S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the S&P Global Fireside Chat at the Morgan Stanley Financials Conference. I'm Toni Kaplan, the head of U.S. business services at Morgan Stanley, and I'm joined today by Martina Cheung, President of S&P Global's Market Intelligence business. Before we begin, I need to read the following disclosure. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I also want to let investors know that if you have a question, you can submit it electronically via the webcast link. So we will take those as well. So great. So just to give some quick background on Martina. Previously, she was the Head of Risk Services in Market Intelligence, which, along with numerous other responsibilities, included overseeing S&P's growth strategy in ESG and cyber risk. And she was also S&P's Chief Strategy Officer, which included not only the company's growth strategy, but also overseeing investments in early-stage fintech start-ups. So a lot of exciting topics to talk about here.

Martina, maybe you could just give us a sense of, just given the environment that we're in with COVID-19, could you just talk about any changes to your business over the last 3 months or so? Have there been any changes to retention rates or usage or new business pipelines that are worth calling out? And just wanted to hear what the impacts have been from COVID.

Thanks, Toni. To your point, it's really been -- the impact has really been in the last 2 months. We didn't see it play out across the global book in Q1, although we definitely saw it play out in Asia in Q1. So actually, as early as early February, we were already reworking our commercial playbook for the year, anticipating that we were going to see some new challenges. There are a couple of common themes that we see across the book. We're looking at it very closely. So if you look at, firstly, new sales versus retention, there is a -- there's been a lengthening of the sales cycle. And what we saw is we saw that pick up fairly fast in March and April, but then it plateaued. And it hasn't gotten any worse, but it also hasn't gotten significantly better, I would say, in the last 2 to 3 months. However, if things were to play out the way they have played out in Shanghai, Beijing and Hong Kong, where we've seen kind of a more sort of kind of faster or earlier return to work, return to offices, we are seeing the sales cycle come down there. So only time will tell on a region-by-region, country-by-country basis whether it's going to look like that, but it's encouraging to see some positive trends there. On the renewal side, we are seeing delayed renewals, asks for us to kind of delay their renewal for 30, 60 days. We are, like probably most of our peers, being asked for no price increase, price reduction and in some cases, although we haven't seen it substantially, in some cases, cancellation as well where a company may just seem to be going out of business or being acquired. And so on that side of it, the focus for us is, first and foremost, on retaining the ACV. We absolutely do not want to use -- lose a subscription. And then as much as possible to use our commercial playbook to get some price increase or increase to our ACV or subscription value. And even if it's not what we would have hoped for as well as laying the foundation for increases when business comes back to more normal levels in '21 and beyond. And the reasons why -- I think it's important to say the reasons why we were maniacally looking at this. It's not just for 2020. I mean the beauty and the challenge for our business as opposed to and distinct from the other divisions within S&P Global is that a very healthy portion of our revenue growth in any 1 year is dependent on increased subscription sales or subscription value from the prior year. And so we're looking at everything we do now is as much 2021 as it is 2020, and we have realigned our commercial strategy and incentives accordingly. I don't know that there's too much more I would say on maybe other than perhaps we're seeing more stress in smaller accounts. As you know, we're pretty diverse, not only in the sector but also in the size of accounts that we serve. And so we would see -- we'd be much more likely to see a cancel in a small account, for example, than we would in a midsized or larger account. So we're monitoring the small account group very, very carefully as well right now.

That makes a lot of sense. And sort of a follow-up to that is just in terms of the competitive environment, is this an environment where you feel like you have the opportunity to take market share? Or is that sort of overshadowed by tightening budgets and just basically the overall challenging environment? Just wanted to -- yes, go ahead.

No, there absolutely is an opportunity. And if we get a client that comes to us and says, look, sorry, we had 3 vendors, and we want to go to 2, that's an opportunity for us to be 1 of the 2. In other cases, there are clients coming and saying we need a price decrease because we're under pressure. We can say, actually, did you guys know that we offer these data sets also, and we could just simply replace vendor X that you guys use for that kind of data? So those are all part of the renewal playbook and tactics that we're training sales force on and executing on since the February, March time frame and a few ones we still have deep -- which way it's going to go. And I think the sort of opportunities are definitely going to vary when it's tied sort of very specific to COVID. Obviously, there were a vast number of other opportunities for us this year that are driven specifically by new products that we're launching and synergies with the acquisitions that we've made, like 451 Research, for example. That's a whole other set of opportunities there as well.

Great. And even more broadly, in terms of differentiation of your Desktop product relative to competition, I know you're investing a lot on expanding out the SME and private company coverage base. Can you talk about that? How that is going in terms of an opportunity?

Yes, absolutely. So we started a dialogue with a couple of strategic partners around 18 months, 2 years ago maybe, around SME and private company data specifically. And what we were looking to solve for was the use case, which is just, I need the financial data, and I'm going to run the financial data through a model. In addition to, I need more data like ownership data, news, et cetera, and different kinds of qualitative data sets. And so we partnered with 2 providers. And actually, this month, we're going to be launching the first major phase of that data. It is going to be exclusively launched on the Market Intelligence platform. And I can come back to why that's important later, but we'll be launching data, financial data specifically for 10 million additional companies this month, and we'll be scaling further throughout this year and next year on the market out on Desktop. And we're also making available individual credit reports for 50 million private companies also as part of this major launch this month.

That's great. And you know it wasn't going to be too long until I asked about ESG. So could you just talk about what's currently available on the platform right now with regard to ESG, what do you expect to see in terms of how much demand can you -- like is this a multiyear sort of growth opportunity if you can size it in any way? Just what your revenue model looks like, et cetera?

Yes. So ESG for us is comprised of 2 investment themes, I guess. One is in ESG more broadly, which is how many of you might think of it, the sort of MSCI-type scores, et cetera. And obviously, we acquired at S&P Global the SAM business, and we will distribute the SAM scores, and we are building workflow, analytic workflow around the SAM scores. Now the way that we'll monetize that, we've brought the scores into our data architecture, and actually, we were able to produce the speed product very quickly. So that went out in May, and we closed our first deal within 2 weeks of it going out and with really healthy pipeline there. The -- and that was by the way, that was an investment management firm. And the next piece that we're doing around ESG is we're taking all of the SAM data, 7,300 companies covered, and we're basically breaking down all of the underlying metrics and data underneath the scores. So you can get into a super-detailed company profile and drill down as deeply as you like into the scores, assuming that it's not one of the questions that might be proprietary to that company. And then you can also basically conduct the same analysis across the peer group, within a sector or for your portfolio. And so we're basically going to marry the SAM scores with our Desktop capabilities and our portfolio management model, which we're adapting for ESG. That will be later this year. What is currently available is actually more on the climate stuff on the Desktop. So we brought Trucost over to MI, as you know, a couple of years ago. We made a bet that we think climate it as important as ESG overall. And by climate, I mean much more discrete, detailed analysis that companies would need to do to measure and actually be able to create inputs into models to quantify financial risk of climate. And so we have been building out, for example, our physical risk data set, which will allow clients to look at the exposure of companies at an asset level to 6 different climate risks. We just recently launched our full suite of climate analytics on the desktop as part of our April release. So you can go in and for 15,000 companies, you can look at physical risk, you can look at -- run various different climate scenarios, et cetera, in a company-by-company basis, again, against the same set of options: peer, sector, portfolio. And we have some really interesting tools in there that our clients are very interested in. I would say more broadly, there's a lot to come around the climate piece of it. The ultimate step for us is to be able to have a quantitative model that allows our clients to take the actual cost of some -- and risk of physical risk exposure as well as transition costs and things like that and actually model it into their quantitative credit models. So that's work that's underway. Once we have that and our SAM scores in the workflow on the Desktop, I think we'll be -- that will be the major win for us in terms of product. But this has been an area where we've been looking at very closely and rolling out products very quickly.

Yes. And it is such a large market, too, that, I guess, right now, there are players in the space. I guess is it the depth of data and transparency that will be sort of the competitive advantage that you offer? Just trying to understand. Will it be about selling to new customers or displacing existing vendors? Just trying to -- yes.

Yes. So let me take ESG first because that's where you've got the direct comparison to some of the more well-known realty raters, let's say. So within that area, what we've heard from our clients over the last couple of years is we want more transparency. We want to see standards. We want to see perhaps more accuracy checks and things like that. And all of that as well, you can play out in various different sort of editorials in the FT and other publications. We believe that SAM score, with its history and its just sheer depth on a company-by-company basis with the number of data points that they look at, is -- it's incredibly deep. We believe we can provide transparency into a methodology that has been improved by the same group of experts looking at this space year after year. And we have enough history in the data to be able to test for quantitative signals so that when we make some of those underlying factors available, that it becomes more usable for our clients. So I think first and foremost, it is about the quality of the data and what we got with the SAM acquisition. I think the second piece is that we're very well positioned to combine this data set with other data sets that we have. So we're already looking at -- we started with Trucost. At Trucost, we're combining Trucost data with -- just give an example. One of the state Department of Insurance, in addition to being an -- already a subscriber to our SNL Insurance data, purchased our Trucost data so that they could overlay it with the SNL Insurance data and actually look at portfolios where there may be exposure to fossil fuels, for example. So there's real power in taking these data sets and actually linking them back to proprietary sector data that we have, and that's something that's very unique to S&P Global and S&P Global Market Intelligence specifically. And then I would say our ability to integrate that with the full end-to-end experience on the platform with all the tools that we have, the mapping tools, et cetera, I think it's -- those are other key differentiating factors for us.

That's great. And I wanted to move to the Marketplace. So you launched the Market Intelligence Marketplace earlier this year. Just to clarify, is this priced separately? Or is it an additional offering to current customers? And then also just wanted to hear about the long-term opportunity that you see from the offering.

It's priced separately. And we have some -- we have already made sales since we launched it earlier this year and have a very healthy pipeline. The opportunity there is really -- you'll find, Toni, that a common theme for us is making sure that we sustain the quality of our core fundamental data sets and then buying or accessing new data sets that are both critically unique and that we can combine with our existing data sets. And that's -- we're taking that approach now with Trucost. We're overlaying it with a bunch of our existing data. We'll do the same thing with the ESG scores. With Marketplace specifically, instead of it -- I mean, it's -- Marketplace is almost like a misnomer because it really -- what it really is, is a heavily curated set of data that has been sort of hand selected by our quant teams, tested for signal and importantly, cleansed and prelinked with -- using our reference data with our company data. That makes it easy for our clients to access it, not have to do the research or the testing, to understand what kinds of use cases it can be valuable for and to cut out a lot of manual work in linking and getting it set up in their systems. And so in that respect, it's kind of more like a sort of high-end boutique data shop as opposed to a data mart or a data marketplace. And we're really happy that we took that approach because we anticipate that some of our clients who might have been doing lots of R&D around very obscure data sets might just drop those data sets if they're coming under increasing pressure to manage costs. What we've done is we've prioritized only data sets that we think are very high in signal. And a good example of that would be SCRIPTS Asia, which is our transcript service in Japan, as well as our Airsage for traffic data. And we've got a lot of research built around those data sets, for example, to show the value. So the other thing on Marketplace is -- which we're also charging separately for is we're offering wraparound solutions with Kensho, so the linking service that Kensho's actually helped -- they built for us in order to scale our SME data ingestion but also to scale our Marketplace service. We can actually offer that commercially as a stand-alone product. And so we're also looking at -- we're in dialogue with, I would say, a handful of clients right now who are looking to purchase Scribe, and that is a Kensho model that we deployed into our transcription service. We think that, that's a very interesting opportunity as well to have those wraparound services from Kensho around the Marketplace. So I think generally, very, very interesting. I think it's an area that -- where we see a really significant amount of opportunity. It's a key part of our growth strategy going forward. I would say in terms of the importance we would sort of attribute, if you like, to the various investments we are making, I would tell you that we would view Marketplace, SME and ESG as all very important. I don't know that any of the 3 would be more important than the other. China's a little bit more of a longer bet for us. So if that's helpful, that's how we're viewing those investments.

That's great. And just since you mentioned China, basically, I think usually the conversations that investors have with me and that are asked during the earnings calls tend to be around the Ratings business. But basically, in terms of Market Intelligence, maybe you could talk about the China opportunity there.

Yes, absolutely. So we've been in the China market for several decades, actually. And we've got some extremely large clients in the Chinese domestic market. Our products traditionally have been -- so we sell the Desktop in China right now, and we've got hedge fund clients in China. We have a lot of banking clients, some insurance clients, et cetera. But several years back, we looked at the Chinese market, and we said, look, we believe this market is important enough, but it's also different enough in terms of how it's developing to necessitate or warrant the development of something that's bespoke to this market. And so the first -- and this was sort of instead of like basically translating Cap IQ or SNL into Chinese, which we've also done. And so what we've effectively done is we started looking for partners. We had to narrow it down. So we knew we couldn't -- like if you look across the spectrum of our clients, we knew we couldn't serve every single client that might exist in China. So we have to sort of narrow down to kind of a used case pie per category, and we prioritized credit. And then we went looking for partners, and we talked to lots and lots of companies, again forging some relationships and prioritized a partner that we've been working with now for a couple of years that is both our data provider for the offering as well as codeveloping the actual product with us. So it will be a separate workflow designed specifically for the Chinese user. And it's called -- we haven't -- don't have a public name for it, but internally, we're calling it the China credit workflow. And that will focus -- it would include listed companies, but also we're getting a very significant volume of private companies and SME companies from the vendor in China locally. So what we'll essentially be able to provide is a tool that we'll be able to -- users will be able to model and stress credit for public and private, large and small Chinese companies. We think it's very timely. I mean nobody could have anticipated the pandemic, of course. We feel quite fortunate that we have the beta coming out because the need for just fundamental credit analysis and data is really high.

Makes sense. That's great. And we've talked a lot about different opportunities within Market Intelligence. I think recently, the long-term margin guidance in the business was updated to mid-30s from mid- to high 30s prior. And part of that, I imagine, is because of the investment to capitalize on these opportunities. And so I guess, is there a point where investments subside and we can see more operating leverage? Or I guess, just talk about the investment cycle in the business.

Yes. So we do expect to be able to get to the mid-30s. That's the guidance that we've given from where we are today. The level is a reflection of a couple of things actually. '21 is the investment, which has certainly driven it. But the other is also a reset on -- and a restatement on the allocations for digital infrastructure into MI. And so that plays into those 2 areas. What I would say is the opportunities we have will come in at right a ways, I mean, obviously, you'll just -- margin expansion from the new sales from new products. The margin expansion will also come from things like optimization of BAU costs like digital infrastructure, which is a hefty cost for us and an area that I think maybe hasn't gotten as much attention and needs quite a bit of attention. We're bringing in some new technology leaders who are tackling those areas. And I would say that we find opportunities from the deployment of machine learning. There's tons of really interesting stuff going on in our data operations, for example, where we see -- Scribe is a good example of some ways in which we could gain efficiencies in the transcripts process. But each data domain -- and we have many data domains, ownership, estimates, keydevs, fundamentals, et cetera, in addition to transcription, for example, all of those big names have good opportunity for the deployment of additional machine learning techniques. And we've been piloting a couple with the help of a couple of really innovative outside companies as well as some internal innovation. All those things, I think, could be very good for us. It's what gives us the confidence to say that we can guide for mid-30s. And I think beyond that, we see opportunities in more white space, more commercial opportunities and then ultimately, over longer-term horizons, an optimization of our digital infrastructure expense.

Got it. And can you update us on where we are in the integration of the new Market Intelligence platform? How many Cap IQ users have been transitioned, and what the time line is for completion?

Yes. We have -- by way of background, Market Intelligence is the, call it, latest iteration or latest release of the legacy SNL platform. The -- so to that extent, there's about 80,000-plus SNL users already on the platform. We -- there are a few different things that we have to accomplish to make this ready for migration. It wasn't just about features, functionality. It was about meshing together data sets in the background, bringing databases together and breaking down some complex infrastructure silos that existed. And then we also have to make sure that from a performance standpoint, if you're going to take the number of users and multiply it by 3 or 4, it's got to be able to perform at the same level of stability and timeliness as it does today. And so the -- we had a massive release in April. And with that, we brought into production Omnisearch, for example, as well as a lot of the other functionalities that we've been waiting for, and made available a lot of the other data sets that we had been working on. And so we're really excited about Omnisearch being in production now. In July, we'll have another massive release, which will bring more of the functions and data sets along with some significant work that we're doing on the performance side. And then in 20 dot -- well, sorry, internal language. In our October/November release, that will be the release that will put us in a position to begin saying to our clients, actually, you could consider instead of dual usage and trying it out, you could now consider moving over. And the teams have been preparing for that. It's not just a technical thing. It's obviously -- there's a huge go-to-market angle and a marketing positioning angle to this as well. And we have a very comprehensive customer journey road map that actually we've already started because you have to get out ahead and raise awareness first before you start engaging with clients and trying things. We have -- as part of that this year, we have a target around incremental active Cap IQ users on the MI Desktop. And then we'll be looking at net migrations starting next year. From a timing standpoint, I think you should be looking at end of '21 into '22. As we've always said, this would be client led, and it just -- it takes a minute for people to get used to something that looks different and can feel different in a few different ways. Even if you think you're giving them better experience and all the pilot testers and users have told you, it's a better experience, it's still going to take a minute. So that's the outlook on that.

Yes. Great. And we're running out of time, but let me just ask one last question. Just given your background with analyzing sort of early-stage fintech start-ups, what's sort of cool or interesting or innovative that is sort of out there that maybe S&P could utilize in their own product and such?

Yes. Well, I mean, I'll speak on behalf of Market Intelligence as opposed to S&P overall. I mean we are keeping a close eye on what's going on, all things ESG. But where we might be set apart a little bit is we're actually looking really closely at discrete data sets that could work as well in our climate analytics, for example. That might look -- some of those might look a little interesting. And there's always an option for just pure commercial arrangements, but we would certainly take a look at anything that will come across our desks that fit that description. And we have considered, because so much of what we're doing in our internal operations is around optimization processes using Kensho but also other parties, if there was a company like a Kensho that brought different strengths, different types of machine learning models and things like that, we'd certainly look at that as well. And then lastly, I would say the bread and butter of legacy SNL was always your deep sector experience. 451 is a good example of an acquisition we made for our TMT segment, and we're extremely pleased with that acquisition. If there were other sector-specific data companies, we'd take a look. But I would say the other -- I would say, asset class specific is interesting as well. So we're super interested in private assets. And like I talked about our strategy there, but we'd be opportunistic on all that stuff, I would say.

Perfect. Well, thanks so much, Martina. We're over time. And so if anyone has any questions, please feel free to reach out to me. But Martina, thank you so much. This was really interesting. Great to hear about the Market Intelligence business at S&P.

Great. Thanks, Toni. Take care. Bye-bye.

Take care.