Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2023 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 we will limit participants to one question at a time. We will have further instructions for you later on. I'd now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin.

Thank you. Good day, and welcome to the MSCI Third Quarter 2023 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter 2023. This press release, along with an earnings presentation and a 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-K and in our other SEC filings. During today's call, in addition to results presented on the basis of US 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 rates is available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the third quarter, MSCI delivered impressive results in an uncertain environment. Among other highlights, we achieved adjusted EPS growth of over 21%, total revenue growth of 12%, recurring subscription run rate growth of 12%, and a retention rate of 95.4%. Amid turmoil in global markets, rising geopolitical tensions, and a challenging operating environment, our highly diversified, all-weather franchise continues to drive strong financial performance. We recognize that in this uncertain environment, our capital allocation decisions are more important than ever. In the first nine months of this year, we returned $459 million to the owners of MSCI in the form of share repurchases and more than $329 million in the form of dividends. This signals our confidence in MSCI's long-term prospects and our commitment to be a compounder for shareholders. We're also committed to prioritizing high-growth and high-potential investments while maintaining high levels of profitability. We recently capitalized on two opportunistic strategic acquisitions. With the completed acquisition of Burgiss, MSCI can now provide additional clarity and transparency, highly needed by investors across private and public assets in their portfolios. Over the past 36 years, Burgiss has created greater private asset transparency while serving institutional investors such as special funds, endowments, foundations, and family offices. Combined with our private real estate franchise, MSCI now has the world's largest highest-quality private asset class database, covering more than $60 trillion of assets. We believe we now have a unique and strong foundation of data and analytics to build standards such as benchmark indices, performance, risk, liquidity, pricing, and asset allocation models and other tools. In effect, our goal is to develop the MSCI of private assets. As for MSCI's announced acquisition of Trove Research, Trove is a world-renowned source of intelligence on the voluntary carbon market. We believe this market will play a significant role in helping institutional investors and companies reduce climate risk. All markets drive on reliable, uniform standards and robust transparency. As the world pushes for net-zero emissions, investors need to understand whether companies are making real progress and how they are using carbon credits. Likewise, companies need to understand the value of the credits they are buying and selling. By integrating the data, analytics, and capabilities of Trove with our own comprehensive climate solutions, MSCI will have a robust suite of tools to promote clarity and consistency in the voluntary carbon market. Both of these acquisitions, Burgiss and Trove, advanced MSCI's larger business strategy and mission of providing tools for the investment world to systemically understand and measure performance and risk, which leads to more optimal asset allocation and portfolio construction. We aim to capture major trends across the investment landscape, including the continued allocations to private assets and the growing incorporation of climate as a material driver in the repricing of securities and the reallocation of capital. Our product lines are increasingly interconnected, which means our work in private assets reinforces our work in climate and vice versa. For example, together with Burgiss, we previously developed a tool that offers climate data on around 50,000 private companies and more than 6,000 private equity and private debt funds. In summary, MSCI continues to benefit from our resilient business model underpinned by rigorous financial management and a strong secular tailwind. From our recurring revenue business model to our mission-critical solutions, we believe MSCI remains well positioned in any operating environment. And with that, let me turn the call over to Baer.

Thank you, Henry, and greetings, everyone. In my remarks today, I'll build on what Henry said about Burgiss, discuss our third-quarter results by product line, and highlight our regional performance in Asia Pacific. Our acquisition of Burgiss, which we completed earlier this month, positions MSCI to serve investors and managers across all asset classes with a world-class platform for delivering total portfolio investment solutions and one of the industry's largest private asset databases covering more than 13,000 bonds. As Henry mentioned, Burgiss deepens our existing presence with pension funds and sovereign wealth funds while helping MSCI expand our presence among client segments, such as endowments, foundations, and family offices. We are well underway with integrating the 650-plus Burgiss employees and the roughly 1,000 Burgiss clients into our operations, and we look forward to providing updates on our progress. Turning to our Q3 results, MSCI achieved another solid quarter of performance across client segments and product lines. At the client level, we delivered subscription run rate growth of 15% collectively among wealth managers, banks and broker-dealers, hedge funds, insurance companies, and corporates. For our largest client base, we delivered around 10% growth amongst asset owners and asset managers combined. As those numbers indicate, we have maintained our strength and momentum across all client segments. Looking at our product lines, in index, we posted our 39th consecutive quarter of double-digit subscription run rate growth of 11%. Meanwhile, total direct indexing AUM based on MSCI indexes increased by 68% to $95 billion. We also saw increased index licensing from hedge fund clients, where new recurring subscription sales more than doubled, reflecting growth from both market cap-weighted modules and our float data. In addition, MSCI won a big strategic mandate to build client design indexes for one of America's largest wealth managers. This demonstrates how we continue to capitalize on rising demand for tools to support portfolio customization at scale, a trend that is especially visible in the wealth segment. Turning to analytics, we delivered subscription run rate growth of 7%, resulting in over $639 million of run rate and a near-record retention rate of 95.1%. Globally, we posted recurring sales growth of 30% in enterprise risk and performance driven by a significant number of large deals with asset managers and asset owners. For example, MSCI completed one of our largest-ever liquidity analytics deals covering both regulatory reporting requirements and liquidity risk management. Despite pressures on equity managers, we also grew equity analytics by 11% to nearly $200 million in run rate. In ESG, we delivered 21% run rate growth across our product lines, taking our run rate to $387 million while posting a retention rate of 96%. At the regional level, the regulatory environment continues to drive ESG sales in EMEA, and our solutions continue helping clients navigate new requirements. In Climate, we achieved 49% run rate growth across our product lines from Y, where we now have $98 million of run rate including $68 million of subscription run rate growing by 49%, which had a retention rate of 97%. In addition, AUM and MSCI index-linked climate ETFs increased by 64% to $71 million while MSCI index-linked climate equity non-ETF AUM increased by 75% to $107 billion. Finally, in real assets, we posted total run rate growth of almost 10%, along with a retention rate of 91%. Geographically, our Q3 results were especially strong in APAC, where MSCI continues to benefit from the increasing scale and growing breadth of the investment industry and the reach. For example, in real assets, APAC achieved 15% run rate growth and strong sales with asset owners, including for our real estate index, Intel, and performance insights tool. In Index, APAC delivered recurring subscription run rate growth of almost 15%, bringing our footprint to approximately $178 million. MSCI's underlying strength reflects our increasingly diverse range of capabilities and clients across geographies. Those advantages become even more important during periods of market volatility and uncertainty. As a result, we continue to see high levels of client engagement across segments, products, and regions. We also see a healthy pipeline as we approach the end of the year. Looking ahead, MSCI will remain laser-focused on strong profitability while continuing to invest in our business. And with that, let me turn the call over to Andy. Andy?

Thanks, Baer, and hi, everyone. Our attractive financial model enabled us to deliver double-digit growth in the quarter across revenue, recurring subscription run rate, and adjusted EPS. In Index subscription, we drove 9% run rate growth in our market cap-weighted modules, high-teens growth in custom indexes, and mid-teens growth in our ESG and factor modules. We saw strong subscription run rate growth from hedge funds, wealth managers, and broker-dealers of 26%, 19%, and 15%, respectively, all of which continue to support steady double-digit index subscription run rate growth. Asset-based fee revenues were up more than 12% year-over-year, benefiting from $55 billion of cash inflows and $186 billion of market appreciation over the last 12 months within equity ETFs linked to MSCI indexes. During the third quarter, cash inflows into ETFs linked to MSCI equity indexes were driven by ETFs with US and other developed market exposures. These cash inflows were supported by roughly $3 billion of flows into equity ETFs linked to our ESG and Climate indexes. We continue to gain traction in fixed income with AUM and ETFs linked to MSCI and Bloomberg joint fixed income indexes reaching nearly $52 billion, growing more than 40% year-over-year. In analytics, subscription run rate growth was 7%, with continued strength in our factor models and our risk tools more broadly. Our investments in enhancing our content, our capabilities, and the client experience, including through Climate Lab Enterprise insights and ESG and climate reporting services are driving new commercial opportunities across analytics. In our ESG and Climate reportable segment, the run rate growth was 25%, with 21% growth in ESG research and 44% growth in Climate. Relative to a year ago, we saw lower new recurring sales in the Americas, which continue to reflect more measured purchasing decisions among US investors. However, new recurring sales in both Europe and APAC were essentially unchanged year-over-year. The retention rate in the ESG and Climate segment remained healthy at 96%, although we did see slightly higher cancels resulting from client events at smaller institutions. Within Real Assets, run rate growth was 10%. We see momentum in our real estate index intel and portfolio offerings, although we continue to see the impact of industry pressures on our transaction data, most notably in client segments such as real estate brokers and lenders. While we expect the pressures to continue, we are encouraged by the long-term opportunity and the momentum we see in many of the market data, climate, and portfolio offerings we are providing. We are also expanding our commercial real estate transaction database to include deals below $2.5 million and our data universe to include properties that have never transacted. As a reminder, beginning in the fourth quarter, we will report financial results for Burgiss in our all other private assets segment. To provide an update on the financial impact of Burgiss, we expect Burgiss to generate slightly above $90 million of revenue for the full year 2023, with revenues of $22 million to $24 million expected in the fourth quarter. The standalone Burgiss adjusted EBITDA margin is expected to be around 15% for the full year 2023. However, we currently expect about $4 million to $5 million per quarter of allocations to Burgiss from centralized and shared costs on top of the standalone adjusted EBITDA. It is worth noting that these allocations are reallocated from other segments and will not impact firm-wide EBITDA. Given these allocations, we expect contributions from Burgiss to the adjusted EBITDA for all other segments to be minimal in Q4, although we expect some margin expansion from Burgiss next year. Meanwhile, as we've done in previous acquisitions, we will exclude certain integration-related expenses from our adjusted non-GAAP figures. More broadly, on the capital allocation front, we continue to be opportunistic and capitalize on attractive opportunities as highlighted by our announced acquisition of Trove. We expect Trove, which has a few million dollars of run rate and which will be included in our ESG and Climate segment to be immaterial to our results in the near term. Turning to our guidance, I would highlight that our ranges incorporate the impact of Burgiss and assume that AUM levels remain relatively stable through the balance of the year. Expense ranges now reflect both the slightly elevated pace of spend as well as a full quarter of expenses from Burgiss, including a small amount of integration expenses that will not be included in adjusted metrics. Our free cash flow guidance remains unchanged, although we have slightly increased our CapEx guidance which continues to reflect a higher level of software capitalization and some elevated hardware purchases related to our hybrid infrastructure approach, which includes maintaining a presence in select on-prem data centers as well as leveraging our public cloud partnerships. Our D&A guidance captures the additional intangible from purchase accounting adjustments related to the acquisitions. We've slightly lowered and narrowed our effective tax rate guidance, reflecting the impact of a nontaxable gain on our investment in Burgiss of approximately $140 million in the fourth quarter, which will be excluded from our adjusted metrics. Excluding the impact of this one-time item, we would expect an adjusted tax rate range for the full year that is about 1% higher than the effective tax rate range or 17.5% to 19%. Lastly, our interest expense guidance reflects our intention to draw a small amount on the revolver to provide some additional liquidity. Additionally, I would highlight that we expect lower interest income on our cash balances as a result of funding Burgiss. As of today, we currently have more than $300 million of cash on hand, which is in line with our minimum global cash balance range. Overall, we remain well-positioned to drive growth. While we continue to see some budget pressures from clients in a slightly elevated level of client events, we continue to see healthy engagement from our clients and a strong pipeline to finish out 2023. We look forward to keeping you posted on our progress. And with that, Operator, please open the line for questions.

The first question is from Alex Kramm with UBS. Your line is open.

Hey, good morning, everyone. I would like to talk about the index sales during the quarter. I think flat year-over-year. I think it was a tough comp and 3Q is generally a little bit lower seasonally. But just wondering if there's anything in particular you would highlight there both in terms of the third quarter, but also as we think about the fourth quarter. And then maybe specifically on index sales, it looks like the custom index run rate was just marginally higher in the third quarter, quarter-over-quarter. So just wondering if that was a big and maybe why? Thanks.

Thank you, Alex. It's Andy here. There's nothing significant to note in the index results. You addressed the relevant points. Overall, we've maintained good momentum across module types and client segments. As Baer mentioned and I elaborated, we experienced approximately 9% run rate growth in our market cap modules and mid to high-teens growth in our non-market cap-weighted modules. Asset managers contributed about 9% run rate growth, with solid double-digit growth in almost every other major client segment. Recurring sales were mostly in line with last year's third quarter. Cancels were slightly higher, but we believe the overall retention rate remains strong at 96.2%. Regarding the cancels, we saw a slight increase mainly from hedge funds, driven by client events, which is expected in the current environment. We are noticing some budget pressures linked to the environment and the equity markets, but we still have strong engagement and momentum as we enter the fourth quarter across client segments. So, there's probably not much more to take from this; we continue to see good momentum throughout the franchise.

All right. Thanks very much, guys.

The next question is from Alexander Hess with JPMorgan. Your line is open.

Hi, guys. Maybe stepping back to some comments from last quarter about accelerating product development within ESG and Climate, I want to know where you stand as far as that goes, how the Google partnership fits into that, how the Trove acquisition fits into that, and any other considerations we should keep in mind as far as when that might show up in net new?

Sure. Hi, Baer here. So look, for sure, ESG and Climate product investment is central to a lot of our day-to-day activities and looking forward into next year. In both areas, we see significant market opportunities as we've laid out before, and this includes a variety of things, including expansion of the data, certain regional expansions, notably in Asia Pacific for ESG, where we've got a lot of demand for new types of data cards, greater company coverage, et cetera. So I think in ESG, it's a steady story driven also by the headwinds brought by regulation. Clearly, in EMEA, in Europe, which we've mentioned in the past, but also in other regions increasingly. And then finally, in Climate, we're definitely at the investment phase there across client segments and across different asset classes, and increasingly tying into the comments today, there's demand for climate information and solutions in private markets as well. So I think all of those areas are very consistent with our comments from previous quarters, and we'll continue to have a positive impact on the growth story.

Thank you, Baer. And if I could quickly get a follow-up in. Can you maybe comment on how one of your competitors shedding headcount through a large layoff program might impact their competitive positioning vis-à-vis you guys?

Yeah. Look, as you know, we love to discuss our competitors specifically in all areas, we avoid that. I would try to say more broadly that I think that we're in a strong position to compete in the core business. We're clearly committed to it. Certain competitors may not be providing exactly the same services that we are; in this instance, this competitor was cutting back in an area where we've chosen not to compete, I think, wisely. So I think overall, we're very committed to being a leader in this area, and we're confident that even in a tougher environment, we can continue our leadership position.

Thank you.

The next question is from Toni Kaplan with Morgan Stanley. Your line is open.

Thanks so much. I was hoping you could provide a little bit of extra color on ESG. It sounded from the prepared remarks like Europe maybe was somewhat flattish with America still under pressure. Just wanted to get a sense of if there are any catalysts coming up, if you're seeing more stability there that could help drive accelerated growth in upcoming quarters? Thanks.

Sure, sure. Thanks, Toni. So I would say it's important to firstly underscore that we see strong engagement across ESG and Climate, as we mentioned in the prepared remarks. I think it's clear, and you can see this from the retention rate that ESG and Climate are becoming and probably are mission-critical structural parts of the investment process already. I'd say the dynamics are pretty consistent with what we've seen in recent quarters. We did, to your point, see slower growth in the Americas. You know, just to put a finer point on that, within the ESG and Climate segment, the growth in the Americas was around 15% versus 35% in EMEA and Europe and 22% in APAC. It's important to underscore that within ESG and climate, EMEA represents close to 50% of the run rate. So the largest region for us is growing at a pretty healthy growth rate of 35%. As I mentioned, sales were fairly flat year-over-year in EMEA and APAC, although they were softer in the Americas year-over-year. I think the dynamics that we're seeing in the US continue to play out where investors are being much more measured on how they integrate ESG, and that's resulting in longer sales cycles and more deliberate purchasing decisions relative to what we saw a year plus ago. But I think given the range of users and use cases, as well as the strong engagement and retention rates that you're seeing, we're quite encouraged by the stability we've seen even in the Americas, even though it is a lower growth rate. I'd say the dynamics in EMEA continue to be the same. Baer alluded to this, but there's some element of regulation being a catalyst. It is also something that is resulting in longer sales cycles as well as investors and broader financial services firms to navigate these regulations, but it's one where we can be helpful to them as they think about how they're going to comply, and we have solutions and tools that will help on that front. There are some environmental impacts as well. It is worth noting that the equity investors, in particular, are under pressure, and we see some of that translating through to cyclical impacts. But we continue to have confidence in the long-term dynamics here and continue to believe this is a big long-term opportunity set for us.

Terrific. Thank you.

The next question is from Manav Patnaik with Barclays. Your line is open.

Thank you. Baer, regarding the strong pipeline you mentioned, could you provide some context? Looking at the net new sales numbers for the first three quarters, they haven’t been very strong. What do you anticipate for Q4, and how do you view that as we move into 2024? Additionally, Andy, regarding the margins you reported for the fourth quarter, you increased the expense guidance, and it seems like Burgiss will be a challenge for a while next year. How should we consider the impact of these factors on next year's margins?

So Manav, I think where you're talking about the overall sales pipeline at the firm. Am I correctly understanding that? Yes.

Yes, that’s correct.

No, we think it's very healthy. We're very healthy. There's nothing there that would be abnormal of where we are today, allowing for the very uncertain environment for everyone, for our clients and some pressure on them. I still am happy to refer to it as either healthy or solid, right? So clearly, we're not generally here to try to fine-tune that excessively in the context of these calls, but there's certainly nothing there that I would call attention to other than to say it's solid and healthy and maybe pass it over to you, Andy, for the rest.

Sure. I can provide some insight into the overall expense guidance and also discuss Burgiss and its potential impact on the company's broader margin. As mentioned last quarter, if assets under management (AUM) remain flat or increase for the rest of the year, we would likely be at the higher end of our expense guidance range. AUM was mostly flat in the third quarter, and our organic expense growth has increased slightly as we've ramped up spending and investment. We are on track towards the upper end of the range. Additionally, the expenses from Burgiss, which will be reflected in the fourth quarter, are expected to have a significant effect. We will account for a full quarter of adjusted expenses in Q4, contributing to the higher overall expense guidance. This range assumes that AUM stays about flat for the remainder of the year. Regarding the impact on the firm's overall margin, Burgiss operates with a lower margin. As we mentioned separately, the margin for Burgiss is in the mid-teens, and incorporating this will decrease the overall firm margin. As we include Burgiss results in our financials for 2024, the margin will likely be lower compared to last year. However, we believe there is good operating leverage in Burgiss, similar to other products and solutions MSCI offers, which tend to have attractive margin dynamics. If we can achieve the growth we expect in Burgiss, it should lead to some margin expansion there, but on a straightforward comparison, the expenses from Burgiss will reduce the overall firm margin.

The next question is from Kelsey Zhu with Autonomous. Your line is open.

Thanks for taking my question. I have a quick one on ESG and Climate. The run rate growth looks much stronger for Climate compared to ESG. I was wondering if you can tell us a little bit more about the key drivers behind the divergence between the performances between those two segments? And as you think about the long-term growth target for the second overall in the mid-to-high 20s range, does that work similar across ESG and Climate? And lastly, just what net new subscription sales growth looks like for Climate and ESG separately in Q3? Thanks.

Sure. There are several questions here, but I'll address them one by one. Within Climate, we have a unique offering that overlaps with our ESG research and ratings to varying extents, depending on the company and sector. However, the solutions we provide for climate are distinct. We offer a variety of solutions that assist clients in incorporating climate considerations into their investment processes, reaching net-zero goals, and managing specific climate risks that may affect portfolio performance. Currently, the run rate for climate-related products at MSCI is $98 million, with approximately $54 million coming from our ESG and Climate segment. While this is relatively small compared to ESG offerings, we are still in the early stages of climate tool adoption. Clients are evolving in their understanding of climate issues and are just beginning to consider regulations and net-zero goals. As a result, we anticipate that Climate will experience higher growth than ESG, which has been around longer and is more established in the market. Despite being a newer offering, Climate is expected to drive significant growth overall. Regarding our long-term targets, we have not made any adjustments in either ESG or Climate. We remain optimistic about the long-term potential in both areas, as there are numerous opportunities across different client segments, asset classes, and regions. Although some short-term cyclical factors are impacting growth, we believe we are well-positioned to seize long-term opportunities in ESG and Climate. As for the growth rates in Q3, the subscription run rate growth for ESG was approximately 21% within our ESG and Climate segment, while Climate saw around 45% growth related to our climate tools. The overall run rate for Climate is $98 million, and it is growing closer to 48%, encompassing tools across all our product segments.

Thanks so much.

The next question is from Ashish Sabadra with RBC Capital Markets. Your line is open.

Thanks for taking my question. I wanted to focus on pricing. Pricing was a significant deal in net new this year. I was wondering, a lot of companies are talking about normalizing pricing as we get into next year. I was just wondering if you could comment on how do you think about the pricing trend as we get into 2024? And have you seen any pushback on pricing, particularly for netting tax?

We have been successful in implementing price increases, although these have been modest compared to previous years. In the third quarter, the contribution from price increases was similar to that in recent quarters, with price increases accounting for around 30% to 40% of new recurring sales. There is some pushback based on the product, region, and type of client, and we recognize that many of our clients are under pressure in the current environment. Therefore, we aim to be careful and ensure we provide value alongside any price increases. We focus on enhancing the solutions related to the price increases and often deliver more products or additional solutions to clients to add value. We keep an eye on the overall market, and wider inflation trends play a role in our pricing decisions. If inflation continues to decrease, it may lead us to consider moderating prices in the future, but we will keep reassessing that. The main priority is to ensure we provide value to our clients when implementing price increases.

That's very helpful, sir. Thank you.

The next question is from Owen Lau with Oppenheimer. Your line is open.

Hey. Good morning. Thank you for taking my question. I want to go back to expense guidance and ask the question a bit differently. So you raised the full-year OpEx guidance by about $40 million, and based on my math, Burgiss $20 million per quarter this year. And I think you mentioned $4 million to $5 million of acquisition-related expense. My question is, how about the rest of the expense increase? And how much of that incremental expense would be recurring in 2024? Thank you.

I prefer not to discuss 2024 at this moment. We'll address that when we release our Q4 results, as we normally do. I want to highlight what I mentioned in response to an earlier question. Our previous adjusted EBITDA expense guidance was between $965 million and $995 million. We indicated last quarter that if AUM levels remained flat or increased, we would lean towards the higher end of that range. During the third quarter, AUM levels were relatively stable, and our organic expense growth increased slightly as we stepped up our spending and investment efforts. Therefore, we are moving towards the upper end of that range. Additionally, the expenses from Burgiss, which will be included in the fourth quarter, are expected to have a more significant impact. We will account for a full quarter of adjusted expenses in Q4, contributing to our higher overall expense guidance. It's important to note that this range assumes AUM levels stay approximately flat for the remainder of the year. Regarding the overall firm margin, Burgiss has a lower margin business. As I've mentioned before, its standalone margin is in the mid-teens. Incorporating Burgiss will reduce the overall firm margin. As we begin to include Burgiss's results in our financials for 2024, we anticipate the margin will likely decrease compared to the previous year. However, I believe there is strong operating leverage in Burgiss, similar to our typical offerings, due to their focus on IP-based products and solutions with appealing margin characteristics. If we achieve the growth we expect in Burgiss, it should promote some margin expansion there, but when comparing directly, Burgiss's expense base will generally drive the overall firm margin down.

The next question is from George Tong with Goldman Sachs. Your line is open.

Hi. Thanks. Good morning. In ESG and Climate, you mentioned growth slowed in the Americas to 15%, while growth in EMEA was healthy at 35%. Can you elaborate on what you're seeing in the Americas and when you would expect to see catalysts for improved growth?

Yes, sure. So I'd say, we're seeing consistent themes in the Americas compared to what we've seen in recent quarters. As investors, managers, broader financial services firms are integrating ESG and launching ESG strategies or planning to launch ESG strategies, they have to focus on a range of considerations, including how it aligns with their overall investment objectives. So what is the impact that ESG considerations will have on risk and return? How do I optimize my risk-adjusted returns by incorporating ESG into my investment process? How do I differentiate relative to my competitors? How do I address the ESG objectives that my clients have or that the investors have? Then for new products that they launch, how do they communicate their approach to ESG and how do they again position themselves relative to other products in the market and how do they prepare for coming regulations, which is not just a factor in EMEA but it's something that US investors have to deal with as well. And so, it is a complex environment for them to integrate ESG. The good news is we are in a good position to help them navigate that. And so when we say our clients are engaging strongly, they want to have those conversations with us. But because of that complexity, because of all those factors that feed into their buying decisions, we are seeing more measured purchasing decisions, longer sales cycles, ultimately a lower amount of sales. But overall, the engagement level is healthy, but we do expect these complexities and longer sales cycles to continue and persist for some time in the Americas. I think these factors at play on top of the cyclical factors will probably persist for some quarters here.

The next question is from Faiza Alwy with Deutsche Bank. Your line is open.

Yes. Hi. Good morning. Thank you. So I wanted a bit more color on the Analytics segment. You've seen run rate growth accelerate here. So I would love to hear more about where you might have invested and where you're seeing the acceleration and how you think about the competitive dynamics in that segment?

Sure. Thank you for the question. Baer here. So what I would frame it is to say we've got three key areas of focus. The front office, both in equities and fixed income, and you saw we had very nice numbers in equities. More content, which includes insights, better coverage of private assets, doing better and being more competitive in fixed income and structured products and climate risk. So those are the key areas we're focused on and I think that we're pleased with, well, I would say we're definitely not happy with the growth number. We think we'd like to continue to be ambitious to see it go up. The retention rate of 95% is also a sign that our clients continue to use our tools in these environments. So we've been very consistent in the story here. I think we continue to have structural improvements in how we deliver the products through better technology, greater integration of our content across different types of analytics. And in keeping with the theme that we've repeated here, our client engagement is excellent, and we have a wide variety of use cases that clients are asking us to solve from going across very large firm use cases to very specific structured products, front office use cases, equity portfolio construction. So it's just a category where with the combination of our investments in content, better technology, and better delivery and the expertise that we bring to clients, we hope to continue to have good directional growth. The only thing I would add just as a slight note of caution is it is an uncertain and amicable environment, and client events can occur, but those are often things that we don't control ourselves.

The next question is from Seth Weber with Wells Fargo. Your line is open.

Hey, good morning, guys. Thank you. I know it's early days, but with the Burgiss acquisition, when you announced it, you talked about good opportunities for joint product development and cross-selling. I'm just wondering if you could talk to any early traction that you're seeing there. Thank you.

The Burgiss acquisition strategically strengthens our foundation for developing private asset classes. We require data, specifically insights into investments and their pricing, to create a comprehensive suite of investment tools for asset allocators and managers. This suite will include benchmark indices, performance attribution, risk analysis, risk management, and liquidity management related to private assets, including cash flow scheduling for calls and redemptions. The integration of Burgiss will proceed along three parallel tracks. The first track focuses on merging various support functions in areas like HR, office space, accounting, and finance, along with aligning data, data centers, and technology. This will also involve integrating the sales forces of Burgiss and MSCI. The second track will concentrate on new product development, particularly in enhancing benchmark indices for private assets, a frequently requested improvement from clients. Additionally, we aim to explore the connection between private assets and climate, particularly in the realm of private credit, which we've just begun to address. The third and fastest track involves boosting sales of the Burgiss product line, which we believe is significantly underrepresented among limited partners globally. We are coordinating efforts between Burgiss salespeople and our senior sales team worldwide to drive this initiative. Our primary goals are to achieve strong sales growth, ensure effective integration, and innovate in analytics over time.

The next question is from Heather Balsky with Bank of America. Your line is open.

Hi. Thank you for taking my question. I have two questions. First, regarding capital allocation, you mentioned its importance to the company. Can you share your thoughts on capital allocation as you integrate Burgiss? Are you prioritizing buybacks or M&A, and what does the M&A pipeline look like? Secondly, in your growth numbers for ESG in the US and EMEA for the quarter, how do those compare to the first half of the year? Is Europe's growth rate consistent with the first half, or is there an increase? Thank you.

Yes. Regarding your question about capital allocation, we have discussed this extensively before. We are always focused on asset allocation at MSCI. We think that capital allocation drives long-term growth for a business, and the daily capital allocation decisions we make ultimately contribute to a strong financial model and compound growth over time. We prioritize internal capital allocation concerning our organic investments, guided by our triple crown methodology, which we've previously explained. The second aspect is external asset allocation, which involves decisions around dividends, stock buybacks, and inorganic investments. During bullish market conditions, asset prices are very high. In such times, acquisitions can become very costly since competition drives bids up, often resulting in overpayment. Consequently, we tend to avoid making significant purchases during these periods. Our RCA acquisition was made during an average market condition. Overall, we remain disciplined financially and generate excess cash, most of which we use for share buybacks. In times of high uncertainty and unpredictability, companies tend to become conservative, and boards may be risk-averse; these are the moments we see opportunities for financially sound acquisitions, like the recent Burgiss and Trove purchases. Thus, we plan to pursue relatively small bolt-on acquisitions that will utilize a significant portion of our cash. Lastly, regarding financing, it is currently quite expensive. We are in a deleveraging phase, with our leverage at approximately 3.1 to 3.2 times, possibly lower. Therefore, we are not looking to increase our leverage at this time. Combining all these factors means we will have limited excess capital available for buybacks in the coming quarters. We will continue to pursue small bolt-on acquisitions while being cautious about increasing our debt given the current financing rates. This summarizes our financial strategy concerning capital allocation at this moment.

And then just quickly on your second question, I would say that if I look at growth rates in the second quarter, the subscription run rate growth rates by region for ESG and Climate are largely consistent with the figures that I quoted this quarter. So similar dynamic where the Americas is in the teens; EMEA is in the mid-30s, and APAC's in the low to mid-20s, so very consistent.

The next question is from Russell Quelch with Redburn Atlantic. Your line is open.

Yes, hi, guys. Thanks for squeezing me on. I think you did a great job of implementing a downturn playbook last year in difficult markets. You said much more cost flex than some of your peers. I was wondering, can you do this again next year if we see a big fall in equity market levels? Perhaps what areas of the business could you look to take costs out? And maybe do you already have some plans in place in case 2024 gets off to a tricky start, particularly in equity markets?

We have always maintained strong financial discipline, and that continues to be the case. We definitely have the capacity to reduce costs. This is part of our downturn strategy that we can activate to safeguard the company's profitability. If there is a significant drop in equity values and a slowdown in subscriptions, our intention to significantly cut new investments in the company may not align with the decline in revenue. We will need to consider that trade-off at the time. However, we are committed to maintaining high profitability levels and making impactful investments, regardless of whether the market conditions are favorable or challenging.

The next question is from Craig Huber with Huber Research Partners. Your line is open.

Yes. Hi. Thank you. Andy, my first question, your costs in all four segments look to us like they were down sequentially. Can you just touch on that and also in light of your overall cost guidance for the year, which is just interesting to me that the costs were down in the third quarter. Why is that? That's my first question.

There’s nothing specific to mention other than that our costs will fluctuate from quarter to quarter due to various factors. These factors can include less frequent recurring costs, nonrecurring expenses, professional fees, compensation adjustments based on our outlook, and items such as severance and spending pace. Therefore, there’s no particular insight to highlight regarding expenses compared to Q2, and I wouldn’t draw any conclusions regarding a trend. I recommend paying more attention to the guidance we’ve provided.

Our final question is from Greg Simpson with BNP Paribas. Your line is open.

Hey, good morning, yes. Can I just ask on the expense growth in the ESG and Climate? It looks like it's been below your mid-to-high 20s medium-term guidance. The EBITDA margin, I think, is north of 30% now. So I just wanted to check in on if there's any kind of change around investments in this segment versus any kind of slowdown on the cost side? Thank you.

There’s nothing to be concerned about, and there are no changes in our plans or outlook regarding investments in ESG and Climate. We are continually adjusting our strategy across all segments based on the opportunities available and our overall financial goals. ESG and Climate remains a promising growth area with significant opportunities, so we intend to keep investing there. Margins will vary from period to period due to several factors. When examining product segments, you might notice fluctuations due to shifts in allocations or the capitalization of software development costs. Additionally, there may be movements in expenses related to nonrecurring costs or adjustments. However, I wouldn’t place too much emphasis on the margins in the ESG and Climate segment, and as I mentioned earlier, there are no changes to our long-term targets.

We have no further questions at this time. I'll turn it over to Henry Fernandez for any closing remarks.

So thank you, everyone, for joining us today. And despite the more uncertain and more predictable environment, economically, financially, geopolitically, we continue to benefit from a great all-weather franchise. Our desire is to be a compounder in good times and in bad times. We're very excited about all the opportunities that we see ahead of us in all of our product lines from index, to analytics, to ESG and climate and now obviously private assets and the opportunities we can unlock with Burgiss and with Trove. We didn't talk much about the voluntary capital markets and the opportunities there, but those will be very significant. So we look forward to updating you in future calls about all of our plans and our progress in all of this. And again, thanks for joining.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.