MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. We can go ahead and get started. Good morning, everybody. I'm Patrick O'Shaughnessy, capital markets analyst here at Raymond James. Presenting next, we have MSCI. And on their behalf, we have CFO, Andy Wiechmann. Format, Andy is going to go through a few slides to kick us off, and then we will move into Q&A from there. So good morning, Andy.

Good morning. Thank you, Patrick. It is very nice to be here. It's great to be doing this in person again. I feel like this event is a staple of the industry. And so I think it's hopefully a sign of things to come that we're doing this in person here. As Patrick said, I want to spend a few minutes giving an overview of MSCI, talk about some of the secular trends that are fueling the business and then highlight the financial model and some of the resiliency of our business and how we manage the company going forward. I think it will serve as a good foundation for some of the Q&A we'll get into with Patrick. When you think of MSCI, it is really important to acknowledge that we are a very unique company. We are very differentiated in what we do and how we do it, particularly our focus, our strategy, our mission. We are entirely focused on helping investors define and segment markets, helping them to understand the drivers of investment performance and risk and then ultimately helping them to build portfolios to best achieve their objectives. We serve 6,300 clients around the globe in 95 countries. So truly a global organization serving the who's who of the investment industry. We are serving the key investment decision makers, so CIOs, Chief Risk Officers, portfolio managers, research analysts, with their most important jobs, which is building portfolios, managing portfolios, managing risk, making investment decisions ultimately. And so we are a mission-critical tool for the most important roles at the most important investment institutions. As a result, we are very well positioned given the trends that are happening in the investment industry broadly. At the highest level, you have global savings increasing. So you have individuals, institutions, governments, all saving, saving more and more, and they're directing those savings into professional management or what we call the investment industry. So you have AUM growing on one side. On the other side, you have more markets becoming available, more asset classes available, more securities, more security types. On top of that, you have more information and data about all those opportunities. And so there's more complexity. And this is where MSCI comes in, more AUM, more complexity. We provide those systematic frameworks and tools that help investors navigate the complexity and ultimately take advantage of it. And so all of that translates into some structural changes that are happening in the industry where you see more indexation. So indexes are increasingly an effective mechanism to reflect a systematic investment strategy and our tools, in particular, are well suited to help on that front. You see more customized and solution-oriented investment products that are geared towards a specific investor's objectives. Our multi-asset class and single-asset analytics are part and parcel for helping investors deliver those more customized outcomes. You see more sustainability-oriented strategies, and our ESG and climate tools are very uniquely positioned to help develop more sustainable portfolios. And then you see larger allocations to private assets. And so we're trying to provide all those tools that we've done for the public assets, for private assets in a way that nobody else is. And so we're uniquely positioned to help investors navigate this new frontier of private assets for many of them. And so when you look at these powerful secular trends, the role we play, serving investors with their mission-critical roles, the business model and financial model that we have is quite compelling. So -- and quite resilient. 97% of our run rate is recurring in nature. 70% of that is recurring subscriptions. And that recurring subscription base is hugely resilient. We've now had 17 consecutive quarters of 9% or higher recurring subscription run rate growth, including in the most recent quarter, 13% recurring subscription run rate growth. We've had 6 consecutive years of annual retention rates of 93% or higher on that subscription base. And importantly, we have the tools to navigate upturns and downturns in the market. So when things are going well, our performance-oriented solutions are in demand. We invest more in the business to drive growth in key areas. When markets are choppy and we see volatility, our tools are mission-critical in those environments, our risk management tools, our liquidity insights, our exposure tools, our volatility tools, all things that can help investors in those volatile times. And we have levers to manage the business on the expense side, many of which are self-adjusting, but also levers that we can pull on our expenses that allow us to drive a very compelling financial model in all environments. The last point I want to make before we turn it over to Q&A here is just around the Russia, Ukraine war. I want to make clear what our exposure is there. It's an area we've been getting questions. So as a business, serving our clients, it's obviously an area we are intensely focused on helping our clients understand the impact of this terrible war on Ukraine is having on global financial markets and help them to navigate what the implications are on their portfolios. But for MSCI as a business, operationally, financially, we do not have any material exposure to Russia or Ukraine. We don't have offices in Russia or Ukraine. Our run rate is less than $1 million to Russian and Ukraine clients, including client organizations that are owned by Russian or Ukraine organizations. And we only have 3 data sources, 3 material data sources coming from the region. So we have data coming from the Russian and Ukraine Stock Exchanges, and we do have a data source in Russia for real estate data. But in aggregate, no material exposure for MSCI in the region. So with that, Patrick, why don't we turn it over to Q&A here?

All right. Terrific. Have a seat, and we'll go ahead and get started with Q&A. So I was looking up your biography, before we started here, and something that I didn't realize was you joined MSCI in 2012, but you actually were part of the IPO of MSCI back in 2007 when you were working at Morgan Stanley. So you've been with the company for a long time at this point. Did you, did Henry, did others know Baer, back in 2007, kind of what a unique asset MSCI was and the path that it might be setting out on?

So I would say yes. Definitely, the Baers, the Henrys of the world understood the power of the franchise. I actually started working with the company in 2006 as an investment banker. And now it was the first iteration of MSCI trying to acquire RiskMetrics. I remember me personally at the time being -- like everybody who learns the business for the first time is just amazed at the power of the business model, understanding the role of benchmarks, how sticky it is, ingrained in the investment process, understanding then you can license those benchmarks to ETF providers and other index managers, and MSCI gets paid there, and understanding the secular tailwinds fueling those parts of the business. I thought it was an amazing business, but I didn't really appreciate it, I'd say, until I joined the company in 2012. And probably, to be honest, spend a couple of years there, and then you start to appreciate how rich the business is, where you start to understand the ecosystem within the investment industry, the fact that MSCI has this virtuous feedback loop with the world's largest asset owners where they're continually helping those asset owners understand trends in the investment process. But at the same time, MSCI is getting input and feedback about how they're thinking about investing that allows us to create the next generation of tools. Understanding the criticality of our frameworks not only within that traditional institutional investment process, but the fact that those same frameworks and tools have applications across wealth management, across insurance, across the fixed income investment process and hopefully, private asset investment process. And so just the layers of opportunity and growth have really been remarkable, and I've come to appreciate that over my time at the company. Thinking back to when I first started working with MSCI in 2006, MSCI was about $300 million of run rate back then. I think it might have been a little bit higher. It's kind of like where we are right now with ESG and climate, where it's $350 million of run rate. You know it's really amazing and it's got huge growth opportunity. But trying to say what it will look like in the future today is kind of tough. I look forward to seeing what it will look like in 10 or 15 years, but you just know it's this amazing financial and business model that's going to be huge in the future.

So then I think building off that point and leveraging your history with the company, can you walk through the process of how MSCI decided to build out what has become an industry-leading ESG ratings franchise and how, if at all, that's informed the company's aspirations to build out private assets?

Yes. It's a good question. Actually, the 2 are very closely related. So I think it's a very thoughtful question. Maybe just going down memory lane one more time, going back to -- so you're probably aware of this, but the bulk of our ESG franchise or at least a big chunk of it came via RiskMetrics. And so RiskMetrics actually in late 2006 acquired ISS. Subsequent to their acquisition of ISS -- and I think RiskMetrics view was ISS is another form of risk. You have the core investment risk management tools from RiskMetrics that most of us think of, but then you have this governance risk aspect. And so they started to build more of what I would call a GRC-type offering around that. They acquired a forensic accounting research business. They acquired a securities class action settlement collection business. And then they acquired these 2 niche assets, which were focused on these flags within the governance space called ES&G. The businesses were KLD and Innovest, and they had it within their governance segment. When we acquired RiskMetrics in 2012 -- sorry, 2010, there was an important switch that, to Henry's credit, Baer's credit, Remy's credit that we made, which was moving the ESG part of that governance risk area into the investment part of MSCI. So MSCI at the time had 2 segments. We had our investment performance and risk segment, and we had our governance segment after we acquired RiskMetrics. We kept ISS and the class action settlement and the forensic accounting in the governance piece but pulled ESG into the investment performance and risk part of the segment. The reason we did that is we knew this is something that investors were thinking about as part of their performance and risk analysis, not just something that was a governance flag. And so from there, the emphasis that MSCI has been building it out to be a tool that can be used as part of the investment process, not just a middle or back office thing that's part of proxy voting or proxy analysis. And so the tools have migrated from what were screening tools used by sustainability or impact funds, which is still a big part of the business, important part of the business, but there's been much more an emphasis on the ratings and why investment -- or why ESG matters for investment risk. And so that has been a big differentiator for us and part of what's driven, I think, the huge growth in the segment. On the private asset front, we're getting into it for the same reason. We hear investors tell us, particularly asset owners, "I'm allocating more to private assets. This is something that's more important to me, but I don't have the tools and framework to understand basic things like market size, market trends, understand what's driving the risk in my private asset portfolio. Our managers actually adding more value or they're just in a certain asset class or in a specific sector or geography." And so as we build out private assets, we have an intense focus on helping solve those investment decisions, which I think is very different than any other data or analytics provider to the private asset space.

So you've mentioned RiskMetrics a couple of times, and that's a key business within your Analytics segment. The old Barra business is in there as well. It's a substantial segment on its own. It's a meaningful revenue and profit contributor to the overall company. But as I think about Analytics, I think of it as the R&D engine that kind of feeds the rest of the company. Is that a good framework to apply?

Yes. It's actually a great point and one that often gets lost, where -- if you think about what Analytics is doing at its core, it is within single asset classes. It's mainly equities, and we've got a very fast-growing fixed income analytics front but also for multi-asset class portfolios, whether that's a MAC solutions portfolio or probably more generally used at a fund level, an enterprise level, an organizational level, being able to understand what's driving performance and risk and then helping to optimize or construct and backtest portfolios. Based on how I described the company, what we're trying to do, that is a critical part of MSCI's strategic advantage in the investment process. And the way it manifests itself is on a number of fronts. One is the content that comes out of the Analytics segment. So the clearest example is our factor indexes, which are close to $200 billion of AUM and ETFs linked to our factor indexes that is built off the factor models from our Analytics segment. And we not only have factor models within equities, which is what we're best known for, but we have fixed income factor models, multi-asset class factor models. We have private asset factor models or risk models as we call them. And so Analytics is the engine that fuels a lot of that. Even beyond that, fixed income content that is helping to support our fixed income index initiatives. The second dimension I would highlight is the capabilities in Analytics. So things like the Optimizer are critical to us as we move in the direction of more customized indexes. Those indexes can be optimized or customized for client-specific objectives using some of the analytic powerhouses and engines that we have within our Analytics segment. And then the last -- actually, one that I don't want to miss because it's important increasingly to ESG and will be very important going forward is things like our stress testing capabilities in Analytics, but also our reporting capabilities. Those are all things that are engines that can be used to drive some of the regulatory reporting solutions we have for ESG and climate. And then the last but probably arguably one of the most important or has been one of the most important to this point is the client relationships. So our analytics tools, particularly our multi-asset class analytics tools, are used by Chief Investment Officers and Chief Risk Officers who are looking across the total organization. And so that is a door opener for us to go in and help them think about and have the conversation about what are they trying to achieve as an organization? How are they thinking about investment strategies? And then that lends itself to a, "Hey, we can help you with a customized index on this front. We can license you these index modules. Here's how you can use ESG and climate and understand the risk and performance of ESG and climate." So Analytics, yes, is a very strategic business for us. And it should be, hopefully, a compelling growth driver in its own right, but it's definitely fueling growth in other parts of the business.

So speaking of your client relationships that you're just mentioning, it seems to me that you guys probably have a more collaborative approach with your customers than maybe a lot of your competitors might. Is that something that you see as a key distinguishing advantage for MSCI in terms of you're working with your clients to figure out what are they trying to solve?

Yes. Yes. Absolutely. I think you said it well, actually. So -- and you've probably heard us talk about extreme client centricity. I know it's something we talked about at Investor Day last year, and you've heard on some of our earnings calls. It's a key emphasis for us. There's a few dimensions to that. One is exactly what you're highlighting. Our clients are a key source of insight to us about the investment industry. There are also very important influencers. And so our strong relationships with the world's largest asset owners help drive common languages that are used around the industry. And so ensuring that we continue to be very close to our clients and help them in their transformations that they're going through, help them navigate the industry is a key source of insight to us. And it's also a key angle for us to continue to promote our products. The other thing is the commercial reality of the fact that our -- while we're very excited about the new clients that we're getting access to through ESG and climate and through private assets, the reality is the bulk of our growth for the foreseeable future is coming from our existing clients, doing more for those existing clients, so upselling them. And those clients have appetite to use products across each of our product areas. And so being a close collaborator with our clients is going to unlock the biggest growth opportunities we have in front of us. And then the last point that's related to that, our clients are looking to operate more efficiently in many parts of the industry. As many of you are aware, there are pressures on many parts of investment managers. And they are looking to streamline their operations, be more efficient in how they operate. And we can be a player that can help them across a broader range of solutions that they have. And so being close to them as one of their selected partners is going to be critical for us to unlock the full wallet opportunity we have in front of us. And so client centricity is not only a sales and client servicing. Yes, it's that. But for us, it's technology solutions, how we deliver our tools, making sure they're easily accessible and interoperable. It's how we develop our content and making sure our content is consistent across product segments and can be used together. But it's also in how -- the ease of interaction with clients, so even things like billing and contracting that my team focuses on in finance. We're trying to make it very easy for clients to do more with us going forward.

So drilling down on the topic of client centricity and client collaboration, how does that manifest itself in terms of ESG? And what are clients looking for from you guys in ESG? And I ask that in the context of some debate over ESG ratings and what are they trying to evaluate and is that what should be evaluated?

It's -- yes, it's a very important point and actually one that's gotten a lot of attention in the media recently where ESG and climate mean different things to different people, is kind of the punchline. And probably the most important thing is we provide solutions for many different ESG and climate objectives for investors. And so we have our climate products that allow investors to understand the climate footprint of issuers or portfolio. We have our temperature rise tools that allow investors to understand how aligned the company or portfolio is with a certain temperature rise scenario. We have our Climate Value-at-Risk. So even within climate, we have a whole set of tools that allow investors to do different analyses, different pieces of research and develop different objectives across the climate dimension. And that's just within climate. We also have our screening tools, which I alluded to earlier, for investors that maybe don't want to invest in companies that have certain exposures or certain business practices. We provided content and it goes together with those screening tools that allow investors to -- if they have an impact objective, invest in only companies that are aligned with certain purpose-driven causes. And so we do have a range of tools out there in addition to our ratings. And our ratings, we have developed as a way for investors to understand -- as I was alluding to earlier in one of the earlier questions, our ratings are meant to help investors understand what matters from ESG and climate perspective for a specific company within a specific sector and how that matters from a risk perspective. So it's really embedded in that investment process. And so we have really differentiated ourselves and I think helped drive the ESG transformation and been a key player because we have focused on with our ESG Ratings, what really matters from an investment return and risk standpoint, which is very different than most of the players out there. But it's also something that's gotten attention from the media saying, "Hey, your ratings doesn't acknowledge that this one company is actually doing X, Y and Z from a climate standpoint or from a social standpoint." And that might be because that individual or that source has their own objective, but it doesn't necessarily mean that, that's a key component of investment performance at risk. And so that is where we're differentiated. And I think that is an angle that we will continue to take it, is why does ESG and matter -- why does ESG and C matter from an investment standpoint. And that's the approach we take across everything we do. And it goes back to my opening remarks, which is one of the things why we're very differentiated in the industry, we're focused intensely on the investment process even beyond just providing data and tools and analytics.

In your introductory remarks, you spoke a little bit about Ukraine and Russia. And one of the things that you guys announced a couple of days ago, I think, was removing Russia from some of your indices. When you're interacting with your clients and saying, "Hey, here's what we're going to do," how do they react to something like that? Does it introduce tracking error if they can't sell their Russian stocks or their Russian bonds because those markets are closed and the financial connections are interrupted right now?

Yes. I do want to disclaim that I'm not on the index and research team, which sits on another side of a wall that makes all these decisions and consults with clients. But I can say that whenever we evaluate situations like this or in this case, a terrible war and implications on the financial markets, there's a heavy industry consultation. And so we interact very heavily and we solicit input from not only managers and asset owners, but intermediaries and other market participants in terms of how they are thinking about the situation. And we evaluate across 2 main lines, which is accessibility and investability. In this case, when you look at what's going on in Russia, in particular, the financial markets have been closed. The exchanges have been closed. Intermediaries are inaccessible and then there's not a clear way to get capital now in or out of the economy. And so it's -- I think our researchers use the term, it's uninvestable and so the market's become uninvestable. And so that's a determination that was made in heavy consultation with the industry, and it was moved from an emerging market into a single market. And the important thing, I think, to your question is there's also heavy consideration given based on feedback about how we make that transition. You're not going to be able to solve for everybody's objectives and constraints, but we try to do it in a way that is constructive to the industry and how they manage their portfolios.

Makes sense. I will pause and questions from the audience.

Can you talk about the pricing environments and price elasticity, demand for your product [indiscernible]?

Yes. So as I was talking about in the beginning, most of what we do is mission-critical to the investment process. But importantly, we take a value-based approach to how we price our products. And we consider a number of dimensions in our price increases when we do have price increases. So we think about the value that we're adding in any given year. So our products are not static, and our solutions are not static. We're continually enhancing the data that's included in the data modules that we sell. We're continually adding new indexes to our index modules. We're continually enhancing our analytics and our analytic capabilities. And so there's a continual evolution of value that we are adding to our clients. And so that is something that feeds into our pricing equation in any given year. We do also consider what our competitors are doing and look at the competitive environment within the lens that we want to be a long-term partner to our clients. We recognize, as I was saying earlier, that our largest source of growth is doing more for our clients. And so we want to be really a responsible partner for them as they continue to build their business. And so we're very measured in where and how we use price increases. And sometimes when our competitors are increasing their prices even higher, we will sometimes be more measured because it creates more opportunity for us to upsell our clients. And then we do also consider cost. And so when there is more cost for us to construct and deliver our solutions to clients, that's an input into our pricing equation. And so we factor all those in and generally have relatively structured annual price increases that we deliver to our clients going forward, which reflect all those dimensions and the current operating environment as well.

All right. Maybe one last question from me before we run out of time.

Sure.

The SEC has obviously been very busy, but one of their recent proposals was increasing disclosures by private asset owners. How does that dovetail with what you guys are doing on the private asset side?

It's a very important point because it's not just the regulators that are focused on transparency in private assets, but it is the investment community and particularly asset owners who are increasingly allocating more of their portfolios to private assets as a way to get outsized and uncorrelated returns they believe. But there is the screaming need from those clients to have more transparency around the markets. They want to understand -- and I touched on this a little bit earlier, but the managers that they're investing in, the funds they're investing in, many times have inconsistent definitions of geographies, of sectors just because private equity funds says they're a health care fund, doesn't necessarily mean the same thing as another health care-oriented fund. Even definitions of LBO versus VC versus growth within the real estate space, how do you define a certain property type, these are foundational basic things that investors are looking for. And even just how do you define the addressable market of investable opportunities. And then layering on top of that, how do I understand the risk that I'm taking by going into certain private asset portfolios? How do I understand the value that a manager is providing? Firstly, you need to understand the market to understand whether that manager is adding value relative to the market. What are the contributions from things like leverage and liquidity? How do I think about private assets in the context of my total portfolio? And how does that -- the assets correlate with my public equities and with my fixed income portfolio? And so there is the screaming need for structure and transparency around the growing size and complexity of the private asset space. And we hear it from our clients, and those are the solutions we're trying to deliver to the market. So we're very excited about that opportunity longer term. We know there's the demand for it. I think there will -- it will be an evolution, and it's very much in the early days. But we do believe over time that will be a massive, massive opportunity for us.

All right. Terrific. With that, we will wrap it up. We'll have a breakout session downstairs. Thank you.

Thank you, Patrick. Appreciate it.