Toni Kaplan — Analyst, Morgan Stanley
Thanks so much. I was hoping if you could talk about whether you've seen sort of any uptick in revenue specifically related to AI. I know you talked about sort of the products built on AI, and any quantification around expense savings with regard to AI. Thanks.
Henry Fernandez — Chairman and CEO, MSCI
Yeah, Toni. Basically, every new product we're launching has an AI component to it. A few of them are AI native, some of them are AI powered, and some of them have some AI enablement. Depending on the product and the area, the importance of AI is very big in the AI-native ones or just the ingredients that go into the launch of the product. That's pretty much across the Board in any new product. Therefore, we have been tracking last year on the revenues associated with, quote-unquote, AI products. We keep doing that, but it is almost irrelevant right now because everything that we're launching has an AI component to it. It's just a matter of degrees. The second part of your question is efficiencies. We are seeing significant early efficiencies in the use of AI across the whole Board.
It started in earnest applying AI to the data capture and the data development in private assets and in sustainability and climate. That has accelerated significantly to the point that it allows us to dramatically increase the amount of data gathering and data development with the same level of headcount that we have, rather than adding headcount. We're beginning to see significant productivity as well in software development, new software development, new software applications. We haven't yet started rewriting the current software that we have, in terms of either production or applications with AI, but that will be a big project that we want to get into in the near future. Thirdly, and also very importantly, we began to use AI across the Board in the development of models and methodologies. For example, in Custom Indexes, that we're ramping up.
As you know, the development of the Custom Index capabilities, we're now using AI, obviously managed and monitored by our humans in our research department in the creation of Custom Indexes at a much faster speed that we've ever done before. We're always using AI for analytics sub-models as well. We just revamped the entire sustainability rating system, ESG rating systems, using AI, and that's in the process of being relaunched, and that's going to give us enormous productivity and scalability.
Andy Wiechmann — CFO, MSCI
Toni, this may be
Henry Fernandez — Chairman and CEO, MSCI
By the way, I would just add that from a year ago to now, the use of AI across our over 6,000 professionals in the company has increased dramatically. About a year and a half ago, we made AI a condition of employment at MSCI. We started giving tools and training and demos and created champions and all of that across the whole company. We now have the vast majority of MSCI employees.
Using AI models every single day that they're working. Andy?
Andy Wiechmann — CFO, MSCI
Yep, Toni. This is Andy. One other point to highlight, which adds to the benefit side of the ledger from AI, is we are starting to see clients that are interested in licensing more content, getting access to more content for AI-driven use cases. We think that's early days, and that's potentially a huge opportunity for us and something we get very excited about given the unique content that we have. That, added to all the points that Henry highlighted, reaffirms that AI is definitely a boon for us.
Owen Lau — Managing Director, Clear Street
Hi. Good morning. Thank you for taking my questions. Analytics revenue was up over 10% year-over-year, and Andy, you also mentioned that you had some pretty strong non-recurring revenue related to implementation. Could you please talk about the outlook there, specifically for implementation? And then how high is the correlation between the strength of the index business and the strength in analytics in the first quarter? Thanks.
Andy Wiechmann — CFO, MSCI
Sure. A few points there. Maybe let me talk first about the momentum we're seeing in analytics, which definitely has been encouraging. We continue to have strong success with our equity analytics, and we had some big wins in the quarter, and we also had some nice wins on the multi-asset class side, so that the success that we saw in analytics in the quarter was across multiple fronts. We're seeing strength across client segments. We continue to see very strong growth with hedge funds. We actually had 14% growth in analytics with hedge funds. We're also seeing strong momentum with banks, where we had 10% growth, and asset owners also are a big win area for us, which Henry highlighted earlier. A lot of that is enabled by our total portfolio capabilities, which really lean on our differentiated private asset content.
We saw 9% growth with asset owners. Good momentum across client segments. Our factor franchise continues to get a strong boost within that hedge fund community. Excitingly, we are seeing traction outside of hedge funds, so had some wins with traditional asset managers as well. We're encouraged by the momentum across Analytics, and you see that in the run rate, where we've been kind of steady in the high single-digit type area. Your comment about Analytics revenue growth was. There were some unique factors at play in the quarter, so I would highlight that we did have a large implementation that was completed during the quarter, and hence you saw some meaningful non-recurring revenues within Analytics, which drove the overall revenue growth to be slightly above 10% within the segment.
As you've seen in the past, there can be some lumpiness with regards to when those implementations are completed and the comparisons to the prior year period or the comparable period. In Q2, we do expect the revenue growth to be more mid-single digits, so closer to 5% within analytics. Beyond Q2, we do expect the revenue growth to track much more closely to run rate growth. Looking forward longer term, we think run rate growth is a good indicator of the revenue growth, and as I alluded to, that's an area where we see good momentum and strong traction. Your question about correlation with index. Listen, there are dynamics that are overlapping. Within the trading and hedge fund community, our content sets are very complementary there. We've seen strong traction both in analytics, and in index within that client segment.
We do see also general environmental factors at play that drive both, and as you can tell by the results, we had a good quarter in Index and a good quarter in Analytics, so there is some correlation there. There are also differing dynamics across different parts of the business. I'd say it really depends.
Ashish Sabadra — Analyst, RBC Capital Markets
Thanks for taking my question. Really strong subscription run rate growth in hedge funds, asset owners, and broker-dealers, but I wanted to focus on the asset manager, where it moderated a bit from 7%, I believe, last quarter, to 6%. Can you just talk about the puts and takes there? How should we think about that momentum in asset managers going forward? Thanks.
Andy Wiechmann — CFO, MSCI
Yeah, sure. Listen, there are some FX factors at play with the growth rates in any given sector. We actually have seen good momentum, and we've seen pick-up with asset managers in spots. As Henry alluded to earlier, we are benefiting from the innovations that we've made, so the new product development, as well as just more generally enhanced execution, and that includes how we cover our asset manager clients. The success was multifaceted, so we did have success in licensing more content and broader usage of our tools across asset managers. For many of them, particularly the larger clients, we've taken more of an enterprise type approach to how we work with them, and that leads to some very attractive additional licensing opportunities, and it also leads to more stability in the segment and with the retention rate.
As we alluded to, we saw very strong retention with asset managers in the quarter. From a geographic standpoint, we saw good momentum in the Americas and good momentum in APAC. As I alluded to, we've seen it both in analytics and index. Maybe just to double-click on each of those quickly. On the index side, we have delivered more solutions beyond the broader licensing that I referenced earlier. We've released content sets that are helping these clients in the portfolio construction process, but also in the sales enablement process, meaning how they communicate to their clients and how they think about launching new products. We also have solution sets that are getting traction for active ETFs, and then more generally supporting indexed investing in many forms and fashions. We're seeing a number of areas of growth across index for asset managers.
As I alluded to in the last question on the analytics side, listen, we've had some big multi-asset class wins, and we've also seen some traction with our factor franchise. It's overall encouraging. I think a lot of it, as Henry alluded to, is really driven by our efforts and our execution on that front, and we continue to view asset managers as the key and core client segment for us.
Craig Huber — CEO and Managing Director, Huber Research Partners
Thank you. Maybe just talk a little bit further about a little bit better numbers in sustainability and climate there. It's obviously nowhere back to where it was before. Seems like the environment for that has dramatically changed here in recent quarters. Just talk what's a little bit better momentum there, if you would, please. Thank you.
Henry Fernandez — Chairman and CEO, MSCI
Craig, the way we look at it's important to start by differentiating sustainability or former ESG, sustainability from climate. They have been a little bit linked in the past, not because they have similar dynamics or supply and demand or competitive landscapes, but at least because sometimes the sales that we did were sales that were in one package. We were linking them into one package, which we are increasingly separating between the two because we believe that sustainability, we will continue to sell and sell well, but there is a lot of rationalization of cost. There is a significant market share that we are taking away from competitors on sustainability. On climate, we're pretty hopeful. We're cautiously optimistic that at some point it will re-accelerate, especially in physical risk. This past quarter, we had an important win, which was Deutsche Bank, the Central Bank of Germany.
Not Deutsche Bank, but the Central Bank of Germany was subscribed to a series of climate risk tools from our side on behalf of the European Central Bank system, which incorporates all the national central banks. We're very encouraged by that because it was a competitive win. We were selected as the best provider, and now obviously we got the work of penetrating each one of the national central banks. That tells you how important they view climate risk and how important they view the MSCI offering. We continue to focus on the transition elements of climate change. Very importantly, we're now more and more focused on the physical risk part, and we see increasing demand there.
We believe that the Iran war and the energy shock that has come out of that is going to underscore significantly the energy transition that a lot of countries need to make to ensure less dependence on oil and gas coming from the Gulf. That's going to bode well for a lot of our tools.
Alexander Hess — Equity Research VP, JPMorgan
Hi, guys. I want to jump into the active ETF business. It seems like from our data, there was some pickup in active ETFs more broadly that these seem to be doing pretty well as sort of a category. Maybe you could highlight what that business looks like, how that may have helped your fund flows in 1Q or not. Anything we should understand about how you guys participate in that business and how that flows through your numbers. Thank you so much.
Henry Fernandez — Chairman and CEO, MSCI
We're very excited about that part of our business. Very excited. There are a number of reasons why that's the case. The first one is we believe that this is an area of significant expansion by the active asset management industry, right? That a lot of what they're getting hit in outflows, in mutual funds and other forms of active management, they can latch on to active ETFs and revive growth. This is a client base that we know exceedingly well. They recognize our datasets and our indexes extremely well, and therefore we can be very helpful to them. Number two is, it's important to also recognize that something like 70%-80% of the active ETFs that are being launched have some elements of systematic investing or index investing in them. They're not pure play, stock-picking ETFs, like some of the mutual funds could be.
That is fertile territory for MSCI to be of significant help in terms of the underlying database and the organization of the database to the indexes that are built on the database, and then to the quantitative tools that can be applied on top of the indexes to do overlays that are actively managed on that. We're very bullish about that. Thirdly, of course, that our role in this industry on the passive side is significant, as you know. A lot of our clients are coming to us to help them on the active ETF because of our brand, and the trust on our database and our indexes and our methodologies in order to build this active ETF business. We're very hopeful that that will be a growth area for us on the more challenging part of the active managers around the world.
Andy Wiechmann — CFO, MSCI
Yeah. Alex, just to answer the part about where it shows up in our financials. Firstly, I would say we are very actively used as a benchmark on active ETFs. That is something that oftentimes, as you know, is not a new sale for us. If a client is licensed already for the module, when they use us as a benchmark on the active ETF, that's not going to be a new sale for us. To the extent it is something that's, as Henry said, helping with the health of the asset manager, helping them grow, that can lead to additional sales for us. As Henry alluded to, we do also license additional content sets.
We have some specific content sets like our index universe data, but also broader content sets that can be used as part of the portfolio construction process, be used for overlays, risk management, as part of our clients' active ETF management. That's an additional module license for us. That's on the subscription side. Then we have launched our active financial product license, and this is where you've heard us talk about in the past. We can do more for the client, and be an integral part of the overall portfolio management, if you will, which is the index and calculating the index on an ongoing basis. That can translate through to ABF revenue. We can benefit both on the subscription side and the ABF side. It's very early days, so it's small for us.
As I said, we are getting good traction as a benchmark. We've had quite a bit of success early days in licensing additional content sets. We think the opportunity is much bigger, going forward, as Henry alluded to help, on both the ABF side and the subscription side.
Faiza Alwy — Managing Director of U.S. Company Research, Deutsche Bank
Yes. Hi, thank you so much. I wanted to ask about the strong growth that you saw in Custom Indexes, and I'm curious if it's driven by just your ability to process things faster, or is it more a function of kind of end market demand? Just trying to understand the sustainability of just the higher growth that you saw this quarter.
Henry Fernandez — Chairman and CEO, MSCI
Basically, let's start with the end market demand. In systematic investing, and a big part of that is index investing, the vast majority of the historical work that we have done has been on market cap exposures. That is, give me the market cap of your emerging markets, give me the market cap of Japan or Europe, or one way or another. What is now happening is that the door is now wide open to do systematic investing and rules-based investing and index investing in what we call non-market cap, which is give me a portfolio or an index of all the securities, equity securities in the world that have low volatility, high quality, high ESG ratings, low climate risk or whatever. You can see the flavor. Therefore, there is incredible growth in equities.
We're now seeing fixed income. We're even getting requests about that in private assets like private credit or private equity. Therefore, we're uniquely positioned to benefit from that because not only do we have the index universe, the index methodologies, and a great index brand, but we have all the other ingredients to provide that. We have the factor models to create factor decompositions. We have the ESG ratings, we have the climate exposures, we have the thematic scores. We know the ways in which we can put everything together in building people an index. Some of that gets translated into a standard index that we create or an off-the-shelf index that we create.
The vast majority of that is coming into a form of Custom Index for either active management, for active ETFs, for passive management in ETF or institutional, for structural products, for an over-the-counter swap, an over-the-counter option in a structured product or a swap. The demand is very significant, and therefore, as you have heard us say in the last few years, we've been ramping up the ability for us to meet that demand. That comes in two, three components. The first component, which is the workflow application to help people and help us design these indexes, and that's the acquisition of Foxberry. The second part is once you have that workflow application and you design what you're looking for, how do you link that to an industrial-scale production environment in which you have tens of thousands of Custom Indexes being produced safely and with high quality?
We've done all that work already. The third component is, okay, how do we accelerate the process of creating the methodology, the index algorithm? We obviously were doing that with humans in our research department, and we're now doing that with AI to help accelerate that. The demand is there. We're meeting most of the demand, but we're leaving some money on the table. With all this improvement in these three areas, we're now well-positioned to capture the vast majority of this demand in the world, and we're very uniquely positioned to achieve that.
Anna Wu — VP of Equity Research, Goldman Sachs
Hi, this is Anna for George. We saw very strong AUM growth of ETFs linked to MSCI indexes this quarter, especially in developed market ex-U.S. and emerging markets over the period of time. Can you provide more color around the momentum behind the international inflows outside of the U.S.? How do you see the trends going forward? Additionally, do you expect the trends to drive broader subscription growth opportunities for you going forward given MSCI's unique exposure to international markets? Thank you.
Andy Wiechmann — CFO, MSCI
Sure. As you alluded to, we have a unique and differentiated franchise in ex-U.S. markets. If you look over the last 10 years, we've captured about a 35% share of ex-U.S. equity ETF AUM. That sustained leadership is really supported by consistent inflows, strength of our comprehensive offering, our strong position with the asset owners of the world, and the fact that we really have fit-for-purpose indexes tailored to whatever need our clients need. We feel very strong about the power of that franchise. If you look over that 10-year period, you've seen, for most of that period, meaningfully outsized flows and outperformance of the U.S. market. We did okay. We did fine during that period.
What you've seen over the last 18 months, so really the last year and a half, is you have seen a rotation take place and start to take place into international equity, so non-U.S. equity exposure. Clearly, that has been a big benefit for us. We saw tremendous inflows throughout last year. We saw record inflows into ETFs linked to our indexes in the first quarter here, so north of $100 billion. Importantly, we are capturing a significant percentage of the market share of those flows, which I think speaks to the strength of the franchise. The other stat which I would highlight, and I mentioned it earlier, is within the European-listed ETF market. These are ETFs that are listed in the European market. We have a very strong position. We captured 40% of flows into European-listed funds within the first quarter here.
We also, by the way, had very strong flow capture in the U.S. for international exposure products. Europe has been a continued area of outsized strength for us. That is something that is helping to fuel the broader ecosystem of products for us. The growth in AUM in European-listed ETFs, but also ETFs more generally, is part of what helps fuel the opportunity with the trading and hedge fund ecosystem. It's something that drives more demand for clients to create new ETFs based on our indexes, and obviously helps in the derivatives, both over-the-counter and listed markets. It's an important point of strength for us. I don't want to speculate as to what happens going forward here.
Given many of the fiscal and geopolitical dynamics at play, we have seen sustained momentum of outsized growth into international exposure areas, and that's a huge opportunity for us. We've got an all-weather franchise that can benefit in all environments. This environment is one that creates numerous opportunities across different product areas, different client segments, and different geographies for us.
Henry Fernandez — Chairman and CEO, MSCI
I normally say that we're only getting started in the indexed investing world and in this case, the ETF world. Because the only thing that has been largely captured and conquered is market cap exposures. When you think about the non-market cap investment thesis, which is the vast majority of the investment process worldwide, is being systematized, is being turned into rules-based, just like this active ETF that I was mentioning. There is now a revolution going on in fixed income as well, and in commodities, and in equity derivatives. This acquisition of Compass Financial that we made is going to help us dramatically penetrate these other asset classes like commodities, creating indexes and systematized structures for commodities, for cryptocurrencies, for other digital assets, and for equity derivatives and the like.
I want to make sure you pay attention to that acquisition because it's going to open up a lot of new doors for us. By and large, we are by far and above the provider of choice of these Custom Indexes across the Board. That's been the strength of our fixed income ETF franchise linked to MSCI indexes is being not the market cap fixed income indexes, but the non-market cap which is there is an ESG overlay, there is a climate overlay, there is a factor overlay, and you're seeing that growth. Lastly, I want to reinforce what Andy was saying, which is that the two big ETF markets in the world are the U.S. and Europe. Our presence in Europe is $1 trillion+ out of the $2.4 trillion.
We're extremely well-positioned, capturing a significant amount of the flows there, in addition to the strength that we have in the U.S.
Scott Wurtzel — Director of Equity Research, Wolfe Research
Hey, guys. Thanks for taking my question. Just wanted to ask on the growth that you're seeing with hedge funds. It's been pretty impressive, I think, in this quarter and I think in the past couple of quarters as well. Just wondering if you can maybe contextualize what inning we're in this opportunity to sell into the hedge fund channel, just given the growth that you've seen in recent quarters. Thanks.
Andy Wiechmann — CFO, MSCI
Sure. Yeah. Maybe I can broaden it to traders, broker-dealers, hedge funds, what we've referred to as the trading ecosystem in the past. This is an area, as you alluded to. It's been a strong growth area for us. It's been our highest growth area for the last couple of years, but it's also very strategic for us. We've seen growth in both index, where we actually had 27% subscription run rate growth within index with hedge funds. On analytics, we saw 14% subscription run rate growth with hedge funds. We've similarly had very strong traction with trading firms and with broker-dealers. A lot of this is fueled by our actions. We have benefited probably by the health and asset growth that you've seen within multi-strat hedge funds, and the growth of certain strategies.
Importantly, we have been actively innovating, enhancing the services that we deliver to these organizations. We have been becoming much more of an enterprise-wide partner to many of these organizations. We are offering things like, obviously, custom indexes used for structured products, over-the-counter derivatives, custom bespoke strategies. We have custom index sets, content sets that are used for systematic and index rebalancing strategies. Related to that index methodology data sets, we continue to enhance our risk models and broader systematic solutions, which create additional up-sale opportunities. We believe this is a big market where we will be a critical partner to these organizations. It's a sustainable area where we have a long way to go in terms of doing more for them, at an enterprise level, being a strategic partner for them.
As I alluded to earlier, this is very strategic for us as a firm because it helps fuel opportunities in the ETF market, the non-ETF passive market. As I said, the over-the-counter market as well. This is something that provides more liquidity and more opportunity for asset owners that are looking to implement index strategies, even opportunities within the wealth segment. This has been a nice growth engine for us in the short term here within those three specific client segments. More generally, this is something that's helping to fuel the power of the overall franchise for us. We do believe it's attractive and sustainable, and we continue to innovate and enhance our service there.
Curt Nagle — Director, Bank of America
Great. Thanks very much. Just kind of going back to the net new, very obviously notable in 1Q, great results. I guess, would you be able to, Andy, I guess, disaggregate how much of that was due to, it sounded like some larger concentrated deals, which alluded to the prepared remarks versus, again, the substantial increase in product velocity and execution. Yeah, just any comments on that would be helpful. That's my question.
Andy Wiechmann — CFO, MSCI
Sure. Yeah. We alluded to this earlier, but we did see, as Henry mentioned, we saw a notable pickup in number of new products launched in the first quarter, but we also saw a notable increase in sales from new products compared to the first quarter of last year. Our actions are definitely playing a role in the impact we've seen, the acceleration in growth we've seen. If you look at where some of that momentum is, we've seen strong momentum in areas like Index, where we've accelerated back to double-digit growth there. We've seen an acceleration in PCS on both fronts. We have been very active in pace of new product development, as well as enhancing our go-to-market efforts.
Things like new index content sets that we've been delivering, things like within PCS, a whole host of new capabilities, like our document management and SourceView offerings, like our asset and deal level metrics that you've seen. A number of content sets that are helping drive growth across basically all of our PCS offerings are all things that have been released in recent periods here. Obviously on the custom Index side, as Henry alluded to, that's an area where we've been heavily investing, broadening our capabilities, and become a partner of choice. There's probably some environmental aspects at play. The sustained market momentum is constructive for us, but a lot of the momentum that we've seen has been driven by the efforts and actions that we've been taking.
David Motemaden — Senior Managing Director, Evercore ISI
Hey, thanks for squeezing me in. I wanted to just talk a little bit about some of the momentum since the February rollout of the IndexAI Insights. Sounds like that's driving increased monetization, or at least a little bit of a pickup in licensing data. I guess I'm wondering just how the economics on that might differ, whether it's going through MSCI ONE or third-party apps like Claude or ChatGPT. Thank you.
Andy Wiechmann — CFO, MSCI
Yeah, sure. Consistent with our past approach, we want to make our content as easily accessible and available however clients want to get access to it. As we alluded to, you can get access to it through the Claude MCP, through MSCI ONE. We even have certain content sets available through Copilot. The economics are generally consistent regardless of how clients access it. Depending on how and where they're using it, there can be upcharges and upsales for us. Our goal is to make it easier for clients to access the content and use it in a multitude of use cases. This is something that is one of those areas where we are increasing value to clients.
As we alluded to, we've seen a notable pickup or notable traction, given that we just released it in February, but notable traction in clients who are accessing the IndexAI Insights. We see clients who are getting more value out of the content sets they have so they can query, interrogate, what's going on in the Index, what drives the methodology, what are the constituents. It's also a natural upsell driver for them to ask for additional content sets to want to get insight to our risk models across the firm. We think this is a key enabler. It does help support price increases on the margin. It's something that can lead to upcharges around, as I said, usage. This is step one for us. Over time, we think clients are going to want to use more of our content within their AI-driven processes.
As they start to want to use that content to train models, use it as part of their AI investment processes, those are areas where there are meaningful upsale opportunities for us. We are spending a lot of time thinking about the right licensing models there, how we can capitalize, because we know directly from our clients that they want to use our content heavily, and these initial ways that clients can access the content via the AI channels are the first step. We continue to believe there's a long journey of additional things that we can do and opportunities to monetize the content we have.