MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. Good morning, everybody. Welcome to day 2 of the conference. My name is Chris Shutler. I am the Research Analyst at William Blair, covering the wealth management, asset management and financial technology spaces. Before we start, I want to note that for a list of disclosures and potential conflicts of interest, you can go to williamblair.com. Up next, we have MSCI. From the company, we have Baer Pettit attending. Baer has been with MSCI for 2 decades, serving in a variety of roles, ranging from Global Head of Client Coverage to Head of the Index Business to his current position of President and Chief Operating Officer. In terms of format, Baer has some slides he's going to run through. And hopefully, we'll have some time at the end for Q&A. So feel free, if you do have any questions, just send them through the web console or you can e-mail me directly at [email protected] So with that, Baer, thanks for taking the time to attend the conference, and I will turn it over to you.

Great. Thank you, Chris. Greetings, everyone. Thank you for your interest in MSCI. I come to you from a rainy London this morning, which actually has not been the case because it's been pretty dry for the last 2 months, remarkably, but delighted to be with you virtually at this time. So first of all, I just wanted to make clear that we have some forward-looking statements here. I'm sure the vast majority of you are very familiar with this language, and you can read the fine print. And equally, on the following page, there are some more details about other information, which is, I think, fairly commonsensical, and like I said, you're very familiar with. So look, today, I hope to give you a little bit of a perspective on MSCI. Some of this may be familiar to some of you and less to others. I hope we have a pretty good track record of very clear disclosure and communication. So I'll just try to put, both some more specific observations and there's a few numbers here. But I'd also like to cover that a little bit with my own perspective on the company and kind of how I see things. So first of all, importantly, on this page, we really do see ourselves as a company that is focused on helping our clients build better portfolios. So that is really a critical lens and prism because all over the years, I have often been asked, are you an index company, are you an analytics company, are you an ESG company? And fundamentally, before we get to the very critical question of thinking about what financial returns we might get, the first prism or lens that we look at, in terms of an activity and how it fits with us strategically is, will it help our clients build better portfolios. And so that's kind of the first and driving question. And recently, we added the phrase for a better world. Now we're pretty, I would say, buttoned down and analytical people at MSCI. So we were cautious in adding that. I think people often think about it's easy to put up for a company to put a bold phrase out there. But we reflected on it a lot, and I think there's 2 reasons why we added it. The first one is actually purely financial, which is that we are convinced that when we bring efficiency, clarity, inside, et cetera, to our clients, they manage that money better, and in turn, that creates better returns and less risky returns for the many end investors around the world. The other component is which I'll touch upon further and as I go through the presentation is that ESG and sustainable investing has now become fully integrated into investing. And there are, today, decreasing numbers of institutions, whether they be institutional investors or advisers who don't think about the ESG angle when they're talking about investing. The other thing that I am very focused on from is -- and we, as a firm, are very focused on, is our clients and our client base. So as Chris said, I ran our client organization for about 12 years. And we're very focused on how we can better serve our clients. And we're very conscious about the ecosystem in which our various clients operate and that is a very significant driver of how we think about what we do. It's really driven around this question of how can we help our clients build better portfolios? And how do they operate? What is the ecosystem they're in? And how can we add value to them? So if we go over the page, here are a few slightly more timely things. So clearly, we've been in a challenging environment for the last number of months. And I'm pleased to say that we've really been able to operate almost entirely as normal during this extraordinary time. A lot of that goes to having a highly distributed global system with strong business continuity planning. But the other thing is, I think, our mindset is that we had to really raise ourselves to the crisis. And so I would say that while we haven't been visiting clients in person, we have really been focused on enormous amounts of client outreach, certain -- several direct communications from myself to our clients with free trials to get the most critical, timely data to them to help them navigate the crisis and a number of other actions. So on a narrower point, acting as an extended member of our finance team, you will note that we issued $1 billion worth of debt at the 3.875% coupon, and we're redeeming $800 million at a higher coupon. So I think this was a great outcome and is reflected the investors' interest in our continued issuance. It will mean that we have a few million dollars of duplicate interest expense for a period? And equally, in view of what's happened to the short end of the curve, our interest income will be several million dollars lower than -- versus Q1 '20. So those are a little bit more some housekeeping financial points there. If we go to the next slide and come back a little bit to the bigger strategic picture and going back to our purpose in helping our clients build better portfolios, I think, there are 2 key elements that we've been trying to build out over the years. The first one is the thesis that we have to cover everything that a client owns in their portfolio and that has been a strategic goal. So either -- so typically, our route was in equities. We expanded, call it, roughly in the last decade plus to add significantly and improve our fixed income coverage and analytics. And now we're on a path to have ever better private asset class coverage. So that is kind of what is in the client portfolio. The second thing, which is on this page is we are extremely focused on this ecosystem of clients in the investment world. So we are acutely conscious of the interaction between them. And in many regards, our products and services act as a common language for these different participants to speak to one another. And if you like, speak to one another quantitatively and also qualitatively through many aspects of the investment process. So just like we have been broadening the nature of the analytics that we do, the nature of the asset classes we cover, so we have been going ever deeper into different client types. So if you go back in time, call it, 15, 20 years ago, MSCI was very much in the institutional space, both from an asset manager and an asset owner point of view, and we have broadened significantly over time. And I would say that while we're clearly well distributed across the ecosystems, particularly, of late, we've been finding a lot of interesting opportunities going deeper into wealth managers, focusing on a lot of upside with investment banks and brokers and deepening our relationships with exchanges. So if you go to the next page, clearly, we have benefited from -- what we have both benefited from and I hope also, been an instigator or a creator of certain tailwinds, right? So taking some of these few observations on these and not necessarily in the order on the screen, clearly, everyone involved in the investment space wants to be both efficient and differentiated. And those things can sometimes be intention with one another, and we are very focused on both of them. The efficiency is from having better tools, better analytics, having common view of what you look at things. And the differentiation is from helping clients, take their investment, knowledge, experience and strategies and helping them make them a reality through our tools and data. Another big trend is that -- and we -- it says here the trend towards internal management, and that particularly relates to institutional asset owners. And I would position it even more broadly that all categories of investors want -- have a demand for greater transparency. They want to understand better the drivers of risk and returns in their portfolios across a number of different types of characteristics, and we're clearly heavily involved in that day to day. As part of that, the role of indexes, not merely as benchmarks, but as portfolios has grown dramatically and that was initially those market cap benchmarks that were increasingly used as the basis for index portfolios. But we see that now across an enormous range of strategy-, factor-, ESG-tilted indexes. So on that note, ESG, I believe, we have a good claim to have been a leader in this space. And we are now a leader, not nearly from having, I would say, being an intellectual leader initially, going back a decade-plus going back in time, but we're now also a business leader there, and that we're convinced that, that will be a critical opportunity going forward. And as I mentioned a few moments ago, we want to move from the securities world also into the private asset class world. So if we move on to the next page, I think that MSCI has a fair claim to having a track record to be focused on what we see will be some of the critical drivers in the investment management process over the last few decades. And as I said at the very beginning, we typically bucket those into these 2 things that you see there on the left side of the page, which is clients and client types, the needs of specific client types. So for some time, we have had our client coverage organization organized around client types, where we -- for example, we have a senior account management process, we have a biweekly call on that. And we had a deep dive just 2 days ago into what are some of the key drivers that are happening today with active managers, how can we help them? What are the pressures they are under, et cetera? And clearly, the capabilities component, which gets a lot of the focus is another one. And so I think that through this combination of increasing capabilities and broadening client base, we have enormous ability to take our intellectual property and tweak or adjust it to the particular context of the client and hence, continue to grow and add value to our shareholders. One specific example is, if you go back in time and you just look at the index business, the sort of first pillar of that we had, going back to the benchmarking world, was our subscription data model. The second big pillar of that was the index or passive management and notably, the ETF business. And the next one, if we go to the next page, as an example, is our futures and options business. Now we've seen very dramatic growth in that in the last few years. Now at that rate, I'm not sure the growth is entirely sustainable at the percentage shown on this page, which has been great. But for sure, this is a very attractive growth opportunity for us. And what it plays to is precisely this ecosystem point that I made, i.e., within -- so you -- if we start with the investing community, and we have a strong value proposition for them, then what is, in essence, happened here is the futures and options area, which had traditionally been a country-specific and typically a single currency, country-specific thing with all the major national indexes that you're aware of, has now morphed into being a multicurrency, multi-country and various different styles, factors and ESG. So we think this is a great opportunity. And to the left is the other -- another obvious example, which is what we've done from ESG. And so this ability to both be creative in terms of investment content and focused on what we think will be the cutting-edge thoughts or insights in the market is kind of the starting point. And then what we try to layer on top of that, of course, is multiple ways of wrapping that and different ways of monetizing it, whether it could be through subscription products for research, through index products and ultimately through tradable products. So it's that -- it is those pillars of understanding the client need, being on the cutting-edge of the research that can help them, give them insight and then finding various ways to package and monetize that, which, I think, is at the core of the MSCI value proposition. So if we go over to the next page, and we look at a little bit more of the nitty gritty, I believe, you are all financial people. So I think that this page is fairly self-explanatory. But -- so I think what we have been able to do through strong financial discipline over the last number of years is to continue to invest in such cutting-edge content, processes, infrastructure, which allow us to be growing, but also having a lot of financial discipline so that we can do that in a way, which then is reflected, both in the EBITDA, earnings per share and free cash flow. So that's our continued focus, and that's the model that we want to continue to maximize. If we go over the page, when I was looking at this, I realized that the -- there's a reference here to the Triple-Crown framework, which may sound a little bit obscure or remind certain people of a horse race. So I thought I would explain that a little bit more. So a number of years ago, we decided to be ever more exacting about trying to make all of our investments, jump through various hoops of flame to be funded and the Triple-Crown refers specifically to a combination of the 3-year ROI, the payback calculation and evaluation in net present value terms of future cash flows that we try to put almost all of our investments through. Now there are certain things where it's harder for sure. There are certain types of expansion of companies covered in ESG. Sometimes these things are tough. But the key point being is that leaving aside the fact that it may not be perfectly applicable in all cases, it's this emphasis on being disciplined about our investments that I think is also a hallmark of MSCI. So coming back to the current circumstances, I think, we had mentioned on our quarterly -- first quarterly earnings that in the current context, we had, first of all, frozen our spending. And then I was -- personally have been either giving the yes or no on all marginal headcount and all marginal capital investments in the company. So we've recently freed up a little bit more money for investment going back to our operating plan, not fully, but some, and we've been very rigorous about using this framework in doing so. So the other point here is we are very much an open platform, and we are an open platform in terms of our content, even licensing what could sometimes appear to be competitors for our content if there's a business upside. We continue to be looking at acquisitions, of course, as may come up, and we'll see whether the current circumstances in the markets create some attractive opportunities. But the additional point here is on partnerships. We've really put a lot more emphasis on that. And this is really, if you think about it, it's a way -- it's another, if you like, leveraging point to do ever more to get our content out to a broader audience. The final point, I think, we have a strong track record of a disciplined return of excess capital. And I think we've shown good discipline with our opportunistic repurchase of our shares. So going on to the next page, you -- some of you may be familiar already with this chart. I don't have a great many additional comments to make today, except that we're still committed to this framework. We'll have to see what comes ahead in the markets and the economy. We're clearly in a very unusual situation at presence, where we -- to a degree, at least, the macro economy seems to be somehow divided for markets for the time being. Time will tell what goes on. I'm not here to speculate about that today. But the key point being is based on our current vantage point and based on our -- the information we have available at this hour, we remain committed to these long-term targets. So then going over the page. So look, I think that this is -- these are the 3 bullets here. I think they're pretty straightforward in terms of their clarity. And in just making a few additional observations on them, I think, without being too sounding arrogant or whatever, I think, this tailwinds topic is one where we believe that we can both ride tailwinds, but also, to a degree, at the margin, help to create them in the industry for us. I think our business model has proven itself in terms of what is largely a subscription model with very attractive characteristics. And lastly, but far from being least, I think, we've really developed a really strong people and commercial culture at the firm. And I'm very pleased, and we've seen this again in the last few months with the difficult circumstances that the level of engagement and commitment of our global team has been fantastic. And their creativity in the face of the challenges has been really great. So those are my thoughts for today. I'll pause there, and I think that, that may give us just a few minutes to squeeze in a few questions if there are any. So Chris, over to you, sir.

All right. Yes, just a few questions. So first, I wanted to ask about the index subscription business, which has been an extremely consistent kind of 10%, 11% grower over the years? Can you disaggregate the sources of that growth? I know that pricing is, call it, 1/3. Maybe just talk about that.

Yes, sure. So pricing is about 1/3 and volume about the 2/3. I think, one, I don't know whether it's like the swan gliding over the water with the legs furiously paddling underneath that you don't see. So I think within that 10%, the pricing component has been fairly consistent. But I think we've done a lot to drive -- we've done a lot of drivers of change to drive the other components. So for example, our factor and ESG subscription models, I think, as of Q1, we're growing roughly 27% and 18%, respectively, year-on-year. So they're growing significantly above the average. And the way I think about it is -- so then there's the -- so then that -- so the one component is the product mix has changed. There sure -- there are some strong continuous components over the years, but we've been able to add new growth drivers. And then I think the other one is we continue to expand both geographically and in terms of client type. So we've had -- we continue to expand quite a lot in Asia, as an example. And we've also seen, let's say, over the years, surprisingly certain categories, like hedge funds, have been fairly good buyers of our subscription data products for equities that they were not, let's say, 10 years ago. So I think that -- and I would -- finally, I would say, look, we'll see what the environment that we go into is. So we -- I think we can continue to grow the volume side of it, and we have never -- we have always had a philosophy of not excessively pushing our pricing power. I think we want to get the balance right between both being able to monetize a strong franchise, but not doing so in a way that is seem to be gouging or excessive to our clients. So with that all in balance, those are some of the key components.

Got it. Okay. Switching over to ESG, Baer. So there's -- obviously, it's been extremely topical in the news. I think that there have been some comments by regulators recently about being skeptical of kind of boiling an ESG -- boiling ESG down into a single score. So I mean what are your thoughts on that? Do you think ESG is better suited for a more customized product like a separate account? Or how do you think about where it's best suited?

Look, so I think there's a few different layers. And for sure, it's a complex topic. So I do think that there will be, over time, through a variety of mechanisms, and it could depend on the market, through certain market sort of service providers like us, maybe through regulation, there will be increasingly standardized ESG field. Then -- but they won't all be the same. Point number 2, I personally strongly believe that ESG ratings should not converge. And I don't buy the logic, which certain people put forward that it's a problem that different ESG research companies have different ratings. I think it's a healthy sign. And lastly, I think that there are a variety of different levels of sophistication. So you have certain asset owners, for example, have very clear and prescriptive views, and they want a certain thing. But there will also be mainstream products, indexes for underlyings, for ETFs, where the general investor just wants to make sure that their exposure to companies that are doing the right thing is higher than companies that are maybe not doing so much of the right thing. So I think it's a complex landscape. I think it will remain complex. But as long as we're kind of conscious of all these various opportunities and pursuing them the right way, I think, it will create a lot of opportunity for us.

Got it. Okay. I think that we're pretty much at the end of our time here, Baer. So I want to say thanks, and hope you have a great conference.

Thank you so much. Thank you for having me, and thank you for everyone's interest.

All right. Take care.

Thank you.