MSCI Inc. (MSCI) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary reflects strong financial performance, with record high recurring sales and significant growth in various segments, especially in sustainability and climate solutions. The partnership with Moody's and focus on custom indices and active ETFs are positive catalysts. Although there are some concerns about lower retention rates and a lack of clear guidance on subscription growth acceleration, the overall sentiment is positive, supported by robust asset-based fee revenue growth and a strategic shareholder return plan. The market is likely to react positively, with an expected price increase of 2% to 8%.

Key Financial Performance

Revenue growth Over 9%, driven by strong performance in index and asset-based fee franchise.

Adjusted EBITDA growth Over 10%, reflecting operational efficiency and revenue growth.

Adjusted earnings per share growth Almost 15%, attributed to revenue growth and operational leverage.

Free cash flow Over $300 million, supported by strong operational performance.

Share repurchase $286 million worth of MSCI shares repurchased year-to-date at an average price of $557 per share, demonstrating long-term confidence in the franchise.

Total run rate growth 11%, fueled by record AUM levels in ETF products linked to MSCI indices.

Asset-based fee run rate growth 17%, driven by record AUM levels and strong investor interest in MSCI indices.

Equity index ETF AUM linked to MSCI Indices Surpassed $2 trillion for the first time, contributing to total Index ETF and non-ETF AUM balances tracking MSCI Indices reaching $6 trillion.

Fixed income index ETF AUM Reached $84 billion, linked to indices created by MSCI or in partnership with others.

Private assets run rate growth Nearly 13%, driven by new product launches and enhancements.

Recurring sales in analytics Highest ever Q2 recurring sales, driven mainly by equity risk models.

Subscription run rate growth with banks and broker-dealers 10%, supported by traction in index and analytics.

Subscription run rate growth with hedge funds 12%, driven by analytics and demand for equity models and risk insights.

Subscription run rate growth with asset owners 12%, driven by analytics and private capital solutions.

Subscription run rate growth with wealth managers 17%, driven by index and analytics.

Subscription run rate growth with asset managers 6%, supported by steady performance in core index modules.

Subscription run rate growth with insurance companies 12%, driven by index and climate solutions.

Sustainability and climate subscription run rate growth 11%, with 9% growth from sustainability solutions and almost 20% growth from climate solutions.

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Operating Highlights

Index and asset-based fee franchise: Achieved record AUM levels in ETF products linked to MSCI indices, surpassing $2 trillion in equity index ETF AUM and $6 trillion in total AUM tracking MSCI indices. Fixed income index ETF AUM reached $84 billion. Launched new data solutions for index insights.

Private capital solutions: Introduced MSCI Asset and Deal Metrics covering $2 trillion in net asset value and launched MSCI World Private Equity Return Tracker Index. Partnered with Moody's for private credit risk assessments.

Real assets: Introduced new products like data center's product and RCA funds intelligence covering over 8,000 real estate funds.

Sustainability and climate tools: Won climate mandates and expanded tools for insurance companies. Launched new climate physical risk and reporting solutions.

ETF market: Captured more indexed equity ETF cash flows than any other index provider during the quarter. Equity ETFs linked to MSCI indexes saw $49 billion of inflows, representing 29% of all indexed equity ETF inflows.

Wealth management: Completed largest MSCI wealth deal ever with a U.S. regional bank, driving subscription run rate growth of 17%.

Hedge funds: Achieved 12% subscription run rate growth, driven by analytics and equity models.

Asset owners: Won mandates with European pension funds contributing to $25 billion of new AUM benchmarked to MSCI Climate Index.

Recurring sales and analytics: Achieved highest ever Q2 recurring sales in analytics, driven by equity risk models. Completed largest deal for MSCI Wealth Manager.

Client diversification: Expanded client base across banks, hedge funds, asset owners, and wealth managers with double-digit subscription run rate growth.

Innovation and product development: Focused on developing innovative use cases and new solutions for diverse client segments. Generated $4 million in sales from new products released in the last 6 months.

Climate and sustainability focus: Repositioning tools to adapt to cyclical slowdowns and capture new opportunities in sustainability and climate solutions.

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Risk or Challenges

Real Assets: New recurring sales were challenged and down from Q2 of last year, indicating potential difficulties in maintaining growth in this segment.

Sustainability and Climate: Despite being a leader in this space, the segment is facing a cyclical slowdown, and demand is expected to remain muted for several quarters, impacting growth.

Private Capital Solutions: Retention rate for private assets remained stable but slightly over 91%, which may indicate challenges in retaining clients in this segment.

Market Volatility: Increased volatility in global markets is amplifying the need for unified risk tools, which could strain resources and operational focus.

Economic Conditions: The company is cautious about forward-looking statements due to current economic conditions, which may pose risks to achieving anticipated results.

Competitive Pressures: MSCI displaced competitors in some deals, but the competitive landscape remains intense, particularly in fixed income indexes and climate tools.

Regulatory and Reporting Requirements: Growing demand for regulatory support tools, especially in wealth management and climate reporting, could increase operational complexity.

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Guidance & Outlook

Revenue Growth: MSCI expects continued strong revenue growth driven by asset-based fee run rate growth of 17% and subscription run rate growth across various client segments.

Index Franchise Growth: The company anticipates significant growth opportunities in its Index franchise, particularly in non-U.S. market exposures and fixed income index ETF AUM, which reached $84 billion.

Private Assets Expansion: MSCI is expanding its tools for private capital solutions, with Q2 run rate growth of nearly 13%. The company plans to launch new private credit risk assessments in partnership with Moody's in the coming weeks.

Sustainability and Climate Tools: Despite a cyclical slowdown, MSCI expects sustainability and climate tools to remain critical for investment strategies. The company is repositioning its tools to capture new opportunities.

Wealth Management Growth: MSCI projects further growth in wealth management, supported by its largest-ever deal with a U.S. regional bank and increasing demand for direct indexing AUM based on MSCI indexes.

Asset Manager Growth: The company foresees steady growth with asset managers, supported by new active ETFs and fixed income indexes displacing competitors.

Insurance Sector Expansion: MSCI sees promising growth potential in the insurance sector, particularly for index-linked annuities and climate tools.

New Product Innovations: The company expects commercial benefits from ongoing investments in new product innovations, with over $4 million in sales from new products released in the last 6 months.

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Shareholder Return Plan

Dividends: No specific mention of dividends or a dividend program was made in the transcript.

Share Repurchase: Year-to-date, MSCI repurchased $286 million worth of shares at an average price of $557 per share, demonstrating long-term confidence in the value of the company.

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Key Q&A

Q:What is the impact of the rotation of assets from the U.S. market to international markets on MSCI's business?

A:The rotation of assets from the U.S. market to international markets is a significant boost to MSCI's asset-based fee business. MSCI has $6 trillion of clients' assets indexed to its indices, with $2 trillion in ETFs and $4 trillion in non-ETF AUM. While this rotation is expected to help the subscription side, it will be incremental and take time to manifest as a major catalyst.

Q:What is MSCI's strategy to accelerate subscription run rate growth?

A:MSCI aims to accelerate subscription run rate growth by focusing on non-active asset managers, which currently grow at 11.5%, and creating new products for banks, hedge funds, asset owners, and wealth managers. The company is also targeting the fast money segment and active ETFs, which represent a significant growth opportunity.

Q:What is the impact of industry consolidation on MSCI's results?

A:MSCI does not see industry consolidation as a major concern currently. While consolidation is a secular trend, it is not expected to accelerate significantly or hurt MSCI's results in the near term. The company is more focused on the transformation of the industry, including the shift from mutual funds to active ETFs.

Q:What are the drivers of lower retention rates in analytics and sustainability?

A:Lower retention rates in analytics and sustainability are driven by client events and financial budget pressures. Hedge funds and corporate advisers within the sustainability and climate segment have shown elevated cancellations. Retention rates for asset managers remain solid at around 96%.

Q:What is the sales environment for MSCI in the second quarter and outlook for the third quarter?

A:The sales environment in the second quarter was consistent with recent quarters, despite a volatile market backdrop. Sales were $44 million, down year-over-year due to a one-off item in the prior year. MSCI remains encouraged by client engagement and a healthy pipeline of products.

Q:What is MSCI's outlook for asset-based fee (ABF) revenue growth?

A:MSCI sees ABF as a significant growth area, driven by secular trends in systematic investing, including non-market cap products, fixed income, and active ETFs. The company expects continued growth in ABF revenue over the years and decades to come.

Q:What is the demand environment for custom indexes?

A:The demand environment for custom indexes remains strong, and MSCI is confident in its growth potential. Quarterly fluctuations in sales are attributed to specific deals, but the long-term outlook for custom indexes is positive.

Q:How is MSCI positioned in the active ETF market?

A:MSCI is well-positioned in the active ETF market, with 50 clients globally and significant dialogue with asset managers. The company provides data, benchmarks, and investment theses for active ETFs, which are expected to drive growth in the active asset management industry.

Q:What are MSCI's plans for private capital solutions?

A:MSCI is focused on expanding its private capital solutions by integrating data and technology, developing value-added pricing for private assets, and targeting general partners (GPs) and wealth managers. The company sees significant growth potential in this area.

Q:What is MSCI's approach to pricing in the current macro environment?

A:MSCI's approach to pricing remains consistent, aligning prices with the value delivered to clients and ongoing investments. The contribution of price increases to new recurring sales is stable, with slight variations across product lines and client segments.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the question about how long it would take to see meaningful acceleration in non-active subscription growth. They emphasized the significant opportunities and ongoing initiatives but did not specify a timeline for acceleration.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reflects strong revenue growth, particularly in equity solutions and climate tools, alongside significant expansion in private credit and real assets. The Q&A section highlights MSCI's strategic focus on innovation, AI, and expanding client segments, with positive sentiment from analysts. The commitment to share repurchases and leveraging AI for operational efficiencies further supports a positive outlook. Despite some uncertainties in management's responses, the overall sentiment is positive, likely resulting in a stock price increase of 2% to 8%.

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MSCI Report

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