MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you for being here at our Global Financial Services Conference. For those of you who don't know me, my name is Manav Patnaik. I do the information services coverage here at Barclays. And we're very pleased to kick off our afternoon session that we share with MSCI. And we have Andrew Wiechmann here from MSCI, who is the CFO. So thank you, Andrew, for being here.

Thank you, Manav. Thanks for having me.

I guess, Andy, we'll just get right into it. I mean so far this year, I would say it's been a tale of 2 quarters. So maybe let's just start with the first quarter where, I guess, the results were a little bit surprising in terms of the cancel and new business activity. So if you could just help us -- remind us rather of what happened in that first quarter period? And what was the element of surprise -- perhaps for you guys. I mean it's a surprise for us, but maybe for you guys as well.

So it's important to keep in mind that operating metrics can be lumpy. They can be volatile a little bit quarter-to-quarter. Clearly, they are important for indicating -- indicators, as you can see by the reaction in the stock price and we release them, but they will be volatile quarter-to-quarter. And it's important to keep in mind the long-term drivers of the business, the secular opportunities that are fueling our growth still remain intact, and they are still very, very attractive. We had some noise in the first quarter related to a couple of factors. So firstly, it's important to keep in mind that we have some seasonality in our operating metrics. So the first quarter tends to be a little bit lighter for us from a sales perspective. The third quarter is also seasonally a little bit lighter for us from a sales perspective. But we had a grouping, a bunching of client event-related cancels that took place, the largest of which related to a large global bank merger, where we had about $7 million of cancels that were recognized in the first quarter. We had small enough cancels related to that merger in prior quarters, we had a little bit since. But the large majority of cancels related to that merger occurred in the first quarter. And that cut across -- Index was the largest piece of it. ESG, a sizable piece as well as a small part in Analytics. We also had some chunky hedge fund-related cancels where there were teams that had left hedge funds, some hedge fund events or restructurings that impacted us. And so we had this grouping of cancels that occurred in the first quarter. The second quarter was much more attractive. So the retention rate rebounded actually quite an attractive retention rate in both Index and Analytics north of 95%, close to 96% in Analytics retention rates in the second quarter, and sales were quite robust. And I think that the important thing to take away, as I said at the beginning, is the underlying drivers of business are still there. And so the thing that is fueling the sales and fueled the sales in the second quarter were those attractive client segments for us. They were the new attractive content areas and product areas, which continue to grow at an attractive growth rate. And the cancels, we just had bunching in the first quarter and a little bit less in the second quarter. And so it is not great to focus on one quarter in particular. We have indicated that in the third quarter, we expect cancels to be elevated relative to a year ago. And I think to your question, we have been seeing some elevated cancel activity related to pressures that have built over the last couple of years. And so as I alluded to, a lot of the cancels have related to banks, the hedge funds, a little bit on the buy side with asset managers. And that's a result of organizations that have been a little bit more in contractionary mode to organizations who have been focused on downsizing and rationalizing offices, pruning budgets that leads to longer sales cycles and some elevated level of client events. Now we know that with sustained momentum in equity markets, that tends to be a leading indicator of improving conditions, focus more on expansionary activities. So when our clients are focused on opening new desks, launching new funds, hiring, investing in technology, those are all positive drivers for our business. And we hope with sustained momentum in the markets, all that will translate through to positive momentum for us. I would say on the cancel side, we also did indicate in addition to cancels being elevated in the third quarter relative to a year ago that we expect retention rates to rebound in the fourth quarter closer to where we were last year, so closer to the fourth quarter of 2023. And so again, punch line is I wouldn't focus too much on 1 quarter's operating metrics. The underlying drivers of growth and secular trends in the business are very much intact for us.

Got it. Just a few follow-ups on those. So the big bank merger, which I think you called out, was $7 million in the first quarter, was that $7 million and done or is there more trickle effect?

That was the large majority of it. So as we indicated, there was a small amount in prior quarters, likely have small amounts trickling through as they continue with their integration, but the large majority of it occurred the first quarter.

Got it. And then the elevated level of cancels you've referred to in the third quarter and maybe part of the second half, is that just the more of the hedge fund community? Or are you talking even broader categories?

I would characterize it as the same dynamics that have resulted in higher level of cancel activity in the first quarter. And so it's just broader pressure on the industry. You've seen many large global banks that are focused on cost savings, restructurings. You have seen some elevated hedge fund activity, and you've seen pressure from the asset managers. All those things take time to work through contract negotiations and impacts on the organizations. And so that's why we expect some elevated cancels in the third quarter.

Got it. And so this lag effect that you're talking about, if you talk -- if you look at your kind of current pipeline, if you call it, based on your conversations, have things at least settle down because I'm guessing that elevated is more a continuation, right? Of what we've seen as opposed to anything incremental?

Yes. So we've -- yes, we've said we haven't seen any deterioration. We've seen strong engagement from our clients, and so our clients are talking to us about wanting to do more with us, expanding with us. But we are still seeing the longer sales cycles although -- and we have elevated pipeline of cancels. But as I mentioned, we are expecting retention rates to rebound closer to where they were in the fourth quarter of '23 as we approach the fourth quarter of this year.

Got it. And then I think it's understandable clients under pressure. You have a subscription-based business, so it takes kind of the lag effect to start feeling in. Is there -- like in the numbers that you've seen, is there kind of a set 3- to 4-quarter, 3- to 5-quarter lag? Like when -- what do we need to see and when do you think we can start seeing some of that rebound?

Yes. It's not scientific. I think it has varied in past cycles. So in past cycles, if we look at the financial crisis or if we look at the pandemic, early days of the pandemic, we started to see rebounds after -- well, firstly, we started to see the pressure after 2 to 3 quarters, sometimes even faster. But in both of those instances, there were systemic events that happen in the financial system and financial services companies. So you saw large global bank failures. You saw a lot of organizations going out of business and quickly restructuring. You saw halts in the liquidity markets and pressures in the capital markets. And so you saw a pretty quick impact during both the financial crisis and early days of the pandemic. It's taken much longer in the cycle, I think, in part because we haven't had those same systemic pressures in this cycle. It's been slower moving. But in both those instances, you saw a rebound within a few quarters when you started to see that sustained momentum in the equity markets. And so that is the key. It's having that sustained momentum in markets. When clients start to feel more confident, when they believe that the momentum is here to stay is when they start to translate through to, hey, I want to hire a new team. I want to launch a new fund or investing in our technology. We want to expand our capabilities. That is when it becomes more of an expansionary type of mindset, and the sales cycles get shorter. But it does vary cycle to cycle. So I don't want to be too prescriptive about what we're expecting in the cycle.

Got it. So based on what you've said and what we discussed before, the pressures this year have been more cyclical and not structural. So maybe just talking about some of the structural factors, you have both exposure to active and passive. And some of the concerns have been this year is have you come to a tipping point where as the active gets pressured, you guys get pressured more? Or how do you see the runway there in terms of that perfect dynamic that has benefited you guys?

Yes. I mean we do have a large exposure to active asset managers. But that is -- the pressures there are not new. We've seen that pressure for arguably the last 15 years, so since the financial crisis. You've seen this gradual period of muted flows and fee pressure on active managers. And so I think it's unfair to characterize it as a tipping point. I don't think that dynamic has changed. Active managers still play a very important role in the investment industry, and I think they will continue to play an important role. I think you've seen acute pressure on them over the last couple of years for a couple of reasons. One, you did have volatile and sideways markets. You had a market sell-off going back 2.5 years now. And then you've had volatility and basically flat market for a period. That was exacerbated by the elevated rates. And so you saw significant flows in the cash products and money market funds, which came at the expense of active equity. So you did see meaningful outflows from active equities. And so you can say it's been more pronounced. The cyclical pressures have been more pronounced on active equity managers. But hopefully, that means the upside is there when rates start to come down, if and when rates start to come down that you'll see stronger flows into active equities. And in any event, there's a whole host of things that we can do with equity managers to help them transform their businesses into the models of the future, give them the tools that investors are putting money against, help them differentiate relative to their competitors. And on that front, we are well positioned to help both active managers as well as the index fund managers. So we believe there are secular growth opportunities across both frontiers.

Got it. The other area is, obviously, ESG. In the last couple of years, obviously, that growth rate has decelerated. I think you still maintain your long-term framework of mid- to high 20 growth in ESG. I would say a lot of people in the room are a little bit skeptical of that at this point in time. So can you just help us appreciate why you're maintaining that and how we should be -- what can convince us on that -- on the growth rate there?

Yes. I mean it is -- we can't lose sight of how big the opportunity is in sustainable investing and climate investing, climate considerations across broader financial services. And we're early in that journey. There was a period when our ESG and Climate segment was growing close to 50%, and we didn't revise the targets up. Obviously, market was very excited about it in those periods. But what we're trying to capture with our long-term targets are those long-term secular trends and places where we can deliver solutions that we know a broad range of investors will adopt and establishing standards. And that continues to hold within both ESG and Climate, where the market does need a common language. They need common frameworks to think about sustainable investing. They need the underlying data to understand where those risks are, and how they navigate them. And then they need the tools and ultimately, the products that allow them to put money to work to take advantage either to manage risk or capitalize on opportunities. I think we've established ourselves as a key player, if not the leader in the space. And we're still early in adoption across asset classes where we're very strong in public equities, but growing healthy rates in fixed income, big opportunity in private assets across many different private asset classes across as well different solution types. So within ESG, there's a whole host of coming regulations that we can help with. On the climate front, climate is in its infancy where we are delivering solutions to help manage -- understand your mission footprint and manage targets that you might set, also to navigate transition risk as the economy moves to a low-carbon economy, understand physical risk. And we're just starting to get into a whole host of client segments, including huge pools of assets and capital like banks and insurance companies. And so a multitude of opportunities across client types as well and then the range of solutions to deliver to them. And so we think there is a long way to go. It's not going to be linear. We expect the conditions that we've seen in recent quarters to persist in the next several quarters. But that long-term opportunity is there, and we are well positioned to capitalize on it.

Got it. Sometimes when you peel back the onion, I think there are some pieces in there on how you can get to that long-term opportunity. So I'm referring to either there's the climate, nonclimate breakout and then geographic as well, right? So on the climate side, first, can you just remind us how big climate is, what it's growing at? And I think Henry has said he thinks climate one day will be bigger than the rest of ESG. So just some perspective on that as well.

Yes. And just to dimension it, so if we look at the total run rate of ESG and Climate revenue across MSCI, it's about $545 million. That cuts across, again, Indexes, Analytics, some of our ESG and Climate solutions for private assets and then our ESG and Climate segment. About $155 million of that is asset-based fees. So that's in our Index segment within the ABF line item. There's about $55 million or so that is in non-ESG and Climate segment subscription run rate. And so that's things like our -- some of our reporting solutions in Analytics, our Climate Lab Enterprise within Analytics, index subscriptions. We have index data -- ESG index data module. So there's a run rate associated with that as I alluded to, some of our private asset ESG and Climate solutions. And so when you take that $545 million back at the $155 million, back out the $55 million products and other solutions, that leaves within our ESG and Climate segment about $345 million of run rate. So that's within our ESG and Climate segment. Within there, climate represents about $68 million of subscription run rate. And it's still a modest part of that overall run rate, and that is growing at, call it, 30%-ish or so. Now there's a portion of climate run rate that's also in the Index segment. We have climate indexes as well. But if you look at the part of the segment because we're talking about growth rates there or long-term growth, which applies to the segment, climate is still relatively modest, growing at a healthy growth rate. And we have a multitude of solutions that are very early in their adoption. And so we think climate, as you said, can be massive. It will be a long-term opportunity, but there's a wide range of tools, data sets, services that we can deliver to clients to help them navigate the transition to a low carbon economy and all the risks that come along with that.

And is the climate opportunity being bigger than the rest of ESG just more clients to target necessarily, more solutions? Like how does that stack up?

Yes. So it's a little bit of both. So when you think about transition and physical risk and climate data, it has applications well beyond the investment industry. We're very big in the investment industry. ESG is heavily concentrated in the investment industry. We have sold a lot to issuers directly, to advisers, to even some banks, insurance companies. So sustainable investing is very important to a wide range of organizations. But climate is relevant to every financial services participant, and it is extremely relevant to the insurance industry. Insurance industry, managing long-term risk and long-term portfolios, has a keen eye on understanding the physical risks, especially over both short duration and long duration on their -- both their liability side and their asset side banks, whether it's from regulation or enhanced risk management, want to understand better their climate risk associated with their loan portfolio and their organization more broadly. And in many countries, banks need to comply with climate-related risk management activities as well as risk disclosures. There's a whole host of other industry participants that are focused on climate and climate-related data. And so to your point, it is the range of clients, the range of use cases and the range of solutions and how significant this is going to be to every part of the capital flows over the next 20, 30 years. It's going to be an intense focus, and people will need those tools and frameworks to navigate it. And we are uniquely positioned to help on that front.

Got it. Just one more question on climate. I think it's probably fair to say compared to the breadth and depth you have on the non-kind of ESG side, like you said, it's a whole host of other vendors and providers and modelers out there on the climate. How do you look at the competitive landscape? And at just $68 million, does that mean you need to do more M&A in that area specifically?

Yes. So -- and just to provide a bit more color. So $68 million within the ESG and Climate segment overall, it's $124 million of climate run rate. That $124 million includes the Index piece and some of the tools we have in Private Assets and Analytics. That is growing at 30%-ish or so. And so yes, there's -- because there's a wide range of solutions out there, every major index and analytics company have some climate offering. It is relatively competitive in certain areas. But the places where MSCI really differentiates and where we are a leader is where does that matter for investment, performance and risk and more broadly, asset performance and risk. And so we have a very strong position within the investment process. So with asset owners and asset managers, if you want to understand your emissions footprint on your invested portfolio, you want to understand the trajectory of those emissions and how it aligns with commitments, you want to understand where you're exposed to certain green or gray technologies and renewables or other environmentally sensitive activities within your portfolio, we are a leader there. And that's where a large part of that run rate is focused. And so again, it's -- if you just want climate data on a specific sector, there are a whole host of providers out there that can provide it. But if you want to understand what it means for your investment portfolio, what's going to drive the performance of that portfolio, what risks do you need to account for, that is where we are a leader. And I think that will be an area where we can continue to differentiate relative to others out there. There will be a whole host of, as I said, data sets and services and solutions that will help you understand specific investments, specific asset, specific sectors. We hope to expand our data coverage to also cover those. But when you want to understand why it matters for performance of risk, we are a leader. And given our ingrained and trusted position with the who's who of asset owners out there and managers as well as the broad range of solutions we can deliver that are interoperable so it can use our solutions to not only understand where your exposures are, but then implement strategies, manage risk using our indexes or risk management tools and do it across the total portfolio, there's nobody that can offer that same solution set to manage the climate risk and climate opportunity. In terms of M&A, it is a focus area for us. You saw us do an acquisition late last year of a company called Trove. There are certain areas where we can harness and access unique data sets. So in the case of Trove, we got the leading data set an research platform to understand the carbon markets. And so through that, we can not only help our clients understand the validity and quality of offsets, but also understand where their portfolio companies are using them and how effective they are. And so there, we will continue to focus on these unique data sets, capabilities that will complement what we're doing there, but we will be very disciplined. I think we have the core of what we need. We have, as I said, a differentiated franchise. And so for us to pursue an acquisition, it needs to be strategically aligned, so enforcing our competitive advantage in the investment process and it needs to be financially attractive compared to other sources of capital and uses of capital, namely share repurchases. And so we'll continue to be very disciplined, but there could be bolt-on accelerators that we pursue in the future.

Got it. And just real quickly, besides climate growing 30% plus, I think by geography, outside of North America, it seems like everything is close to double digits. So maybe just help us lead this with the growth rate there.

Yes. It's an important point. I appreciate you're flagging it. It's a little bit different than other parts of MSCI. And so the largest portion of our ESG and Climate run rate within the segment is coming from EMEA or Europe, where it's 50% of the overall run rate in EMEA. Americas is mid-30%. And so there's a huge focus, and I think you are probably exposed to it of slowdown in ESG, headwinds in ESG, rhetoric around ESG. It's important to keep in mind that is not the case around the globe. There are many markets where sustainable investing in ESG is not under the same scrutiny and seen the same rhetoric that you see here in the Americas. In the Americas, as I said, mid-30% of the run rate. And then APAC, which is in the teens, is a high-growth area. That is our highest growth area right now, around 20% run rate growth across ESG and Climate. And there are parts of APAC or Asia where it feels like we are earlier in that adoption curve. We are definitely earlier in that adoption curve. So they are just beginning to think about what we call ESG integration. So why does ESG matter from an investment performance standpoint, I want to make sure my investment teams are integrating ESG into their investment process and thinking about those dimensions when they're making portfolio decisions and developing new products. And so there's still big opportunities for us geographically. So it's a good question.

Got it. Just to wrap up on ESG and find our way into private credit. Maybe you can just talk to us about the recent partnership with Moody's.

Yes.

I think you put it out during your vacation weeks. You probably didn't get as much headline as you would like. But just what is exactly the back and forth with that partnership?

Yes. That was -- it was an important one that underscored our leadership in ESG. So very exciting for us on a number of levels. So maybe I can talk through a few key components of that. The first component is that Moody's will be replacing within Moody's Analytics their proprietary ESG content that is included in many of their Moody's Analytics offerings and platforms with MSCI ESG content. And so they have made the decision to replace what is currently being offered with MSCI content, which we believe is a recognition of the quality of our offering and the strength of our position in the market. That, as we commented, contributed to -- was a significant contributor to recurring sales in the second quarter. So we did have a significant contribution to recurring sales from that component of the partnership. They're licensing our content to provide in several of their platforms. And across the various platforms, they will include various levels of information and granularity, but it is a broad replacement of what they're doing today. The second component is the complementarity of client footprints that we have. So Moody's is very strong in many financial services organizations where we haven't been as strong historically. So they're strong with credit investors, as you alluded to. They're very strong with banks and the lending part of banks where we've been less significant historically. They're very strong with parts of insurance companies, and their tools are used by those organizations. And so there is an opportunity, and both parties are motivated based on the arrangement to drive broader adoption and more sales within that client segment. And so we can benefit going forward as we continue to grow in those channels. And then last, also related to private credit, we get access to the Moody's Orbis database, which is arguably the leading private company database out there. And so we can use that data to expand our ESG coverage. We already cover a wide range of private companies. They are mostly the largest private companies. But Moody's has some broad coverage of middle market, SMEs, small entities that allow us to provide ESG insights across a much broader range of the private universe, which is very relevant as we want to expand into private credit. As we alluded to, we think there's a huge opportunity there. Serving banks as we were talking about before, the ability to serve banks and their lending book means you need to have coverage of many middle market and small entities that these banks have lent to. We can come up with coverage and have deep insights into or at least insights, not always deep, but insights into many of those organizations to provide a solution to better serve those banking entities. And so it's an exciting opportunity for us. And I think it's both a recognition of our strength, but also is something that harnesses the complementarity of our organization.

Got it. And just to follow up, the benefit you had last quarter, was that basically Moody's taking all their existing subscribers, if you call it, and transferring them? Or is this something we'll see a steady stream of for the next 4 quarters?

Yes. You won't see that jump in recurring sales related to -- that same jump in recurring sales in future quarters. That was them licensing the use of our content across their platforms. We hope to continue to grow with them, but you won't see that significant contribution in future quarters.

Got it. And then -- so that's a good segue into private credit broadly. And I know private credit is a huge term. It can go many different ways. Henry, MSCI and yourself have always been very targeted with whatever you do. So maybe just help us appreciate when we say private credit and we associate MSCI with it, what exactly are you trying to solve?

Yes. So it probably makes sense to take a step back and think about private assets or private markets more generally and what we're trying to solve there. And then we can talk about the opportunity in private credit specifically. Our focus on the private markets derive from our focus on asset owners, pension funds, sovereign wealth fund, insurance companies, endowment foundations, wealth-driven investing, serving those that own the assets and are looking to put those assets to work. Those investors are increasingly allocating larger portions of their assets to private markets. And many of them are paying the majority of their fees to private market managers or private asset managers. And they are screaming for tools. We help them manage risk. We help them think about asset allocation across their total portfolio. They want to have deeper insights into their private allocations. If they're going to be paying the majority of their fees and allocating more of their assets, they want to understand what is the risk I'm taking? What's driving the returns that I'm getting? What is the value that managers are providing to me? And so we're on a journey to provide firstly, standards. How do you think about the investable universe of private market? How do you define that private market investment opportunity? Then how do you segment it across typical dimensions that we think of, geographies, sectors, sizes? How do you think about things like risk factors and sources of risk in the space? So creating those and even industries, how do you create those frameworks that are foundational to doing an asset allocation and then understanding the building blocks of risk and return, which really don't exist today. So we want to create those and then providing those value-added insights to be able to understand what's the return I should be getting on my allocation? What is the value that the manager is adding to me? How do I think about asset classes? What's the difference between opportunistic real estate versus core real estate? And how do they differ from risk return profile? How do I compare that to my private equity? And LBO's very different than venture investing. They look completely different. And then how do I think about things like private credit? And how do I think about that compared to my public fixed income portfolio or my liquid fixed income portfolio? And so there is a massive opportunity to provide not only the data, but ultimately, those frameworks and then the value-added insights, the real value-added insights within the private capital space. Through the acquisitions that we've done and building over time, we have a very -- we have an unparalleled data set within the real estate space. We have the highest quality, investment quality data set covering the real estate universe, commercial real estate universe. With the acquisition of Burgiss, we now have the best and broadest investment quality database for the private equity universe as well as, I'd say, the closed-end fund structures more generally. So also opportunistic real estate, infrastructure, natural resources, and Burgiss also gets information on private credit. And so we are very focused on harvesting really unlocking the value in that rich private credit information that Burgiss gets. So today, Burgiss does calculate things like fund returns and cash flows and NAVs or values of those funds, and it's part of the solution that they deliver to LPs. But there are rich insights that we can unlock with the data that we get. We get every PDF that the GP sends to the LP. And so from that, we can collect a whole host of information around the loans, the terms and conditions around those loans, the marks on the loans, the value of the loans. And from that, you can start to create rich insights that just don't exist today in the private credit market and then even get into things like credit analytics as well as performance and risk insights, liquidity insights, things that we do in the public markets for the private markets. So I think you're all probably familiar with the amount of assets going into private credit right now. But there is a huge demand we see out there to fulfill the need for deeper insights and transparency into those markets.

So maybe asked a different way, in terms of the capabilities you have or don't have and the market you're going after, like you said, the real estate side, you acquired RCA. You just talked about the Burgiss acquisition. Is it fair to say this will be your most active M&A area to fill out capabilities then? Or...

I wouldn't say that. You mean private asset in general? So similar to climate, we do spend a lot of time looking at private asset space. I'd say, as is always the case, it's as much from a partnership lens. There's a whole host of workflow providers or data providers that have complementary capabilities to what we do. And so we can partner to work with them. There are small assets out there that might have a unique data set, a unique angle to get data that is compelling to us. And so there will be some bolt-on accelerator acquisitions. But I'd say we have the large majority of probably what we need in the space. We -- as I said, we have already the leading investment quality data set within private markets that we can build tools on. And so our primary focus is unlocking that, driving adoption of it, driving growth with what we have. But that can be complemented with bolt-on accelerators. And so we do spend time around it, but I think we have the bulk of what we need today.

Okay. And then maybe that leads into a broader capital allocation question. You guys have tended to be a little bit more opportunistic on the buyback front. And so just talk to us about how you think about that as opposed to kind of maybe a consistent stream because you've had the occasional M&A, but usually it's pretty quiet.

Yes. So we are long-term buyers of the stock. We are long-term believers in the opportunity, the powerful secular trends driving systematic rules-based personalized portfolios. And as a result, indexation, the drivers fueling sustainable investing, private asset investing and need for analytics and insights. Those are all long-term trends where we are a leader. And so we believe in the long-term opportunity. Our approach to share repurchases is as much around getting optimal execution. And so in the short term, we look to buy our stock back based on 3 criteria. One is excess cash or excess capital. And so when we are in a period when we have more excess capital or cash, we're going to be a little bit more aggressive at buying our stock back. We set up our repurchase programs to capitalize on volatility. So they tend to take advantage of those periods when the market is moving around more and our stock prices around more. We tend to find that we get better execution with that approach. And then we do take a view on value in our repurchases. Again, we believe they're all attractive values over the long term. But in the short term, we have degrees of conviction around the share price value. And we triangulate based on a whole host of measures. We look at a whole host of reference points looking at market dynamics, cost of capital, intrinsic values and have this range of degrees of conviction around value at different levels. And that helps calibrate where we repurchase our shares. We found that has worked very well, where we can be very aggressive when they're -- those periods when we -- when the market pulls back and our stock pulls back. And we can be a little bit more measured either when we have other uses of cash, we have less cash or we think it's not the best long-term buying opportunity.

Got it. And then...

Or short-term buying opportunity. It's always good long-term buying opportunity.

Just in terms of this year's guidance, could you just remind us of the assumption you made on the market levels? And then also, I somewhat tied to that, just a question around margins. Like how do you -- you already have pretty healthy margins. Clearly, there's a lot of opportunities you want to invest in. What is that philosophy on managing it because I know some are -- you do assume kind of market levels there, too.

Yes, yes. So the market assumption or the assumption that underlies the AUM in our -- or all of our guidance is that the markets gradually increase from the June 30 levels through the balance of the year. That is above the market levels that we had in -- underlying the guidance when we -- or at least when we talked about guidance at the beginning of the year and then after the first quarter. And so we have said if the market stays at those levels or goes above it, we will likely be towards the high end of our expense guidance ranges. To your broader question in terms of how does that impact our pace of spend, we are continually calibrating the pace of spend, as I think most of you know and appreciate. Our dual mandate is to invest in the long-term growth of the company. As I alluded to, we have very compelling long-term secular opportunities where we are a leader and have the ability to unlock big amounts of revenue in large addressable markets. And so we want to continue to invest to unlock those, while at the same time, delivering consistent and attractive profitability and cash flows in the short term quarter-to-quarter. And so we calibrate the pace of spend and investment based on not only the ABF, which can fluctuate up and down. And we don't want to be starting and stopping that regularly. And so we tend to look at a smoothing and have views on how that ABF is trending, and that feeds into our calculus of the right level of spend. But we're also looking at overall business performance, the performance of the investments that we're making. And we are looking at the implications of various expense growth rates on the cash flow and profitability of the company. And we triangulate to what is the appropriate level of spend at any point in time. And so when we see sustained momentum in the equity markets and we think it has some resiliency, we will take up the pace of investment and spend and be very targeted on where we do that. And so when we have those opportunities, we try to put it against those very attractive opportunity sets that are going to fuel that long-term growth of the company.

Got it. All right. Well, we're out of time. So I think we'll end it there. Thank you, Andy, for your thoughts.

Thanks, Manav. Thank you all. Appreciate it.