MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thank you for being here in Day 2 Americas Select Conference. We appreciate your attendance. For those of you who don't know me, my name is Manav Patnaik. I'm Barclay's Business and Information Services analyst. And we're extremely happy to kick off the Day 2 here with MSCI. We have Baer Pettit, the COO of the company. So Baer, thank you for being here again. Always happy to host you.

So I guess, Baer, the best place to start, obviously, is the first quarter results. Because there was a little bit of a surprise with a lot of us, and we saw that with stock reaction. Maybe from your vantage point, can you summarize what happened there? And maybe what elements were surprising to you as well?

Sure. So look -- by the way, nothing says relaxation like coming into a windowless room at 9 a.m. on Wednesday having a spotlight put in your eyes. I can't see any of your faces. But anyway, yes, so clearly, it was a disappointing quarter. There was one material component, which was the large bank merger, which we discussed. But nonetheless, I think notably, so I would say, some optimal sales, but not bad sales and disappointing cancels. So I would say 2 things. One is we're very focused on remedying that. And we have a lot of tactical plans in place to ensure get we into a better direction in terms of our results. But equally, and I really do not want this to sound complacent at all because we're not -- and we never -- we are not and never have been in my almost 25 years at MSCI, complacent. But we're not a different firm than we were the previous quarter, right? We're not a different firm. It's not like our clients have changed. It's not like our strategy or our use case has changed. So I think that we need to sharpen the pencil in a few areas. We need to accelerate some new product development across pretty much all the product lines. And we need to ensure that we're staying as close to our clients as possible as always. So all those things are central, and we're very focused on trying to deliver the next quarter more strongly and the second half of the year more strongly. But I was thinking about this in the way in, and I was actually reflecting on the changes in the U.K. from quarterly reporting to semiannual. And I think the issue that we have just generally is -- and by the way, I'm a big believer that quarterly reporting increases company's performance, so I'm not complaining about it. And I'm totally in favor of the transparency, and I think we're extremely transparent. But you can't make things very noisy, right? And we saw the previous quarter, the stock had popped up dramatically. And so I just think I would advise a little bit of caution not overreacting to a given quarter's numbers, whether for the good or for the bad because we've got a pretty steady franchise, and I think we've got pretty tough financial management. So generally speaking, I think we can steady the ship and get back to some stronger numbers.

Got it. And maybe just to follow up on a few points. So on the elevated cancels, as you called out. So you're quarterly reporting that. Was that just cancels that could have happened in the fourth quarter and second quarter, happened in the first quarter? Like how many of these were known and just...

Yes. Look, I think it's a bit of that. I think there's some elements, look, there's always the nature -- so still today, the overwhelming number of cancellations that we take are client events. And client events, by definition, are not that predictable. Shutting down the strategy. Clearly, the big obvious one was the merger. So client events are not necessarily predictable, and they don't necessarily come in a given quarter. So there's a bit of a random element to that. I think there's also been some cost pressure on long-only managers. And in particular, I would say, there's been increasing differentiation. And with the numbers that we showed in the quarterly report related to the size of the client, we see that those larger clients that use more of our products have significantly higher retention rate. And the smaller medium clients, who may have bought something and then they're not quite sure whether they're going to use it fully and then maybe they're under a bit of cost pressure, that's where we have seen more cancellation pressure.

Got it. And then since you pointed out the suboptimal sales, I guess, and you referred to asset managers under pressure. You have a good vantage point into what's going on. So maybe just give us a flavor of like what are the challenges the buy side was facing?

Yes. So look, I think it is quite different across -- as I said, it's a very -- it is quite a differentiated landscape. We've had more discussions in the past with clients of the type of we're under pressure now, give us a bit of breathing room, and then we'll maybe put an increase next year or the year after type of thing. And we have structural contracts like that. So I would just say generally that, and this goes to a point that we've made previously, were something of a lagging indicator to markets in terms of our subscription. And this goes back -- that pattern goes back a long way, including, I remember at the very beginning of my period at MSCI, where after the bubble burst in '99 and in 2000, we had a great few years, and then we came under pressure in 2003, actually, when the markets were reviving. So I think there's a little bit of a lagging effect from last year's budgets. There are some idiosyncratic client events. And I think that's really the sum of it. I don't think that there's -- I'm not seeing anything more than that at present that I kind of -- that sticks out, right?

So I guess the way to try and summarize would be you think it's more cyclical, not structural then?

No. I think the area where we could have improved is we've had, I would say, a less new product coming to market than I would have liked. We had a new Head of Index come in at the end of the year. I think we're going to see a lot of innovation in Index. And that includes across a variety of things, new types of content, focusing more strongly on use cases. I think our -- what we can do in custom indexes is just at the beginning, and we did an acquisition of Foxberry there, a London-based firm, who I think is really going to help us accelerate that. I think in Analytics, we have a really interesting pipeline of stuff. We're bringing out, I think, what I would call our first significant AI product in Analytics in June, which allows clients, especially those who are using us across their entire firm in risk and portfolio management to gain stronger insights much more quickly. Look, that's a very new development. Clearly, there's some interesting parts of what AI can do. There's also a little bit of hype as to what it can do, but we're excited about that launch. We continue to be very focused on the -- mostly right now on the regulatory opportunity in ESG and climate, notably in Europe. And there has clearly been a bit of a split now between the U.S. and Europe on ESG. But on Climate, I would say, the separation between the U.S. and Europe is overstated or is not so obvious. And we're actually seeing quite a lot of focus on Climate by the large pools of capital in the U.S. and obviously, in Canada, very much so in Canada, but in large pension funds and in insurance companies in the U.S. as well. So I think we've got a healthy pipeline there as well.

Got it. And just to go back to the quarter, I mean, naturally, when you have one of these bunched up quarters, you get the question of are you losing share? So just anything you could add there?

No, look, we don't -- look, it is the most imperfect of data because not every time do we get told. It's not like clients show up, and sometimes they tell you, sometimes they don't. But going back to the observation I made at the beginning, the overwhelming number are client-driven events, are still client-driven events. So we don't have any factual evidence that we're losing share in any particular category that we're aware of, so you have that.

And then you also said you have tactical plans in place to Indexes. And one of them is clearly this new product pipeline. What else is part of the plans?

Look, I mean, there's a lot of things. So for example, I think we're being very creative. So generally, the sell side and capital markets are doing pretty well right now. There continues to be a lot of interest in structured products and a lot of data for trading. The type of sales we can get an index often involve specialist data, historical data, things of that kind. So there's a big focus on expanding what we're doing in wealth. So I think this across the board, we're trying to be both continue to invest in the longer term. But -- and we actually have some -- and I'm cautious talking about it because it goes precisely to my quarterly earnings number. But we've actually had some very interesting pretty material deals in ESG in the pipeline as well. So I think just across the board, we're very focused on continuing to bring new ideas to clients across the range of what we do.

Got it. So maybe we can shift gears and talk by segment. Since you brought up ESG towards the end, let's start with that one. I think the growth obviously has decelerated. So maybe just some perspective from your standpoint. Obviously, I don't think anyone expected you to keep up the 50%, but it did seem to decelerate faster than maybe we all expected. So what happened from your perspective?

Look, I think clearly -- so the way I would separate it is into a few different categories. One is the slowing of the issuance of ESG-related product for retail investors. So that slowed dramatically. So -- and clearly, we had the strong performance of those funds a number of years ago in the pandemic. Their performance got a little weaker. And so whenever that slowing of new funds, slowing of new ETFs occurs, that's going to be a challenge for us, right? Now I'm not sure. It's too early to tell whether that is just a small trough we're in and will be revived. But we still have a lot of ongoing discussions, notably in Europe, about bringing new products to market. So that's one thing. I do think that the interest in -- and I would say that, that product issuance story is true, both in the U.S. and in EMEA. Actually, we've done well in more -- we've done well, but on a much smaller starting point in Asia on ESG-related product. And then I would say that to put it crudely with -- in the absence of the regulatory drivers that are present in Europe, the -- a lot of the clients had been, I guess, you could say it on a kind of an ESG data and services, buying sort of binge during the previous years, and a lot of them are now in the process of integrating that data into their investment process. And so I don't think it's actually the fact that people are not using this data and information, but I do think it's a moment where people are thinking harder about how they want to use this in the investment process, what elements are most important to them, what elements do they want to make their -- does their firm want to make a judgment about, and what elements do they want to rely on a third party for information. So all of those things, I think, are going on right now. And clearly, we're close to the market and we speak to our clients about it, but I'm not entirely clear the degree to which this will stay slow. I think there's plenty of evidence from our client interactions that this will remain a very attractive growth category for us. And we have, in almost all of our product lines, including in Index, by the way, had periods of where things slowed down before they accelerated again, right? So that's kind of the best overview I could give. But we'll have to -- I think, look, again, I'm bringing it back to your comment at the beginning. I think the main thing we want to try to do is "show you the money," right? So we have -- we'll have to figure out how -- what we deliver in the next quarter and the quarter after that and the quarter after that.

Got it. And just to follow up on the comment on the regulatory distraction, I guess. Earlier, you said one of the new product pipelines you're working on is ESG regulatory. So what kind of just some flavor about that...

Yes. Yes. So for sure. So look, so both for ESG and Climate, notably in Europe, regulation is quite a good thing for us. It's not a bad thing, right? So I think that there are a lot of -- and so the way I would say it is the nature of regulation is such that one can have a debate about it, about a particular approach to a particular topic. But by definition, it's a necessary thing to do, right? So those -- so notably, the EU directives on sustainability generally are relatively prescriptive and require a lot of work from the client and a lot of justification of their actions. And by the way, I would say not just in the EU, but also, for example, recently in Australia, the regulator has become very focused on what they refer to as green washing, which again, we don't have enough time to get into that whole debate right now, whether it's greenwashing or not. But let's just say that they are very focused on being very narrow and very prescriptive about how certain categories of fund activity are placed before clients. So quite literally in the last few weeks, we're bringing out some specialized products just for Australia related to various regulatory disclosures. That's just one example. There's actually regulation coming in, in Japan as well relating to this topic. So all of those things are very positive for us because people need to create transparency. They need to prove that they source the data adequately. They need to prove that the data comes from a reliable source that's reputable, and all those things are good news for us.

Got it. In terms of the geographic divide you were talking about. I think in your numbers, EMEA and APAC are growing strong double digits, and then Americas is growing 9%. So from your perspective, just a flavor of like is it just Florida, Texas? Like what's going on? Like what's the real issue in the U.S. that's playing in your business there?

Well, look, bar a few large asset owners, who are extremely important to us and we value, we're slightly underweight Texas as a state, MSCI. But those are very valuable clients. But jesting aside, I think the main thing in the U.S. is the point I made earlier. It's the slowdown in the issuance of ESG-related products. I think that's research and our Head of ESG research about this. The thing that we're going to become much more pointed about is -- and it's ironic that we were -- have been in various articles over the last 5 years sort of "accused of this," which is that our version of ESG or where I could say we've been the leader is about financial materiality. It's 100% about financial materiality. And I think amidst a lot of the financial, the noise surrounding the topic, these -- and so it's always been about financial materiality. And the GE or the governance component has always been the most heavily weighted in our score, right? And some of you may have noticed that Mr. Musk, who called ESG a scam and the devil, which is an interesting way to refer to it, had some corporate governance challenges in accord in Delaware recently, right? And so these things -- we believe these things to be very material to investors. We don't think that we have no "woke agenda," we just think that there are significant extra financial material elements that can affect a given investment, whether it's a stock or a bonds performance. And we continue to believe that those will continue to have an effect on the performance of securities. And so that's the furrow that we're plowing, and we'll have to see how that plays out in the quarters ahead.

Got it. And then maybe one more. Like Climate is within your ESG run rate. It's almost 20% of it, growing 40%. But Henry mentioned that he thinks Climate could be even bigger than ESG overall. And so just your take on what drives that? Yes.