhances both of those dynamics even more. So we're creating even more scale, enhanced productivity, enabling us to invest even more in the business, enhance our solutions and drive attractive top line growth as well as profitability growth. And as Henry alluded to, we are not going to take the margin down with some massive elevated AI spend, but it's something that will be a key ingredient to continuing to fuel that dual mandate that we have with our shareholders, which is continue to invest in the business to drive long-term growth and continue to drive attractive period-to-period profitability and free cash flow growth.

And so it's something that will be a smooth impact on the overall financial model here.

Let me just add that the virtuous circle that we will -- that we're trying to achieve over time is one in which we push higher and higher the operating leverage of the company to free up resources -- let me say, push higher and higher the operating leverage of the company, maintain the profit margins, and therefore, free up significant resources to invest back into the business. We have enormous opportunities in private assets, in index investing and in physical risk and climate, in wealth management, in GPs, in the faster money segments, hedge funds, broker-dealers, data sets, investing and creating new data sets and all of that.

We do not want to make those investments by taking the profit margins down. But we need investment dollars. And the bigger the investment dollars, the more we can achieve higher growth in the company. So that's going to come from AI.

That's what we're looking for.

And the next question will come from Russell Quelch with Rothschild & Company.

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

Sure. So I'm not being cute, but it's genuinely unintuitive to me why it would cannibalize it, right? So you think there's -- so there's an active fund. It's benchmarked.

And it's previously likely wrapped in a mutual fund or perhaps some other type in some other way. So then that same active fund, let's say, holding everything else constant, it doesn't change its investment strategy, it stays the same, goes into an ETF wrapper. It's fundamentally pretty much neutral for us, right? But in fact, generally what occurs is the following things.

One, in transferring into an ETF wrapper, it typically has a more rules-based approach, wants to be more transparent. It doesn't just want to move the fund into it. So there are many occasions. I'm not saying it doesn't happen.

There are a lot of funds that go straight in ETF wrapper. But in many instances, the investment strategy is somewhat adjusted or you could say, quantified, quantification of the strategy, and we have a role to play there with our tools, factor models, et cetera. Then in turn, it may go a further step and it may be turned into an index. Maybe then those rules become more strict and hence, the strategy becomes an index.

And in turn, many such strategies are being built from scratch today, and so we play the part in it. So I would say that -- and in turn, the people who are doing this are generally or not in the index or the passive as people say, we don't like to term that much, but the index business, they're not the traditionally -- there are some major index players doing in the active space, but many of these are purely traditional active managers putting an ETF wrapper on a fund. So honestly, it's just not a -- it's not a threat to the existing business and there's a lot of upside for us in the future.

Yes. And to add to the financial model is, in addition to the subscription fees, when that product is systematized, we charge assets under management fees on top of the data fees. So that's where the incremental revenue comes in.

And our last question will come from Gregory Simpson with BNP.

I wondered if you could share more on MSCI's product offering, revenue and strategy with the GP client base given alternatives now make up over half of the revenue pool in asset management. I also wanted to ask this in the context of the 5.5% run rate growth in the private asset segment and the opportunity and time line to get this growth rate up.

So private assets, as you know, we have it classified at MSCI between real assets, real estate and infrastructure and what we call Private Capital Solutions, which has some real estate component on it -- in it, but it's -- a lot of it is private equity and private debt. So within Private Capital Solutions, which is the former Burgiss company that we acquired 3 years ago, a lot of the business there has been built in creating tools and transparency for the institutional LP market. So the model is that an institutional LP gets presented with a proposal by a GP to invest, they invest and they invest in hundreds of these things.

And then they turn to us and say, "Can you help me understand all of this?" So we go to the GP and tell them that we're representing the LP. The GP gives us all their data, every single data that they give the LP. And therefore, we aggregate that data. And then we look at the funds, we tell the institutional investor, what's in the fund, what is the benchmark, how are they doing relative to the benchmark, how is the performance, how is the risk, when will the capital be called, when will the capital be returned, and all of that.

So in that model, we get paid by the LP, and that's largely the business model today. So what we're doing is 2 things is we are we're creating the product line that is similar to the institutional LP so it can be used by the wealth LP, which is not a big transformation. It's just reprogramming the tools of transparency, of understanding, the benchmark, the performance, the risk and all of that in the portfolio, the credit-worthiness, the market risk and all of that, that I talked about like in private credit. And then serve it up to the wealth management organization so they have the same level of transparency and understanding what they invested in as still limited partners, because they are, instead of being an institutional limited partner, is now an individual limited partner or a pool of limited partners.

So that's one part of the growth. The second part of the growth is to then, which we're doing right now, is to create products for the GPs because we are in the ecosystem. We're talking to GPs every day because of the role that we play for their -- with their investors. So we go into the GPs, and we launch a few products.

Recently, we launched one, it's called Asset and Deal Information in private equities as to looking at every deal, at every asset based on our database, and provide that as a reference for the GPs to see who is doing what around the industry. So right now, our revenues coming from GPs directly on private assets and private capital solutions is minimal. A lot of the revenues that are coming from the GPs right now are in Analytics. We help them risk-manage their assets.

We help them with certain -- with indices in certain parts of the business. We help them with Sustainability and Climate, but our revenues coming from PC -- from private assets of these GPs is minimal. I don't know, $5 million, $10 million, some number like that. That is a massive opportunity for us.

So those are the 3 -- the 3 strategies are deepen our penetration on the institutional LP, expand to the wealth or individual LPs through the wealth management sector, and build products for the GP in which we have all the underlying information and the data and everything. It's just a question of building products.

This does conclude today's question-and-answer session. I would now like to turn the call back over to Henry for closing remarks.

So thank you very much for attending. Obviously, a different tone from last quarter. I normally say to people, it's darkest before it's dawn. And we feel that the dawn has arrived and we're turning the corner here.

It's not going to be a straight line. It's going to be lumpy. We're not in the kind of business that flares up and flares down. It's a consistent buildup and it could be a little lumpy, but we're very optimistic about our prospects now.

So thank you, everyone, for joining. As you can see, we have an all-weather franchise, delivering significant performance and attractive margins. We're a mission-critical tool. Our footprint has largely been product-driven.

And now we are very expanding more strategically in a lot of different client segments to link the ecosystem and benefit from that. So -- and that will bear value creation over time. We're a long-term compounder. We're not a flare-up, flare-down company.

So our goal is to continue to build higher growth, higher profitability on a year in, year out basis, year in, year out basis to be a long-term compounder of EPS and growth. Thank you very much, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.