MSCI Inc (NYSE:MSCI). reported its fourth-quarter 2024 earnings, exceeding analyst expectations with an EPS of $4.18 compared to the forecasted $3.96. Despite this positive surprise, the company's stock fell by 5.45% in pre-market trading. The revenue came in slightly below forecasts, which, along with broader market dynamics, may have influenced investor sentiment.
Key Takeaways
- MSCI's EPS of $4.18 surpassed expectations by 5.56%.
- Revenue slightly missed forecasts at $743.51 million.
- Stock price dropped 5.45% post-earnings announcement.
- Continued strong growth in AI-driven initiatives and ESG products.
- High retention rate of 93% and robust asset-based fee growth.
Company Performance
MSCI demonstrated strong performance in Q4 2024, with organic revenue growth nearing 10% for the full year and adjusted EPS growth of 12.4%. The company also saw significant free cash flow growth and repurchased $810 million in shares, underscoring its commitment to shareholder value. Key growth areas included AI-driven efficiency improvements and strategic investments in private markets and analytics.
Financial Highlights
- Revenue: $743.51 million, slightly below the forecast of $746.56 million.
- Earnings per share: $4.18, beating the forecast of $3.96.
- Organic subscription run rate growth: 8%.
- Asset-based fee run rate growth: 15%.
- Retention rate: 93%.
Earnings vs. Forecast
MSCI's EPS of $4.18 exceeded the forecast by 5.56%, while revenue was marginally below expectations. This mixed result highlights the company's ability to manage costs and drive profitability despite revenue challenges.
Market Reaction
Despite the earnings beat, MSCI's stock declined by 5.45% to $594.09 in pre-market trading. This drop may reflect investor concerns about the slight revenue miss or broader market trends affecting the financial sector. The stock's movement is significant given its 52-week high of $642.45.
Outlook & Guidance
Looking forward, MSCI expects gradual market improvements in 2025, with continued investment in AI-driven innovation and key growth sectors. The company remains optimistic about enhanced client budgets and sales cycles, although it is reevaluating long-term targets for its ESG segment.
Executive Commentary
CEO Henry Fernandez emphasized MSCI's unwavering commitment to sustainability, particularly in Europe. CFO Andy Wishman noted that rising markets are beneficial for sales and retention, while President and COO Baer Pettit highlighted the importance of AI in 2025.
Q&A
Analysts questioned MSCI's ESG outlook, pricing strategies, and geographic performance variations. Executives reassured stakeholders of their commitment to value delivery and efficiency improvements, particularly through AI advancements.
Risks and Challenges
- Potential revenue pressure from macroeconomic factors.
- Market volatility impacting stock performance.
- Regulatory changes in key markets like Europe and Asia.
- Challenges in maintaining high growth rates in competitive segments.
- Dependence on continued innovation and technological advancements.
Full transcript - MSCI Inc (MSCI) Q4 2024:
Conference Operator: Good day, ladies and gentlemen, and welcome to the MSCI 4th Quarter 2020 4 Earnings Conference Call. As a reminder, this call is being recorded. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on.
I would now like to turn the call over to Jeremy Uland, Head of Investor Relations and Treasurer. You may begin.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI: Thank you. Good day and welcome to the MSCI 4th quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the Q4 2024. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward looking statements, which are governed by the language on the second slide of today's presentation.
You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward looking statements. For a discussion of additional risks and uncertainties, please see the Risk Factors and Forward Looking Statements disclaimer in our most recent Form 10 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'll find a reconciliation of our non GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, Eric Pettit, our President and COO and Andy Wishman, our Chief Financial Officer. Lastly, we wanted to remind our analysts to ask one question at a time during the Q and A portion of our call.
We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?
Henry Fernandez, Chairman and CEO, MSCI: Thank you, Jeremy. Good day, everyone, and thank you for joining us. In 2024, MSCI delivered a strong financial metrics that once again demonstrated our scale and leadership in servicing the global investment ecosystem. For the full year, we achieved organic revenue growth of almost 10%, adjusted earnings per share growth of 12.4% and free cash flow growth of 21%. We also repurchased $810,000,000 worth of MSCI shares for the full year.
During the Q4 and through yesterday, we repurchased over $425,000,000 worth of MSCI shares in alignment with our shareholder centric capital allocation policy. In the Q4, our operating metrics included organic subscription run rate growth of 8%, excluding FX headwinds and 7% on a reported basis. Asset based fee run rate growth of 15% and a retention rate of 93%. Our ABF run rate growth was driven by higher average AUM, aided by the highest quarterly cash inflows into equity ETFs linked to MSCI indices since the end of 2021 at more than US48 $1,000,000,000 Among client segments, we also had a strong quarter with hedge funds and wealth managers as we grew our firm wide subscription run rate growth by 15% and 12%, respectively, excluding FX. While active asset managers continue to face cyclical pressures, we posted 5% growth in subscription run rate, excluding FX and a 94% retention rate with this segment.
In my remarks today, I will focus on 3 areas in particular that demonstrate the success of our strategy: index, wealth and fixed income. In Index Products, the ecosystem linked to MSCI indices remains central to global investing. And in Q4, we saw a number of milestones. Last month, for example, one of our large asset manager clients launched a new ETF linked to an MSCI Climate Index with a record breaking ceded investment of $2,400,000,000 from 1 of our large pension fund clients. This highlights the prominence of our indices, the network effect among our clients and the continuing demand for climate related investment products.
Clients increasingly want specialized portfolio construction tools, while aligning with the frameworks, classification systems and rules based methodologies that MSCI has established as standards. This has fueled demand for MSCI's custom index capabilities, including the Foxbury F9 platform, which is now being fully integrated into our product suite. We also completed large index deals with 2 of the world's top investment banks, which Baer will discuss shortly. In the Wealth segment in Q4, we achieved 12% subscription run rate growth with Wealth Managers, excluding FX, with a total wealth subscription run rate of $116,000,000 We also saw direct indexing AUM based on MSCI indices increased by 31% to nearly $130,000,000,000 MSCI Wealth, a new MSCI brand is helping wealth managers attract AUM by enabling them to build a scalable, personalized and outcome oriented portfolios. Our client engagement levels with wealth managers are now higher than ever, as I have seen firsthand in meetings across Europe over the past month.
MSCI's progress in wealth also reflects the benefits of our long term investments, including in our data and technology and a laser focus on evolving client needs. In fixed income products, during the Q4, we drove fixed income run rate growth of 15% across all of our product lines, which is now $104,000,000 Most notably, we completed a large 7 figure fixed income portfolio management analytics deal with a U. S. Based asset manager displacing a major incumbent provider. We also secure a first of its kind federal government contract in which the client will use our agency mortgage backed security analytics to better understand the performance and risk of this huge market.
Both of these wins stem from the work we have done to enhance our fixed income capabilities, including investing in hard to model assets like securitized products and mortgage backed securities. Putting it all together, MSCI continues to benefit from the depth, diversification and resilience of our client, product and revenue base. To the extent market levels and fund inflows remain supportive, we believe this will support active asset manager client budgets this year. MSCI is increasingly well positioned to expand our footprint among established and newer client segments alike, thanks to our data, models and technology. We believe these advantages can help us drive compounding growth across the years and across market cycles.
And with that, let me turn the call over to Baer. Baer?
Baer Pettit, President and COO, MSCI: Thank you, Henry. Greetings, everyone. Given our focus on client segment growth, I'd like to use this opportunity to review our progress in the Q4, which highlighted the broad reach of our solutions and the underlying strength of our all weather franchise. I will start with wealth managers where MSCI's recent investments have helped us build significant momentum across product lines. In Q4, we achieved firm wide subscription run rate growth of 12% among wealth managers excluding FX, bringing our total subscription run rate with that segment to $116,000,000 We also delivered 14% subscription run rate growth among wealth managers and analytics excluding FX, which now totals over $25,000,000 In addition, we closed a large enterprise deal for the MSCI Wealth Manager platform formerly known as Fabric.
MSCI Wealth Manager has positioned us to support a wide range of use cases including proposal generation, model portfolio construction and home office account management and monitoring. These use cases extend to ESG and Climate. In Q4, we achieved 28% climate run rate growth among wealth managers, which totaled $7,000,000 We drove 67% ESG and climate recurring sales growth among that segment, which was $3,000,000 Turning to hedge funds, we achieved 15% subscription run rate growth excluding FX, including our best ever Q4 recurring sales, driven by 46% recurring sales growth among hedge funds in index. We completed large deals with several multi strategy hedge funds, including conversions of a one time float data sales into recurring subscription deals. These conversions showcase the value of our product as well as the growing liquidity of MSCI index linked products.
Moving on to banks and broker dealers, we delivered 7% subscription run rate growth excluding FX across product lines with particular strength from index where new recurring sales for the segment was over $7,000,000 in Q4 growing almost 39%. In 2 of our most notable index business wins, we expanded our relationships with a pair of large investment banks in the Americas. As part of these deals, the bank's trading desks will use MSCI index data to support their origination of OTC derivatives and structured products and for Delta 1 use cases. Such examples confirm that market participants are increasingly using our content to enhance their research, risk management and alpha generation strategies. If we look at asset owners, MSEI achieved 11% subscription run rate growth excluding FX, including almost 40% recurring sales growth in Q4 among asset owners in index.
Our position among asset owners has also been strengthened by the continued importance of climate along with our burgeoning capabilities in private assets. We recently won a large climate index mandate with the UK based asset owner, which is expected to result in $20,000,000,000 of AUM benchmark to an MSCI Climate Index. Meanwhile, our run rate among asset owners in Private Capital Solutions is now $78,000,000 after growing 15% in Q4. As asset owners increase their allocations to private assets, we recently launched a new data set to support their growing interest in private credit. Our new private credit data set provides terms and conditions, transparency on more than 2,800 private credit funds and more than 120,000 private credit holdings to support various due diligence and portfolio management needs.
Turning finally to asset managers, we grew our firm wide subscription run rate by 5% excluding FX headwinds, while achieving a retention rate of 94%. In analytics, we landed a large deal with an asset manager in the Americas for our fixed income portfolio attribution and fixed income factor risk tools. This deal was enabled by our new AI portfolio insight solution and it further endorses the multi year investments we have made in our fixed income franchise. Another key asset manager win came with a large existing client in Europe who expanded their use of MSCI's managed services, data management and enterprise risk and performance analytics. We also continue to support asset managers with tools for sustainability and the low carbon transition.
Globally, we delivered a retention rate of nearly 95% among asset manager clients for our ASG and climate product line. With asset managers in Europe, we landed numerous large ticket deals for our nature and biodiversity tools and for our climate scenario analysis and stress testing regulatory solutions. As you can see, our product data and technology investments are helping us expand our footprint with a range of clients across the capital markets ecosystem. All of this supports our ability to deliver attractive top line growth and profitability. And with that, let me turn the call over to Andy.
Andy?
Andy Wishman, Chief Financial Officer, MSCI: Thanks, Baer, and hi, everyone. I continue to be really encouraged by the resilience of our results and the momentum we're seeing across product areas. Index subscription run rate growth with asset managers and asset owners was almost 7% 12% respectively. These client segments comprised nearly 70% of our index subscription run rate. Among hedge funds and broker dealers, we drove 22% and 8% index subscription run rate growth respectively in the 4th quarter.
Custom indexes and special packages grew 8% versus last year. Within the category, our custom index subscription run rate growth was mid teens, while we had a lower contribution from special packages. And overall retention rate in index was 95% with a retention rate of almost 96% with asset managers. Within asset based fees, global cash inflows into equity ETFs linked to MSCI indexes was $48,000,000,000 in the quarter. With particular strength in ETFs linked to developed markets outside the U.
S, ESG and Climate and Factors. Q4 cash inflows into ETF products linked to MSCI ESG and Climate indexes reached nearly $12,000,000,000 our highest quarterly cash inflows since the Q1 of 2022. These inflows accounted for nearly 70% of global cash inflows into ESG and Climate Equity ETF products in the 4th quarter. AUM and ETF and non ETF products linked to MSCI Climate Equity Indexes grew by more than 50% from last year, driven by strong inflows into ETFs and a few key mandate wins from asset owners. Meanwhile, inflows into ETF products linked to MSCI factor indexes were almost $6,000,000,000 with solid inflows into quality, value growth and momentum factors.
These MSCI factor index linked ETF inflows were the highest quarterly flows since the Q2 of 2021. In Analytics, subscription run rate growth was 7% excluding the impact of foreign currency and was supported by the large wealth and fixed income mandates previously mentioned. Analytics organic revenue growth was approximately 5% in the quarter. As we previously indicated, the revenue growth was impacted by the timing of implementation related revenues compared to a year ago. The release of subscription revenues related to implementations can be lumpy and will fluctuate from period to period.
Near term, we continue to expect recurring revenue growth rates will be slightly below run rate growth as we compare to periods with higher concentrations of these revenues a year ago. In our ESG and Climate Reportable segment, subscription run rate growth was 10%, which excludes the impact of FX. Excluding FX headwinds, the subscription run rate growth for the segment was 14% in Europe, 11% in Asia and 4% in the Americas. Our retention rate for the segment was over 93% with most of the cancels reflecting client down sales and not outright terminations. The multi year investments we've made in data quality and new content and capabilities like biodiversity, nature, regulatory solutions and geospatial supported recent wins.
In general, across our ESG and Climate franchise, we are benefiting from the breadth of our offering, data quality, large and comprehensive securities coverage across asset classes and the interoperability across MSCI products and frameworks. In Private Capital Solutions, run rate growth was 15% over the same period last year and we had a retention rate of 92%. In Real Assets, new recurring subscription sales improved, although we had some large cancels related to client events and vendor consolidation, particularly among developers, brokers and agents. We had very strong free cash flow in 2024, up 21% with some improvement in collection cycles in Q4. Our capital position remains strong with gross leverage of 2.6 times 2024 EBITDA and we continue to be laser focused on continuing to create value through disciplined capital allocation.
Turning to our 2025 guidance, which we published earlier this morning, our expense outlook assumes gradually increasing market levels throughout the year and reflects the ongoing reinvestments we make back into our business to fuel future growth and efficiencies. As we've seen in previous years, we expect adjusted EBITDA expenses to be about $35,000,000 higher sequentially in Q1 2025 compared to Q4 of 2024 mostly driven by elevated compensation benefits related expenses. Our CapEx guidance reflects our investments in software development across most parts of the business. Free cash flow guidance reflects higher cash tax payments in Q1, some of which we deferred during 2024. As a reminder, our 2024 free cash flow reflected cash tax timing impacts of which about $30,000,000 is resulting in elevated payments in 2025.
Our interest expense guidance assumes our current debt levels and does not assume additional financings. We expect our Q1 effective tax rate to include a benefit from discrete items. Beyond Q1, we expect a quarterly operating effective tax rate of 19% to 21%. We're looking forward to an exciting year ahead. Our financial success and investments from 2024 provide a strong foundation for us to drive further growth in 2025.
We have numerous large opportunities that we are poised to capitalize on. And with that operator, please open the line for questions.
Baer Pettit, President and COO, MSCI: Thank
Conference Operator: you. Our first question comes from the line of Toni Kaplan with Morgan Stanley (NYSE:MS). Your line is open.
Toni Kaplan, Analyst, Morgan Stanley: Thanks so much. Henry, I wanted to ask a question about how you're thinking about ESG ex Climate more on the subscription side than on the ABS side. Just how are you thinking about the potential growth rate for the business long term? Are we in sort of a cyclical challenging period and it accelerates? Or is this sort of the new normal and what are the key factors that would dictate sort of what happens from here?
Henry Fernandez, Chairman and CEO, MSCI: Thank you, Tony. I've spent the last 4 weeks traveling through various cities in Europe. I visited over 50 clients in 4 weeks in 7 cities in some 5 countries or so. And so I've had a chance to discuss obviously this very critical topic for many of these clients, whether it's managers or wealth managers, banks, insurance companies and the like. And I have not seen any let up in the commitment of all these European Financial Institutions to sustainability.
Obviously, as I prepare to see each one of these clients, I read a lot of their material, the way they position, the way they look at their strategy, the way they describe themselves and without any almost any exception, they are positioning themselves to live in a sustainable world. So, with respect to Europe, the issue becomes that there is a new set of regulations that people have been adjusting to. They're rebranding their products, and therefore, there's been a little bit of a pause in launching a lot of new products. But it'd be very hard to believe that European investors, whether retail or institutional investors, will move away from their ingrained habits of investing according to sustainability principles. With respect to our product line, the product line needs to evolve from simply ratings and that report on ratings to the underlying data, the underlying information, the materiality of the signals that ESG presents for their investment process, etcetera.
So therefore, the demand is there. The obviously, the Hayeros and cyclical downturn is still here, but I don't see any but we also have to evolve and transform our product line to meet that demand. And part of that demand is compliance with the very heavy disclosures and regulatory requirements of European regulators of a lot of these financial institutions that they're not only European, but any other international global institution that operate in Europe. So, I'm pretty bullish on the opportunity there. We're beginning to see a lot of this early days, but we're beginning to see a lot of this in Asia Pacific with a lot of new regulations in Australia, in Japan, in Hong Kong, in Singapore, etcetera.
So that's important. In the U. S, I think that obviously, the new administration is not focused on sustainability, is not focused obviously on climate. And therefore, we have to see how that evolves. But importantly, a lot of our clients in the United States have come to the view that sustainability and climate impact in their portfolio is here to stay and it's a secular trend, whether person A is President of the United States or person B is President of the United States.
So I think that a lot of this will move in the United States from the governmental sector to the private sectors where it should belong to begin with in people looking at their portfolio and the materiality of these factors in their portfolio. So, I think it may take time, but it will come back and the demand will be there. Of course, as we have noted in our disclosures, we have been reevaluating our targets, our long term targets. And at some point, hopefully throughout at some point during the year, we will be putting that in the marketplace, but we don't know yet what those be, because obviously, this has been a little bit of a moving target.
Conference Operator: Thank you. Our next question comes from Manav Patnaik with Barclays (LON:BARC). Your line is open.
Manav Patnaik, Analyst, Barclays: Thank you. Andy, I just wanted to follow-up on your comment on the exciting year ahead and I was hoping you could just contextualize that a bit with the environment. So this time last year you talked about elevated cancels and then lower budgets following kind of a weak market period for your large clients. So from where you stand today, like how do you look at the cancels and what are you hearing on the new budget environment, please?
Andy Wishman, Chief Financial Officer, MSCI: Sure. Yes. So in general, as we've talked about, rising markets are supportive for clients both on the sales and cancels front. The momentum we've seen in equity markets and overall confidence in the sustainability of market levels is constructive to buying behaviors in certain areas, notably in the U. S.
And so we have seen some encouraging signs. On top of that, my excitement is coming from all the innovations we continue to make. And so we are getting traction in key areas across custom indexes, solutions in front office analytics, analytics insights, many of our private asset solutions and areas in climate. And so we continue to be very excited about the outlook there. Generally speaking, the environment is somewhat more constructive and we are seeing a pickup in the pipeline in spots.
There are some spots where we still see pressure and it will take some time to fully rebound. We do see some lingering pressures on active managers, particularly in Europe. But overall, we're seeing a shift in the dynamic. On the point of cancels, as you know from last year, we did have a concentration of cancels related to some big client events. We don't expect the same level of cancels in the Q1 here as a year ago.
As I mentioned, rising market should be somewhat supportive for clients and we will still see some lumpiness and lingering noise. But overall, we're seeing encouraging signs in areas and the market environment is constructive across many areas. And as you know and as I've mentioned before, you shouldn't focus too much on any 1 quarter.
Conference Operator: Thank you. Our next question comes from Alex Kramm with UBS. Your line is open.
Alex Kramm, Analyst, UBS: Yes. Hey, good morning, everyone. Just maybe to stay on that same topic, can you maybe talk about how pricing conversations and impact should be this year? Obviously, in the last couple of years, you've been a little bit softer there, but your competitors continue to be pretty aggressive. And as you said, the environment should be better.
So maybe you can talk about pricing a little bit more and also maybe on a segment basis, because it does seem like in ESG you have some more opportunities to us as market has matured completely? Thanks.
Andy Wishman, Chief Financial Officer, MSCI: Sure. Sure. So Alex, as you alluded to across the company in 2024, the contribution from price increases to sales was slightly less than the contribution in 2023. As you alluded to, we did moderate price increases in certain spots. It is important to keep in mind that price increases are not just like for like.
We are oftentimes providing clients with broader access, broader usage in addition to continually enhancing our products, which we capture through price increase. And so we are, as you know, very focused on capturing value and linking our price increases to the value that we're generating to clients. We do look at the overall pricing environment and client health as well as an input here. But the environment, client health, the value we continue to add are important drivers to enable us to capture value from our clients. It's something that we will continue to monitor closely and calibrate based on the dynamics we're seeing.
But relative to competitors, we think we're very well positioned from an offering standpoint. And as you know, we are continually trying to take a long term approach to pricing with our clients to be strong partners to them over time. From a segment dimension, I don't want to get into too much color on pricing dynamics specifically. But as you alluded to and as I mentioned, we think in many areas we have a very strong value proposition based on the quality of our offering, which is best in class based on the breadth of coverage and depth of coverage that we have the interoperability of our tools and the value of the ecosystem to our clients and our ability to help them raise money, drive growth using our tools are all things that position us well to face off against competitors. As you alluded to in places like ESG, we have seen some competitive wins and we think we are well positioned there.
But across the organization, we think we are well positioned relative to competitors as well.
Conference Operator: Thank you. Our next question comes from Ashish Sabadra with RBC. Your line is open.
Ashish Sabadra, Analyst, RBC: Thanks for taking my question. Wanted to drill down further on, Andy, your comment on improving pipeline and a constructive environment. I was just wondering if you could also comment on how the sales cycles are trending, if you've seen any shortening there. Those obviously were elongated last year. And on the innovation front, you talked about custom indices, but if you could just drill down further on the trends that you're seeing on the index front?
Thanks.
Andy Wishman, Chief Financial Officer, MSCI: Sure. So, as I alluded to, elevated markets in AUM levels are constructive to get confidence. They're translating through to in many places higher revenue for asset managers and that's constructive to budgets and buying behavior. I'd say the dynamics are very nuanced by geography, by clients, by segment, although those things do work through to sales ultimately. And in terms of the sales cycles, We see some improvement there, but in many areas it continues to be long.
As I alluded to earlier, the dynamics are slightly different between the U. S. And Europe. But overall, we are seeing constructive trends in general and in the U. S.
In particular. We are seeing, as you alluded to, momentum across other client segments as well. And so areas like hedge funds, areas like wealth managers, asset owners, these are all areas where we've grown at solid growth rates and delivered solid growth rates in the current quarter. And so the dynamics can be slightly different in those areas. I'd say it's something that continues to evolve and I think we are capitalizing on many of the innovations that we are generating.
As I alluded to when you asked about on the custom index side, within that custom index subscription line, the growth in custom indexes was mid teens. We continue to see very strong progress on the custom index front on the ABF side as well. Obviously, you can see your visibility into what's going on in ETF flows, which were quite strong in the quarter. But if you even look beyond ETF flows into non ETF passive, we've seen very strong traction in non market cap weighted products. So these are rough figures, but in non ETF AUM, we saw close to 35% growth in AUM linked to our non market cap indexes, including ESG and climate and factor indexes that compares to 20% in the non ETF category overall and 50% roughly within custom indexes.
And so it's an important trend for us in institutional passive, obviously something that's helpful in direct indexing. We also see it on the structured products front with banks and within over the counter derivatives. And so this is an area where harnessing our position with clients, the standards that we have out there together with our capabilities on the index side and across the organization, we are uniquely positioned to be a leader on the custom index front and we're excited for it.
Conference Operator: Thank you. Our next question comes from Alexander Hess (NYSE:HES) with JPMorgan. Your line is open.
Alexander Hess, Analyst, JPMorgan: Yes. Hi, everybody. Just to go back to the sort of the overall discussion of the trends in the subscription business. As it stands, organic subscription run rate growth of 8% in quarter, couple of quarters of growth of about that level. Obviously, MSCI hasn't been an 8% grower in its history.
How do we get that cycle to turn? When would that how are you thinking about when that inflection might occur? Can you help us just dimension how close we are to potential reinflation, reacceleration?
Andy Wishman, Chief Financial Officer, MSCI: Sure, Alex. As you know, we've gone through a dynamic environment over the last couple of years. And so there have been a wide range of competing dynamics across client segments, across product areas for us that have all fed into that overall subscription run rate growth. Sitting here looking forward, we continue to be, as I mentioned, excited about the opportunities in front of us. In the short term here, there's going to continue to be some noise as I alluded to as we see pressures working through the system.
We see some of the lingering impacts of the outflows and asset management over the last couple of years. We see lingering impacts from some elevated client events that have worked through the system. But you can see in areas like index, we've seen a bit of momentum, obviously a strong quarter from recurring sales and recurring net news standpoint. And as I alluded to, we are seeing traction in some of those key growth areas, both from a client segment standpoint as well as from a content area standpoint. And so that combined with some of the big secular opportunities which we think we're well positioned to capitalize on in areas like wealth management, We're relatively small today, but growing at a healthy growth rate and have a differentiated value proposition there as well as in areas like PCS and the private asset space general and then areas like fixed income and on the analytics side, we think we've got attractive opportunities in front of us that will help us fuel higher growth in the future.
Conference Operator: Thank you. Our next question comes from Lohan Lau with Oppenheimer. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI0: Good morning and thank you for taking my question. Could you please talk a little bit more about your Analytics segment? It looks like the runway came down a little bit from last quarter. And I think you talked a little bit about the timing of subscription revenue in your prepared remarks. But could you please expand a little bit more on the driver of that?
And how do you see the outlook going forward? Thanks.
Andy Wishman, Chief Financial Officer, MSCI: Sure. Yes. Owen, it's a good question. So let me actually take it in 2 parts. 1, I'll focus on the subscription run rate growth, which if you exclude FX was relatively consistent from the prior quarter.
So I think it was around 7.1 percent organic subscription run rate growth in the 3rd quarter, 6.7% in the 4th quarter, so both around 7%. The stated number was lower, so it did look like it dropped, but that was driven by a meaningful FX impact on the run rate, which, as you know, FX impacts adjust the run rate immediately. So the appreciation in the U. S. Dollar relative to areas like the euro and the pound translate through to a drop in the stated run rate.
But as we alluded to, the organic run rate has been relatively steady. And we continue to see good momentum in areas like as we call it fixed income wealth. Our insights offering continues to open new doors for us and create upsell opportunities. It's helping to improve the customer experience, bring scale to our clients and help them be more efficient within their large and complex workflows and adding additional value. So we continue to be excited about the momentum we're seeing in these key growth areas in analytics.
As always, there can be some lumpiness quarter to quarter. And so you saw we did see a bit of a pickup in cancels. That's to be expected as some of the noise that we've seen across the company and other segments is hitting analytics. But overall, we continue to be encouraged by the momentum we've seen in analytics. On the revenue front, as you alluded to, the revenue as we mentioned in prior quarters was impacted by the timing of implementation related revenues.
So the revenue was slightly below run rate growth. The revenue growth was slightly below run rate growth in the quarter. And this was as a result of lower contribution from implementation related revenue releases, which is in line with what we expected in the comparable periods a year ago. We did have a large amount of implementation related revenue. So when we compare to those periods, the growth rate looks a bit lower.
We do expect in the very short term here that this will continue. So we expect the revenue growth to be slightly below the run rate growth in the next quarter. But I would focus on the run rate growth more generally as a sense as to the direction and trajectory of the segment. And as I mentioned, we continue to be excited there.
Conference Operator: Thank you. Our next question comes from Kelsey Hsu with Autonomous. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI1: Hi, good morning. Thanks for taking my question. So in private assets this quarter, I think we've seen declines in both retention rates and net new sales. I was wondering if you can provide a bit more colors on that. I know you touched on that in the prepared remarks.
And for Private Capital Solutions, I think at the time of the acquisition, you talked about accelerating revenue growth from mid to high teens to 20%. So I was just wondering what's the timeline to achieve that target? Thanks.
Andy Wishman, Chief Financial Officer, MSCI: Sure, sure. Hi, Kelsey. So, yes, on the and maybe I'll look at PCF separately from real assets because the dynamics are different as you know. And this is the Q1 when we are reporting the 2 together here. And so it's worth dissecting them individually.
On PCS, as you alluded to, we did see a slight slowdown in subscription run rate, but pretty steady growth at 15%. The sales and cancels can be a bit volatile and we did see a bit of softness in the recurring net new in the quarter. Although we are having good traction in landing new logos to the segment, We're seeing good traction with both asset owners and managers and asset owners where MSCI is I think bringing some opportunities with large organizations that are MSCI clients and not fully leveraging the Burgess offering or the PCS offering. And we've continued to see good momentum in EMEA and APAC. And so overall, we are still encouraged about the opportunity in PCS and we see real opportunities there.
Things like the index side, as you know, we released in the middle of last year a wide range of benchmarks and indexes for the private asset space. We have been aggressively driving awareness around and adoption of those indexes. And those are things that over time will also lead into additional sales of not only our indexes, but our content more broadly. And there's a whole host of new innovations and content sets that we're releasing around private credit, around additional data insights, both of which we're leveraging AI to unlock, that are creating robust opportunities for us. But as I said, it will be sales and cancels can be a little bit volatile quarter to quarter.
But overall, we continue to be encouraged about the opportunity within PCS. In real assets, we did see the same overall dynamics that we've been seeing for the last several quarters. So we were impacted by one large down sale with a client that has been feeling real pressure. We also felt some pressure as I alluded to in the prepared remarks with brokers and agents. That's translating through to softness in our data and property Intel (NASDAQ:INTC) products.
We are still seeing decent momentum in areas like our index Intel, which gives market insights. And we have started to see some very early signs of improved traction in capital coming back into the space or seeing institutional money start to come back in the Americas and Europe. And we hope that that is an early sign of transaction activity coming through at some point in the future and a pickup in activity. But in the Q4, we really saw just a continuation of the trends that we've seen with probably an outsized contribution of cancels and what we would expect to see just from a couple of big items.
Conference Operator: Thank you. Our next question comes from Scott Wortzel with Wolfe Research. Your line is open.
Andy Wishman, Chief Financial Officer, MSCI: Hey, good morning guys. Thank you for taking my question. I Wanted to ask on the Wealth segment. The growth has been pretty strong there and just wanted to see if you can kind of share what sort of your strategic roadmap and priorities are for that opportunity as we move throughout 2025 to potentially try to maintain that elevated run rate growth? Thanks.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI2: Sure. So I think there's clearly an opportunity across all of our product lines. And some of those are in existing use cases across indexes and benchmarking and in other of our standard data used in the investment process. But we think we have much more significant opportunities to help with the scaling of wealth portfolios and the balancing act of central control of risk of portfolio construction with giving advisors insight and actionable tools. And we think there's an enormous opportunity there.
And in fact, even just as Henry and I crossed the Atlantic in opposite directions. So I spent the last few weeks in New York, and a lot of my meetings were with large wealth players. And there is a significant need for improvement in, I would say, both the analytical environment for the CIO office or the product control groups at the center and for better tools for advisors. And there's a lot of legacy systems that stand in the place of that. So I think we have a generalized opportunity across all of our content, including there's enormous amounts of discussion and now action of moving more private asset products into the Wealth segment.
And there's daily news about that that we all read. And we think we have an enormous opportunity there also to incorporate all of the private asset analytics that we have into the wealth segment where often the some of the largest wealth managers are also clearly significant LPs on behalf of their clients as well as some of them even originating and acting as GPs in private markets. So both of those create opportunities for us. So I think the key point that I would say is we've got very high levels of engagement. I've been in some of those meetings ourselves, myself.
And I think what we'll continue to see, we have attractive growth rates. But I think as we as some of our solutions start to get traction, I hope and believe, and this is our plan, that we get a virtuous circle where our credibility becomes earned as a serious player in the wealth segment, which I think we have all the capabilities to deliver. And I'm quite confident that as we look forward into 2025 that this will be a really, really important year for us in wealth and we will see both more significant deals with larger players and we will establish ourselves with a great deal more credibility as a provider of solutions data and content to wealth managers.
Conference Operator: Thank you. Our next question comes from Craig Huber with Huber Research Partners. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI3: Great. Thank you. Can you guys focus on AI here for a few minutes? I'd be curious if you can give us some concrete examples about where you're particularly excited where AI can help you on the cost efficiency side? Maybe also give us some examples of major beneficiaries on the revenue side with enhanced products and long term do you think that will help you on the pricing side?
I think you will charge more for AI enhanced products. Thank you.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI2: Sure. So let me take those in order. So I would say that from the efficiency point of view, very much leading the charge is in our data operations area where we are able to we've already seen the ability to significantly reduce the cost of data acquisition. But I think also importantly, because we still are growing business with a lot of demand to scale up our ability to get new categories of data with significantly less cost than we would have had in the past. So if you look at certain areas that is also then tied in, so the product transformation and the efficiency story kind of go hand in hand.
So at present, for example, we've embarked on a scalable sort of mapping of private credit data using AI, which would simply have taken us, 1st of all, a lot more time. We would have hired had to hire a lot more humans. So it's both a speed to market. We're measurably lowering the cost of data acquisition. And extremely importantly, we're going to be able to build more attractive products and analytics on the back of that much more quickly.
Clearly, generally in software engineering, there are efficiencies to be had with AI and we've built quite a number of those also into our 2025
Baer Pettit, President and COO, MSCI: budgets. So from
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI2: a product point of view, I think that we've got some very interesting green shoots and that 2025 will be an important transformative year on the product side. So we've mentioned the AI analytics insights, which we will continue to deepen and
Baer Pettit, President and COO, MSCI: is an important area for us.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI2: We will we've currently brought to market for index some thematic driver discovery using AI, which we've had which is currently in beta. We've had some very positive feedback from some very major clients and we'll be rolling that out shortly. And addition versions of index insights, will be coming out later in the year. Again, that's a confluence of data acquisition and scale and product innovation, notably in the climate area, both in ESG in terms of the scaling of data gathering and the quality control in areas like controversies, etcetera. But one example would be our geospatial data asset intelligence on which we work with Google (NASDAQ:GOOGL) and which has a significant AI component.
So I think that both in terms of our efficiencies and in terms of new product development, 2025 will be an extremely important year for AI delivery. I think the jury is then still out whether it creates kind of a raw pricing power. I don't think it has that it's inherently a pricing power topic. I think it's more an efficiency topic and it's a creation of exciting and interesting new products. But I think it's not entirely clear if it's in a strict sense of pricing power thing, but I think it will be a massive innovation engine and that should help us drive sales and growth.
Conference Operator: Thank you. Our next question comes from Faiza Alwy with Deutsche Bank (ETR:DBKGn). Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI4: Yes. Hi. Thank you. So you've alluded to some bifurcation in terms of geography around what you're seeing from your clients in the U. S.
Versus outside the U. S. So I'm wondering if you can put a finer point on that, share some color on where you think things might go from here internationally versus U. S? And then separately, if I can just sneak in a housekeeping question.
You talked about some conversions of one time data into subscription. So curious if that I know that's normal course of business, but curious if that was at an outside level? Thank you.
Andy Wishman, Chief Financial Officer, MSCI: Sure, sure, Faiza. So, on the geographic differences here, as I alluded to earlier, it's very nuanced and dynamic picture. So it does vary client segment to client segment, even firm to firm here. But we have seen the pressure on asset managers linger a bit more in Europe. And that is something that, I think is we're seeing both on the sales and cancel side.
I think in general, they follow the same trends that the overall asset managers do. There can just be lags there. And so in the Americas, as you know, we were coming out of a period where we saw significant outflows for several years from many asset managers. I think with the market levels up, sustained momentum, a bit of confidence, we are starting to see that change. And hopefully, we start to see the same thing over time in EMEA, although we expect to see some lingering impacts continuing at least in the near term.
And as you know, there are some large mergers potential mergers out there that could happen as well, which we are keeping our eyes on. But overall, we do think the environment is encouraging. I think it's just going to impact different segments in different regions at different paces here. Sorry Faiza, the second question you had the clarification was on what topic? I think we lost her.
I'll follow-up with you Faiza on the housekeeping item. The free flow data sales. Yeah, apologies for that. So, yeah, we do have from time to time, it's part of our business. Oftentimes, we will sell our free float data package on a one time basis.
And clients when they get a handle on it and how to use it and the value they can derive from it will convert to an ongoing subscription. And so that is something that we saw in the quarter. I wouldn't call it out as a significant item in the quarter. It's something we have seen in prior quarters as well. And it's part of our business model and part of our trend here.
And I think there are a number of data offerings that we have where we can get in the door with clients sampling the data and then turn it into an ongoing relationship. So I wouldn't call out any outsized impact in the quarter from that.
Conference Operator: Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI: Hi, thanks. Good morning. I wanted to go back to new subscription sales and cancellation trends. You had expected cancellation trends to normalize and improve in the Q4 on a year over year basis. Can you elaborate on areas that may have surprised the upside or downside in the quarter with respect to cancels and also new sales?
And when you expect net new recurring subscription sales to inflect the positive growth?
Andy Wishman, Chief Financial Officer, MSCI: Yes, sure. I mean, I touched on a lot of this earlier and don't want to be too specific about trajectories or inflection points other than just to highlight that we are seeing encouraging signs and you do see as I alluded to earlier, pretty strong quarter on the index subscription front both on the sales and cancel side. Listen, I wouldn't say there are any dramatic surprises. I think cancels in Q4 came in generally in line with what we had mentioned and what we were expecting. We do see lingering impacts, elevated level of client events and budget constraints.
You can see there were elevated cancels in areas like real assets, which we've been seeing and expected. You saw retention rate was pretty solid in ESG or pretty consistent in ESG and Climate to just above 93%. That stabilized over the prior quarter, but there are certain areas in ESG and Climate where we have seen, some elevated cancels like with corporates and corporate advisors. And analytics just by its nature tends to be lumpy and we oftentimes do have elevated cancels in the Q4, just given client renewals. And so I'd say the dynamics we saw were pretty much in line with what we expected.
And we continue to be encouraged by the outlook, but expect some lingering noise and impacts and probably some elevated degree of cancels from the factors that we've seen.
Conference Operator: Thank you. Our next question comes from Russell Quilt with Redburn Atlantic. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI5: Yes. Hi, good morning. Just wanted to ask a question on the partnership with Moody's (NYSE:MCO) in the ESG segment. Wonder what you're doing with the new data capabilities you talked about on the private side given you now have access to their Orbis database. Is this already something where you're seeing an impact on sales growth and product opportunities?
I also wondered, is there an opportunity to increase the scope of this partnership?
Henry Fernandez, Chairman and CEO, MSCI: Yes. So the announcement that we made, I think, last summer had 3 components to it. The first component was that Moody's Analytics, not the Moody's Investor Services, the rating agencies, but Moody's Analytics will be subscribing to a lot of our ESG data to be able to package it with their products and sell it to their clients, which are a lot of them are banks and insurance companies. So that was one part of the announcement and we are we have already started doing a lot of that. The second part of the announcement was that we had entered into a contract with Moody's that we will use their Bureau Bandai data, the former Bureau Van Dijk database to create ESG scores on a large number of entities that are sitting in that database.
I think it's probably going to be over 100,000,000 entities with ESG scores that can be again combined with their products and our products. The third part of the announcement was an intention. The first two were actual the actual deeds, right. The 3rd part of the announcement was an intention to work together on private credit. And of course, as you know, Mauriz is very strong credit analysis, in probabilities of default and the like.
And we're very strong, obviously, in a lot of databases and a lot of risk analysis and performance analysis of individual instruments in private credit and in funds. So, the idea here is to explore the possibility of joining forces with those 2 complementary capabilities. Obviously, we're still talking, we're still working through things and if there is some kind of agreement of that, it will be in due course. So, those so I think that it's early days with respect to the synergistic revenues associated with this, both from their side and our side. And obviously, we'll report more as we see an upswing in a lot of this.
Conference Operator: Thank you. Our next question comes from Jason Haas with Wells Fargo (NYSE:WFC). Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI6: Hey, this is Aude on for Jason Haas. Thanks for squeezing this in here. I just wanted to ask on the expense guidance. For 2024, we saw expenses come in towards the low end of the range despite the run-in AUM. I think last call you guys might have signaled that we would be gravitating towards the high end of the range versus where we ended up coming in.
And so I'm just curious as to why that was the case this year. Is there maybe some offsetting savings or something to do with what you're seeing in the environment that's keeping you from pressing on the gas a little bit more. And then just wondering if you could talk to us about the puts and takes of the expense guidance range for 2025, understand the assumption on AUM levels gradually increasing throughout the year, which is anything outside of AUM that can take you guys either to the high end or low end of the guidance range in 2025? Thanks.
Andy Wishman, Chief Financial Officer, MSCI: Sure, sure, sure. So, yes, just on Q4, there can be a number of items that can swing the ultimate expenses up or down, things like the ultimate bonus accrual can cause expenses to fluctuate a bit, things like severance levels and other non comp expenses can cause things to swing a bit. You did pick up on in our messages earlier that we are expecting a jump in expenses in the Q1. And so there can be some timing related items. And then, as I alluded to, the main drivers compensation and benefits related expenses that is causing the sequential expenses to pick up from Q4 to Q1 here.
In terms of the overall guidance for the year, as you heard our guidance is based on the assumption that markets gradually increase throughout the year. The overall approach has not changed where we are really continually trying to maximize the level of investment to drive top line growth while also driving attractive profitability and cash flow growth on a consistent basis. I'd say embedded in the expense guidance is our plan to continue to invest in those key secular growth areas like rules based investing, private markets, front office analytics, our modern architecture, AI driven enhancements to our infrastructure, but also our solutions. And so we are we do have an ambitious agenda to continue invest based on included in that expense guidance. But we are also continually focused on driving efficiencies.
And importantly, we will continually calibrate the pace of spend through the year based on a whole host of factors as we always do looking at not only market levels, but business performance opportunities that we see out there and other factors. So we will keep you posted, but no change in our general approach to expenses.
Conference Operator: Thank you. Our next question comes from David Motemaden with Evercore ISI. Your line is open.
Jeremy Uland, Head of Investor Relations and Treasurer, MSCI7: Hey, thanks for squeezing me in. I had a question, follow-up on pricing. So you guys mentioned that pricing was lower in
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