Q1 2020 Earnings Call
2020 earnings conference call.
This time all participants are in listen only mode made only will conduct a question and answer session well, we will limit participants to one question and one follow up.
We will have further instructions for you at that time.
As a reminder, this conference call is being what.
I would now like to turn the call over to Salli Schwartz.
Investor Relations and Treasurer, you may begin.
[music]. Thank you operator, good day and welcome to the and that's the first quarter 2020, <unk> earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the first quarter 2020.
This press release, along with an earnings presentation, you will reference on this call as well as a brief first quarter assays are available on our website NSPI dotcom under the Investor Relations tab.
Let me remind you that this call contains forward looking statements.
You are cautioned not to place undue reliance on forward looking statements, which speak as of the date on which they are made and are governed by the language on the second side of today's presentation.
For a discussion of additional risks and uncertainties.
We see the risk factors and forward looking statements disclaimer in our most recent form 10-K.
And in our other SEC filings.
During today's call. In addition to results presented on the basis of U.S. GAAP.
He 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 facilitate meaningful period to period comparison.
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 deem that information to be meaningful as well. It's how management uses these measures on pages 30 to 37.
Earnings presentation.
We will also discuss organic run rate growth figures, which exclude the impact to changes in foreign currency and the impact if any in acquisitions or divestitures.
On the call today, our Henry Fernandez, our chairman and CEO Baer, Pettit, our president and COO and Linda Huber, our Chief Financial Officer.
Andy Wittmann, our Chief strategy Officer will also join us for the Q and a portion of the call.
Like many of you we're in various remote locations today.
We have any audio quality issues. We appreciate your patience that works for them.
Finally, I would 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 liver Henry Fernandez Henry.
Thank you Sally Hello, everyone and thank you for joining us today.
Hope everyone is staying safe unhealthy in this difficult environment.
Before I turn our coal over to our first quarter results I would like to our knowledge this unprecedented times.
I'm sure a few of the actions related to our people.
Our clients.
And our shareholders.
We have taken to monitor successfully through these challenging environment.
Our gross M. A C ice duty five locations in 22 countries around the globe.
We have deployed our business continuity plans in full force.
Almost 100% of our 3500 employees are currently working remotely.
They remain engaged productive.
With the right due to work effectively across all functions of the company.
Our data processing production in bar man remains extremely resilient unreliable.
With an uptick time over 99.9 person.
Because we have been able to seamlessly transition to these new working them bar man, we have state keenly focused on our clients.
Supporting the challenges that they're facing in managing their portfolios I'm businesses.
Our sales consultants on our client Gulbis representatives, how provided immediate expanded access to our approach on services.
One example is by removing location restrictions or bolt on services to support our clients as they work from home.
We have delivered more frequent content updates.
I'm all for select free trials are grows our boat suite.
In an effort that has been widely embraced and the last few weeks.
I know research team has mobileyes rapidly to create a wide variety of inside and research analysis.
This has been delivered to the market timely through social media focus on our dedicated Corona Biros web page.
The allocates we have received from clients demos that that we're doing the right things to support them I'd is crucial time.
I am incredibly proud Oh, the way my colleagues have stepped up to work with our clients to serve whatever their needs may be.
Keep in faithfully to our mission of providing greeley called tools and insights to help clients build resilient portfolios.
Regardless of market conditions.
And finally, we have begun a series of greed actions doing sure. It must see I had remains well positioned financially.
And that our shareholders continued to benefit from their support of the company.
Let me now turn our focus to Q1.
And how we will continue to navigate during this crisis.
During the first quarter, we delivered strong financial performance across our franchise.
With year over year growth of 12% in operating revenues.
16% in adjusted EBITDA.
And nearly 23% in adjusted earnings per share.
Since the beginning of the year I'm through April 24.
We bought back $357 million, So let me see I shares.
A total of 1.4 million shares at an average price of $250 on 65 cents.
We also paid to shareholders approximately $58 million in dividends during the quarter.
And our board has approved the upcoming second quarter dividend payment of 68 cents per share.
These actions are consistent with our stated objectives or managing our business with the most optimized capital structure possible.
I know returning excess capital to our shareholders.
Our share repurchase program since the start of the year is consistent with our practice of taking advantage of periods of volatility in our stock price.
And our dividend declaration is consistent with our policy, Oh pain, 40% to 50% over just that you'd be as in the form of quarterly dividends.
I've doors of your capital.
And as important shareholders ourselves.
We are highly driven to manage our company carefully through these times of economic stress on market uncertainty.
With the on an ongoing keen drive to innovate and is strategically grow the business for the benefits of our stakeholders regardless of market conditions.
As you know compensation costs are the most significant part of our expense base.
Currently we have a hiring freeze in place.
The only very few headcount additions are being made in critical areas.
It's significant part of our compensation expense is variable.
I meant to be flex stop or flex down depending on the financial performance of the company.
We are more focused on ever on driving productivity improvements and ensuring that our operations are appropriate at least scale for the opportunities and challenges we see Inferno was this year.
As we continue to navigate this unprecedented and evolving in Borrowman. We are confident that I missed the ice content analytics and technology applications remain most have tools for our clients on their bidding did resilience.
See of our franchise.
The enduring secular trends and drivers supporting our business.
Also propel our confidence I'm belief in our ability to that significant value to our clients and create more value to our shareholders.
I'll now turn the call over to bear who will provide more color on what we are seeing and hearing from clients as well as examples of our ongoing innovation.
There.
Thank you Henry.
I share your confidence in our durable business model and in our colleagues abilities to deliver significant value for our clients even in environments like this.
Our focus there for remains to engage with our clients in detail about their businesses, an investment and to run our ownership tightly to ensure total operational integrity.
We continue to closely manage expenses.
I'm personally reviewing every request for head count and additional non compensation expenditure to ensure prudence and using the resources entrusted to us.
At the same time, we want to create catalysts for our clients to continue to rely on our tools, particularly in the context of the on going in certainty around the depth and duration of the pandemic and its economic effects.
Over the past several weeks, we have intensified our engagement with clients, providing research insights and tools to help them performs press that's on their portfolios.
Identify key factors that reflect their investment views and rebalance their portfolios to achieve their objectives.
We're delivering daily research content, including pieces on liquidity hedging risk exposures and the performance of various asset classes factors and other strategies.
Responding quickly to events in the market, we have upgraded certain of our modeling tools to enable clients to more closely monitor recent liquidity constraints.
For users of our multi asset class risk tools, we have provided access to model portfolios stress tests to simulate outcomes across equity credit oil foreign currency and commodity shocks.
Many of M. A C ice products and services have important risk management capabilities and these features become even more critical during periods like this when economies in markets are under stress.
We had several bright spots in the first quarter.
One was the continued adoption of E.S.G. investing.
We observed a 120% year over year increase in assets under management in equity Etfs linked to MSC, I.E.S.G. indexes, which reached $37 billion at the end of the first quarter.
Year to date, we've observed a $11.6 billion of cash inflows into E.S.G. equity Etfs linked to MSC I indexes.
Looking forward, we expect investors to continue demonstrating an appetite to implement these kinds of long term sustainable investing strategies.
And our research indicates this has been a successful approach during the crisis so far.
I missed the I.E.S.G. indexes have shown resilience, even more notably in the first quarter of this year.
Another bright spot I would like to highlight is our growth in index licensing for futures and options, which is part of our asset based fees revenue and run rate within our index segment.
The first quarter volume in futures and options linked to MPCI indexes.
Grew approximately 54% year over year, reaching over 40 million contracts with ongoing market volatility. We believe clients will continue dynamically trading and utilizing the unique multicurrency multi time zone derivative products linked to our indexes.
Our run rate for futures and options linked to our indexes based on Annualizing. Our results from quarter end now totals nearly $50 million, which has more than doubled since last year and continues to be one of our fastest growing opportunities.
In fact, our continuous innovation efforts will benefit a variety of facets of the ongoing growth as a company.
As one example, we're currently working with a partner on a potential new series, if the Majdic indexes focused on the important areas of innovation in genomics and robotics. This will add to our existing suite of thematic indexes ranging from digital economies to disruptive technology. This is just one example, within our index.
Franchise of our approach to creating tailored products to client demand across a wide variety of exposures factors and asset classes.
Climate change remains another front of mind topic for investors. Most recently, we launched our climate value at risk product did he is G.
This effort has been a direct outcome of our successful acquisition of carbon Delta in late 2019.
And we expect will be an important growth driver for MPCI, not only with new and existing clients and he is G. But also for our real estate clients.
Before I turn the call over to Linda I'd like to share, what we're seeing and hearing from our clients and how that might translate into opportunities or even headwinds going forward.
Our asset owner clients are proving to be resilient part of our franchise.
The on growing trend in sourcing assets continues to capitalize them into upgrading their risk management tools and embracing factor investing and SG integration even in this environment.
Thanks, and broker dealers remain generally well capitalized and eager to improve their tools in index derivatives related areas, yes, GE and liquidity risk all areas of strength Remise <unk>.
Clearly the breadth and depth to the crisis, we'll have a bearing on this going forward.
I'm also encouraged by our progress within wealth management in the area, we have targeted for growth. The crisis. This heightened demand for more transparency and analytics among wealth managers.
In response, we have had the opportunity to sell across new use cases that bring value to advisors. We are working to integrate our content into their platforms and reporting.
Driven in large measure by areas, where we have expertise such as Iasci factors informatics with regard to hedge funds. Some strategies have suffered greatly from the onset of the crisis and experienced outflows as it's been widely reported.
Stably players in selected other strategies have fared better these firms have been keen to acquire more of the content analytics and technology applications MSC I can provide in order to better navigate the crisis.
We are acutely aware that this operating environment could evolve to create challenges in generating new sales and avoiding cancellations.
Thus far we have seen deals pushed out later rather than pulled completely.
Procurement processes have become tighter and may become more. So additionally, we could see even more lumpiness in some of our larger ticket product sells notably in analytics.
At this point the pipeline remains quite healthy and retention rates indicate that the must have nature of our products holds fast. We're certainly focused on doing everything we can to maintain this position of strength as we progress through the year.
The continued strong level of client engagement and the variety of client problems and opportunities. We are addressing continues to highlight the strength of our franchise.
Let me now turn the call over to Linda who will discuss more of the specifics of our first quarter performance as well as our current outlook Linda.
Thank you bear and Hello to everyone on the call, let's start with a review of the first quarter's results and then move onto our capital position, our current guidance and our downturn playbook.
For the first quarter focusing on operating revenue.
Recorded nearly $417 million up 12% from the prior year looking at each of our business segments first an index operating revenue grew approximately 16% growth in asset based fees was a meaningful contributor at 22.5% year over year. In addition, we saw close to double.
Growth in recurring subscription revenue driven by continued momentum across modules.
Second analytics operating revenue increased more than 3%.
Higher subscription revenue in our multi asset class an equity analytics products.
Theres comments, we would also remind you of the Lumpiness, we continue to see in this business.
Finally for the all other segment operating revenue grew nearly 20%, reflecting robust growth across our ESG ratings screening offerings and higher subscription revenue in real estate.
We ended the first quarter of 2020 with assets under management in equity.
Mm indexes $709.5 billion.
Kind of $225 billion from the fourth quarter 2019, However, it's important to note at more than 96% of this sequential decrease was driven by market declines.
Only 4% of the decrease was driven by cash outflows.
Packs, most severe in international markets, notably in the last part of March.
The last few weeks, we have seen what appears to be.
Intentional initial recovery levels across all equity.
Mr. indexes.
As of Thursday April 23rd.
Assets under management had increased to approximately $744 billion.
And asset based fees quarterly revenue nearly 23% from the prior year.
Because we saw record AUM levels earlier in the quarter, even with the downward trend in March we were able to drive higher asset based fees from equity each yes linked.
Indexes.
They are noted we were excited to see record quarterly volumes in futures and options linked to MSCI indexes, which grew approximately 54% to more than 40 million contracts. This helped more than double or asset based fee revenue from futures and options linked to our indexes, which was approximately $11 million.
Order.
Sequentially, the average basis point fee on equity.
Linked.
Indexes decreased zero point 11 basis points.
Decline reflected continued mix shifts into funds with lower total expense ratios inline with our expectations. It also included among other items. The most significant phase of the implementation of our contract renewal with Blackrock.
Looking at our quarter end exposures by geography across <unk> assets under management linked.
Indexes as I noted earlier, we observed more severe market declines in emerging markets and developed markets outside the U.S. just happened to mid turbulent markets triggered by the pandemic as well as volatility in oil prices compared to the greater resiliency, we saw in U.S. exposures.
With regard to the year over year drivers of our adjusted earnings per share growth.
Approximately 80% of our 35 cents adjusted earnings per share increase came from growth in our business.
This was largely the impact of our lower adjusted tax rate.
Now I'll turn to our balance sheet.
The first quarter, but the cash balance approximately $1.1 billion.
February you will recall that we issued $400 million of notes due 2030 at a coupon of 3.6% to 5%.
$300 million the proceeds to refinance our remaining outstanding 2024 knows that had a coupon 5.25%.
As of the ended the first quarter or gross debt to latest 12 months adjusted EBITDA ratio was 3.6 times well our net debt to latest 12 months adjusted EBITDA ratio was 2.4 times.
I also noticed in our 10-Q filing that we drew on our revolver in the quarter, we borrowed approximately $5 million and then repeated April solely as part of our business continuity testing.
We have a strong capital position that affords us the opportunity to continue to both invest selectively and strategically in our businesses and to return capital to our shareholders. Henry noted since the beginning of the year through April 24th we've returned approximately $416 million capital.
Combination of share repurchases and dividends.
Now I'll review, our current outlook for the full year 2020, including slept guidance metrics, we have revised based on our best view of the environment as of today.
Full year 2020, we now expect adjusted EBITDA expenses in the range of $700 million to $750 million.
This is our prior guidance $750 million $770 million.
Capital expenditures in the range of $50 million to $60 million versus our prior guidance $60 million to $70 million.
And free cash flow in the range of $540 million.
$600 million versus our prior guidance, the $580 million to $640 million.
A full list of our guidance is included in our earnings release published this morning as well as in our earnings presentation for this call. Both are available in the Investor Relations section of our website Amazon Dot com.
Important to emphasize that these numbers reflect our best estimates at this time.
As we gain additional information and experience, we will be able to further assessed the implications of the pandemic and its impact on global economies, our clients and our business.
Finally, our updated guidance reflects a thorough review of our downturn playbook as we continue to closely monitor the operating environment.
Both Henry and bear referenced earlier, we remain highly thoughtful regarding both head count related spending noncompensation expenditures with a focus on her most critical areas to support the long term franchise.
Genocide up to $50 million of adjusted EBITDA expenses, we can cut if needed.
Correct, we've already taken certain proactive actions as Henry said, we have hiring freeze in place.
Very few head count additions are being made for critical areas.
And as we've noted previously honest could also adjust depending on economic conditions, we have significantly reduced discretionary spending such as travel entertainment and marketing expected. This spending generally not return in the near term.
And while we continue to continuously innovate.
We are spending investment dollars much more cautiously.
These initiatives see changes to the timing cadence and or amount of spend we will commit.
And the same is true of capital expenditures.
Despite these actions I, Nonetheless share Henry and there's confidence in our business in fact, I would like to close by pointing back to our long term targets that we shared with you last year at Investor Day, Henry said earlier, we continue to leave that these trends and drivers will support our business and propel our team's execution of these targets.
And with that operator, please open the line for questions.
Thank you. The line is now open for questions. As a reminder to ask a question you want me to press Star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You Me then returned to the Q2 with giant question press the pound.
Please standby, while we compile the kiani roster.
My first question will come from Toni Kaplan from Morgan Stanley. Please go ahead.
Thanks, very much and congrats on the quarter and glad to hear that you're all safe.
Just wanted to ask about you could give us some color on what you're seeing in April in terms of new sales on E.S.G. front, just wondering if the new sales pipelines been building more slowly in a period of market volatility or if it's held up really well.
Oh, Hi, Tony Blair here. So look we really haven't seen dramatic change you know across the board. We've seen you know in all products, a little bit of slowness, particularly in in the procurement.
Process I think you would expect that in the current environment that people need to go an extra step to get signatures et cetera.
And you know that we're seeing in different degrees and its you know not a very clear pattern, but U.S.G. certainly has held up well. So a you know I would say that the simplest headline would be we've really seen no dramatic change in DSG and continued to you know.
Hi levels of activity with clients moving in the right direction.
That's great and then for my follow up just trying to think about long term impacts on the business in the aftermath of come at 19 would you expect anything just meaningfully change in terms of industry trends or any strategic changes with.
Your company just as you think about all that's going on with the current situation.
So Tony I think the even if it did we see no no significant long term changes.
At least no negative changes to.
So the franchise to to the way, we interface with clients and.
On the drivers on trend so underpinning our business.
If anything.
It you know if anything over the last 25 years or so.
Baron I've been working together for over 20 years in each one of these circumstances, where we have had.
Dislocation or a crisis, we oh, we have been able to to stay very close to our clients to innovate faster to come up with probably looks up.
Much faster.
And and every time in our franchise has come out stronger as a result of of the crisis. So I would anticipate that that will be the case here and what job, we will come out stronger on particularly because pretty much every one of our product lines.
I have a the winning their back from sustainable investing to factor investing to risk management on risk analytics, particularly in a in a volatile environment like this to passive investing to private equity on a prime minister class investing it and so on and so forth and obviously as you know well the underpinnings of.
Our business are also predicated on three things you know beta.
For two months of data lot of analytics, one form or another.
On a an incredible amount of technology, so as clients work even more remotely.
And and don't rely on a lot of interpersonal.
Issues you know therefore, we should see an uptick on a lot of what we do with our clients.
Terrific. Thank you.
Thank you. Our next question will come from Alex Kramm with U.P.S. Please go ahead.
Yes, Hey, Hello, everyone I'm, just wanted to come back to the updated guidance for this year. So you're taking your expense guidance down and you also taking your cash flow guidance down more at the same time. All your comments you are sound pretty positive still in terms of retention and Brazilians et cetera, So I guess.
My question is.
Are you won't just lowering your expectations for the asset based side that you can obviously observe and can change real time or or are you building in any any any sort of reduction in subscription revenues and if so what are the areas that youre, a Ken I I guess, the most negative near term. Thanks.
No I think look I think they clearly we have Oh as you know Alex you know business that is.
About 80%.
Subscription base, which is.
What was going to be very receiving them is very sticky.
Got it lags on the way down as well as he likes on the way up.
On a 20% of the business that is largely.
As a base fee or daus or we have been mentioning a part of the asset based fees is transaction based which is the futures and options I know part, which went then at some point in the future to start breaking out or so that people can see the difference between those two of those two areas.
So so we are we what we react and right now is largely to the decline of assets under management fees Oney P.F. Another form so passive in order to protect profitability.
Dark and definitely be flex stop a if Bob.
If the markets continued to do well as they have so far and during April so so but they don't environments. Like this you know there's doesn't pay to be hemorrhoid keep base to be cautious it pays to make sure that that your sober a we don't know how the world will come out Dodd.
This crisis, particularly in a in economic terms, how the various economies around the world will lot will come out.
We have been pleasantly surprised by the a evaluation and equity markets relative to the.
So the state of the global economy, and we hope that that continues but if it doesn't continue I would see another downdraft on dot we have to be prepare you know to tighten the belt well one of the thing that we're also doing is a in addition to that do you know we are looking out to reallocating resources.
From a project. So we're a very important before the crisis two projects that are more important now and I would allow us to continue to invest I'm being the late.
The last thing that I will say a unbearable kinex can mix. They go through out the more detail is you know crisis like this are exercises of.
Oh, Bob throwing out they know the we can sit right. So therefore, we need to be.
I'll Miss on Dot Adam Sci, we're also focused on intensely on efficiency and productivity.
Because graces like this force you to do that and that should also creates saving for girls to invest more but at least I anything else that you went out to unexplored question.
Sure Alex Let me just walk through what we're seeing with.
And you're right that cash flows more free cash flow has moved down more than cost cuts. So let me just take you a little bit through that as Henry said, 80% subscription revenue business, but then we've got to think about which is about 20% of the total revenue. So the run rate for a B.S. as of March 30.
First was $350 million. So if you think about it in three buckets roughly 200 billion is from <unk>, another 100 million or so its non <unk> passive and remember that's reported on a one quarter lag very sticky doesn't move too much and the remaining somewhat less than 50 million comes from futures and options.
So what's happening with each of those.
T F run rate, we saw this $225 billion decline.
And that was almost entirely driven by market appreciation I commented on that in the script, 96% from market depreciation.
Nannizzi passes as we said pretty stable few outflows.
Quarter lag reporting so that wouldn't hangs in there and then futures and options are able to make up some of the decline that we've seen from.
The.
Run rate that we talked about before but not all of it and we think that that will continue to pick up so.
We've got kind of one chunk, that's down which is asset based fees a passes hang in there a futures and options doing really well.
How did that you have to lay in a couple of cash flow factors. So last year coming off of 19, we had very significant stock based compensation, which vested we don't have that this year.
And we have taken into account.
<unk>.
Slowdown in collection, so as part of Henry's comment on Conservative planning, we thought about slowing that down a little bit which also would hit our cash flow. However, we're working very hard to make sure that we keep our days sales in line with what it's been.
So it's mainly just conservative planning and hope that helps you.
No that's great. Thank you and then maybe just a very quick on just so I make sure I heard you right on the basis points side on the on the F. fees on the fees you set the Blackrock renegotiation is now fully in the run rate. So basically now all else equal basically support as a point or is it.
Are there any more stepped down so we should be thinking about as you maybe change some of the contracts around floors et cetera or is it all there now.
Sure and a bare may want to comment on this after me of course, Alex we're not going to go deeply into this but I think we set on the script that the biggest chunk of that reset has now passed behind us and.
That.
I have some impact as we go forward, but as we said that's the biggest piece there may wish to add.
Oh I've nothing that I think that's pretty Twitter.
Alright, Thank you again.
Thank you. Our next question will come from enough Putney <unk> with Barclays. Please go ahead.
Thank you.
There you know you're opening remarks around you know feedback from clients or can you just remind us what the customer mix. It by those clients and if I don't if I missed this but you know from the core asset management fees I don't think you address what you're hearing there.
Sure. Okay, so or we can give you the exact break down, but clearly you know with rounding error.
No asset managers, our largest segment I think we're at a roughly 60 percentish at this stage.
But you know more broadly across the board you know we've had I think really an excellent resupply and respond.
You know, we've we've been reaching out <unk> very broadly I sent an email to all the clients and we laid out a range of free trials on a number of products, which have had a very high uptick across all product lines and regions.
Our research readership is I think up something like 70% over the 25 24 month average we've been putting out a lot of a very topical research related to market reaction stress testing et cetera, we've given clients enormous amounts of support relay.
Needed to working remotely and of course as even before that as a starting point you know we've been we've we've shown great resiliency and all of our deliverables to clients. So I would say that you know in terms of.
The levels of client engagement.
The outstanding job that our client coverage teams have done working remotely in reaching out to clients continuing to do demos of our software products et cetera, you know it has been great.
At this stage you know in view of the fact that were really only a month into the quarter, it's very hard to draw conclusions much beyond the ones that Henry laid out you know a bit earlier, which is for sure. The sales cycle has got you know a bit slower we are.
We're seeing certain things being pushed out a bit we are seeing things need being pushed a little bit more senior and organizations to get approval and the likelihood is that will continue.
And our expectation.
His although just to be clear, we haven't seen a great deal of evidence of this but our expectation is likely that it would be logical that if the you know the economic consequences.
Of the pandemic are those that were reading about everyday that we will likely see some pressure from cancellations as certain clients come under you know strain. So so I would say great client engagement.
The pipeline still healthy and the sort of marginal tensions that you would expect at this stage without anything dramatic or anything that's a clear pattern.
Got it and you know just.
Somewhat tied to this question just a philosophical question like how flexible are you guys you know willing to be I'm not sure. The analogy to draw from will lead to a nine 'cause. It did this customer base, presumably maybe fields and the impact that the lag. So once we get there and that is your philosophy on pricing and working with them, giving concessions et cetera.
Change at all.
Look we're we're not in a position at this stage to need to seriously consider you know sort of structural adjustments you know the first stage that we've done is just to make things easier right. So for example, you know, giving free trials, that's not out of economic pressure.
That's in order to make things easier for our clients to to make sure that they have access to the right tools immediately such as our shorter dated models. So I think you know we will see you know as as things progress you know we most of our clients. So in fact, almost all of our clients have been in locked down as we have and you've been a we've had.
The you know a to a degree after the initial trough. Some about you know resilience in the equity markets and some support in the fixed income markets from various government. So you know we're in a situation now where I think it would be difficult to speculate.
As to what will happen going forward, but you know the simplest answer to your question is as of today, we have no. We've not seen any fundamental changes in the way, we operate our pricing or anything of that kind.
Okay. Thank thank.
Thank you. Our next question will come from Chris Shutler with William Blair.
Everyone. Good morning.
Mentioned, the outperformance of yes G indexes. So far this year I'm curious to what extent your team is parse the did I understand.
How much of that like just the underlying factors driving that outperformance wondering how much of it is sure yes, she factor specifically versus quite quality growth.
Other types of factor Yeah. So I hope you don't get me into more of a a quantitative finance trap here as we have many experts in the building [laughter], but you know so look the way I would understand it is for sure and this is on a high level I'm sure you appreciate that and we'll be happy to jump you all the relevant research.
But the way I would say it is I think there are two things right. One is likely the structural trend of you know the larger amounts of capital our tilting towards E.S.G. strategies and so there is likely of.
There's an element of simply more money following companies that have a better yesterday rating in terms of some of the factor analysis. We've done a there is clearly a a link to to quality to a degree in some of that those analytics, but you know and in certain cases with certain companies.
Surprisingly, there's actually sometimes when a link to momentum. So I think it's it's been you know he it's it's its not the right place or time to give an exact parsing of that but I think the main headlines are you know continued resilience of people wanting exposure to.
The company's DSG companies that they believe will drive longer term returns and as I said, we're happy to give you a lot of other research and data around that.
Okay. Thanks, Linda just a quick update on that yes.
Linked.
Cash inflows across all geographic exposures and factors other than.
Gross inflows in all regions.
Merging markets.
Interestingly it from a market share perspective.
Rose 81% of global.
Flows and 165% global sector.
Flows again that's X.
Hope that helps you bet.
And one final point look just leaving aside the performance, which again.
You know those maybe those better equipped to do the full break down but look the going back to the earlier question about the is cheap pipeline certainly we're seeing very much clear and intensifying focus on this.
Even in the last few weeks I've been on to senior client calls.
One with a large asset manager linked to an insurance company, one with a large asset owner and North American large asset owner and for sure. The U.S.G. a conversation remains very front and center and we see no evidence of you know that changing at all.
Okay. Thanks for all the color.
One more and I certainly appreciate it super early days, but any anecdotal evidence from your conversations with clients around the kind of active passive.
No allocations, whether whether that may shift a little bit based on your conversations.
Look I think the simplest answer is no you know I I, just don't think no, but I really I think with the relatively short amount of time frame and the volatility of markets for sure. We we've seen we've you haven't seen or heard anything that.
I'd like to I'd feel comfortable extrapolating from.
Okay fair enough. Thank you.
Thank you know our next question will come from Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone. So first question for you I wanted to ask for a little color on the.
Well basically.
How are you able to retain such a high level of the you add meaning that you know $225 billion downtick.
Only 4% of that can be explained by the asset outflow that seemed like very sticky.
And I think yes, you could probably explain some of that but I just wanted to get your color on that.
So.
Bill I think the where you have here is that.
<unk> due to three different brands. The first one is in general.
We have seen imperial saw a significant market volatility on a decline.
Got it all investors, who want to remain Aequus dies.
I know simply sort of go to cash, but a fair to put their money into indexed strategist.
So dot in of itself has supports the has always supported the market for for it the F and for sure there's no withdrawals in a of any significant.
Maybe to from a institutional passive management.
Secondly, with respect to M. A C I.
There are a there's a mix you know going on.
<unk> dot dot, we'd like to allude to the it there's a shift doors.
Factor investing and we benefited from that there's a shift towards the as GE investing where benefited from that.
Are you as our MSC I USA in the says license to out you know to eat the apps in <unk> in the U.S.
So just the U.S. say no minimum volatility index for example.
Hi, gather assets and as you know and this appears at all about volatility in the world. There's been a money flocking to the U.S. markets. So we have being a beneficiary of that not dissimilar to some extent that all theirs. Because obviously, we do have a large exposure in emerging market, which is up you know.
It's been a negative.
On another developed markets around the world.
But for sure as we have developed more and more MCR USA indices unlicensed them to we'd be of managers that has allowed to more assets to flow into that compared to up to the past. Those are a few examples of why we believe.
We have.
Perform.
Relative to a two other you know to a or their interest in mix providers on relative to a an or are they are clients, who are if managers I'm outperformed relative to other it the f. monitors.
[noise] well for my follow up question you you had mentioned hedge fund outflows and I you know I noticed on the retention rates for the end of Q1 day look fine, but should we be bracing ourselves for a tick down in the retention rates for the into Q2.
No not really I think that I like to sort of reinforce what Baird said, which is.
Hey.
We are we were very pleased with job would the last week.
Or so of the quarter there last week of March and that's two weeks of March even in the midst dog huge amount of volatility in the markets major scare on fear and uncertainty as to what will happen.
And a meaningful amount of our sales.
In the quarter end up being the last week or two of the quarter.
And and we weren't able to close the vast majority of those.
Fewer slip Dorothy a the following quarter, which is a normal cadence that happens sometimes you know you can now get all the approval. So the sales slipped into the next quarter.
And in in the month of April so far.
We are clearly bracing ourselves to to up to lower sales on higher councils on elongated sales cycles and the like but as bear indicated we have not seen significant evidence of that yet.
Again, we are bracing ourself on we want to talk to all of you openly about that.
You know on it it's something that we want to prepare for but we have not seen yet significant evidence of that.
Got it alright, well, thank you very much.
Thank you. Our next question comes from Craig Huber with Huber Research partners. Please go ahead.
Oh. Thank you your cost guidance for you you, obviously brought it down by 50 million Linda.
The low end to your range. There can you just sort of thing help us think about that for the two major segments as a sort of broken down 50 50 between indexes analytics.
Well have a follow up.
Sure.
Craig first thing to focus on is we want to reiterate we said up to 50 million and it is our fond hope that we won't have to cut that deeply the actual amount depends on what we do and when it's the crisis gets worse.
We can toggle more toward that 50 million and if not.
Maybe too much some of the flexibility is already embedded in our process you've seen our downturn playbook. The first bucket as the self adjusting metrics based incentive plans. So obviously, if we don't do as well we don't pay out as much so that happens automatically.
We do have the majority of the expenses with the people and so a meaningful amount of it is compensation you heard we have a hiring freeze in place that's across the board and it doesn't relate to any of the businesses. Specifically so just make it very few critical hires and again the bonuses could adjust based on the economic conditions.
Some discretionary spending that we also talk about in a downturn playbook. So.
You know T. any has has largely frozen at this point.
Training professional fees marketing those kinds of things we can.
We can limit pretty pretty quickly and that has allowed us to.
On our cost base. So again, if things are are really difficult. We can go back to sort of having expenses being flat to last year and if not we will continue.
Yes, if an expense cuts, but it's not really broken out specifically by businesses, we do intend to continue to invest.
This moment, we're holding onto a very high percentage of our investment dollars at this point.
And we're gonna have to see how things go through the rest of the year, but it's Henry stresses all the time, we have to be prepared. So we are prepared and we will see how conditions, but 50 million of C. D outside.
If things are quite difficult so hope that helps you.
Well I like to out to lend us comedies that we we had the mom and do not necessarily have.
Hey, bearish view of our environment.
Oh, the same way that we don't necessarily have a bullish view on the on the alarm and what we are doing autumn Sci and we always have dawn is to ensure that we are putting a bear.
To flex up.
Flex down makes up meaning if the are you MBR covers we will be backout, putting some although they are the investment spending that we have talked about which all but I'm going to benefit us in the longer term.
If if things get more difficult, we will lot type thing or you know the belt.
And I'm not even in those scenarios so difficult market conditions. We are we're still doing a meaningful amount of investing particularly in short term return projects that will benefit all I will our you know come out of Oh This crisis much better the nothing.
And that I will say you know is this should not be any interpretation to anything that we have said that I missed the eyes not the is not prepared to continue to do we innovate and invest in our business, we will be doing that even during this crisis. It's just the manner in which would do it is is what up what is right.
Live on.
My final question is you derivatives or your futures and options business is obviously quite a bit smaller than when your major competitors out there or just you just touched on some innovation summit work you're doing there to help drive this going forward. Please thank you.
So I definitely a lot of innovation happening.
A lot of new product development occurring.
A lot of.
Good discussions with our partners around the world.
We are a lot of our partners in on the West Europe on the U.S. is an ice and on the Orix and we've had a number of discussions with them about what new products to launch. So for example, there's been a big emphasis in in both eyes on your eggs to launch I.E.S.G. Index futures.
So we're working on Dod we are up we're also ramping up our discussion with up our partners in Asia.
In terms of Bob <unk>, optimizing B M. A C I franchise in <unk> in Asia right now a big part of what we do there has been futures and options on <unk> on Taiwan, Singapore. Another single country, we're pushing pretty hard on the you know the futures contracts on the emerging market. They show you know their merger.
Mark at Asia Index.
The like so quite a lot of activity on this front <unk> for sure and we see that's out there, particularly in this environment.
As a great time to be able to push all about further in order to have been a continue to diversify our revenue base.
Thank you.
Thank you. Our next question will come from Henry Chen with BMO. Please go ahead.
Hey, everybody.
Thanks for taking the question I wanted to ask.
Broadly.
A big market volatility reaction, but in the.
In the event that.
More like an economic recessionary type environment this year.
You know understanding the downturn playbook and longer sales cycle.
How do you think about that.
Like an economic recessionary impact on on the asset management industry in your clients.
Like I missed the eye.
History and that in the prior downturn and also given the fact that passive is a.
A lot higher percentage of the asset management industry I'd just.
I'd love to can you hear thought there. Thanks.
I think when you hobbies.
It is a dog of to a two variables.
That typically happens in downturns like this.
On one hand.
Pretty much all of our products.
In a market in a downmarket become more important much more essential.
Two out to the success of our clients.
For sure risk management, you know risk analytics was management of whether its multi asset class portfolio fixing can portfolios equity portfolios.
For sure factor investing you know because they need to understand that we talked a lot about in the in this crisis. The out performance will be as GE. So that's going to become more important.
On passive you know it on one hand, yes in an environment like this active I still speaking benefits, but there is a huge amount of money that gets gosh equitized.
In passive investing so they bought a passive gets a benefit so that's the underlying trends behind our business become much more important.
In an environment like this.
On the flip side is the grew at least the budgets of our clients on how much can they make room.
In their budgets for dose absolutely essential tools that they need a two hours to the to what they have and and that's where the our comes in would try to be more flexible would try to figure out easier ways to work for them to do business with us et cetera. So so I think there what happens on India and it's.
A little bit of Ah, that's a set of a dog between those two variables and there are times in which the positives outweighed the negative and there are times in which the negatives away the positive, but there's never a big downturn in all of this now the last point on respect to passive obviously compared to the financial crisis.
Our dependence of a passive investing is a is more is put all the double or triple you know a but broadly triple what it wasn't a tom on the financial crisis.
But we're also very confident they get confident that even in markets like this of of a crisis. The equity markets will remain resilient why there is financial repression. The alternative Oh <unk> overinvesting in bonds is very low compared to our risk assets. So so we've ever we remain fairly confident on our.
Ability to to recapture some of those fees in terms of a US is under management fees you know in quarters, two com, even in the context of a recessionary environment.
Got it.
Okay. Thank you Simon.
Thank you know I know last question today will come from Keith So some with Northcoast research. Please go ahead.
Morning, guys. First question is just remind us how many sugar solutions can be done remotely with the work at home edicts. That's been going on now is it possible do implement obviously actions when you're not at a customer site.
Yeah.
Almost.
Entirely is what is the answer right. So.
We have you know our products are typically no longer locally installed at our clients bar some extremely very small percentages, which are really not worth going into so you know our clients have been able to continue to access you know.
All of our content data analytics et cetera continuously throughout the crisis right. So I think it's been both.
You know a very strong operational outcome in terms of you know the you know our our business continuity planning and the fact that we.
Have been able to move every one out of our own offices and continue producing and and and you know launching new software versions and correcting bugs and doing all the day to day stuff.
And equally our clients have been able to move to their home locations and continue to do everything that they you know that they normally do so so in that regard you know, we're we're pretty well set up for.
For you know should this type of environment continue you know we feel very confident that we can continue to operate a as we normally would do okay. Then just as a follow up you know obviously the virus changed quite a bit over the past few months you guys got great balance sheet, how does your appetite for M&A changed as a result, who is currently happen.
Thing and does become any easier or harder to get it done.
So then environment like this you know we keep a we stay very.
Gross to.
So the companies that are that are of a strategic interest to us.
We remain.
On become even more financially disciplined.
In valuation in value from valuation in an environment like this.
And they are a us Dom goes by you know what opportunities do present, a themself in situations like this and we will be definitely on a license them and if a if they meet our criteria of significant strategic value to us on appropriate or you know rates of return.
I mean this case, even enhanced creates a return given the the risk premia that is happening around the world you know, we will definitely up pursue them.
You know that's a that's that's we are little more keen on following those M&A opportunities somewhere where a six months or a year ago, but but it is a you know it's totally random right is whatever happens in a become available that the weekend action the turning into action great.
Thank you can't it's.
It's Andy wish men just to add a little bit more color typically what you see in a crisis environment. Like this is normal process either healthy companies get put on hold so sellers don't have to sell that usually don't want her a process process. When there's uncertainty around the outcome knowing the buyers tend to be very sad to then baked that into.
You their valuation expectations. So as a result, what we're seeing right now.
As much more of those sellers that have to sell so in orange in our space in our environment.
Tend to be early stage startups that are cash flow negative and really dependent on their next capital raise we're much more open to a two transacting and it's Henry said, we're very active looking at these engaging with these companies they tend to be relatively niche.
And have large cost base, which are the draw back but we are we are staying very close to them to the event or to the extent there is an opportunity for us to take advantage at 70 said.
Great. Thanks, Eddie its lend I thought Andy might want to just taking a minute update on the Burgess investment that we made and as a matter of housekeeping I just wanted to remind everyone on the call that we're using the equity method of accounting for Burgess you won't see any revenues from Burgess this quarter because its recorded on a one quarter.
That the.
Impact of the investment will show up in other expense and income nets, if you're looking for it.
Just thought that and you might want to might want to comment on how purchases going.
Sure sure. Thanks, Linda So just from an overall business performance standpoint, I would highlight that they are they're generally pretty stable.
Their business is almost entirely subscription revenue.
Like MFC or providing mission critical content services to their clients.
And the largest portion of their client base is Lps or asset owners as we would call them, which are by their nature relatively stable and these environments and they are acutely focused on trying to understand what their exposures are in all the funds they've invested in.
What what where they might have risk trying to understand when the fund they've invested in light Cole capital and then trying to understand when those funds might distribute cash and so burgess, it's helping those clients with all those mr. critic mission critical areas that are that much more important in an environment like this so there are there in a reasonably good shape.
Just the to underscore at Linda said from a financial reporting standpoint to two points to underscore here.
One is that because they're closing cycle is a little longer than ours.
We are choosing to recognize our share of their earnings on a one quarter lag and so in the first quarter. We did not record any your earnings from from Burgess and what you will see in second quarter is our portion of earnings for the period that we had the investment into first quarter is going to highlighted that will.
Flowed through in the other income line.
And then the other point to a to underscore just around Burgess is.
We will amortize the portion of the excess value above our share of the company's booked value that's attributable to intangible assets.
And so there will be some intangible amortization flowing through that other income line, it's very small, but like we do with acquisition, we will exclude that amortization expense.
Our net income excuse me in our adjusted net income and in our adjusted EPS.
Okay. Thank you Sir I'm showing no further questions at this time I would now like to turn the call back over.
Mr. Henry Fernandez, Chairman and CEO for closing remarks.
Once again, thank you everyone for joining us today on for your continued interest in MSC I.
We sincerely hope that you on your family sustains safe during this difficult pandemic.
And look forward to keeping you updated on our progress. So operator this concludes today's call.
Ladies and gentlemen, this concludes today's conference call. Thank you Sam participation you may now disconnect Oh.
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