MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. We will go ahead and get started. Thanks, everybody, for joining us this morning. Presenting next, we have MSCI. And from MSCI, we have CFO, Linda Huber. If she looks similar, she has been here a number of the years -- a number of years in the past with Moody's, but now she's at MSCI and another exciting story. So with that, I'll turn it over to Linda.

Thank you, Patrick. Good morning to everyone. A psychic handshake or a fist bump to everybody. We can't actually shake hands this morning. We have about 15 minutes before the market opens. And right now, it looks like we're going to be up around 200 was the last we saw in the Dow. So here's hoping that we have a good day with a positive bounce. Very excited to see the room full, and we think we have a pretty good story. We have an all-weather franchise, which is particularly attractive for market conditions like this. So if you'd take a moment to look at our forward-looking statements, we have a couple of pages for that. Going on beyond that, what I'm going to talk about this morning is an overview of MSCI, a financial review and then segment highlights of our businesses. And hopefully, we'll be done with a few minutes to take questions in this forum and then downstairs. So MSCI, a $25 billion market cap company at this point. If you look at this slide, you can see a quick snapshot of who we are. 7,500 blue-chip clients in 85 countries. We have must-have products and services for asset owners and the asset management industry. 3,300 talented employees, and I can very much testify that those are very hard-working employees that we have. The run rate for the firm, $1.6 billion as of the end of last year and 11% year-over-year subscription run rate growth. In a minute, we'll get to the fact that for MSCI, we have 97% recurring revenue, which is particularly helpful in a bouncy market environment like this. Lastly, we have a strong performance and a very inclusive type of culture. Henry Fernandez, who brought the company public 12 years ago, is absolutely still very much involved in everyday activities at MSCI and, in fact, led a strategic offsite for us last week in which we saw that we have amazing opportunities available to the firm, and we're all very excited about where we are right now. So what do we do? We work with clients in their investment process. And across the top, you can see, as I look at asset allocation, portfolio construction and then perform performance and risk management, MSCI is integral to all of that. We are particularly close and important to asset owners but also asset and wealth managers and intermediaries. So we help at every step of the investment process, defining the investable universe, allocating assets sustainably, and we'll get to talking about ESG, a space where we like to think that we are, in fact, the leader. We help clients create better portfolios. That's really our mission statement. And we help them measure and manage risk and report both to their constituents and to regulators. So all these activities are critical, and we feel that we have best-in-class tools in these areas. Now we work with both public and increasingly private asset classes. So as I said, we help clients and customers build better portfolios and to use our risk and analytical tools. So for public asset classes, we sort of grew out of equity and then moved to fixed-income indexes. We have now factor models and analytics. ESG, as I said, is a very bright spot in the MSCI story. And then we're moving into private asset classes. You may have seen our substantial investment in the company Burgiss to help us in the private asset class part of the business. We're very active in real estate benchmarking, which we'll talk about in a minute, and now expanding into private equity and other private credit models and risk analytics. So we do have the wind at our backs at MSCI. In fact, conditions are pretty terrific for our company. As the focus moves to global investing, moves to index-enabled investing, as companies look for sustainable returns and focus on private assets on the right-hand side here, they focus on emerging markets and move their -- shift their portfolios from a west-to-east focus, start looking at internal management and looking at overall solutions, these are all things where MSCI can play in a very strong and positive way for clients. So again, if you look at most of the trends in the asset management industry these days, those provide tailwinds for MSCI. Now we have 3 ways we're thinking about the business: the core business, in-flight opportunities and investing in next-wave opportunities. So our core business on the left, of course, we have market cap indexes, equity factors and ESG Indexes and multiasset class and equity analytics. But as you move to the right, we're also looking at creating and working on ESG, indexes and factors, fixed income analytics and Real Estate insights and futures and options, which is a very fast-growing business for us. As we move forward, we're looking at private equity, as we have said, credit and infrastructure tools, and ESG for private assets would be sort of one of the next-wave opportunities that we see for the company. Now this is how and why we win. We are embedded in the processes of many and perhaps most asset managers. We are the benchmark to which many of you compare your performance, and all of that is very important. It's difficult to change out our place in the investment management cycle. We're moving to next-generation platform delivery as well and, as I said before, an all-weather franchise. Given the high-recurring nature of our business and our very strong downturn playbook, which I'll explain in a minute, we're well suited for market environments just like this. Now the financial review, which, frankly, is my favorite part of this presentation. We put forward some pretty good numbers for you. MSCI is a company where we don't have to stand and talk about what we're able to do. We'd really rather direct your attention to what we have done. So revenue growth since 2015, 10% CAGR; adjusted EBITDA, 15% CAGR; free cash flow growth of 25% CAGR; and adjusted EPS of 29% CAGR. We are very clear about our financial goals, and we have done very well in running our financial model. I talked about recurring revenue and high retention. You see here from 2015 to 2019, recurring revenues of 97% annually; retention rates of 92% annually and, in fact, in some of the quarters of last year, we were closer to 95%. We have a very scalable cost structure. We watch our margins, which have expanded very carefully. Our tax rate has come down. Last year, adjusted tax rate, 17.6%. And we have a high cash-generative business, free cash flow last year of $655 million. So again, these attributes believe we make the company a very attractive investment. Capital and liquidity is also strong. Our total cash right now, end of '19, actually $1.5 billion; total debt at that time of $3 billion; net debt of $1.5 billion; total debt-to-adjusted EBITDA of 3.6; and net debt of 1.8. Since then, we did do another financing. We did that on February 19, $400 million. We were able to issue a long, 10-year non-call 5 bond at 3 5/8%, which is a record for a speculative-grade company. So we feel very comfortable about what we're able to do with the balance sheet, and you'll note here that we have plenty of excess cash as well. So we also have a very healthy dividend. We pay out 40% to 50% of our targeted EPS -- adjusted EPS in dividends, which resulted in last year about $221 million worth of dividend. Last year, we repurchased $102 million of stock very opportunistically. The price was about $147 and change, just under $148. So we continue to look at share repurchase in a very opportunistic fashion. We have not repurchased any shares in 3 quarters, but I think it's very fair to say we're watching this market extremely closely. And obviously, we have an opportunistic share repurchase program in place, about which I will say not much more. Our long-term targets, and this is probably the most important chart in this deck. These long-term targets, which refer back to our Investor Day last year, low double-digit revenue growth. And again, we don't just mention this, we've been able to achieve it over the past 5 years. Adjusted EBITDA expense growth rate in high single digits, resulting in adjusted EBITDA growth rates in the mid-teens and adjusted EBITDA margins in the mid- to high-50s. So if you look at each of the businesses, in turn, the Index business, low double-digit growth rates; Analytics, high single to low double-digit revenue growth rates as well, and this is excluding the ABF part of the Index business; ESG growing in the mid-20s; and Real Estate growing in the mid-teens. So again, we feel that these are very impressive long-term growth targets and one which we take very seriously. Now if you look at the segment highlights for the business, most everyone knows of the Index business. MSCI is a lot more than just an Index business at this point, but we do have this business at our core. And you can see that we provide quite a number of tools on the left-hand side, all based on strong research and top-notch analytics. We create these indexes, which we believe are market leading. And we help clients again with portfolio construction, performance management and risk management. The Index run rate fundamentals are broken into 2 parts: the subscription part of the business and the asset-based fee part of the business. So on the left-hand side, you can see $559 million run rate for the fourth -- for all of 2019 and the asset-based fee run rate, $396 million. On the right-hand side, it's a bit difficult to predict. It bounces around. We don't predict this side of the revenues. But again, on the subscription run rate, you can see, in volume, 2/3 of the growth comes from new clients and upsells and less than 1/3 of the Index revenue growth is from price, less than 1/3. Our retention in this business, 95.7% in 2019. So again, solid base of recurring revenue in the Index business. This is the growth in the subscription part of the business. Again, looking at $559 million that I've mentioned before and 11% growth, you can see that this growth has been very consistent at 10% and 11% growth over the last 6-or-so years. Index subscriptions, you can see here. If you look at who and where these products are being sold, it's a pretty careful, even split between EMEA and the Americas, each at about 40%; about 20% in APAC. The client base is largely asset managers at 68%, followed up by broker-dealers. And you can see on the left-hand side the 11.3% growth rate that I had spoken about before. Now as we move into the Analytics part of the business, while the Index part of the business is the best known, I think the Analytics part of the business has had the most impressive performance metrics recently with a mid-30s adjusted EBITDA margin and good, strong growth. Here, we work with investment teams, product and operations teams and marketing and distribution teams. What they do is asset allocation, portfolio construction, attribution and risk management. And then if you move over to chief risk officers and so on, we work with the second line of defense, as it's called in banks. So enterprise risk management, performance attribution, regulatory reporting. And then finally, we work with marketing and distribution teams on investment reporting, digital delivery of content, and we help investment firms articulate their unique value propositions. So what we're finding is more outsourcing of parts of the investment management process, and this plays exactly into what the Analytics business does. So we see a $20 billion total addressable market globally. We are able to work in greenfield areas, factor investing in ESG. We're able to replace internal client spend as more traditional asset managers realize they don't have to own the whole value chain for asset management. And we can displace smaller niche providers as we provide such a large variety of tools. Now we use these tools with inputs from clients and ourselves and from the market. On the left-hand side, our calculation engine and models provide for a lot of data manipulation, as you see in the middle. And then we have enabling technology to deliver the various things you see on the right. So we're really deeply embedded again in the value chain of asset managers, asset owners and others in the investment industry. And the Analytics segment skews. If you look at the global footprint: 54% sales to the Americas, 30% to EMEA, 16% to Asia Pac. On the left-hand side, the growth rate in this area for revenue was 7.1%, 7.2% organically. So we're very pleased with that. And the client base here is a little bit less weighted toward asset managers, more broker-dealers at 22%, hedge funds at 16% and asset owners and consultants at 14%. So again, broadly diversified end-user group here for the Analytics business. Now ESG and Real Estate, which is in our All Other segment. You'll see that the blue part of the bar is the ESG part of the business. Now keep in mind ESG Index results are in the Index segment. So this is research and ratings part of ESG here in the dark blue. This business grew 27% last year from $80 million in 2018 to a run rate of $101 million in 2019. The Real Estate business is growing nicely as well at 12%, moved from $45 million to $50.8 million. And again, these are 2 of our fastest-growing businesses. The global footprint for these businesses is a little bit more heavily skewed toward EMEA at 53%, the Americas at 38% and Asia Pac at 9%. And again, a diverse client mix on the right-hand side, as you can see, for these businesses. Now ESG, the fastest-growing part of our company. New client penetration is still pretty low at 30%. We see, for the large asset managers on the left, that moving to 50% penetration as we get to next year. Most clients are looking at 2-or-so use cases, leading clients have 4 or 5. So we're seeing that ESG is becoming embedded in the investment process. We see that's very much already evident in other countries, Europe, Canada, Australia. Specifically, the U.S. perhaps is a little slower to adapt to the ESG view of the world, but we're seeing that starting to take place. So ESG products. Again, we have ratings and research. We have Indexes which cover both equities and fixed income, and we have analytical tools which handle this area of ESG as well. We're investing heavily in ESG as one of the leading uses of our Triple-Crown investments. Our Triple-Crown investments are investments that have a quick payback, high returns and are in our segments that are the strongest in terms of investor interest, which would be Index and ESG. So that's where we're directing our investments. For the most part, in the other businesses, if they have particularly good investment ideas that can compete with Index and ESG, we're also allocating money to those investment ideas as well. So this is a very important chart. If you look at ESG content, $101 million in 2019. It, in fact, doubled from $49 million just in 2016. And if you look at ESG Indexes, $45 million in 2019, more than doubled from 2017 where it was $19 million. So these business are -- businesses are growing extremely rapidly, and this is why we are investing in them to secure our market-leading position across the spectrum of ESG investment tools, research, ratings and indexes. And last but not least, our Real Estate product overview. We're very excited about this business. Real Estate combines components of public and private market classes. And so we provide analytics, intelligence, indexes and benchmarks and research. Real Estate, obviously, a very fast-growing sector as well. And we're very pleased with the performance of this business, which is putting up nice growth and very nice margins at this time as well. So with that, I will stop here and will sit down and see if we can get some questions here from Patrick.

Great. Thank you, Linda. So as you're getting in your seat here, you did mention how MSCI has an all-weather franchise. And you've kind of commented on it or kind of what comprises that a little bit in some of the presentation. Maybe, I think given some of the macroeconomic events the last few weeks, can you expound on that a little bit more and talk about where you see the resilient parts of your business, if there's -- how you view the sensitivity of the asset-based fee side of this -- of the business and then how you might modulate expenses given -- in potential different macroeconomic conditions?

Sure. And I think, Patrick, you've set a record there for like 4 questions in one question. So I'll see if I can remember most of them. Regarding coronavirus and the situation that we're facing exactly today, we're most concerned about the health and well-being of our employees. So we're being very thoughtful about how we handle that. It's too soon to comment on what that might do to business conditions. This is a day-to-day situation which is changing rapidly. And I think we'll probably have more to say about that as we get to first quarter earnings. In terms of this being an all-weather franchise, it is. Very strong recurring revenue, which is very helpful in conditions like this, and we couple that, if we need it, with what we call our downturn playbook. So pretty easy for us to pull back on expenses in the tens of millions of dollars. We can do that if conditions require it. We're looking at our financial results of course constantly. And we can pull back on hiring. We can pull back on the pace of some of the investments we have spoken about before. Our compensation self-adjusts such that that saves us money if we need to. And we can, as is happening now, perhaps naturally take a close eye on the travel and entertainment budget, which is one that, as I said, we're looking at for other reasons right now. So we feel pretty good about the downturn playbook. It's one that's well exercised. We also have, on the other side of things, the upturn playbook. If things go well, we look at increasing our pace of investments generally every month depending on how numbers are coming in. Now a lot of that, to go to the last part of your question, ties to the asset-based fees part of the business. And we have been running quite strong in the asset-based fees numbers. You saw that in January. Around $950 million, I think, was the last number we saw. And the great concern about the basis points on asset-based fees is a question we're asked basically in every meeting. We have talked about over time how those fees might trend down. But lo and behold, in the fourth quarter, ABF basis points actually ticked up just a tiny bit, but they did tick up. So that part of the business is very much influenced by mix. So it would be inaccurate for us to give more fulsome predictions on where that's going to go because we just don't know. It's the flow of assets coming into markets. Given this bounce that we're having now, we'll see what happens. But again, we feel very comfortable with our ability to manage the franchise in both down and up markets.

Got it. And I think you did answer all parts of my question.

Wow.

So in the introduction, I mentioned that you previously had been at Moody's. You've spent 13 years, I believe, as CFO of Moody's. As I think about Moody's and particularly the ratings business, one of the things that investors really like about that is Moody's actually saves the issuers money. The issuers get a lower cost of funding with that Moody's rating on it. How does MSCI help its clients either generate more revenue or save money such that MSCI becomes something that it's viewed as a partner for your clients as opposed to a cost?

Yes. I think MSCI is very much already viewed as a revenue-generating partner. So we are the embedded benchmark in many asset management firms against which portfolio managers' performance and compensation is measured. So that's a very important thing. And we think that the clarity and accuracy of our indexes make them a critical part of the investment process. We're also very flexible. For example, the most broadly used equity index, if you want that, for example, with or without China A, we can do that. We're very flexible in terms of what investors would like to look at. But we do feel that our products allow investors to perform very well for their clients to help them in alpha generation, which is really what they're all about. And we think that there is a strong value proposition. There was one investment firm that changed indexes quite a number of years ago. That caused an outflow of AUM. So we believe that there is strong value in what MSCI has to offer. Also as asset management firms look at every part of their value chain, as I had said before, outsourcing some of that to other companies might make some sense. And we are able to do that as well and hopefully help on the cost side in addition. But we have found that our tools are very sticky, and we work very closely -- we're well aware of the trends in the industry, and we work very closely with our asset manager and asset owner partners and have for many, many years.

Got it. And then in the presentation, you mentioned ESG several times, and obviously it's a really nice growth story right now for MSCI. There's a lot of money coming into the space right now, your previous employer, S&P, some other firms as well. How do you look at MSCI's competitive advantage in the ESG space? And how durable do you think that is?

Well, we've been in the ESG space now for quite a number of years. Henry Fernandez, who has an uncanny ability to see where the markets are going, really looked at this business, which came out of MSCI when it owned the ISS business. And Henry was prescient enough to keep this part of the business, which turned out to be, frankly, a brilliant move. So we've invested in the business. We started with analytical tools. Now we do have ratings. That ratings format is very data intensive. All that information is scraped from public sources. Most of them are very hard to find. We have a large number of people doing this work, and we don't have rating analysts who handle this work. So it's all done quite efficiently. And we're coming at this business from a different perspective than the rating agencies, who are paid by the issuers. We're paid by the investors. So it's a bit of a different take on how the businesses operate, which we think allows us to have a good, independent view on ESG ratings. So we're very pleased about that part of the business, and, as we said, we're investing in it. We would like very much to continue our dominance and establish a standard in the ESG space. So we think we're in a good position. We think that the investment that we're putting into the business will serve us very well, and our shareholders seem very pleased with the efforts that we're making.

How important is it that you have ESG that touches all 3 of your segments? It's in Indices, it's in Analytics, it's in All Other. And presumably, there's some unified benefit of being able to touch it all throughout the organization.

Yes. I think there is great benefit. We have quite a number of ESG professionals who are very experienced in environmental and climate as well as social and governance parts of the business. And that research focus moves across all of the business lines, which is very, very important. ESG fixed-income indexes are a place where we're going now. We see that as a very big opportunity, and we will continue to grow the ratings and research part of the business as well. So having all of these tools and resources to move across the firm, even into the Real Estate part of the business. If you think about Gold standard, LEEDs, buildings and things like that, ESG has a very strong role to play in the Real Estate business as company look at -- companies think about future locations and climate change events and things like that. So ESG has a very, very strong place in all parts of our business.

I think it was interesting when you were talking about your Index subscriptions business that 2/3 of the growth comes from areas other than pricing, upsells, new customers. And still I think about 80% of the revenue of that business is tied to your legacy products. So as well as factors and ESG are doing, it's still the legacy market cap-weighted indices that are driving most of that growth. Why is that? Like why is the asset manager -- why are you able to upsell them? Why are they adding more content and that continues to be such a robust growth engine for the company?

Sure. I think, Patrick, we would observe there are any number of competitors. There are companies that are choosing to do self-indexing, which we're very pleased to see as well. We have the ability to, as we call it, rent the kitchen. If people would like to use our tools or our indexes and brand them with their own brands, that's fine, too. So we are an open-platform company. We're happy to help investment managers and asset owners however they would like from a very open perspective. So we think that helps. And we think the quality of the work that we do and the tools that we offer seem to speak for themselves in that we are able to have these upsells and add to our client base. It also speaks well to our client coverage team. Most of the professionals have worked in the asset management industry. So highly trained people who know how the markets work and are quite effective.

Got it. With that, I will see if there's any questions in the audience. All right, I don't see any hands going up. So maybe one last one from me, and then we'll move to the breakout downstairs. So another key initiative for MSCI is real assets. And historically, there's been limited data in that space. How do you make sure that you can put together a quality product? And then what is the demand for the product that you are creating?

Sure. I think both ESG and Real Estate require original data gathering, which is a little different than some of our other businesses. And we're doing that work ourselves. One thing about MSCI is we do a good deal of this work offshore. In fact, our business at this point is -- I believe the balance is for personnel, 60% emerging markets, 40% developed markets. For my staff, the finance staff, we're over 75% emerging markets located. So we're very thoughtful about where we do this work, but it is original work, and it's very labor intensive to track all this original data. But we think we're efficient at it, good at it. And once you have that established space with a history going back many years, it's quite sticky, and it becomes a very important base component of the business. So stickiness, handled well, handled accurately and handled in a cost-efficient way. So I think that would sum up what our advantages are.

Great. With that, we will take it downstairs for the breakout. But thank you very much, Linda.

Thank you, Patrick.