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

Okay. Good afternoon, and welcome. I'm really pleased to be joined by Martina Cheung, CEO of S&P. Martina, thank you for being here with us today.

Thanks, George.

Okay. So at your recent Investor Day, you provided updated medium-term organic revenue growth targets of 7% to 9% and 50 to 75 bps of margin expansion per year. Can you talk about some of the top drivers underpinning your confidence in achieving these targets and what risks could challenge them?

Well, thanks. It's great to be here. I would say we were thrilled to get out at Investor Day with our medium-term guidance shaped around our strategy of advancing essential intelligence. And for us, this is really core to what we do. We know from our clients that their need for additional insights and more data is growing just annually. And so our overarching theme here is keeping pace and getting ahead with our customers, strengthening our position in our existing areas of market leadership, but also looking at areas where we can grow in high-growth adjacencies, and we talked quite a bit about private markets and energy expansion, but also other areas like wealth and decentralized finance and supply chain where we feel we have additional growth opportunities at little incremental investment. And then finally, by amplifying our enterprise capabilities that we're doing things once across the organization, and we're really bringing the breadth and depth of S&P Global together and with all the leverage across the asset base that we have. And the guide we put out contemplates 6% to 8% for Market Intelligence, a 6% to 9% range for Ratings, 6% to 8% for Commodity Insights and 10% to 12% for Index and of course, the 50 to 75 bps of margin expansion. So you can sort of look at the 4 divisions and think about the market-oriented divisions, if you like, being Index and Ratings more so than perhaps the other 2. And in each of those divisions, we have very strong secular tailwinds. In the case of Index, we have a strong continued capital markets expansion around the world in addition to continued push from active to passive. And that has been a good growth driver for us going forward. And then we see in Ratings, obviously, we spent a fair amount of time at Investor Day talking about the refinancing wall and you take that, which is at historically high levels and combine it with some of the trends that we're seeing around private markets, infrastructure and data center investment, and we have good confidence and line of sight there in terms of our outlook for Ratings. I would say in the context of those 2 businesses, in particular, we absolutely do not foresee a downside recession, right, as part of that guide. And so when you think about risk, that's probably the key point to make there just based on how we've shaped our guidance. And then with the other 2 divisions, we would have different lines of sight and different drivers based on the extent to which those divisions are driven by ACV or subscription revenues. And so with that greater line of sight, you can build a bit more kind of bottoms-up into the forecast and the guidance range for those -- for Market Intelligence and for Commodity Insights. And of course, we've highlighted a number of the areas that we think provide the growth tailwinds for those areas, whether it's private markets, energy expansion and some of the other key areas such as really strong execution, innovation, the velocity with which we are bringing our products to market. And so we're quite, I would say, confident in our overall top line view. And then on the margin side, the 50 to 75 basis points allows us to continue to expand margins. And we've said that we intend to do that in every division. And there, that range can actually be potentially better if there is a year where we have outsized performance, for example, in the debt markets or in the equity markets. And so these are the sort of the shape of it. I think the -- for us, the biggest concern would be the macro exogenous factors, which, of course, could happen at any point. But with the projections that we have around the stability in the markets and things like that, we've got good confidence in those ranges.

Makes sense. You had estimated that around 95% of S&P's revenue is tied to proprietary benchmarks, data, workflow tools. Can you talk about how your proprietary data gives you an advantage into translating your tools and data into AI-enabled products?

Yes. So look, this is an exciting time for us, and we view AI as an incredible opportunity for us. We're very clear that we believe we have some of the most unique IP, including data and benchmarks research, et cetera, and some of the most important workflows that our clients use depending on the sector. And so AI presents a huge number of opportunities for us across our entire organization. When we think about the ways in which we can actually really bring that to benefit our customers, we have increased the speed with which we are integrating generative AI on our core platforms, for example, we launched our LLM-ready APIs for our data sets. We've, of course, been out partnering with LLMs, hyperscale partners and other players so that we are using AI players as an additional distribution channel, which offers us the opportunity to improve economics with our customers over a period of time. And we see opportunities for new data sales, for example, a lot of the conversations that we're having with our customers are leading to requests from the customers to try data sets that they may not have actually had access to before this dialogue. And generally speaking, there's, a, I think, a longer-term theme here for us around new product creation, which allows us to take what we're doing with the enterprise data office and then to actually bring that to create new insights by combining data in different ways across the divisions in ways that we wouldn't have been able to do before. So it's a really exciting time for us. I think some of the feedback we've been getting from our clients has been very positive in this. The automated data ingestion capabilities in iLEVEL, for example, have received very, very positive feedback from our clients. We're seeing a substantial uptick in use of things like Doc Intel 2.0 on Cap IQ Pro, a very large list of clients that are using Microsoft Copilot and accessing and integrating our S&P Global Energy research into that channel as well to enable their workflows. And so positive feedback from the clients, I would say, on the efficiency benefits from them as well from this.

And then sticking with the topic of AI, how do you plan to monetize the AI functionalities within your products? Are you thinking about upgrade cycles with products, pricing? Or perhaps, as you mentioned, the clients are seeing better outcomes, perhaps it's pricing based on client outcomes.

Yes. It's -- I would say it's going to fall into a number of buckets, and we touched on some of this at our Investor Day as well. So first and foremost, if you think about the fact that we are integrating generative AI into, let's say, our platforms as well as our major workflows that clients actually use day-to-day. The big important factor for them in that is that they can actually experience the generative AI capabilities and user experience in a workflow that they're very familiar with. And they can get access to all of the proprietary data, much of which they want to use on Capital IQ Pro data sets like Visible Alpha, data sets like our fixed income data, et cetera, and increasingly new data sets like With Intelligence. And so that's incredibly important. And that's the sort of thing that allows us to have a really good conversation at renewal time around the value that we're providing through that. I'd say in addition to that, as we use these LLM partners, and we've announced many of them as additional distribution channels where we turn on our customers who are licensed for a specific data set that's another opportunity for a dialogue around, well, you've turned on 2 more channels through this LLM and that LLM, let's talk about your usage and how that's helping you to actually get your work done on a day-to-day basis. So those are ways in which we look at sort of the current products and how we actually think about the economics and the value that we are creating for our customers. There are these other opportunities, for example, there's just a massive appetite for data. And the number of conversations that we're having where clients want to test new data sets in LLMs that they don't have access to today that's growing. And so this is a very interesting opportunity for us also to convert new data sales with existing clients. And then you can think about all the ways in which as we can develop agents in more discrete ways and look to maybe price those agents out for new and different use cases, these are other ways in which we can benefit, and we're thinking very carefully about those opportunities as well. Those are at this very early innings there. But the IBM partnership that we announced is an interesting example of how we'll test other ways to create value for our customers in a way that is very sticky by having our data integrated into their workflows via an agent that we created with IBM.

Great. We get a lot of questions from investors on the potential threat of AI, specifically with Market Intelligence. Can you talk about any potential competitive shifts you expect with MI given the rise of AI and how MI's positioning with AI differs with the other segments within S&P?

Yes. I think perhaps to the last point, I might say that MI in some ways has been earlier to the race, if you like, on AI. And a large part of that is because when we acquired Kensho back in 2018 and the Kensho team started to work with the divisions, the one that they navigated to naturally because of the amount of data that's there and the fact that the team just loves to work with massive amounts of data was Market Intelligence. And in fact, they created all these foundational capabilities, many of which went through MI first. So for example, Scribe that does audio to text conversion and many of the other capabilities, including Kensho Link, for example, that was built for MI. And so they've been an early beneficiary, I would say. You can see some of that in how quickly we've been able to move on the EDO as well because there were so many of those capabilities that benefited the data organization of Market Intelligence even before we brought the Enterprise Data Office together. I would say more broadly from Market Intelligence perspective, it's taking the massive amount of data as well as the critical workflows that provides essentially a lot of differentiation and stickiness there with our customers and really continuing to embed these capabilities that are getting huge traction with our customers such as Document Intelligence or some of the tooling that is really aimed at pure efficiency like automated data ingestion in iLEVEL, for example, and being able to really up the game for our customers and improve their experience and their efficiency. And so we think we're in a very strong position and a highly differentiated position with the combination of the unique IP, the deeply embedded fit-for-purpose workflows and then this very strong go-to-market that we have. And of course, with our larger customers in our Chief Client Office, we're having very elevated dialogue with those customers around how we can actually benefit them across their organizations. And increasingly, we're meeting with heads of AI, heads of data science, along with heads of business and actually having very broad dialogue around how we can work with them, not just within Market Intelligence, but obviously bringing the full breadth and depth of our content and with those same customers having opportunities to co-create through Kensho Labs as well. So it's -- I think it's a very good position to be in, and we're quite excited about it.

That's great. You highlighted private credit and energy as key medium-term growth drivers for the company. Can you talk a little bit more about how S&P is positioning itself to capture and leverage these secular tailwinds in these big adjacencies that you're going after?

For sure. So we highlighted private markets as well as energy expansion and private markets is a true multi-asset class opportunity for us. So not just private credit, but private equity, hedge funds, infrastructure and some of the other asset classes that can be captured there as well. And so we see really strong opportunities across the full multi-asset class scope, let's say, for private markets. I would say within private credit explicitly, this has been an area that has benefited more so the credit rating agency than perhaps some of the other divisions where it's tended to be more of the perhaps private equity play as well as some of the broader expansion in private markets. And for the credit rating agency, we were quite deliberate, I would say, in getting out there several years back and ensuring that we were -- the most important thing that we can do from a credit agency perspective because we don't compete, obviously, on the rating outcome is to make sure that both fixed income investors and issuers, sponsors, banks understand the methodology that the credit rating agency operates and that there's full transparency around the methodology. We say all the time we don't attempt to rate everything. We operate with a methodology that for some issuers would not be -- would not provide the appropriate outcome that they might be looking for. And so that has always been the case for S&P, whether it's public or private markets and continues to be the case today. And where we have done extraordinarily well, I would say, is at that intersection of being really focusing on the methodology awareness and education with all market participants and then executing at really high levels of excellence. We were very good on, I would say, streamlining around how we interact with private market stakeholder groups. And so this has driven growth. Back in 2023, it was more on looking at, let's say, entity ratings, private entity ratings, private loan ratings. Now that has expanded to where there's almost like a private version of every practice, if you like. So there's private across much of the structured finance asset classes, asset-backed finance, CLOs, middle market CLOs, et cetera. And so you're seeing us basically have -- use the same methodology in a standard way and rate the debt wherever it comes, whether it's public or private. And the AUM deployment and asset allocation has gone to beyond the sort of the loan area where it had kind of tended to dominate the headline in 2022 across multiple asset classes.

And what about energy?

Energy expansion is one that is incredibly exciting because it's one of those megatrends that has evolved like quite dramatically over the last several years in a way that is quite positive for S&P Global just given the depth and breadth of the capabilities that we have. And so if you look at the forecast that we have for energy demand, we see a 50% increase in overall demand for energy by 2050 and a tripling of demand for electricity across that same time frame. And so you start to think about all the things that need to happen, large investments in energy infrastructure alongside, of course, data infrastructure. You see the need for integrated energy outlooks because we know that all forms of energy will need to grow to actually meet this demand. It can't just be hydrocarbons. It can't just be renewables. It has to be everything. And so investors and energy operators will have choices to choose between different sources of energy, our integrated energy outlooks, our cost curves and the ability for our stakeholders to understand the return on investment, whether it's a large infrastructure investor or a sponsor or an energy company directly. This is a very important part of the overall narrative. And one of the things that we've been quite flexible on, which is a reflection of how the market is changing is reorganizing ourselves to better reflect what our customers actually need. And so we've moved our data center research team, 451, who covered broad technology, semiconductors and data centers to sit next to the power team because that's the actual intersection that we're seeing in the market. And so it's us showing that we can really be responsive and actually create those opportunities internally to get unique research, unique IP and unique data. And in fact, we just did a big publish -- published a big report rather in the last several days on our outlook for data centers that was contributed by all groups around the organization that have unique IP and insights into this.

Right. That's great. Let's dive into some of the segments individually. So with the Ratings business, the 6% to 9% medium-term growth, how much is private credit factored into that growth target? And then can you talk about the refinancing wall, the opportunity over the next several years with the pipeline of debt coming due?

Yes. Well, I would say there are many factors that will influence the growth of Ratings. And for us, it's a story of many, I would say, tailwinds over the medium-term time horizon. So we have, in the first case, obviously, good line of sight on the transaction side into the refinancing wall. And we talked about that, that is elevated relative to the last several years. It's also 9% over 2024 as of our midyear report. And so that is a high level of refinancing that, that we see now. Now of course, we can't dictate what the timing of when something will refinance. So we see those needs and we know it has to be refinanced, but the timing of it can change depending on rates and spreads and macro backdrop, et cetera. The broader point I would make around the issuance picture is that over time, it tends to be more correlated to GDP growth than anything else. And so importantly, we -- as I mentioned earlier, we don't anticipate a recession, for example, we have a very balanced outlook in terms of economic growth over the next several years. And then you take into consideration the needs for more energy, lots of infrastructure expansion with data centers, a high appetite for private credit, appetite for structured finance. And these things altogether are what inform our outlook on the transaction side of the book. Now private credit, we don't size it separately. But I think it's suffice to say that there is a sort of a public version -- a private version of all the public sort of practices and asset classes with some exceptions that we see. And I think we're as well positioned to rate with our consistent methodology there. And then let's not ignore the non-transaction part of the book. It's a healthy portion of the book. There, it somewhat serves as a ballast to times when we have maybe a little bit of a slowdown from an issuance perspective because a large part of that part of the book is surveillance fees, and those fees grow when there's issuance in the prior year, right? So in any given year, you're rating -- you're surveilling rather issuance that has happened in prior years as well as just the past year. And so the benefits from issuance tailwinds, it also benefits from the amount of engagement that we have with our issuer customers around our surveillance, the things that we do. We offer a lot of research. We offer scenarios and analytics to our customers. And of course, with all of that, we look to align the economics with the value that we provide. And then there are also other very important areas like RES and ICRs that could benefit depending on, for example, in the situation of RES, which is a rating evaluation service, we can tend to see higher levels of RES for example, when we have elevated M&A. And we did have some really good performance across RES and some of our other nontransaction nonsurveillance fee revenue lines in Q3, for example, which I think has been quite positive for us this year as well. And so we would see all areas of that business growing nicely through the medium term.

Great. And then with Market Intelligence, you've got the With Intelligence acquisition going on there. You've got sales force enhancements, end market dynamics. How do you put all those pieces together to inform the 2026 outlook?

Well, I'll give you guidance on '26 in February of 2026. But maybe to take a step back and think about how we look at the key drivers of growth over the medium term. And this is consistent for us with not only what we've said at Investor Day, but also some of the evidence of this that you've seen throughout the course of this year. There's been very strong execution from the leadership team in Market Intelligence, and that has shown up in multiple areas. I talked a lot about the speed and velocity around the innovation that we're seeing and the ability for the team to really harness generative AI, but also scale to get product out to market much faster. A good, really nice anecdote for that for us is we closed our With Intelligence acquisition a couple of weeks ago, and we have an extremely accelerated time line during which we want to actually integrate the With Intelligence data with the other data that we already have in that space. And we're going to be able to meet that very aggressive time line with about 1/4 of the resources that would have been needed before we actually have renovated and really beefed up the capabilities around Kensho Link, which is the tool that we use to link data across multiple different vectors, and that was boosted by the acquisition of this little small company that we acquired earlier this year called TeraHelix. And so just the power that we're unlocking with these capabilities is really great. And so that innovation coming all the way from our data organization and going very, very quickly out into our product gets us very excited about our ability to continue to differentiate there and to innovate. Of course, you've seen the great work that's been done around revenue transformation and the partnership with the Chief Client Office. We've also done a lot of streamlining across the Market Intelligence team. You pair that with this insatiable demand for new data and new insights from our clients, and we think that puts us in a very, very strong position in order to deliver these medium-term targets.

In the Energy business, you're targeting revenue growth to accelerate or reaccelerate from current levels as some of the macro headwinds ease and you lap some of the regulatory factors in the business. What would you need to see from a macro and industry perspective for the growth rates to improve meaningfully from current levels?

Yes. So we said there is 6% to 8% over the medium term. And I think there's some puts and takes that are, we'll call them onetime, right? So we've -- certainly on the sanctions front, we had highlighted about a $6 million impact in 2025, about a $20 million impact in 2026 from the most recent round of sanctions that was announced, I think, about 2-ish months ago. And obviously, that is something that over time will lap, right? Within upstream specifically, which is the area that has had some pressure as opposed to the other areas that have performed very, very strongly. We also see these onetime challenges persisting from M&A and consolidation in the upstream area continuing to impact us a little bit through the first half of next year. But at that point, we're going to see that lap. And so our expectations are that we get to that 6% to 8% growth on average through the medium-term plan.

Great. And then turning to the Index business. The margins there are already incredibly high. How do you think about balancing margin expansion with reinvesting for growth in the Index business?

Yes. Well, I'm going to pretend I'm Eric here for a moment and say that, look, our goal here is to drive profitable revenue growth. So we want to drive revenue growth, and we want to drive margin expansion. And we've said we would drive margin expansion in every business in every year. And the key for us in these areas where we have, like in our S&P Dow Jones Index franchise, higher margins, and we also have incredible growth opportunities that the business is able to pursue. There, we will continue to invest for growth. And we've seen the results of that, not just in the core business in terms of how the S&P Dow Jones team has been able to expand over the last several years, but we also see it in the new areas that the team has invested in, including Factors and Thematics as well as some of the multi-asset class opportunities that they've been able to unlock with the introduction of the fixed income indices that we brought in through the IHS Markit acquisition. And so there's just, I would say, a good list of options there in terms of where to prioritize growth. Some of them I'm delighted to see are ones that the team has been able to go after with very little incremental investment. We're super excited about, even though it's early days, very excited about the work that the team is doing in decentralized finance. The fact that we have a tokenized 500 and have the first tokenized 500 ETF on chain is very exciting to us. And that is a great example of how we take our core IP and really expand our market leadership and at the same time, tapping into areas where we can actually get to new end users and end customers.

Right. The index business is your fastest-growing segment. Can you talk about some of the innovations beyond -- you touched on decentralized finance, maybe private asset classes, penetration into additional passive categories that can further support that 10% to 12% longer-term growth?

Yes, absolutely. So the team is -- on the private piece of it, the team is working very hard. We have a suite of private market, I would say, indices that the team has been launching quite proactively on top of the success that we've had with our partnership with Cambridge Associates over the last several years. And so you've seen us launch indices over the course of this year like Top 10 stocks, private stocks, Top 50 private stocks. There's some good opportunities here with the With Intelligence data. That was one of the key areas that we focused on from a diligence perspective to ensure that there were some nice opportunities there around public private and our ability to leverage some of that data into new and innovative indices. And I would also say that with fixed income, in particular, there's some interesting puts and takes there. We've got some really nice, I would say, wins under our belts with the work that we've done with UBS and the partnership on their Leveraged Loan Index. I think there's some ways in which the team views other opportunities to look at, especially some of the data that we have internally and have some additional new and innovative opportunities out there as well. And so good opportunities on the private markets front. I think on the active to passive front, the scale of innovation continues with the team, and we've had, I would say, in the core business area, continued innovation, continued growth and success, many with our most important client partners around the world. And so I think the outlook there on the core business continues to be strong with good execution.

Great. Let's switch to margins. So you had mentioned that with the 50 to 75 bps of margin expansion opportunity over the medium term, Market Intelligence represents the biggest opportunity for a segment level expansion. Can you talk about the main levers for expansion? How much of it's going to be based by AI-driven productivity? How much if it's going to be based on process redesign, organizational changes, et cetera?

Yes, for sure. So the simple way to think about it is that Market Intelligence has the highest headcount in the organization. And so as we see scaled enterprise productivity initiatives taking off, Market Intelligence is just it's actually going to be the greatest beneficiary because of the headcount equation there. And we are very excited, I would say we have -- in parts of our organization, there have been very good efforts that had started going back probably even 2 years ago. And earlier this year, Eric and myself and our Chief Product Officer and others decided, look, we need to actually really get our arms around these things and scale them in more of an industrial way so that we can have something systematic that can be used across the organization. And so we've talked about Spark quite a bit over the last couple of years. That's been wonderful to get at everybody using an LLM in a compliant way so that we're not releasing our content. And we've had incredible innovation individual to individual. In some cases, we've had innovation by team, but we haven't had innovation across an entire process and value chain. And so we have large initiatives that we brought under an umbrella to ensure that we were scaling them. And part of bringing them under the umbrella was, for example, earlier this year, we had 3 CTOs leading development of an agentic software development life cycle. Now we have one CTO who's leading that for the enterprise with inputs from the other CTOs. So we're creating it once, and then it will be rolled across the organization in that same format. And so we're trying to get more efficient, not reinvent the wheel. We don't need to. We have incredible skills and talent across the organization. So in 4 areas, in particular, we're really looking at this scaled enterprise impact. I mentioned the first of the agentic SDLC in the technology organization. The second is all the work that we've been doing in the Enterprise Data Organization. And in some ways, they're a little bit ahead, not just because of the creation of the Enterprise Data Organization, but also because that team had been very proactive in integrating AI over a period of time. We also have a large effort within our Energy business to reinvent the workflow for researchers. We have thousands of researchers around the organization. And we have a workflow called the Analyst of the Future in S&P Global Ratings. And so those 4 workflows touch on the 4 largest pools of colleagues that we have around the organization. And the idea is to essentially make sure that wherever we have people who have the same either job description or job type that we're actually scaling that same set of capabilities that are being developed in each of those 4 areas across the entire organization. So that's where we would expect to see a scale of efficiency and effectiveness and speed to market that will build over time. And of course, we're taking that to the next set of functions across the organization. I would say those 4 happen to be probably the more specialized ones. And so it's good that we've hit some of the hardest ones first. And then we will be able to take some of those learnings to other parts of the organization as well. And so as a general statement, our ability to drive improvement in productivity is really, I would say, connected to these very robust and rigorous transformation efforts that we have going on. That, of course, in turn, benefits Market Intelligence as well as the other divisions. And we'll take some of those productivity gains and reinvest them. This is something that we highlighted in our Investor Day and balance out the need for investment in new areas using those productivity efficiencies as well as delivering on our margin targets. And of course, I'd be remiss if I didn't add that in a good year for our transaction businesses, it is always possible that we will exceed margin targets, particularly if we see outperformance in Ratings or Index.

Great. Well, Martina, we're just about out of time. Thank you so much for the insights and the discussion. Please join me in thanking Martina.

Thank you.