BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Good morning, everyone. I'm Mike Cyprys, Morgan Stanley's Brokers and Asset Managers analyst. Before we get started, I've been asked to direct your attention to some important disclosures on the Morgan Stanley research disclosure website, morganstanley.com/researchdisclosures. And if you have any questions about those disclosures, please reach out to your Morgan Stanley sales rep. So with that out of the way, welcome to Day 2 of the Morgan Stanley Virtual Financials Conference. And we kick off now with BlackRock, and we're pleased to have with us today, Rob Goldstein, BlackRock's COO and Head of BlackRock Solutions; and Sudhir Nair, Global Head of Aladdin. Rob has been with the firm for nearly 25 years and has played a key role in building many of BlackRock's foundational processes and capabilities, including Aladdin and BlackRock's financial technology business. Prior to assuming his COO role in 2014, Rob headed BlackRock's institutional client business and held a variety of roles across BlackRock Solutions. Sudhir has been with the firm for over 20 years and currently oversees the Aladdin business within BlackRock Solutions. As many of you know, BlackRock is the world's largest asset manager. They also have a suite of technology solution offerings that are a true differentiator, and we're excited to spend some time diving into that a bit deeper this morning. So with that, Rob, Sudhir, welcome. Thanks for joining us.

Thank you.

Thank you, Mike.

Great. So I'm going to kick off the discussion here, and we'll see if we have some time towards the end to take any questions on the investor portal.

So Rob, let's start with you here. In terms of the growth outlook, technology is a nearly $1 billion revenue business for BlackRock today. And you've mentioned in the past that revenues are likely to grow in the low to mid-teens. So I was hoping you could unpack the components underlying the growth outlook. Which is the biggest contributor? How has this mix evolved, say, between new clients that you're onboarding versus wallet share expansion of existing clients, versus new products and functionality and pricing?

Sure. Sure. And Mike, as you know, because you've had the opportunity to spend a lot of time with us through the years, technology at BlackRock, it actually means a lot of things. And to us, we really view it as a significant strategic differentiator, and it's at the core of everything we do. To us within BlackRock, technology is not only a business, it's a mindset, it's a culture. And it really touches upon all aspects of the firm, whether it be generating sustainable alpha across our investment processes, enhancing our distribution capabilities, how we actually provide controlled scale, given our size. But specifically, to your question, obviously, we have through BlackRock Solutions, a large and fast-growing financial technology business, and that business generates tech-for-fee revenues. Revenues in this business have grown at a 15% compounded annual growth rate over the last 5 years, and we're approaching that $1 billion mark. And those revenues do not include Aladdin's largest client, which is BlackRock's internal asset management activities. This business through the years has consistently grown in the low to mid-teens, and our target growth continues to be in that range over the long term. However, importantly, as we discussed during the first quarter earnings, near-term revenue growth may be impacted by extended sales cycles, particularly as clients continue to address to strategic decision-making in this remote working environment, in this crisis mode that everyone more or less is operating in. When we think about growth over the long term, it's going to be driven primarily by 3 key areas. First, by gaining new clients, and there's significant opportunity there. Second, by expanding relationships with existing clients as they grow, increasing the number of assets that we manage on Aladdin or extending Aladdin within existing clients to additional asset classes, regions and business lines that they may have today that are currently not on Aladdin. Our fees, our revenue model are largely tied to the assets that a client has on the platform while also having adjustments, having accounting for a client's complexity. And all of our Aladdin contracts include embedded minimum revenue floors. And finally, the third key area is by expanding the Aladdin platform through adding new functionality, new products that allow us to serve our clients in even more ways. So in addition to building new functionality into the core Aladdin platform, just providing more value to our existing clients, we're also quite actively building new products that extend Aladdin's capabilities into new areas where clients have historically bought capabilities and integrated software from other vendors. So let me give you a couple of examples that are more recent examples. We've built an accounting module. We've built a data warehouse capability, both of which are now live at some of our largest Aladdin clients as new products to provide to those clients. Another great example would be our acquisition and our integration of the eFront. We just celebrated, last month, our 1-year anniversary there. And that added private markets capabilities, allowing clients to have that Holy Grail, that holistic view of their portfolio across liquid and illiquid, public and private markets instruments, further reinforcing Aladdin's value proposition as the most comprehensive investment operating system in the world. Finally, we're also accelerating efforts to develop and make available sustainable ESG data and analytics within Aladdin. As a leader in financial technology, as a leader in risk analytics, we are committed to addressing the need for better data and technology, and one of our major focus areas is climate risk. Last month, we actually announced a partnership with Rhodium Group for data on the physical impacts of climate change. And this data, coupled with our leadership in financial modeling and the ability to bring it back to an actual investment portfolio, that's the power of Aladdin, is going to allow us to develop what we believe are incredibly vital, new risk capabilities for our clients in the industry, redefining a new standard for measuring climate risk.

Great. Thanks for that, Rob. And maybe we could dive in a little bit more on the revenue model there. Understand it's largely tied to assets. You mentioned that there are some other components as well, such as the number of users, asset composition, complexity. You have, it sounds like, a minimum floor as well. So I was just hoping you can give a little bit more color around that, a little bit more detail that will help flesh that out for the different platforms that you have, that you operate within Aladdin, and how this pricing model has evolved over time. And also, any thoughts around how -- where you see it evolving over time?

Sure. So as we think of our technology services revenues at BlackRock, it's an important source of sticky, long-term revenue and cash flows for the firm; it's highly recurring; all of our contracts are multiyear contracts; and we're experiencing renewal rates in the high 90s of percent. The majority of the technology services revenue is driven by our institutional Aladdin clients, primarily our full end-to-end Aladdin Enterprise clients. But we also have important businesses with regard to providing the Aladdin Risk capabilities or Aladdin accounting capabilities, as I just discussed. When we enter into a new client partnership for Aladdin Enterprise, we begin an implementation period that often takes between 12 and 18 months. And in an Aladdin implementation, we're very closely partnered with our clients to define what their optimal state, future operating model, is on Aladdin. And we approach every implementation with the goal of really helping, teaching, working with clients to ensure, not only that Aladdin is implemented, but that it's implemented in a way that enables, that empowers the client to maximize the value that they receive from the Aladdin Enterprise platform. During that implementation period, we earn an implementation fee, that's typically a monthly fixed fee. And then once a client goes live on Aladdin Enterprise, the implementation fee ends and the higher ongoing services fees begin. With these ongoing services fees, revenue, as I mentioned earlier, is primarily based on an organization's asset size, it's an AUM-driven model, and there's a complexity component to it. And as I said earlier, all of these agreements have minimum contractual fees, and the fees increase as the usage of Aladdin grows. In our other offerings, whether it be Aladdin Wealth, Aladdin Provider, the fee model, the revenue model, is actually quite similar. Fees work in a similar fashion, primarily being based on assets a client has on the platform. Touching upon eFront. eFront's revenue is based more on an enterprise software sale, related support and hosting services model. Their pricing model had been shifting, and we're accelerating that shift over time towards annual long-term contracts, more comparable, more similar to Aladdin. The commercial models for eFront and Aladdin will continue to be distinct. As Aladdin clients choose to add private market capabilities or eFront modules or vice versa, incremental fees would apply. And importantly, our overarching goal, and we believe what has been one of the key success drivers for Aladdin, is very close alignment between BlackRock and our clients' best interests. And this fiduciary mindset is one of BlackRock's core principles and we believe the key differentiator as a technology service provider.

Great. And Sudhir, shifting over to you. On the institutional side of Aladdin, part of the story has been expanding wallet share with existing clients, but also bringing new clients on board as well. So I guess how well penetrated are you today with existing clients? And more broadly, how well penetrated do you see Aladdin in the broader marketplace relative to the opportunity set? And how do you see this opportunity set changing, if at all, here post this recent COVID-19 crisis?

Great. Thanks, Mike. Yes, let me start by answering the second half of your question regarding our experience and observations during the COVID-19 crisis. Obviously, I don't think any of us had a global pandemic in mind when we designed Aladdin. But given what we see, what we've been through, I think we now have greater conviction than ever that Aladdin was really built for these times. Certainly at BlackRock, and at many of our 250 third-party technology clients, we know that Aladdin played a critical role in helping them transition to BCP. It provided unified technology end-to-end that made it easier and more seamless to migrate their employees to working from home. Aladdin's enterprise risk capabilities and analytics helped them understand their risk profiles and navigate the markets during periods of extreme volatility. And the resiliency and efficiency of Aladdin's workflows around portfolio construction, trading, compliance, operations, helped their staff support record trading volumes, even though they were getting used to working from home and doing their jobs at their kitchen tables. Without this level of automation, of processes, consistency of data and technical resiliency, I think the transition to work from home just would have been harder and more difficult. Now coming out of the crisis, we think that the trends that have fueled Aladdin's growth are only going to accelerate the need to have these comprehensive end-to-end solutions, the technology that supports the entire investment process with a strong multi-asset backbone, is only going to increase. We think that many of the firms who are going to look to make a change are going to want to partner with organizations, work with vendors, like BlackRock, who they can have a deeper relationship with, who bring resources, depth and expertise to support them, especially during these turbulent times. And I think the appreciation and demand for just risk management technology is only going to increase. It's amazing that 12 years after the global financial crisis, so many firms still don't have an enterprise view of risk and answering a basic question, like, what's my exposure to airlines or hospitality? In Aladdin, that's a one-click exercise. But for many organizations that don't have a technology like Aladdin, it's still a 1-week project. So all of these trends are positive for Aladdin, and we believe, are going to allow us to return to the low to mid-teen growth that Rob mentioned earlier. In terms of our market penetration, the estimated market opportunity for buy side, risk and investment technology is roughly $8 billion. It's growing at about a 3% CAGR, of which, inclusive of both Aladdin and eFront, we have about a 13% share. So we're confident that there's still room for growth. And as Rob mentioned, we think that growth is going to come from a variety of different areas and the market penetration will continue to increase over time. It will come from client expansion. Aladdin today still has a very fixed income-centric client base. A lot of that goes back to when we started the business and its initial capabilities. But we've seen a strong tailwind of clients as they focus on their multi-asset operations, adding more asset classes, inclusive of their equity portfolios, onto the system, which leads to our growth. In terms of geographies, we have a global business. Aladdin is used in close to 70 countries around the world. But there are key markets, particularly Europe and Asia, that are newer to us. And as those organizations undergo -- as those regions undergo transformation and increased use of technology, we believe that will be a growth driver for our business. And the final is just the key trends, some of which Rob talked about. But the need for outcome-oriented, whole-portfolio solutions that bring together public and private assets, our acquisition of eFront, we think, will allow us to continue to work with clients and grow there. The need for robust risk management and then the overall operating pressures that organizations are under, driving a push towards streamlining, simplification and looking for efficiency in scale. And as Rob talked about, sustainability is on top of mind to all of our clients, and our efforts to really bring more ESG-related data to our Aladdin clients, provide them choice, but really integrate it deeper into the investment process across both ESG and climate risk, we think will continue to be a differentiator for Aladdin.

Great. Maybe we could dive into eFront a little bit more. This was the acquisition you guys had acquired last year, extending Aladdin into the private markets. Can you talk about how you're integrating that into Aladdin? From a user perspective, what would you say is the core selling point that this enables? And as you build a network and a user base here, what might be some of the longer-term implications of more data about private market portfolios?