MSCI Inc. (MSCI) Earnings

Management highlights

- Overall Financial & Operational Performance • Delivered very strong Q2 2026 results: over 12% organic revenue growth, nearly 19% adjusted EPS growth, 14% adjusted EBITDA growth, 12% total run rate growth, 8%+ organic subscription run rate growth, and 95%+ overall retention rate. • Repurchased $147 million of MSCI shares at an average price of ~$558 per share during the quarter, demonstrating confidence in the business and commitment to shareholder returns. • MSCI-linked ETF AUM has grown by more than $1 trillion over the past 15 months, highlighting strong market endorsement of the company's intellectual property, research, and standards. - Client Segment Growth Highlights • Traders and hedge funds: 15% subscription run rate growth overall; hedge funds specifically delivered a record quarter with 19% subscription run rate growth and 75% YoY growth in recurring net new sales to nearly $15 million, including three seven-figure index analytics deals. • Asset owners: 9% subscription run rate growth, with record Q2 recurring net new sales of $8.4 million (43% YoY growth), highlighted by major deals with a large public pension fund and a large sovereign wealth fund for private asset solutions. • Asset managers: 6% organic subscription run rate growth and 9% recurring net new sales growth, including a large deal for enterprise risk and performance tools and multiple new client wins for active ETF strategy support. - Strategic & Innovation Milestones • Announced a strategic partnership with UBS to expand private assets solution access to the wealth channel, increasing transparency and connecting general partners (GPs) with high-net-worth clients. • Over 1,000 clients already use the recently launched Index AI Insights tool, with hundreds of users accessing core solutions via third-party AI models. • Announced the planned acquisition of FirstStreet, a leading provider of physics-based climate risk data and analytics covering over 2 billion global buildings, to expand climate physical risk assessment capabilities. • Completed C-suite technology leadership changes: hired Dinesh Gupta (ex-Goldman Sachs) as Chief Data Officer in Q1, and Kashi Kakarla (ex-Intuit) as CTO/Head of Product Engineering in Q2. Announced a new Silicon Valley office focused on AI product development, and established a new board-level Technology and Data Committee. • Launched over 80 new products in the first half of 2026, double the total launched in all of 2024, with 40% of first half 2026 new sales contributed by new products (up YoY). - Sustainability Market Context • Persistent near-term market challenges for general sustainability solutions are expected to continue, but MSCI is gaining market share in a consolidating sector and remains the industry provider of choice. There is ~$1.3 trillion in fund assets benchmarked to MSCI sustainability and climate indices, with one-third of that tied to climate indices specifically.

Guidance

- Expense guidance was raised from prior ranges, driven by incremental investment in high-growth priority areas, costs related to the upcoming FirstStreet acquisition, and higher performance-based stock compensation and bonus accruals tied to stronger-than-expected AUM growth for MSCI-linked products. D&A and interest expense guidance were also increased due to the FirstStreet acquisition and higher revolver balances from the acquisition and share repurchases. - Recurring net new sales for the combined Sustainability & Climate segment is expected to be roughly flat to slightly negative over the next two quarters, due to ongoing client spend right-sizing offsetting new growth opportunities from FirstStreet. - Management maintains flexibility to adjust investment and expense levels based on market conditions and business performance, and remains committed to delivering attractive profitability growth across environments while investing for long-term growth. - Free cash flow guidance was raised, driven by stronger collection activity that offset higher cash taxes and compensation expenses, with management confident in continued strong free cash flow growth and conversion.

Segment performance

1. Index: 41% YoY growth in recurring net new sales, 17% total run rate growth, over 11% subscription run rate growth, 97%+ retention rate. Asset-based fees (ABF) run rate reached $948 million, growing 25% YoY, driven by nearly $40 billion in net inflows to MSCI-linked ETFs, pushing total MSCI-linked ETF AUM over $2.8 trillion. Custom index organic subscription run rate grew 23% excluding the Compass acquisition. Index contributed 37% of total recurring net new sales in Q2. 2. Analytics: 7% organic subscription run rate growth (matching organic revenue growth), driven by demand for factor content and multi-asset total portfolio solutions. 3. Private Capital Solutions: Subscription run rate growth accelerated to over 16% YoY, with strong traction across existing transparency, Private Capital Intel, and total plan offerings, plus growing demand for new data platform and asset/deal level metric products. 4. Real Assets: Modest acceleration in organic subscription run rate growth following product enhancements, highlighted by a large exclusive deal with a major property technology firm leveraging RCA content and Global Index Intel. 5. Sustainability & Climate: Generated ~$6 million in new recurring sustainability sales and ~$3 million in new recurring climate sales in Q2. Significant cancel headwinds, particularly in the Americas, from client spend right-sizing. Post-FirstStreet acquisition close (expected Q3 2026), FirstStreet will add ~$10 million in subscription run rate to this segment.

Risks & headwinds

- Persistent client spend right-sizing and cancellation headwinds in the Sustainability segment, particularly in the Americas, are expected to continue pressuring results for at least the next two quarters, with the duration of this cyclical downturn uncertain. - Higher-value large-ticket new products can increase quarter-to-quarter revenue variability due to deal closing timing, leading to potential quarterly results that differ from consensus expectations. - AUM growth for MSCI-linked products has been concentrated in lower-fee developed markets ex-U.S. and all-country products, creating ongoing mix shift pressure on average fee rates, leading to variability in basis point revenue over time. - New product initiatives across private assets, AI-enabled solutions, and hedge fund trading ecosystem products have multi-quarter sales cycles, meaning revenue contributions will lag product launches, creating uncertainty around near-term topline growth contributions.

Analyst Q&A

• Q: Given this quarter's strong record new sales, how would you characterize subscription sales momentum looking forward, and what explains any quarterly variability? /

  A: Management remains bullish on the long-term outlook, as more than 80 new products launched in the first half of 2026 (twice 2024's full-year total) are still early in their sales cycles, which require lengthy institutional client approval processes. Higher-ticket large deals create natural quarter-to-quarter variability as deal closes can slip between quarters. The company is voluntarily raising expense guidance to increase investment in the business because the current pipeline is stronger than it has been in years, driven by a more positive overall demand environment among key client segments.

• Q: Does strong sales growth from large multi-strategy hedge funds inherently increase future revenue volatility, and are you seeing traction on AI model content licensing (MCP)? /

  A: Management notes there will be some limited quarterly volatility as growth ramps, but hedge fund sales will not be a primary source. The current strategy focuses on large, stable multi-strategy hedge funds rather than the volatile long tail of smaller funds that caused historical volatility. Growth in hedge fund index demand is a secular structural shift driven by the large trading and liquidity ecosystem around MSCI-linked AUM that the company is only now tapping into, not a transient trend. Traction for AI content licensing is building, with the first training license recently signed, and monetization expected to grow gradually over coming quarters.

• Q: What is driving asset-based fee compression over the last two quarters, and how should we think about fee rates going forward? /

  A: Fee compression has been driven primarily by mix shift: recent AUM growth has been heavily concentrated in lower-fee developed markets ex-U.S. and all-country products, following a change to pricing floors on large products in the new BlackRock agreement. Management's core focus is growing total run rate and overall revenue by capturing maximum AUM share with ETF partners, not defending average basis points. Fee rates will remain dynamic: they will decline when growth is concentrated in lower-fee products and rise or stabilize when growth shifts to higher-fee products, but the long-term trajectory for total asset-based fee growth remains strongly positive, with continued strong inflows in Q3 2026 so far.

• Q: What needs to change to accelerate growth in the private assets segment beyond the current ~8% subscription run rate growth? /

  A: Acceleration requires changes across all areas, as the company is still early in transforming the segment after acquiring Burgess three+ years ago. A new senior management team was only assembled over the last 18 months, and dozens of new products launched in the last 9 months are still early in sales cycles. New geographic and client segment expansion includes a recent partnership with UBS to serve the wealth channel (a largely untapped market for private asset transparency solutions) and new efforts to penetrate GP clients, where current penetration is far below potential. A new leader for real assets was hired four months ago to refocus strategy on high-growth sub-segments like private real estate debt, and results from this shift are still emerging.

• Q: How long can the current elevated growth rate from hedge funds and traders continue, and what inning is this demand cycle? /

  A: Management estimates the segment is still in the early innings (first 2-3 innings of a 9-inning game), with a very long trajectory of elevated growth ahead. The company has only just begun tapping the large trading/liquidity ecosystem around MSCI's $2.8 trillion in linked ETF AUM, including growing demand for non-market-cap custom index datasets for index arbitrage and systematic strategies. Strong hedge fund growth is not the only high-growth opportunity: the company also sees massive long-term potential in private assets for wealth channels, custom indices for institutional clients, emerging risk analytics (climate physical risk, AI impact, geopolitical supply chain risk), and total portfolio solutions for pension funds.