Q3 2019 Earnings Call
At this time all participants are in listen only mode. Later, we'll conduct a question and answer session rule in the participants to one question and one follow up.
You have further instructions for you at that time as a reminder, this conference is being recorded.
Now I'd like to turn the call over to Salli Schwartz head of Investor Relations and Treasurer you may begin.
Thanks.
Welcome to be honest <unk> third quarter 2019 earnings conference call.
This morning, we issued a press release announcing our results for the third quarter.
Press release, along with our earnings presentation, and every third quarter update are available on our website and I see I dotcom under the Investor Relations tab.
Let me remind you that just call contains forward looking statement.
You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made and are governed by the language on the second flight of today's presentation.
For discussion of additional risks and uncertainties. Please see the risks factors and forward looking statements disclaimer and our most recent Form 10-K and in our other FCC filings.
During todays call. In addition to results presented on the basis of U.S. GAAP.
We also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates adjusted EBITDA adjusted EBITDA expenses, adjusted EPS and free cash flow.
We believe our non-GAAP measures facility meaningful period to period over period comparison and provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we do this information to be meaningful as well as how management uses these measures on pages 20 129 of the earnings presentation.
We will also discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today, our Henry Fernandez, our chairman and CEO Baer, Pettit, our president and COO and Linda Hubert our Chief Financial Officer.
I'd also like to point out that members of the media maybe on the call. This morning in listen only mode.
With that let me turn the call over to Henry Fernandez Henry.
Thank you Sally.
Hello, everyone.
Thank you for joining us today.
Before I start I would like to say that we're very pleased to have Sally with us.
On her first earnings call I must see right. So congratulations to you Sally and.
We're fortunate to hobby.
And the third floor, where games, so strong performance across our franchise.
With all her with year over year growth of 7% in revenue for Corp of 12% on organic basis.
30% in adjusted EBITDA.
I went before first trends just any yes.
In addition to this exceptional financial results, we achieved several significant milestones.
We struck new long term agreements with Black Hawk.
Intercontinental exchange.
Don't your reserve.
I'm Charles River development.
And we are where our goal downtown.
These agreements align those well with GE is strategic our nurse and Allied house with important capabilities.
I will continue to enhance our growth.
On competitive differentiation.
[noise] lateral we extended our successful strategic relationship with them for another 10 years.
On March 20, Tony.
As you are well aware there are strong secular drivers license and we do yes.
And this new agreement creates a tremendous opportunity for him Sci.
Alright, new contract with Blackrock aims to maximize long term revenue growth.
By further balancing on aligning the price volume mix in our arrangement with them.
More specifically on the deal the current license fee rates back I pay storm I see I will be reduced for Mds with total expense ratio below certain levels. According to our face implementation period.
In these yes, our current feed rates has become a much larger percentage of total fees than originally anticipated.
Therefore, the new our agreement Fourx for that.
The average <unk> adoption to our total assets they see run rate until September 30 of this year associated with this adjustment is not material.
Based on the anywhere I So September thirtyth.
Based on the most recently come from total expense ratios of these aircrafts that are subject to these <unk> adjustment.
[noise] any potential future productions in total expense ratios of my sense Blackerby P.S. may reduce the license fee rates being able to MSC I.
For those yes.
This fever adoptions are finalized by the potential for incremental assets to flow into like says Blackrock, yes.
As you know well, we have seen substantial growth they need the EPS over the past decade, well globally the of assets I forget those far in 29 team by approximately 20%.
Our continued aim with Blackrock has been to more closely aligned our mutual opportunities and success, if indeed, the ETF marketplace.
And this agreement for lead reflect dot approach by them and by House.
We're very excited about the path, we see Inferno loss and we believe we're extremely well positioned to benefit from an hour on Oh from I see ice ongoing innovation and product development.
Well as the underlying trends that supports the continue flows into it yes.
We also recently expanded our strategic relationship with the Intercontinental exchange or ice.
It was you know is a leading operator of global the remedy make changes on clearing houses and a provider of fixed income data.
In addition to extend the existing license agreement for listed futures based on him Sci indices.
We license to wise are you just you data for their fixing coming next construction.
And we are we license for advice.
Fixed income pricing on reference data to use across MSC I, including four MSC <unk> fixed income indices.
We similarly, Joe's renewed our strategic relationship with your ex one of the world's leading derivative exchanges I'm part of Deutsche a burst group in Germany.
We not only extended the term somewhere license agreement for link for the existing MSC Index listed futures in Europe , but also expanded the agreement do include futures on M.S. yacht ESG indices to capitalize on the growing interest in sustainable investment.
These type of a strategic relationships are mutually beneficial.
Driving innovation and they deliver increased value for our clients on the industry as a whole.
Similar to our focus on private and bought you sort of global strategic relationships with a wide variety of leading industry players. We continue to selectively pursue highly strategic bolt on acquisitions of companies like Carbone Delta.
Which enhance our capabilities in key growth areas.
Generate attractive returns.
Drive long term growth and differentiation for him Sci.
We're extremely excited by the opportunities that would result across all of this development.
I will now turn the call over to my partner Baer, Pettit, who will provide more color on our continued progress and those two areas from enbridge derivatives, and the SG, including the carbon belt acquisition.
Thank you Henry.
We spoke about index derivatives on our second quarter earnings call and I'd like to briefly update you on our ongoing progress index derivatives, including futures and options continue to gain traction as the investment community use them as effective tools to implement hedging and other strategies.
Extension of our contracts with ice in your acts that Henry mentioned will strengthen our footprint in this area of our index franchise.
In the past quarter, we saw asset based fee revenue or Amy from futures and options more than tripled and the notional value traded in listed futures and options linked to MSCI indexes reached a record level of 1.5 trillion dollars.
Listed futures and options based on our flagship indexes continue to gain traction with open interest in futures and options linked to our emerging market and if a indexes together growing 31% year over year.
And we also referenced some GE a topic of significant interest not only to the investment community, but also to governments corporations and various other constituencies we've seen significant growth in interest in MSC I'd SNG ratings research and other products, we continue to enhance our offerings and.
Recently announced the release of SNG ratings for over 34000 funds that EPS in the equity and fixed income universe.
He is a g. considerations are relevant not only to traditional asset owners, an asset managers, but also to wealth managers retail investor platforms hedge funds broker dealers and corporations.
Within all these institutions, we continue to see demand from a growing variety of user types, including CIO. This portfolio managers risk officers governance teams compliance genes and SNG specialists.
Essentially factors also impact a range of asset classes extending from equity to fixed income to private assets like real estate in private equity.
One area, where were you seeing significant demand for new product capabilities is climate risk as various market constituencies look to understand and evaluate potential climate change.
We intend to be the largest provider of tools for evaluating the impact of climate risk on investment portfolios to that and you saw us acquire carbon Delta, which is a zurich based environmental Fintech and data analytics firm together MSC and.
Carbon delta will offer climate value at risk and innovative and pioneering climate risk metric that calculates the impact of client climate change on a company's market value and helps investors understand and quantify these risks within their portfolios.
Mm guys growing set of climate change offerings together with our research allows investors to more effectively achieve specific climate objectives, including avoiding we're diversifying carbon risks gaining exposure to clean technologies and engaging with companies.
We will keep you apprised on our ongoing progress in Houston G, which is very clearly, becoming an integral part of portfolio construction.
And with that I'll turn it over to lend to take us through the financial highlights and discuss our current guidance for 2019, Linda Thanks, There and Hello to everyone on the call MSC continued its momentum with an eighth straight quarter of organic subscription run rate growth around 10%.
This growth was driven by strength across both our geographic regions and our major client segments looking first at geographic region, our organic subscription run rate was up 8% in the Americas, 11% in EMEA and 13% in Asia for asset owners and asset managers, which collectively.
Prize about two thirds of our subscription run rate, we saw organic subscription run rate growth of 12% and 10% respectively.
Let's see I continues to provide his clients with mission critical products and superior customer service, leading to healthy mid ninetys retention rate across our segments for recurring net new sales nine months 2019 was up 8% with a third quarter, specifically up 3% well index and ESG saw growth of 20.
<unk> percent and 31% respectively.
Linux had lower growth as it led to strong third quarter in 2018.
I'd like to draw your attention to nonrecurring sales, which were up 32% year over year and $14 million, primarily driven by increased sales in our barrel, one and risk manager product offerings and in our index derivative product offerings. This was a six straight quarter of nonrecurring sales greater than $8 million on a year.
To date basis total nonrecurring sales were up 27%, including analytics up 45% an index up 26%.
Turning to our performance in ABS, we continued to benefit from our focus on derivatives with listed futures and options revenue Tripling is fair referenced earlier.
We also note that MBF revenue from futures and options with us over 100% year over year, even excluding approximately 5 million of additional fees associated with prior periods attributed to a retrospective price increase from are we renegotiated contract.
MBF revenue was up 5% with a 7% increase in year over year average assets under management or a win an equity HTS linked to MSCI indexes, partially offset by year over year decline and average basis points. Finally, non MTF pass it on revenue was up 11%.
Driven by increased contributions from higher fee products.
Equity ETF AUM linked to MSC I indexes ended the quarter at $815 billion up 6% versus the prior year average fees continued to gradually decline as lower feed products capture a disproportionate share of new flows into equity, yes with regard to geographic market exposure.
There were $13 billion inflows into fund based on U.S. exposure indexes with more than half NHS based on MSC ice factor indexes, primarily in the low volatility and quality products and about one fifth any ts based on MSC iced tea indexes.
And the CIA operating revenue continue to pace in the third quarter with growth across all product segments. As we described in our earnings release published this morning, our strong execution in the quarter resulted in high quality earnings growth, mainly driven by operating momentum.
We had no share repurchases during the third quarter, but our earnings continued benefit from the significant share repurchase activity in late 2018.
Free cash flow from third quarter was $174 million up $43 million year over year, primarily driven by higher cash collection and lower income tax payments, partially offset by higher payments of cash expenses and higher capital expenditure costs, turning to our capital position our cash balance at the end of the third quarter.
It was $881 million.
Our approach to capital allocation remained the same with no changes to first our dividend policy at 40% to 50% payout of adjusted EPS.
Second our leverage target of three times to three and half times total debt to adjusted EBITDA and third our approach to mergers partnerships and acquisitions and share repurchases both of which remained very opportunistic.
I'd like to now provide an update on our guidance for the remainder of the here as we remain focused on driving growth, we will keep investing in a number of high return opportunities. We continue to expect adjusted EBITDA expenses and Capex will be towards the high end of our guidance range $685 million to 705 million dollar.
Others for adjusted EBITDA expenses, and $45 million to $55 million for Capex with regard to our tax guidance. We are lowering the range of our full your effective tax rate and now expected to be between 6% and 9% as you're aware. This range includes an income tax benefit related to divesting of.
Certain multi year performance stock units in the first quarter, which has been excluded from adjusted EPS. Excluding this benefit of approximately 11 percentage points. We now expect the effective tax rate used for adjusted EPS to be in the range of 17%, just 20% and with regard to free cash flow we expect.
To be at or slightly above the high into the guidance range of $545 million $585 million.
And before we moved to QNX I'd like to turn the call back over to Henry.
Thank you Linda.
I wanted to highlight a press release, we issued this morning announcing the promotion or wildly seminary, two global handle client coverage.
In fact, if January 2nd on next year.
Well as the retirement of Lorenzo year, MSC, as Chief operating officer, and Chief client Officer.
I would like to reiterate my deepest appreciation I'm glad to do to Lauren for his leadership and dedication to MCR high onto our clients.
Neuron has led the transformation or our global client coverage, we're going to station and position us well to realize the many growth opportunities we have across our businesses.
I would also like to congratulate I'll just say on his promotion.
There's been a great deal time in the last few years with Loran visiting clients I cannot pass that he will further develop and expand our global client relationships as we continue to focus on powering better investment decisions made by those same client.
We will now open the line to take your questions.
And as a reminder to ask a question you need to press Star 100 telephones.
To withdraw your question. Please press the pound key.
Please limit yourself to one question and one follow up.
Please stand by what we completed the Q and a roster.
And our first question comes in a line of Toni Kaplan with Morgan Stanley . Your line is now.
Thank you probably have five park with him but.
HM Blackrock contracts extension.
Assuming that expense ratios keep coming down in the industry.
I've been able your fee rate can move more quickly also you mentioned a phased implementation period.
How long will that be you mentioned the first adjustment in March but how many phases are there and can see licensee read page I.
I know it will be reduced for certain E gifts and mark how much.
I have an impact will this be to the average fee rate at that time and I want to ask about 5 million dollar.
That's really it is.
Million.
Mission to run rate.
And yes.
Costs, you're putting it in the estimate to be run rate are you expecting that this $15 million occurs.
I'll leave it at that.
Yes so.
So so.
Obviously, we will give you some directional comments of what.
What our arrangement with Blackrock is but we wouldn't we will not be able to comment on very specific.
Given our policy of not comment on a specific matters pertaining one one client.
So.
It's important to understand.
The the comments, though we're under this gross or that we have made.
In the following sense the agreement calls for a.
Hey.
A series of fees.
Fears and depending on the the total expense ratio of each one of these funds.
The the job adjustment data that we mentioned that is phase stand over.
About 10 month period from March of next year.
Relates to those yes that as I mentioned in my remarks height of normally high.
Percentage of their fee being the MSC IC, so that that takes care of those things and that adjustment based on currently you I'm encouraged total expense ratio is relatively material to us foods, our asset base fees.
The second part of Oh always what we're trying to do is is for the next day in years prepare the relationship.
With lot growth to be portfolio line with market dynamics that to the extent that they are meaningful changes and the total expense ratio reached fun. So in this case or was it coming down that our fee then gets to be commensurate to the to the level.
All of US blade that we were that we were intended to from the very beginning in many of those funds and therefore, it's up in theaters down depending on a on the total expense ratio associated with that and the goal.
In full alignment with Blackrock is doing sure that that they have the flexibility in their own need they have to trade off the volume versus price to gain market share on acquired new assets and then MSC eyes fees are not in the way of creating a.
Disproportionate amount of our fees to the total expense ratio.
Tony It's Linda you. It further asked about the 15 million addition to asset based fees in the run rate that we spoke about and as you're probably aware, we're open to working with a wide range of partners.
So that we can best top clients achieve their investment objectives.
As we had noted we recently renegotiated a few of our agreements as Henry spoke about.
Based on the third quarter 2019 trading volumes.
We expect that those will add approximately 15 million to our asset base fees run rate now. Some of this addition is already in the third quarter ABF run rate and the rest will come into play in the next six months.
That is separate from the impact of the amended Black rock agreement.
And we're not able to provide more detail on which companies any of that relates to a given confidentiality agreements. So hope that's helpful and that's not all we can say.
Very helpful. Then my second question is very short.
The agreement with I thought it really interesting and just wanted to understand you sort of long term where that relationship.
Well, we have a great relationship on increasing one with ice.
And in two areas.
No it two major areas lateral or areas, but in two major areas. One is clearly the.
The the listed futures and options I don't part would draw we have high for quite some time. So we removed that agreement on would renewed our commitment to.
To create new indices for them or license existed in the said in this has to them. So that they cannot they can continue to launch job.
At least a future saw based on on our IP. The second part of the agreements has to do with their fixed income data business, the former IVC or indirectly better corporation business in with job. They have a as you know they have Bob.
Evaluated prices on terms and conditions on an extremely large universe of bonds around the world. So while we are going to be licensing from them.
Dot Dot dot grew roughly one data for office.
To use our growth a lot of our products I missed <unk>, including a potentially MSC <unk> fixed income indices. Likewise, there licensing from US our is G. Data is your rating CSG indicators on all of that so that they can incorporate.
Yes, GE criteria, India of criteria aim to the construction, though there on fixed income indices.
So that they can create an ice branded DSG fixed income indices.
Thanks very much.
Thank you and our next question comes from Manav Patnaik with Barclays. Your line is now open.
Thank you my first question just around the flows than I think they'd love to numbers out there. So correct me if I'm wrong, but.
The other thing S&P talked about 7 billion of inflows are there into the non U.S. side I think you. They said there was 5 billion of inflows and I believe in my comments. He also said there was positive U.S. and close it does that mean non U.S. was negative or am I just.
Campaign right number there.
None of it's Linda I don't think we want to comment on.
What other companies have quoted in their their earnings release.
I think what you have pointed out is correct.
The bulk of inflows was into us fun.
In the third quarter.
And a smaller share with into emerging market fun.
For us were stronger in the emerging markets. So the balance was less helpful to us frankly, so can't comment on the other specific numbers that you certainly have the trends right and I'm just wanted to make sure that you understand the emerging markets piece.
Which has been weaker.
Yes. So there was talking that was pulling out here the the data hard to do that well well talking right buttoned up and so for the quarter on a four for the third quarter and unrelated to women Cie link it yes.
The the total according to our numbers right the normal amount of flows into a equity the ABS.
The idea is related to a messy I was about 5 billion and that was made up of Bob of out of a increase in flows.
To U.S. exposure in the absence of about that say about.
13 billion or so.
Slight negative to develop a market exposure or excluding the U.S. on a 13 billion a negative or outflows to emerging markets.
Okay got it and then just a quick follow up you know.
Congrats and renewing a lot of the contract that you mentioned are there any other notable moving ones coming up that we should be there.
Nothing on the scale of the ones that we mention I mean, clearly we are in continuous discussions with many of our clients.
And we don't habitually discuss specific contracts on this call as you're aware. So I think generally we've got a lot of things going on but nothing that's that's noteworthy or that stands out.
What I would add what I would I know is that just due out some of two strategic commentary is that a as you have heard those talk about him to five.
We are intensely focused.
On develop in the index licensing franchise over Mr. Guy into their deliveries a gross oh forms of the realities on a grows the world.
So up so visit that's made up of list as derivatives listed in the changes futures and options and therefore, we have a number of partners in the world odd to through major ones our eyes on the yorick on the Singapore a change in Asia.
And the second parties. So we're very focused on the over to counter or structure broke through it is market with broker dealers on and all of those things are significant area so of incremental growth for MSC Guy.
Because our own the structure Brookside, we haven't been dot.
Got it sort of present on the derivatives site, we're getting excited because the market for multi country a multi currency.
Index futures is developing fast and we are always had the largest provider I mean this is in that space.
Thank you very much.
Thank you and our next question comes from amount of human other with Buckingham. Your line is now open.
Hi, good morning, Thanks for taking my questions.
I had one on the cost savings you know given the hiring you made on the head of lean practices I know, it's early days and then at the recent higher but if you could just give us a sense on kind of the expense saving opportunities that you foresee you maybe in 2020 and any key areas that you see as an opportunity to focus on.
The way I would characterize that.
Opportunity in that higher is really part of our ongoing business management, which we've discussed on this call you know over a number of years. So I don't think that there is any particular area that we view as.
Sort of particularly a target if you like the one thing I would say is that we have been consistent in saying that our what MSC ice strategy, which brings together a lot of our intellectual property.
As a benefit to our clients is also inefficiency story, so as we reduce duplication of different technologies as we consolidate databases as we allied standards in technology all of those things will create efficiencies over time and we're very focused on.
Good day in day out in the management of the business. So it's not really a specific category. It's just the culture of efficiency and the culture of removing duplication and creating better standards across the firm.
One other comment that I will make on on that or is that the.
You know if we can save a rise our EBITDA expenses into expenses that are to run the current business and continued to feed the a the some of the revenues of the current business.
On a expenses that are much more investment type, which are two our green new things you know on to change the business and change the direction of the business. So so what we're trying to as we said at Investor day, but we're focused on is we have enormous opportunities to invest.
I missed the eye on very high return projects given the nature of what we're doing on the demand for what we have.
So when investment dollars to achieve that so while we're constantly doing a very indicated these creating high levels of efficiencies in what we do they delay to run our existing operations to free up resources. So that we can invest in those new things and continue to have a good I drove margin expansion in the bid.
So we believe that that is a very strong discipline orme Sci R&D helps us grow their revenue line over time and continued to deliver high levels of profitability in the company.
Great. Thank you for the detail there very helpful. And then I guess the follow up question on on the tax rate side I understand there, we're not giving guidance for 2020 overall, but you know given the improvement we've seen this year can you just give us a sense of how we should be thinking about the run rate that's realistic for 2020 for the tax rate.
Yeah, It's Linda I think we would prefer not to get into that there's a.
A world of tax changes happening right now and with a lot of discrete items in motion I think we would prefer to wait until we move into first quarter next year.
To give our views on tax guidance for next year, but please rest assured we will do it when we get to I first quarter earnings call.
Understood. Thank you.
Thank you and our next question comes from the line of Chris Shutler with William Blair. Your line is no.
Hi, guys good morning.
On the flip back to the Black rock agreement.
So we're I think your fees go go down as black rock reduces its expense ratios, how would that differ versus the way that your current agreement is set up I thought that you currently price as a percentage of the expense ratio, maybe tiered, but does that not the case.
Hey, what's the difference is is that.
They were absolutely floors associated with with all with all the funds and therefore, where you now have is a itself is a number of fear floors in a in various autobahn categories of out total expense ratios.
Yes.
Okay Susep more tiers basically that's that's the way to think about yes, yes. Okay. So there was always that there was always a percentage of the though the.
Total expense ratio, but it will but there was an absolute floor in what you do matter what is the total expense ratio wise. The our fees go no go beyond that the below that so now well we've gone is create a a different a number of categories of fears and these fear has its own on percentage on its own.
On floor, which reflects the fact that the mark to market pricing or total expense ratios on DTF are far broader the 10 years ago that there's a much broader range of products at different price points serving different purposes.
For sure it makes sense.
Then the other question I had was regarding the commentary in the press release around the leverage.
Current target three to three and a half times gross debt to EBITDA. Thank you are in the middle that range today.
It sounds like you're considering taking on more debt, where word where would you expect to take leverage target, where where could you take it and then what would you do with extra capital.
Sure.
As we had said at the quarter end, we had 2.6 billion of debt outstanding.
3.2 times, our trailing 12 month, adjusted EBITDA and our stated gross leverage target.
To adjusted EBITDA is three to three to have time.
We do monitor the market and we'll be opportunistic as we think about potential financing.
We also note that the board has added another $750 million to our share repurchase authorization to bring up to a billion for 56.
And we're going to think about those things very opportunistically.
Great. Thank you.
<unk>.
Thank you and our next question comes from online Bill Warmington with Wells Fargo. Your line is now open.
Good morning, everyone.
And Hello, and as and welcome to the Sally.
A question for you on.
On the T. upside the there's been some recently announced.
And highly publicized reductions in retail trading fees and I just wanted to ask.
What you thought the impact of that would be on.
Yeah demand and pricing for MSC I.
Well I think anything bad reduces the friction for trading of financial instruments I.
Creates.
A lot more ability by investors to our invest larger amounts are in those instruments.
Because they now have less friction to Ah khomenei or to come out.
Of out of them, so that bodes well for it the EPS because it the EPS are much more creating instruments that mutual funds for example.
And therefore, we are we anticipate that they will continue to be a.
More assets coming into it the f. over and above what the what is currently comment.
And then for my follow up question I wanted to ask about the the Mega trend in the fees just how what are you looking at these days in terms of a wham tied to those how quickly are they growing when do you think though they're moving the needle yeah. So we're still for short the ground floor in that.
I mean these diseases. These indexes are pretty much hot off the press as it were right. So we've only just launched them. So so you know I don't I don't want to speculate on the exact category as you can see many of these newer categories of what I would call precision exposure type of indexes whether there.
In in factors or Nielsen G.
Have shown very attractive growth and people you know there's for certain a market of people who want to have certain market exposure is very precisely three indexes. So we would be delighted if they were to follow some of the precedence of the other specialized index.
As we have.
We don't want to speculate around that.
So I think we'll just have to keep you apprised on those developments in the quarters going forward, but certainly from just a from a client response point of view and the dialogues we've been having its very positive.
What I would on what our bill is that dog again up.
It's sort of with the more strategic emphasis is that the up what we're moving into autumn Sci in addition to.
The flagship market cap indices, the flagship sort of into factor into says the flagship BSG indices.
That are more a benchmark related to large portfolios. We are a rapidly also moving into directionally, creating more narrow more dramatic.
Exposures.
Based on research that we know we do a that translates into a so it'll does indices and and those are could be significant demand by you'd be at providers.
By a wealth managers in Obi structured products.
Over the counter the remedies under like on a and therefore this is a whole new growth area for him Sci over time in which we're just building the underlines the underlying indices that will be the basis of portfolios of every kind in the world.
Got it thank you very much.
Thank you and <unk>. Our next question comes on line of Craig Huber, which Huber Research partners. Your line is now open.
Yes. Thank you all my first question I guess for Linda I know you've been there are few months Linda just curious your brief observations have been so for what you think investors might be interested in that you might be working like maybe perhaps to try to make a couple of even more efficient and I realize it's a very high bar to say that.
Thanks, Craig coming up on on six months here and it's been an amazing transition. My colleagues are all very impressive very smart and we moved staffed here.
Mainly driven by a Henry blistering pace, but.
We continue to work on efficiencies as fair.
Because we want to be very sure that we're able to continue to make investments and what we call our triple Crown investments, which would be the ones that have short payback period high returns and are in our fastest growing businesses, which would be a index and ESG and then our other businesses are also performing really well.
Well, so incredible focus on where we're going to put our dollars. This Henry's indicated this is.
My primary focus.
And I think the the program we have to do that is is moving very nicely and as we move into next year, we'll have more to tell you about that but I think thats. The most important thing.
And then my second question I guess, Henry maybe just update us on the numbers you look at both in the U.S. active versus passive where's that breakdown right now.
You are looking out and what's your best sense, where you think that might be I know, it's tough question asked the same two years out here, where do you think it's worth tops out if you have a hazard a guess.
Look on a secular on a structural basis.
Clearly passive management.
Continues to grow all by leaps and bounds.
Dave.
For a variety of reasons it creates very easy exposures on a very low cost due on investor.
There's a lot of research drawn that Dr. Uli.
Those portfolios outperform.
The majority of active portfolios.
So we continue to see that you know for sure in an automated way with some cycles, obviously a lot of passive up.
Passive investing or can be deemed sometimes to be momentum investing because youre chasing though the things are going well and so up so I don't have the latest statistics, so where we are but I think that debate as to where is the limit in the short term a biopsy.
Is not a go one because they could be a significant amount of assets in the world that are positive.
Not to a point in which is the vast majority because then obviously it creates opportunities for passive to be able to up to create on file. It. So that's a good thing on runway for us, but bear in mind also that we out a lot of our revenues more than half of our revenues on our clients are active managers on therefore.
We spend a great deal time, helping them create do tools.
On their portfolios.
With the duals their portfolios to outperform passive on to run their businesses better so that they develop competitive advantage.
In the industry.
Thank you.
Thank you and our next question comes from the line of Henry Chen with BMO. Your line is now.
Hey.
Good morning, everyone I'd had a question on E.S. Angie.
So I understand that there's a bit of a secular headwinds or tailwinds to asset.
Yes, and GE mandates and U.S. in Europe , just with the contact that Theres a lot of other providers that are.
Data providers that are going after you feel but it seems like.
Every CIO doing particularly well.
Just wondering if what like what would you characterize like.
Why is the data the E S in T. data.
Compelling for for investors are.
Managers versus other data sets for him as yet.
So let me let me first say that stop because you'll read all these reports all this newspaper articles on all of that how many data providers exists and how competitive the market is uncertain and so forth.
It is very misleading.
Obviously data is that completely necessary condition for success, where you have no data our young you can create anything.
But on top of that what you need to build is what are you going to do so uses data for and in the investment process. The mission criticality of let's say, they're not the reality of the data you've got a lot of data, but what is material through to the investment process I'm wondering material to the impact of what particular company or not so what we consider.
Our ourselves is a leading provider of out of those mission critical tools and the investment processes that are taking a lot of this is GE into account whether its data for say a worries research where there is ratings where there is in this is where there's risk models or whatever and they're not too many providers in that space.
There are not we we have a an incredibly amano runway to continue to leave in that space and that's where we want to be Bavaria, and just maybe to add onto that.
So.
And maybe reinforcing the point.
For from from both the broader point that Henry made and then a narrower narrow for example, the broader point is the topic of abuse in Gi needs to be intelligently incorporated into the overall portfolio construction question, whether it's at the total.
Plan level for an asset owner or within a given fun and so I think it's the combination of the quality of our research and ratings, but also our ability to address the broader context. The second thing I would say is.
They're the it and I and drawing on my observations about the carbon Delta acquisition.
I was in in Tokyo for the task force for climate related financial disclosure, which the government of Japan sponsored a few weeks ago and there is dramatic change in the way that both governments and corporations are looking at that one of the goals of that task force is precisely to.
Look at portfolio impact of climate change, which I was alluding to in mice in my scripted comments earlier quite frankly, there is no one providing adequate solutions in this area no one.
And so and so I'm sure there are others attempting to do so we are we believe we are ahead of that and we're able to do so in the term that they use as climate bar climate value at risk again. This this is plays into all the other expertise that we have an understanding portfolio right.
Ask understanding portfolio construction and the broader context in which in which investors operate. So so yes. There are many disparate you know in quotes data providers, but I think MSC eyes, both leading there, but we were able to help with investors with a broader context of their asset allocation and portfolio.
Construction and I think it's in that that we have unique competitive advantages.
Got it okay that that that helps a lot. Thank you.
Thank you and our next question comes from them on Joseph Foresi with Cantor Fitzgerald. Your line is now open.
Hi, I wondered if you could give us update on your wealth management product.
We haven't talked about I think you call and any progress, you're making any quantifiable metrics, which occurred.
Yes.
Just to clarify we have we have a range of products and services.
Which we sell into the wealth segment and and so all of our total sales into that segment.
No. We only have one product that I would say was historically defined for it.
Which continues to say that the sales of that product I would say are inline with our general growth.
Overall, our growth into the wealth segment has been above average over the last year or two this quarter. It's a little weak because we had a comparable from last year, which was an enormous sale one of the biggest sales that we had last year into into a very large broker dealer in.
Asia, So I would say that we're making steady progress we'd like to see that that growth is above average and this quarter. It's a little below average. So so I think we're we're we're going to I would say there is no breaking news we continue to be focused on the segment and we continue to put more more.
Resources there.
And then my follow up window, you've been there for a while what's missing.
What are you looking for the M&A front.
Or what are you working on outside of the efficiency side of things.
Sure.
We continue to look at a bolt on acquisitions.
We continue to look in the private asset class base, Henry's talk quite a bit about that.
I think we look at database sets, which are attractive that.
Might be useful to us.
We also are looking in the fixed income space to see if theres anything that might be helpful to us there.
This is a very time intensive effort to my colleague any wish men since a lot of time focusing on the partnership part of things you can probably see from what we've announced this quarter. We've worked very hard on these partnerships and theres, they're clearly have great importance to us, but a eyes wide open in terms of potential acquisitions and.
We'd like to stressed we don't need to buy the entirety of companies were very happy to look at partnership structures and maybe I'll turn it over to Henry if he has anything else I'd like to us.
Look I think thats the no we are up building MSC I.
In various areas so.
So what is a lot of the work that remains here on the prologue side is private assets massive pretax income.
On the job on the.
Graphic area is is Asia, we've done very well in Asia recently, we're putting a enormous amount on potential there because of the wealth creation that exists there will be.
Big pension funds wells sovereign wealth funds and the like.
On the client segment clearly wealth management as was asked before is an area that we need to put a lot more investments and.
There are smaller segments like life insurance up for example that were not very high on that will correspond with our.
Once we get a lot of this fixed income pros and we're working on that will be a great place up just to put a lot of efourd because as you know life insurance companies up by a little fixed income.
Thank you.
Thank you and our next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.
Good morning, guys just limit clarification on your non recurring revenues specifically in the features and derivatives.
Indexes section I noticed you guys, obviously talked about the agreements with ice in Europe , but the growth in the features and listed options was it relative to those agreements this quarter or was there a onetime nature that we should be thinking about the growth that you sell this quarter.
So.
So the question is so so fundamentally the the ABS category is is of a recurring characteristic right. So so so the areas where the one time is typically the largest.
Our mostly related to analytics, which has to do with the implementation of of our deals and related services and then in index. It can be certain sales of specific intellectual property.
And occasionally also.
Over in the over the counter derivative areas with brokers, we have various catch up fees the mechanics of which.
We we I won't go we won't go into here, but in essence, those or it's not in the listed derivatives area that we typically have one time fees that is overwhelmingly a recurring revenue business.
And to further expand on that regarding the other parts of the business.
Just to add to Theres comments on analytics, we've talked about lumpiness that we see in sales quarter to quarter before.
This quarter that was particularly acute because analytics had a very tough comparable compared to a strong third quarter last year as their had mentioned we want a significant contract last year with very large agent Asian securities firm.
On our wealth bench offering said the lapping with very very difficult on the pipeline front, though we see healthy pipeline.
And relatively moderate cancels you've seen overall for the firm cancels continue to run our.
Continued to see that were running at about 95%.
In terms of what we're able to do with our subscription revenue. So we feel pretty good about all that hope that was able to answer your question.
There was thank you.
Sure.
Thank you very last question comes on line of Patrick O'shaughnessy with Raymond James Your line is no.
[noise] Patrick your line is now open.
[noise] apologies for that.
In light of your new agreement with Blackrock I was curious to what extent you think that the fees are each have partners about to pay in the past preclude them from competing as aggressively on prices it might have otherwise.
Oh, I don't think so I.
In the boss dog in all of these are you noticing my comments all a lot of this initially is just cleaning up a few things here and there that are not material more importantly, what these up what this agreement is is to prepare for the next 10 years.
On the market dynamics in those 10 years I don't think there was any intent to this point.
To a two to change fees or anything like that it's just too to be ready.
For a four that 10 year horizon.
Due to compete more aggressively.
All in the marketplace on the price volume mix, so that job. So that you know DCT our free no five Blackrock continued to acquire a significant amount of assets on a significant amount of market share so off to achieve that they need to look out there on a expense ratios on managed.
Fees.
No we have to supplier of the IP of I'd be to them. We are we cannot be I've been on the majority of that expense.
In our fees, we have to then be commensurate in our in our percentage or proportion of fees regarding their fees, but but that hasn't preventative you know anybody from competing in the marketplace.
The agreements that we had before work really well, we're now sort of setting the stage for the next level of of competition on assets on growth right.
Great. Thanks, and then.
Seemed to be hearing more about direct indexing these days and firms like Charles Schwab, We're talking about it do you look at direct indexing as an opportunity a threat or a really a non event for you guys.
Okay, I think that the.
So so maybe putting this in the context. The earlier question about passive versus active right. So we we use the two we off we typically use the term index ourselves and so there are both a range of different strategies.
Which some of which are a for the total market summer our for factors are 80 apps or the mega trends that we mentioned.
Clearly direct indexing is too it's Matt it shows itself today as a basket of securities. So it's really a basket of securities created for an individual. So so that is for the moment that is neither I would say an opportunity north threat to us.
IV and I think the question will be is is that structurally different than any other previous coming together of a universe of stocks for an individual.
There could be opportunities for us there, perhaps in in providing overlays and portfolio construction and index methodology.
But for the moment I would say, it's fairly neutral for us.
Great. Thank you.
Before we close I'd like to make a one less just quick housekeeping note for everyone is looking to.
Modeled fourth quarter on you might have noted that it.
Implied that our excess might be a bit higher in the fourth quarter than they were in the third quarter that would be correct. It might be a number the season around approximately $10 million higher we wanted to really stressed first quarter, we're picking up expenses for our carbon Delta acquisition. We just wanted to make sure that everyone understands that.
Also we continue making very selective investments in our strong businesses.
And we have had a slight increase in headcount most of that in the emerging markets and as we are having a pretty good year, we do look toward compensation to probably be quite reasonable given the strong financial results. We've seen this year. So just thinking about expenses for the fourth quarter. Please note that those area.
And just please be aware as we had spoken about four we have close Harbin Delta and we're picking up those expenses in the fourth quarter I Hope that's helpful to everyone, a and I think that.
Concludes what we have in terms of my remarks.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.