MSCI Inc. (MSCI) Q3 2026 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 26 Earnings Conference Call. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. For the question-and-answer at a time, then add themselves back into the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy H. Ulan, head of investor relations and treasurer. You may begin.

Thank you, operator. Good day, and welcome to the MSCI Third Quarter 26 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter 26. This press release, along with an earnings presentation, are available on our website, msci.com. And under the Investor Relations tab. Let me remind you that this call contains forward looking statements, which are governed by the language on the second slide of the presentation, You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward looking statements disclaimer in our most recent Form 10 ks 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 will find a reconciliation of our non GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate, are available in the earnings presentation. On the call today are Henry A. Fernandez, our Chairman and CEO Andrew C. Wiechmann, our Chief Financial Officer and Alvise Munari, our Chief Product Officer and Head of Client Segment who are joining for the Q&A session. With that, let me now turn the call over to Henry A. Fernandez, Henry?

Thank you, Jeremy. Good day, everyone. And thank you for joining us. In the third quarter, MSCI delivered strong financial and operating metrics. Including historic net new sales in index analytics, and private capital solutions plus another record quarter for asset based fees. We have built impressive momentum across these 3 product lines. While sustainability and climate continue to face challenges, we believe that our recent acquisition of First Street will help accelerate a return to higher growth in climate. These results show that MSCI is expanding our mission critical role in global investing. Even as we transform our business to an AI-first company. Since our IPO 19 years ago, MSCI has demonstrated a strong and consistent track record of execution. This foundation positions us well to capture expanding opportunities both across client segments and a growing range of solutions, have multiple dimensions of growth. And a compelling opportunity to compound over the long term. Financially, our strong Q3 performance included total revenue growth of 12.4%, ABF revenue growth of 25%, subscription revenue growth of 8%, adjusted EBITDA growth of 12%, and adjusted EPS growth of 14%. From July 1, through October 19, we repurchased $627 million of MSCI shares at an average price of $562 per share. Since the beginning, of 2024, we have opportunistically repurchased nearly 8 million shares for $4.4 billion. During the same period, I have personally purchased an additional 57 thousand shares for $30.1 million. These purchases unequivocally demonstrate our strong belief in the potential of the MSCI franchise. Operationally, in Q3 MSCI achieved total run rate growth of 12%, fueled by a record ABF run rate of almost $1 billion. Our ABF performance reflects record AUM levels in ETFs and non ETF products linked to MSCI indices, including inflows of $76 billion There are now nearly $23 trillion of AUM benchmarked to MSCI indices. Of that 23 trillion roughly $15 trillion is actively managed, while $8 trillion is indexed. We also posted subscription run rate growth of 9% after adding nearly $55 million in recurring net new sales. And we delivered a retention rate of 95% an improvement of 30 basis points from Q3 of last year. MSCI is a long term compounder driven by both ABF and subscription growth. On the overall subscription side, Q3 was our best ever quarter, for recurring net new sales in analytics, and private capital solutions. Along with our best ever Q3 for recurring net new sales in index. Compared with a year earlier, recurring net new sales grew by 88% in PCS, 63% in analytics, and 40% in index. Notably, MSCI saw robust demand by both our traditional and newer solutions. In fact, we continue to see consistent growth in recurring sales from our newer products. And importantly, our higher pace of innovation is strengthening sales of our existing products as we continue to deliver greater value to clients. Virtually, all those newer products are power by artificial intelligence. Q3 also show our diversified strength across regions. Recurring net new sales grew by 74% in EMEA, 36% in APAC, and 26% in the Americas. Indeed, we achieved our best ever quarter in APAC, driven by analytics. MSCI is unlocking additional growth layers through our recently announced partnerships and acquisitions. In Q3, for example, we formalized the landmark agreement with UBS that we first announced back in July. This agreement will extend the reach of our private asset solutions strengthen connections between GPs and wealth managers, and promote greater transparency across private markets. Similarly, our acquisition of the AI native platform, Vantager, now the MSCI private assets diligence platform, enable us to complete a major deal with a large U. S. Bank. At the client segment level, MSCI achieved a record quarter with asset owners. More than tripling our recurring net new sales from a year earlier. Driven by demand for our total portfolio solutions and our integrated risk and portfolio management analytics. Our largest deal of the quarter moved MSCI from a vendor relationship to a strategic portfolio analytics partner for 1 of Asia's biggest and most sophisticated sovereign wealth funds. We also closed a number of major analytics and index deals with top hedge funds. Including deals for our equity models, and custom index modules. Finally, we maintain our steady performance with asset managers globally while achieving a strong quarter in EMEA where we posted 35% recurring net new sales growth. Despite the ongoing retention pressures, in sustainability and climate, we entered Q4 with solid momentum and a strong client engagement across the whole MSCI franchise. We are incredibly excited about the expansion of MSCI's offering through new use cases for newer client segment such as wealth managers, banks, lenders, GPs, and insurance companies in their underwriting processes. We are delivering and expanding MSCI by leveraging what we already do for our more traditional clients such as asset managers, asset owners, traders, and hedge funds. MSCI truly is a 1-of-a-kind company That is uniquely positioned to benefit from the biggest transformations reshaping the global investment and finance industry. And with that, let me turn things over to Andy.

Thank you, Henry. Hi, everyone. Our strong results reflect our rapid pace of innovation our effective go to market execution and the growing ecosystem around our tools. We believe this momentum is sustainable, and we continue to have an attractive pipeline of opportunities. MSCI is a powerful compounder, and the run rate algorithm was on full display with continued double digit subscription growth in index, high single digit growth in Analytics, accelerating growth in private assets, and outsized secular growth in asset based fees. Across client segments, we saw double digit growth with non asset manager segments, and mid to high single digit growth among asset managers. This algorithm, combined with inherent operating leverage, and ongoing capital optimization, allows us to fuel consistent compounding value creation. And the momentum in the business is evident. With LTM recurring net new subscription sales up 26%. Drilling down into index, organic subscription run rate growth accelerated further to 11.7%. Powerful indexation trends drove double digit subscription growth across hedge funds, banks and brokers, wealth managers, and asset owners of 32%,, 15%, 10%, and 10%, respectively. And the retention rate was over 97% across index, including a retention rate of 98% with asset managers. Additionally, asset based fees were fueled by $76 billion of equity ETF cash inflows concentrated in developed markets ex U. S and emerging markets. This was our second highest quarter of inflows behind only the first quarter of this year. Within analytics, we had organic subscription run rate growth of 7.5%, driven by several large strategic client wins with asset owners and wealth managers. These clients are seeking to modernize their investment platforms integrate risk and portfolio management workflows, and enhance investment decision-making alongside sustained demand for our factor content. As we have mentioned, analytics operating metrics will be lumpy quarter to quarter, but the trend has been encouraging. With LTM recurring net new up 18% over the prior LTM period driven by strong momentum in key areas. In private capital solutions, subscription run rate growth accelerated to 19%. We see growing demand across existing solutions like our transparency, private capital intel, and total plan offerings. And we are building momentum in newer offerings like our data and diligence platforms. Additionally, we are seeing good traction in landing benchmark wins across asset owners. In Real Assets, organic subscription run rate growth was 2% supported by improving client retention and clients seeking broader data access through Snowflake. In the sustainability and climate reportable segment, we executed over $5 million of new recurring sales in sustainability and over $2 million of new recurring sales in climate. We saw elevated cancels with 1 sizable down sale related to a client rightsizing its sustainability spend. Meanwhile, in climate, run rate growth across MSCI product lines was 8%, excluding the impact of First Street, Demand for our physical risk solutions, including from recently acquired First Street, is growing. The integration of First Street remains on track, and client engagement has been very strong. As we mentioned last quarter, the pressures on parts of the sustainability franchise are expected to continue through the fourth quarter. We expect the Sustainability and Climate Reporting segment to recurring net new sales that are roughly flat to slightly positive in the fourth quarter. Turning to our guidance, adjusted EBITDA expenses in the third quarter were in line with the level we indicated in September, driven by the impact of recent acquisitions, higher performance stock based compensation, and higher severance as we unlock efficiencies ahead of schedule. Given these items, which enhance the franchise heading into 2027, and the strong top line momentum this year, we expect to be at the top end of our expense guidance ranges for 2026. To provide more color on the elevated expense items in 2026, acquisitions are expected to add roughly $20 million of additional expenses this year, The incremental accruals of performance stock options which are mostly driven by higher than expected AUM growth in products linked to our indexes, and the strong business momentum are expected to add roughly $15 million to $20 million of noncash expenses and severance is expected to be roughly $10 million to $15 million higher than originally planned. Reflecting the acceleration of efficiencies and the AI transformation across the organization. Despite our high level of investment, and the additional 4 acquisitions, headcount has remained roughly flat compared to a year ago. This reflects our ability to leverage AI to transform the company for the future. Accelerate the pace of innovation and drive faster growth. Additionally, we increased the interest expense guidance as a result of higher revolver balances to support our opportunistic share repurchases. We also narrowed the tax rate guidance for the full year to 18% to 19.5%. Overall, we remain well positioned for and committed to delivering very attractive profitability growth while investing for the long term. In summary, our Q3 results show consistent execution across product lines and client segments. We are pairing continued investment in growth areas with strong financial discipline, and we have the flexibility to adjust as conditions evolve. We look forward to keeping you posted as we deliver on our priorities. And with that, operator, please open the line for questions.

Thank you. 1 moment for our first question. Now first coming from the line of Toni Kaplan with Morgan Stanley. Your line is now open.

Thanks so much. Henry, I wanted to ask a longer term question on analytics. I was wondering how you are thinking about the future in terms of the product platform and distribution just given the advancements in AI? How do you think customers will be interacting with your data, with your platform? Just trying to think of know, from a long term perspective, over the next few years, how you think that this is going to change? Thanks.

Thank you for the question, Toni. The first thing to keep in mind that you know well is at MSCI, we run a fully integrated business in which each product line feeds off and feeds into other product lines. In the in the past, maybe more distant past, you know, we view analytics, especially a risk management platform-- risk and performance management platform. as 1 of the more important product lines. In the recent past, we have begun to develop a strategy that help us take this extremely important product line and make it much more strategic and much more value added. So, for example, in our risk management platform, we get enormous amount of portfolio data. That in general, we have rights to anonymize and aggregate and things like that to develop, you know, new products. Yeah. Secondly, we know the risk management and performance platform. We know what the clients are doing. Every single day. by them having their portfolio and running reports in our platform, So we are developing plans to propose to the client why do not you do this? Why do not you look at this? Why do not you think of this new product, this new idea, this new list to do that. And AI is going to help us do that because otherwise, we will have to have humans in the lab. So, anyhow, so the last point that I will make, therefore, is MSCI is an analytics company. In totality, we are, by history, a modeling versus, therefore, an analytics company. Model The index methodologies are models. The risk the factor models, the risk model, the other risk models, the ESG ratings are models. All of that. So we need to in-- We are in the process of integrating the company into a more holistic analytics shop with proprietary data and very advanced new AI technology to gather the data, process the data, and help our clients consume the content, the data, and the models much more effectively. So that is the vision of analytics at MSCI. Thank you.

Thank you. Our next question, queue coming from the line of Alex Kramm with UBS. Your line is now open.

Yes. Hey, good morning, everyone. You talked about strong momentum in the business continuing. So maybe can you be a little bit more specific. I know we only 20 days into the quarter, but if you think across the business? You talked about sustainability being weak again in the 4Q. But where are you seeing strong momentum as it relates to maybe last year because the 4Q was the strongest sales quarter usually in the year. So just any more color around pipelines to give us some comfort for the momentum at the end, please? Thanks.

Sure. Hey, Alex. it is Andy. So as I mentioned in the prepared remarks, we see an attractive pipeline here. We have got tremendous momentum across the business. If you look at where that momentum is, we saw an acceleration in index, saw an acceleration in PCS, we saw a pickup in analytics, and we have seen it across non asset manager client base And so these are all things that are sustainable trends. And we see good momentum. Obviously, the third quarter was a very solid quarter. We continue to expand and do more for clients. And we are, as a result of that, we are having many large deals. These types of deals are reflective of repeatable types of strategic sales that I think we are going to see more and more across the business and are going to be a key component of growth into the future. There will be some inherent lumpiness related to the timing of these deals. And as we have alluded to, I would not overly focus on 1 quarter. But I would say the overall pipeline is quite robust. The momentum is there. Q4, as you said, is a very strong quarter for us for a number of reasons. Notably, there are things like concentration of contract renewals, client budgets, it is the year end for our sales organization. And so, yeah, we are looking at an important fourth quarter here we have got the opportunities and the momentum to deliver. And I think we are seeing good momentum not only into the fourth quarter but heading into next year across those key growth engines for the firm. Thank you.

Our next question in queue coming from the line of Manav Patnaik with Barclays. Your line is now open.

Thank you. I guess I just wanted to build on that in terms of the big-- you called out a bunch of large contracts this quarter. It sounded like, Andy, you just said you expect more of those to continue. So we should not treat these as timing perhaps. Just trying to get, you know, kind of a level check on the growth rate there. And then I just wanted to clarify your comments around how First Street is going to help the growth on the sustainable side, please?

So hi, Manav. So, look, I think, as we expand MSCI, into new use cases, new client segments, there is an incredible amount of innovation and new product launches, you know, at MSCI. And as we engage with clients, the number of large deals is going to increase. Now, is each quarter going to have a lot of large deals you know, and it will make it a great quarter like this 1? I mean, some, you know, some deals will slip to the next quarter. And it may appear that the quarter was not that great. It will be a mistake to interpret it that way. The best way to analyze our performance is on a multi quarter basis. Because these large deals are going to create differences quarter by quarter. And, and, therefore, you know, when we have a great everyone is going to get really excited. When the quarter is a little less it is a little softer because a few large deals slip to the next quarter, it is not going to look that exciting, and everyone is gonna start worrying. The trend here is very positive. The trend is that we are picking up growth, little bit in asset managers. You know, we are stable in asset managers. With slightly higher growth. But importantly, in the non-asset manager segment. Of course, as ABF is within index and ETF and all that, But in traders and in hedge funds, in JVs, you know, insurers, in asset owners as you saw in this quarter, et cetera. So I think that my best advice to all of you is to evaluate the. Not the financial metrics. The financial metrics get smoothed out by the accounting process. But the operating metrics in recurring new sales and rotations and cancels, you need to evaluate them on a multi-quarter basis. Otherwise, you are going to go crazy that, you know, you are gonna feel very good 1 quarter, and going to feel, you know, not as good the next Thank you.

Our next question in queue coming from the line of Alex Hess with JPMorgan. Your line is now open.

Yes. Hi, Henry. Hi, Andy. Hi, Alvise. Just wanted to see if we can get you both to elaborate on the qualitative and the quantitative coming in your prepared remarks and the press release. You noted robust demand for both traditional and newer solutions. Maybe we could have Andy start off with dimensioning how much are newer solutions contributing to the net new number. And then maybe from Alvise or Henry, how we should think about what is resonating in the market right now? And then also, if I-- If you do not mind me tacking on, any comments you can offer on the largest deal you closed and what was different about that specific, transaction?

So-- yep. Hey, Alex. So let me give some color on the quantitative side. And as you said, I will turn it over to Alvise to give some color on the types of products, where we are getting traction. And he can comment on that big win we had, which is very exciting for us. As you know, we have seen not just this quarter, but this year, we have seen a meaningful increase in the contribution from new products to sales. That is something that is a key driver of growth and we expect that to continue. In the third quarter here, that contribution to new sales from new products increased more than 50% compared to a year ago. And so, we have seen a significant step up in new products launched this year, but importantly, the monetization of those new products I would also highlight beyond just the monetization of the products themselves, that innovation, that development, the enhancements that we are making are also critical in driving improved retention. They also help to support price increases, and they are key enablers in broadening the relationship with many clients. So, this innovation is a key part of our growth algorithm on many fronts, not just the new sales contribution, but it is something that we think is really helping to fuel the company and opening up additional use cases and new client segments. New parts of the market, and new solutions for us. So, with that, why do not I turn it to Alvise to give some more color?

Thank you, Andy, and thank you, Alex, for the question. So we see a continued sustained demand for new solutions for portfolio compression. The demand from all angles of the market for more customized more bespoke portfolio solutions continues in that allows us to continue accelerating the success of our custom index franchise. You also helped us accelerate our model franchise. We launched the custom model service. We are also building new factor models at a pace. And we also accelerating the new specialized data sets we are making available to our clients in the market These are on a range of different aspects for fully construction. There are some very specific new type of signals that we are putting out through our signal library effort on crowding, on specifics of factor models. And there is also new solutions to help people build the opposite of the basket builders' booths. This is all driving this continued growth of the portfolio ecosystems and is offering us, frankly, very, very positive environment for the next several quarters to continue the expansion. The other area that I would highlight is portfolio solutions. So on the 1 hand, a significant appetite for new total portfolio solutions and we have very successfully gone to market in Q3 with a new total portfolio of management offering for asset owners and wealth managers and also a new offering specifically for wealth managers. These, again, are solutions which we see getting more traction in the quarters to come and will continue supporting our growth. And we also delivered a substantial innovation in the multi asset class risk space namely by enabling a substantially lower latency intraday capability that will transform our complex multi asset class investment organizations can bring risk to the front office to inform decision making. Finally, I wanna highlight what we are doing in the PCS space. The private market solutions where, as was alluded to in the introductory remarks, thanks to the Vantager acquisition, we brought to market a highly differentiated and valuable fund diligence document management solution that is getting a lot of traction. And we also see that continuing and is expanding its appeal to investors. Thank you.

Our next question in queue coming from the line of Scott Wurtzel with Wolfe Research. Your line is now open.

Hey. Good morning, guys. Thank you for taking my question. Similar question on the product side, maybe switching to more of a kind of AI focused topic. Wondering if, you know, in your conversation with customers or in, you know, the deals that you are seeing with customers who are adopting AI products, are you seeing any, you know, uplift in deal size, associated with that? Any color on that would be great. Thanks.

Yeah. So the solution I alluded to in my earlier answer, especially in the private market space, These are all natively agentic solutions. And, you know, it is not that people are buying them more because they are, you know, agentic. It is that they could not be delivered and built. Without the support of latest-gen LLM technology. Because. Simply because the amount of syntactic analysis that has to be done it is only possible thanks to the usage of latest gen LLM technology with the right training in the right context specifically for the analysis and understanding of private asset object. So additionally, in the portfolio construction space, all the newest datasets we are releasing again, are only buildable and can only be delivered at scale and with the right consistency because of a massive use of AgenT capabilities. And clients understand that. So they see that this is Intel. it is IP with a transformative value that we could not have created beforehand. Look. There is another step, which is that we are also identifying the way the clients can actually use some of these capabilities. So we delivered within our solution agents that are specialized in actually doing some of this portfolio construction capabilities for clients. We see this as being a game changer. The biggest limit, frankly, will be not our ability to build. But it will be the ability for the clients to accept this solution in their environment given that we are building the Thank you.

Our next question coming from the line of Faiza Alwy with Deutsche Bank. Your line is now open.

Yes. Hi. Thank you. Good morning. I actually wanted to ask about operating leverage and profitability going forward. I know you have historically talked about reallocation of expenses and, you know, maybe AI related efficiencies that are being reinvested in the business. I am curious if your thoughts have evolved around, you know, is there a time where we can start to see, you know, higher operating leverage, maybe more margin expansion? And, you know, potentially a decline in expenses?

The answer is no margin expansion. MSCI is a company with incredible opportunities. And in a in a new world, which is a world of large amounts of data huge number of models to help people understand portfolios-- either invest portfolios, loan portfolios, insurance risk portfolios, and, of course, you know, the use of technology to do all of that. So in the past, 1 of the biggest problems of MSCI is that we have had an enormous number of very attractive organic investments that we have not been able to fund because we did not want to-- you know, we did not want to touch the margin. So, so now with AI, which I call it a godsend, we have an incredibly positive algorithm. Which is we are applying AI to-- we have divided up MSCI into running the existing business and the enhancements and what we call growing the business. Yeah. A lot of the new innovations, the new products, And in the running of the existing business and the enhancements of the existing business, we are applying AI significantly to gradually lower the growth rate of EBITDA expenses, you know, from mid to high single digits to the low single digits and eventually to negative growth. And then we wanna put all that money into the growing of the business with all the opportunities that I mentioned earlier, in order to expand into new use cases new client segments, of course, new solutions, powered by more data, more models, and more technology. So we believe that we have. we are probably going to have a triple benefit of AI. The first benefit is the ability to free up capital to invest. The second benefit is that the products that we are creating, as Alvise just described, we could not do them without, you know, agentic processes. And therefore, we can now do that, and we can expand faster and the payoff is going to be larger per product. As the second benefit. And the third benefit is that we think that eventually, we will be able to disrupt the SaaS software industry by which our clients consume content from us content mean data and models and analytics, with the agentic processes. Rather than this incredible investment in SaaS software that needs to be made under-- like, if you allow me an analogy here. You know, I used to be a media investor. In my private equity firm, And in cable. I mean, in media, the transformations went from over the air transmission of media to cable transmission of media, to streaming transmission of media. So the SaaS industry is the equivalent of cable. It makes-- it is an incredible investment. To wire every house, every building, every dish with copper wire and fiber optic wires, et cetera. So there came a streaming technology that for anybody who has access to an Internet connection, you can have access to all the content in the planet. So we believe that the cable the cable TV type of industry is the equivalent of SaaS and this premium technology is the agentic technology that could bypass all of that and we could then get a big benefit as well and increase the number of users of our content all over the world. Instead of having 100. You know, we now have maybe tens of thousands of users in our client organization. We can have hundreds of thousands and eventually millions of users. Of our content and significantly expand our white space.

Our next question coming from the line of Kelsey Zhu with Autonomous Research. Your line is now open.

Hey. Good morning. Thanks for taking my question. Could you talk a little bit more about your investment into agentic-based AI solutions? And I know you just talked a little bit about that In the private market space earlier, but what new products and features are you seeing in the other segments? And how do you see that changing the competitive landscape for you?

A lot. Yeah. Thank you for the question. So as I alluded to, another area that is revolutionized by agentic capabilities is our model creation factory. So it used to take us several weeks to build and fully calibrate a new model. We can now do it in the space of a couple of hours. Yeah. At some point, we will be able to do it in the space of minutes. That transforms what these models can do. Because we will be literally capable of creating models on demand targeted exactly to the needs of a specific users in a way that it was never possible before. And this done with the same level of quality integrity, and dependability that the MSCI factor model have had for decades. Another area is the creation of new specialized datasets. So the ability to do fundamental analysis of not even companies, of assets, both assets pointing to public companies and private companies through the use of different artificial intelligence technology is you know, is completely transformational. And this allows us to create product offering that are completely different than what we used to do before. So for instance, our geospatial offering is an example of that. We have just launched a few specialized datasets to help understand, you know, the AI value chain. And all of this depend on the agentic ability to basically map company's characteristics company's revenues, company's assets, to very specific characteristics that, you know, it would be impossible to do just with humans. Thank you.

Our next question, the queue coming from the line of Owen Lau with Clear Street. Your line is now open.

Good morning, and thank you for taking my question. Have a question about your free cash flow guidance. It being maintained even though you beat the results by quite a bit. I saw the interest expense raised by $6 million and Andy also mentioned higher investments, and we had lots of conversation about this investment already. I am just wondering like, are these the main drivers of maintaining the free cash flow guidance or there are some conservatism baked into your guidance? And also, do you expect some kind of incremental revenue or maybe lower expense in 2027 or beyond because of this investment? Thank you.

Sure. Yes. So I would highlight a couple of things. So free cash flow as you know, can, be a little lumpy. Quarter to quarter. So what we saw in the third quarter was heavily driven by 1 factor in particular, which was interest payments. So, we had a significant increase, so 50 plus million dollars of additional interest, cash interest payments in the third quarter related to the financings that we did last year. There can also be lumpiness related to tax payments, even timing of collections, other payment items. And so I would not focus too much on any given quarter. The reason why we keep the full year guidance and we are confident about the outlook is the collections have been strong, so business growth. To put it front and center. So, as we continue to grow with the top line, as we continue to expand with clients, that translates through to cash collections, and that is what is powering the overall free cash flow for us, even though we do have, as you alluded to, higher expenses in areas. I would highlight 1 of those items that I called out that is leading to higher expenses this year, namely the performance stock options. And the additional accruals related to those as our financial performance improves. that is a non cash item. So, there are some non cash items in those expenses that are not gonna impact cash flows.The punchline is, as I said, there will be some lumpiness quarter to quarter The timing of some of those items can cause swings, but we continue to be confident about the momentum of the business and the top line growth and that will, over time translate through to better cash flows for the business. As you know, that is a key part of our financial algorithm. We are always focused on driving very compelling EPS growth and free cash flow growth and strictly free cash flow per share growth over time. Thank you.

Our next question coming from the line of George Tong with Goldman Sachs. Your line is now open.

Hi, thanks. Good morning. You mentioned double digit growth across your non asset manager segments. Can you put a finer point on where within the double digit range that growth is running and whether that year over year growth accelerated from the prior quarter?

Yes. So I do not want to get too specific because the amounts can move around a little bit. Quarter to quarter here, but if you look on an organic basis, across organization, we saw solid double digit growth with asset owners as we alluded to, so north of 12%. Hedge funds we continue to see as our highest growth client segment. So I think it was roughly 18% growth. With hedge funds. You will see roughly 10% growth in areas like broker dealers and banks. And, you know, elevated growth in other pockets as well. And so that collection of opportunities is being fueled by innovations that we have been making as we have alluded to before, we have continued to develop new products and solutions that are fit for purpose for many of these client segments. We are also enhancing our go to market efforts around many of these client segments. Those are translating through to elevated growth, and that is gonna be a key part of our financial algorithm driving that overall double top line growth is continuing to fuel the opportunities across these client segments. Thank you.

Our next question in queue coming from the line of Curtis Nagle with Bank of America. Your line is now open.

Great. Maybe a 2 parter. Just going back to think about sort of the expense structure. So appreciating you are not making any changes to the, I guess, the net savings, right, because you are going to be reinvesting at, it sounds like an accelerating rate. But in terms of the timeline, Henry, to your point, getting to a rate closer to low singles, right? And maybe even negative. On a gross basis. Is that something we should be contemplating for next year? You know? Or is that, you know, perhaps a longer time line? Just trying to think through it again how to think through the reinvestment cadence and when that starts to even accelerate further.

Yeah. Yeah, and just to be specific on Henry's comment, I think you got this, but to be totally clear, the low single digits and potentially negative in the future refer to our run-the-business expenses. So these are the areas in the business that are supporting the existing franchise and existing products as they are today, that is an area where AI is being transformative for us. So, in our production environments, within our data operations, our technology, organization, these are areas where AI is dramatically enhancing productivity and efficiency, and that is what is enabling us to take down the rate of growth on the run-the-business expenses. As Henry alluded to, we intend to reinvest those savings. So, those productivity enhancements are going into fueling these very attractive organic opportunities that we have in front of us, and so we do intend to reinvest And so, the overall expense trajectory and the financial algorithm is not changing per se. it is just AI is enabling us to invest more. And that is, if you will, I guess I could say, supercharging that algorithm. So, it allows us to invest more, which is gonna fuel more top line growth. As Henry said, with the same inherent operating leverage. Or inherent margin dynamics, and that is going to fuel over time higher profitability growth for us. And so, it is kind of supercharging what we have done in the past. As we head into next year, there are some items that are positioning us well. So things like the severance, which is running higher than we anticipated at the beginning of the year. A lot of the transformations that we have talked about are quickly and will continue to happen. Those are things that will help position our expense base for next year. There are also a number of broader initiatives that are positioning us well for next year. Now, we do intend to, as I said, reinvest a lot of those savings and productivity enhancements. But we have got the levers in our business to make sure in all environments all dynamics, we have got the ability to flex up and down and continue to continue to drive not only those investments, but also fuel very attractive profitability growth. Going into next year. And so, do not want to comment specifically on expenses, or any targets for next year other than to say we are very confident in our position and the momentum we have in the business. We think we are setting up nicely for next year.

Our next question in queue coming from the line of David Motemaden with Evercore ISI. Your line is now open.

Hey. Thanks. Good morning. I just had a question on the MSCI connectors and what you guys are seeing so far as clients are building agentic workflows with embedded MSCI data. I am just wondering if you have any insight into MSCI data consumption by agents and how that compares to human users? And then maybe how we should think about that playing out as AgenTic use cases continue to gain traction here?

Thank you for the question, David. Look, it is early stages. So we have built connectors for all the main LLM providers. And we have also identified the experience through our own applications. And for the time being, the evidence is the clients prefer to use our content through our own directly trained and curated capabilities. And look, there is 2 reasons for that. Reason number 1 is that the convergence rate is actually higher, massively higher, but it is a few points higher. And so you get the better experience going directly via the MSCI application. And the other 1 is that the client base only has by and large limited capabilities at this point. Look, most of our clients only have access to Microsoft Copilot. Right? And so this will naturally make for a relatively slow rate of adoption. Via, the mainstream connectors and a faster rate of adoption for the directly controlled connectors because you just connect into MSCI as you have always done historically. That said, that will change And so we will be doing 3 things. On the 1 hand, we are accelerating our connectivity to all the main platforms. Where there are large LLM companies or large cloud data provider company like Snowflakes and Databricks. We are also as I explained, continue to invest in our directly provided access capabilities And then we are also building our own agent capabilities to enable the content on the client side, as Henry alluded to, to transform the experience. But we do not know which 1 of these 3 will prevail. But we are preparing to support all 3 And then gradually, the market will show us what works best. As I said, it is very early stages. Right now for the reason I said, the MSCI conduits are the most prevalent. Thank you.

Our next question in queue coming from the line of Craig Huber with Huber Research Partners.

Great. Thank you. I wanna talk about index recurring subscription run rate growth. it is obviously accelerated here. In recent quarters, I guess, 10.7% in the first quarter this year, 11.5% in the second quarter now, 12% here in the third quarter. Obviously, up from the 8.5% to 9% of the prior 8 quarters. Can you talk about what is going on there in terms of how much AI is potentially helping those revenue growth numbers there. it is quite impressive acceleration there. Thank you.

Yeah. Yeah. Craig, so it has been encouraging. We have got good momentum there. As you said, we continue to see an acceleration I would say the themes at this point are consistent with what we have talked about recently. So, we have a huge focus on building the trading and liquidity ecosystem around our indexes. And correspondingly, we have very strong traction with hedge funds and traders within index we saw 32% growth with hedge funds. On the subscription run rate side, we saw 15% growth with banks and brokers. A lot of that success was on the heels of many of the new modules that we have released. And as Alvise indicated earlier, our ability to develop these modules, these content sets is enabled by AI. Our ability to get to market faster is enabled by AI. So AI is helping on the piece of innovation, the productivity front, and that is helping to enable the sales. I would say more generally across index, we are seeing good momentum, including areas like asset owners, and wealth managers where we are seeing 10%-plus growth. And so, we are seeing momentum across the board. Asset managers have been reasonably steady for us. But they are licensing more content from us. we are helping them by licensing solutions that help them in, you know, active ETFs. Help them move to be more systematic in their investment processes, And so, we have seen pretty steady momentum with asset managers. And a lot of that is fueled by innovation better services, access to more content that is fueled by underlying AI. I would say looking forward here, there are dynamics that can even enhance that further. So, I know we have talked about this a little in the past, but clients, many clients, are starting to want to have access to our content to be able to train models, to use more content involved in an agentic investment process. This is very early days, and so the impact has been small to us at this point, but those are things that can create additional demand. On top of all the great things we are doing today. The last thing I would highlight, and we have talked about this a lot in the past, custom indexes, which are a reflection of that move toward systematic investing, and we are best positioned to be able to help clients make that transition. We saw 26 plus percent growth in custom index run rate, subscription run rate, and so we continue to have very strong momentum on that front. Our capabilities there are enabled by AI, and we continue to broaden our ability to do more custom indexes with a faster turnaround, and that is something that is enhanced by AI. So listen, we are very encouraged overall by the momentum index subscriptions. It is fueled by the innovations we have been making. And AI is an accelerant on that. So all good things for us on that front.

Let me add 1 other comment. When we sort of sit back and look at the totality of our index subscription business, in addition to the significant, growth that we see and the focus on indices on the assets. A lot of our business on index has been focused on monetizing the amount of assets that are in the ecosystem of our indexes, $23 trillion of which $8 trillion is-- more than $8 trillion is passively managed. In addition to that, we have found huge white space in developing products on the trading of the assets. The trading of the assets, not just the assets, but the trading of them. So what data sets are gonna help traders market makers, broker dealers, exchanges, help facilitate the flow of trading of those assets And that is what you see you know, this significant growth in index in traders and hedge funds, for example. And we are not even yet penetrating the market makers. that is. You know, we are working on that, but that is not yet even on the numbers. So we believe that this white space is gonna create another layer of growth in our index subscriptions.

Our next question in queue coming from the line of Ashish Sabadra with RBC Capital Markets. Your line is now open.

Thanks for taking my question. I just wanted to circle back to an earlier question from Faiza on operating leverage. Henry, if I understood your comment that no margin expansion, did I hear that right? And is that just for I was just wondering if you could provide some time line around that no margin expansion Maybe just a follow-up there. Obviously, you have had a great track record of these investments. How should we think about the ROIC on these investments, but also how quickly do these investments translate into revenue growth? Thank you.

that is a great question, Ashish. Look, as 1 of the largest shareholders in the company, I would love to see high valuations today and the next you know, couple years. But I would rather see a company double or triple in size in 10 years compared to what it would otherwise be if we had let the margin rise. So we, for sure, have a huge inherent pressure, if you to call it, in the operating leverage increasing And it is not easy when you see that and having to mobilize to invest the additional sort of revenues. Additional cash flows coming from the operating leverage. When we sit down every year to analyze all the investments that we have we have to stop We have to grow the line on invest. On organic investments in places that have sometimes triple digit returns. High double digits, high double digits IRR, with relatively short payoff. Because we do not have the organic capital to do that. Meaning, we do have the capital, it is just that you gotta expense it first before you get generate the revenues, and we do not want to lower the market. that is for sure. But what we can do is not to let it increase. There will probably be a marginal increase in the margin because every time we budget something, we build a cushion, and it and the cushion typically you know, does not get it. Eaten. And therefore, there is, you know, 20, 30, 50 basis points of increases. But that is just because of the nature of our budgeting process and our conservatism. Not because we are targeting an increase in the margin. So the end result is our strategy is that we are going to like this company a lot better if it is 2, 3 times bigger than it would otherwise be if we had let the margin rise. Because of the opportunities we have. So that is that is the that is the process of doing all of this. Now as I mentioned to you, we have a huge installed base of customers. We are gradually moving into new customers and new client segments. Everything we have built is on top of an already existing infrastructure. So the larger the infrastructure, like an index, the higher the payoff. Relative to a lower infrastructure. So the profitability of these organic investments are huge. Because as the sunk cost of the infrastructure is built, the incremental money required or capital for a particular amount of payoff the incremental capital goes down for the same payoff. So it is going to increase the operating leverage even more than before. Thank you.

Our next question in queue coming from the line of Alex Kramm with UBS. Your line is now open.

Oh, hey again. Just a quick follow-up, from my part. On the asset manager customer base, first of all, Andy, I do not think you gave a specific number about the run rate growth. You usually do that. So it would be great to have that. But then more importantly, it sounds like a lot of the momentum and this is a good thing, is coming from some of the new products and the newer customer bases. I think in the past, you may have talked about you know, some of these newer products also applying to asset managers. So I am just wondering are sales cycles longer there? Are you still confident that some of these newer products can, at some point also click into gear? And then do you have to change anything to maybe do a better job on the sales front with that customer base? Thanks.

Sure. Sure. So, yeah, just for reference, Asset Manager organic run rate growth was around 6%. I mentioned within index, it was around 8%. As I alluded to, that is been reasonably steady for us. Retention is pretty steady as well. Maybe slightly up very slightly up from a year ago. Listen, there has been some benefit from several years of equity markets rising. We see reasonably healthy dynamics in many areas with asset managers and you can tell from the metrics and solid retention rate. There are still those secular pressures on asset managers, and those are likely to continue But as you alluded to, we are in a position to help them. And so, we are innovating. We are enhancing our servicing model. We are helping them transition to those areas where they see asset growth and see stability. And so, we are in a good position to help them overall. And so, we think asset managers are going to be an important part of our client base. They are an important part of the investment ecosystem. But they are gonna be more of a steady grower, and we are expecting outsized growth from other areas. And if you look at the environment and the backdrop for other client segments, we see it being pretty constructive in areas like hedge funds, banks, traders, asset owners, wealth managers. it is a pretty constructive backdrop with them and obviously index managers with new and exceptionally well, and we have been we have been doing well with them. So, overall, it is a pretty good environment. We have seen steady progress with asset managers. And we think we are in a good position to help them continue to evolve and adapt to changes in the investment process and the investment industry.

Our next question in queue coming from the line of Jason Haas with Wells Fargo. Your line is now open.

Hi. This is Keegan Nantista on for Jason. Thanks for taking my question. I am curious what you are seeing from your hedge fund end market and particularly quant funds that have been consuming more of your data and new product launches? You think that there is a potentially cyclical component to this and some of this growth could moderate in fiscal year 2027. Are you seeing these funds remain highly profitable with continued inflows that could potentially lead to more funds emerging that you can sell into? Thanks.

Thank you. Very important. We see this as being a structural trend in the market. Especially in the equity market, but we believe that the fixed income market at some point will also follow the same path. And the path is the following. The unit of conversation in the market has gone from being the single stock to being the portfolio. The portfolio in all possible ways possible logics, possible definitions. And this is something which intrinsically requires a high inability to market complex objects at scale, at speed, And this is why in the face of capital limitations from the traditional players, I. E, the broker dealers, and the massive, massive increase of the demand from this portfolio ecosystem is making, you know, 80 very big opportunity get even bigger for the most sophisticated market makers and the hedge funds that effectively play the role of market makers to create an investment function. Because this premise is, supported by very significant investment in the technology capabilities. And superior access to the market, you know, I think this is a trend that is here to stay. Now can there be short term reversal? Yeah. Of course, it can be, right? You know, market never goes in just 1 way all the time, but this is a structural transformation. And because let's say, the unit of conversation is the portfolio, and we are the portfolio guys. we are going to be a massive beneficiary of this continued trend. Thank you.

Our next question coming from the line of Alex Hess with JPMorgan. Your line is now open.

Hey, guys. Maybe just a quick follow-up on 2 initiatives that were pretty prominent for you in the story maybe a year ago. I would like to hear a bit more about, you know, the latest on active ETFs and then you know, has anything changed with respect to the Moody's private credit rating partnership? I know they had an announcement out there with a third firm. Would be interested to know the latest updates on both those fronts. Thank you.

Yes. So on the active ETF front, as Andy alluded to, we have seen significant growth because essentially, the vast majority of asset management firms or traditionally active asset management firms are converting many of the products at an accelerated pace into ETFs. The process of doing so entails a couple of ingredients. 1, most of the time, the conversion takes the products to be closer to being systematically built products. Which, of course, creates a lot of opportunities for our tools and capabilities to help the managers do the transition. So, you know, Alex, asked Andy earlier if some of the tools we built for the, you know, the broker dealer trading and hedge fund and market making communities at some point will be usable for asset managers. The answer is absolutely yes because the growth of this active ETF market will entail these objects being managed more systematically at greater scale with greater level of customization and the platforms we have built to help traders, hedge funds, broker dealers, market makers to do that. Will absolutely be fungible for asset managers. And so we see that, you know, continuing and being a trend which we also facilitate Same for a lot of capabilities we are building in, you know, portfolio creation, basket creation, and the specialized dataset that can be used to create specific flavors with these new active ETF objects. So as I said, I see the trend continuing, and I see the trend being very positive for us. Thank you.

And I am showing there are no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Henry A. Fernandez for any closing remarks.

Thank you, operator. Before we sign off, I would like to share that this is the final earnings call in which Jeremy H. Ulan will be serving as MSCI's head of investor relations. At the end of this month, Jeremy will move to a new and exciting role at MSCI as the lead finance director for client segment solutions. And as we expand into a variety of new client segments, we need better financial management for that and Jeremy will provide that leadership. In addition to his current role as treasurer of the firm. Craig Cutter, currently our head of corporate development, will take over as head of IR. I want to thank Jeremy for all his incredible contributions to the IR team and welcome Craig to his new position. Looking ahead, MSCI continues to expand our footprint with client segments. Traditional client segments and newer client segments. Across the investment ecosystem as we accelerate our product innovation using AI and other advanced modeling and technologies. We have a great franchise for the age of AI. AI is the most useful in places where you have a large amounts of data. Big number of modeling, and the use of a lot of technology, and that is what MSCI is. We remain intensely focused on delivering long term compound growth and long term value creation for our shareholders. Thank you for listening, and we will keep you posted throughout the quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. And you may now disconnect.