FactSet Research Systems Inc. (FDS) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining today's webcast. Analyze Digital Assets with Coin Metrics in FactSet. I'd like to welcome our speakers today. Chris Ellis, who is FactSet's Global Head of Strategic Initiatives; and Tim Rice, CEO of Coin Metrics. Before we get started, I'd like to cover a few housekeeping items. Today's event will last approximately 20 minutes. We encourage you to submit your questions at any time via the Q&A box. We will follow up with you directly. We'll answer some questions at the end. And if we do not get to your question, we'll follow up with you directly after the presentation. However, should you have any technical questions at all, we will address those right away. And lastly, this webcast is being recorded so we will send out a link to the recording after today's event. And with that, I will turn it over to Chris.

Thank you so much, Amanda. Great to be with everyone here today. Thank you for joining us. Despite the well-chronicled struggles of 2022, the total market for digital assets was still over $850 billion at the start of 2023. One of the unique features of the crypto asset class is its concentration. Though there aren't broadly accepted indices that summarize the asset class, Bitcoin is approximately 38% to 40% of the total market, and Ethereum is another approximately 19% to 20% of the market. From FactSet's perspective, in our conversations with our clients, they are the most institutionally common digital assets that we see, held across our client base. And those are the 2 that are most important when we talk to clients about their needs for digital assets. For this reason, the FactSet-Coin Metrics partnership really focuses on the top 200 digital assets. Of course, Coin Metrics has better coverage and any of our clients that need to gain access to an extended universe can do so through a direct subscription with Coin Metrics. Besides the universe of digital assets, the other dimension is the set of data items. And without stealing Tim's thunder, I'll just say that this is one of Coin Metrics' true strengths. The following set of base metrics are available throughout FactSet. From there, if you need more, Coin Metrics has hundreds of other deeper metrics that are available through a premium FactSet subscription or a direct license with Coin Metrics. For many of our wealth management clients and some of our asset owner clients, crypto is already a portion of their overarching investment strategy. FactSet is committed to supporting our clients as they increasingly evolve toward multi-asset portfolios. This has been core to kind of our strategic priority over, frankly, the last 10 years. The addition of digital assets is really the logical continuation of this strategic priority. Ignorance is not bliss. Now more than ever, FactSet clients want a more deeply research digital asset investments and for crypto to share more operational alignment with their other asset classes instead of being an outlier on the fringe of their investment process. Clients want their crypto investments to be part of their core workflow and not ring-fenced into a corner analytically. Like everything in FactSet, a deep understanding of digital assets starts with a deep understanding of the data. And with that, let me turn it over to Tim.

Thanks, Chris. Really excited to be here, and I think this is an exciting partnership for Coin Metrics. And as Chris said, I think that what we're doing here with this partnership is meeting clients where they're currently participating in their traditional asset classes. And I think it's just a super join up. Amanda, if you can just jump forward to that next slide, it would be great. So like FactSet, what we do focus specifically on the crypto asset space is we're a massive content aggregator of what we believe is all the relevant content that an investor would want to understand about crypto assets. So what do we do at the [ cold ] phase of our operations is we run blockchain nodes. So we run Bitcoin, Ethereum, Litecoin, several hundred nodes that we run internally. And we do that in order to read the native API of the blockchain, parse the content off and start to prepare that first level of data-as-a-service and information where we're contextualizing what the blockchain actual data means. The subset of assets that FactSet or metrics that FactSet has put on the platform, as Chris said, are some of the very most exciting and informative metrics that the investor would want to understand. Just a couple of examples, active addresses over the past one year, that can give you a sense of the vibrancy of the asset that you're looking at or examining. There are some other things like free float supply. So in crypto, the only way you can understand how much of the asset is available for trading is to monitor the on-chain addresses of that address for that asset to understand how it's actually circulating. What is the available tradable float of that asset? So I think there's a great subset and probably the most important metrics that are on the FactSet platform. So that's what we do on the blockchain side. We run those nodes. We're very intimate with what's going on, the behaviors. We're studying those in real time. The other part of the business that's slightly different from our traditional finance world is the market data side of the business. And so in order to understand the -- where the assets are currently trading because of the various liquidity venues, the exchanges within crypto, we need to connect to multiple exchanges in order to ingest that content in real time and still actually where the market is. One of the things to know about the crypto asset class is that many of these exchanges, while they're kind of in their early days of forming, connectivity can suffer, especially in times of high volume. And so what we do on our side is we're kind of arbitrating the largest venues for a particular asset and making sure that we're providing data that will give you an example of where the market is trading in aggregate. So U.S. dollar Bitcoin is basically brought together by examining multiple exchanges in real time and then calculating what we believe is the aggregate value of that data set. So we stitched those 2 things together and to start to think about indexes, like how can you start to think about creating benchmarks for yourself to measure your potential exposure into an asset. So you need to kind of bring those things together. So the base conversation around aggregating the correct markets, starts off with that work, but then you can take a deeper examination in your thinking by looking at the on-chain metrics to examine things like free float supply. Chris highlighted earlier the kind of Bitcoin dominance of the marketplace right now, but examining the actual free float supply or the active addresses or the movement on-chain will give you a deeper understanding. And I'd just like to echo what Chris said earlier, right now, we're coming out of a very dynamic market circumstances and people were trying to plead ignorance. And there is so much data available and intuitive understanding is important for people to participate in the asset class. You can think of it as the equivalent of doing the fundamental examination of a publicly traded company to understand its cash flows, how it's thinking, what is -- what things look like. And that's where the on-chain side of this data set is super valuable for people to understand. And I would encourage folks to really dive in on this stuff and start to look at the data and examine what their thesis is and see if it actually builds with that. We've had examples that there are several versions of Bitcoin, for example, there's a major dominant bitcoin itself, but then there's Bitcoin SV and Bitcoin Cash and some others where on kind of high-level examinations, you might actually think one of those is more interesting, but you have to understand the broad deep definitions of these blockchains. And we do that to bring together a great exposure to the marketplace through this. The final thing that I would say and why FactSet is such an important partner for Coin Metrics, and we said at the beginning is you're working on your other asset classes within FactSets, you're comfortable with their data, you understand the formats. And so we're doing the best to meet our clients in the early endeavors of this where they meet and operate, and FactSet is just a fabulous outlet for us to be able to do that work together.

So with that, let's take a closer look at what the integration looks like inside of FactSet. To start, digital assets are fully integrated into FactSet's lookups, the Fact Search and the Type Ahead. So these instruments -- these 200 instruments are easily discovered throughout the FactSet system. It's not hard to find Bitcoin, Ethereum and the other instruments across the system. When you selected in company and security analysis, the Snapshot report is customized to the uniqueness of digital assets and it's set up to showcase those 20 core metrics that I talked about earlier -- that I listed out earlier, and Tim really talked about in terms of the fundamental importance of them in terms of understanding these securities. This is an ideal place to start your research on a particular digital instrument or compare potential investments in 2 different digital assets. Now along with the integration and workstation, of course, this data is also available in FQL codes as well as feeds and APIs. The other way to monitor or research digital assets is through the news and in Q4 of 2022, FactSet responded to the growing turbulence in digital assets by increasing our coverage in StreetAccount. StreetAccount crypto summarizes -- provide summaries that offer a bite-sized, big-picture view of the digital markets and the forces driving them. To provide holistic coverage of the ever-changing landscape, StreetAccount highlights ongoing developments in key markets, monitors on-chain data to gauge network health of the leading assets and stays up to date with company news, capital raises and really all things web3. Updates are posted every 6 hours during the week to the StreetAccount system. Now for an asset owner or a wealth manager, once the research has been completed, asset allocation is the next critical question. And in case you didn't already know, FactSet's allocation -- asset allocation tools were entirely redeveloped in 2022. As you see in this example here, you can inject a digital asset into an existing portfolio to study whether it can be expected to help you better meet your long-term investment objectives. So in this analysis, we're analyzing the impact of introducing a 1% to 5% Bitcoin investment into an existing portfolio comprised of public equity, fixed income and private capital, really a true multi-asset analysis. We can use historical performance from different time periods or our explicit capital market assumptions to model crypto in each of the other asset classes in this holistic asset allocation approach. Once you've decided what's in the portfolio and how you want to utilize crypto in your overall investment strategy, after the fact, FactSet users can fully analyze the digital assets alongside other investments in performance contribution, attribution analysis, composition and weights analysis as well as predicted risk analysis. So here, we have a contribution report year-to-date through earlier this week that you see includes a mix of individual equities, some ETFs, some funds and then positions in both Bitcoin and Ethereum. For those of you who are familiar with the portfolio analytics tools, this works exactly the way that you'd want it to work. The one wrinkle or the one challenge with this is the symbology because there's no industry standard symbology for digital assets today. FactSet uses the symbology that you see here that I don't want to say it's a standard because there is no standard, but it's what we've adopted and if in your accounting system, your OMS, your internal data warehouses, you've used different symbols, you can easily map those between what you use and what we use through the composite asset mapping capability or functionality that's been part of FactSet for 20 years or so. And last, but certainly not least, the digital assets can be compared to funds, SMAs and indices in our SPAR application for returns-based portfolio analytics. And again, coming back to what we talked about earlier, because there really aren't commonly accepted benchmarks in the crypto asset class today, it's just as easy to take Bitcoin, Ethereum or any of the 200 instruments that are being integrated into FactSet from Coin Metrics and use those alongside funds, ETFs and indices for this returns analysis. So it's, again, really everything that you would want it to be fully integrated into that analysis alongside private capital, public equity and fixed income. And with that, I'm going to turn it back to Amanda, and we'll see if we have a couple of questions.

Awesome. Thank you both so much. So we actually -- we do have some time to answer a few questions that we received from the audience during the presentation. Let's see. So the first question looks like it's for Tim. The question is, I recall seeing Coin Metrics as the source for Bitcoin's price on CNBC, but I use another provider for reference rates today. How would you characterize the difference between your reference rates compared to other sources?

Thanks, Amanda. That's a great question. And I think the understanding how Coin Metrics and where we're going from a target market perspective, what we've done is -- our target market is the FactSet client, a regulated financial institution. So what that enables us to do is start to create a white list of liquidity venues or exchanges that we believe are relevant to understanding the price of Bitcoin or Ethereum or whatever the assets that are available. As I said, we do this through a white listing framework. Today, we ingest over 35 markets from exchanges in general. And then what we do is we look at those exchanges. Do they provide AML/KYC? Do they have a regulator that's qualified? Do we understand their technology? Is it robust? Is it solid? And then from there, we start to look at the actual volumes from the venue and start to calculate that U.S. dollar Bitcoin rate in real time from ingesting multiple venues and consolidating those together. What that does for the customer is it allows you to understand the broad aggregate view and potentially the difference between coin-based by itself and the other markets that would go into that U.S. dollar bitcoin price from Coin Metrics and we're very deliberate about what those markets are at any given time, it's available in our website or we probably have that somewhere with FactSet, so you understand what markets are going into U.S. dollar bitcoin. But it's a real proxy for the actual value that's going on. One thing that -- to be aware of that the price that we're putting out does in general, is it takes into account issues with crypto exchanges. And those issues being -- do they have a downtime? Is there an outage in particular? Has one exchange experienced some type of flash crash where it would create an anomaly if you were looking at a Kraken during a given point in time. This is kind of taking all of that data and kind of smoothing it out so that you're never really off the market if you happen to have the opportunity to take advantage of it between markets. It's great opportunity but we think it's a real example of looking at what our clients, where they would trade, where they would interact and then consolidating that data together in one viewpoint.