Q2 2020 MSCI Inc Earnings Call
[music] good day, ladies and gentlemen, and welcome to the M.S.T. <unk> second quarter 2020 earnings conference.
At this time all participants are in listen only mode. Later, we will conduct a question answer session, where we will limit participants to one question and one follow up.
Further instructions for you at that time as a reminder, this conference call is being recorded.
I'd like to turn the call. It two Salli Schwartz head of Investor Relations and Treasurer, you may begin.
Thank you operator today and welcome to the NFC <unk> second quarter 2020 earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the second quarter 2020.
This press release, along with an earnings presentation, we will reference on the call.
As long as a brief second quarter updates are available on our website and I see I dot com under the Investor Relations tab.
Let me remind you got to 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 slide of today's presentation.
For discussion of additional risks and uncertainties.
I see the risk factors and forward looking statements disclaimers 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.
We also refer to non-GAAP measures, including but not limited to organic operating revenue growth rate.
Adjusted EBITDA adjusted EBITDA expenses.
Just to be yes, and free cash flow.
We believe our non-GAAP measures to facilitate meaningful series a familiar comparison.
And provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures in the earnings materials.
And then explanation of why we think this information meaningful.
As well as how management uses these measures in the appendix pages of the earnings presentation.
We will also discuss run rate.
Which estimates at a particular point in time, the annualized value of the recurring revenues under our client agreements for the next 12 months.
Subject to a variety of adjustments and exclusions that we detail in RCC filings.
As a result of those adjustments and exclusion.
The actual amount of recurring revenues, we will realize over the following 12 months will differ from run rate.
We therefore caution you not to place undue reliance on run rate estimate for forecast recurring revenue.
Additionally, we will discuss organic run rate growth figures.
Which exclude the impact to changes in foreign currency and the impact of any acquisition sports divestitures.
On the call today, our Henry Fernandez, our chairman and CEO.
Fair pad, it our president and COO.
And Linda Huber, our Chief Financial Officer.
Andy wishing him our Chief strategy Officer will also join us for the Q and a portion of the call.
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 now turn the call other Henry Fernandez.
Okay.
Thank you Sally Hello, everyone and thank you for joining us today.
And Mr. <unk> second quarter performance once again demonstrated resilience of our franchise.
And the mission critical nature of our content.
Analytics.
On technology applications for investors, particularly during these times of market uncertainty.
It's specifically do they would reported solid operating revenue growth of 6.2%.
Strong adjusted EBITDA growth of 11.8%.
Reflecting our ability to tightly manage expenses.
On strong adjusted earnings per share growth of nearly 15%.
As you are aware and we have discussed in this goals, we have a number over strategic initiative initiatives under way I Miss yard.
First we are expanding our coverage robotic losses.
In two areas in fixed income I'm, probably but often.
Second we are creating new products that can apply to our eyes specific asset class.
Or across multiple asset classes.
These new products include content Indias G.
Climate change.
Doctors risk models semantics.
Futures and options just to name a few.
There we are broadening our reach two new work plan segments like wealth managers.
<unk> companies.
Corporates.
And fourth we are transforming our technological capabilities not only to benefit our plans.
But also to enable our employees to operate even more effectively in the virtual world we're living in.
We have made significant investments in this initiative.
And I'm very pleased to report that these investments are yielding strong results.
During our gold this morning, I would like to highlight three areas.
First.
He is GE and climate change, we have continued to expand our content, including research keep topics.
Additional ratings called bridge I knew indices in both equity and fixed income.
On risk models that integrate iasci on climate change variables.
These investments and he is GE and climate solutions are providing significant returns.
In the second quarter R.E.S.G. franchise across the whole company performed very strongly.
Reaching a run rate of $174 million.
He is G research itself reported its highest ever quarterly subscription sales.
On the knee is GE indices are you EM in equity as GE on climate change it the ABS linked to our indices.
<unk> double year over year.
Reaching $55 billion at the end of the quarter.
We are encouraged by investors increasing adoption of our tools to effectively integrate E G and climate change criteria.
As a core pointing a building with seemed in portfolios.
And we believe our are used to solutions have the additional benefit of driving transparency and creating standards for many market participants.
As you know two wells, we have long believed sustainable investing is a critical part of the long term investment process.
Our early moves in this area, how given those sustain she'll leadership.
On competitive advantage, which we will continue to capitalize.
I think on area I would like to highlight is index futures and options.
We were helping our clients build the various elements on an open they must see I echo system of financial products with deep liquidity.
On a wide range of market exposures.
This ecosystem includes eat the ABS.
Listed futures and options.
At this these swaps and options and is structured products.
Oh feeding I'm benefiting from one another.
Recently.
As part of this important initiative, we significantly expanded our relationship with Hong Kong It changes and clearing.
Berger aligning M.S.C.I. without global change leader in the Asia time zone.
Enabling deeper and more liquid markets for a miss <unk> linked futures and options.
We believe Hong Kong provides access to.
And the benefits of a large client base.
Including mainland China investors.
A significant pool of liquidity.
On a nickel system of both leased the unknown lists the derivatives.
On the field area that I would like to highlight is our investment in our technological transformation.
Last week, we enter into a partnership with Microsoft that will not only spring thing and scale our infrastructure.
But also continuously improve our client experience.
Our transformation through Microsoft Zohr includes I know vans Global network, a beta centers.
I fully integrated cloud infrastructure to provide massive scale, but a little delivery.
Unsophisticated artificial intelligence and national language processing capabilities.
We intend to take full advantage of all the benefits that this partnership can bring you know two women <unk>.
Facilitated by this partnership with Microsoft will be able to help investors more swiftly and efficiently manage data I don't understand better the drivers of risk and return in their portfolios.
Despite the ongoing macro economic uncertainty.
We will continue to selectively invest in the highest returning areas of our business.
Both the further positioning <unk> for growth.
And to drive operating efficiencies.
As you can discern from my remarks.
We continued to execute well I.
No pain significant returns in the areas, we're making a strategic investments in.
I will like now to turn the call over to bear to go over our airports in more detail there.
Thank you Henry.
I'm quite pleased with our teams high effectiveness and working completely remotely with clients this past quarter.
Our results clearly demonstrate our success in adapting to a virtual engagement model.
We also continue to roll out new content and capabilities across the firm.
In June we launched real estate climate value at risk of forward looking tool that provides real estate investors and managers with the ability to evaluate and review climate exposures and concentrations across their portfolios. We also launched index metrics service to provide investors there.
Ability to evaluate compare and monitor strategies linked to M. A C. I indexes, we introduced a mobile app on iOS to support investors with real time access and performance information for MSC I indexes and in May we made 36000, yes cheap ratings publicly available.
On M. Sci Dot com and launch the M. A C. I index profile tool to provide better access to E.S.G. metrics for both E.S.G. and on E.S.G. indexes.
During the quarter, we drove new recurring subscription sales growth of 16% against the strong second quarter last year and amid the current uncertain macroeconomic backdrop.
Yes, GE in particular reported its highest quarterly subscription sales on record with growth of 93% over the prior year.
Index recorded over 20% higher sales growth featuring strong growth in nonrecurring cells, which benefited from increasing demand from broker dealer and bank lands for bespoke ODC derivatives and structured products linked to MSCI indexes.
Analytics, new subscription sales were also strong growing 10%.
Offsetting some of the strength in sales was an elevated level of cancellations, particularly from certain tank and hedge fund clients well a modest number the cancellations could be attributed to covert, particularly among hedge funds. Most of the result of ongoing restructuring within our clients businesses over.
Overall I missed the eyes retention rate for the second quarter was approximately 200 basis points lower year over year, a respectable outcome, allowing for the context the retention rate in our real estate business was notably strong at 96.2%, which helped offset some of the weaker sales.
Looking forward, while we do not have any indication at present in the pipeline that elevated cancellations or a trend. This environment is unpredictable and could be subject to change.
I'd like to spend a few minutes on our index segment.
And the second quarter.
Our clients launched approximately 30, new E T apps link to M. A C. I indexes. The vast majority of these were U.S.G. and climate products.
In July 17, MSC <unk> index future contracts began trading on H. capx with an additional 20 expected to launch in the near future.
We also extended our agreement with the Singapore exchange the listing of both futures and options on the M. A C I, Singapore index year over year futures and options run rate grew 85%.
However volumes in contracts traded for futures and options link, Tennessee, I indexes declined sequentially as we observed a reversion to normal levels of market volatility versus at the beginning of the year.
As you're aware and can see in our results. This quarter. We have remained very disciplined in our expense management in this environment.
We have nonetheless continued investing in our business as Henry noted.
For 2020, we targeted and have been executing against an 140 million dollar investment program to change the business.
These investments span across index, where we continue to build our infrastructure and functionality to enable clients to get more sophisticated and timely indexes client coverage, where we made select key hires to our global leadership team. He is GE, where we have a range of investments for example in improving our climate capable.
Ladies and select other high return opportunities that support our business growth and enable greater operational efficiency.
Before I turn the call over to Linda I thought it might be helpful. Deprive provide an update on my client segment commentary from last quarter.
Asset managers continue to drive the largest mix of new subscription sales across M. A C I through both new and upsell opportunities and this past quarter had a retention rate of 94.6%. Despite continued industry pressures facing active managers.
We're seeing ongoing traction in client segments, we have targeted for growth, including for example, wealth managers, where we have more than doubled new subscription sales year over year, and corporates, where we're beginning to put dedicated sales coverage.
We've also had success increasing our footprint with asset owners were particularly active in implementing climate strategies across asset classes, providing M. A C I with attractive opportunities for our climate solutions.
Finally for hedge funds, we're seeing two different cohorts. The crisis has pressured some funds to exit their strategies and or restructure sometimes leading to cancellations with MSC.
Others have performed exceedingly well and in some instances are inclined to acquire more of M. A C eyes content analytics and technology applications.
Hedge funds of therefore been both a source of higher cancellations, but also have significant recurring subscription sales growth.
As we enter the second half of 2020, while we continue to observe tighter transaction and procurement controls from certain clients. We remain confident in the overall long term trajectory of our franchise.
Let me now turn the call over to Linda who will discuss more specifics of our quarterly performance Linda.
Thank you bear and Hello to everyone on the call. This morning.
Second quarter was another quarter of solid execution for MSR.
Operating revenue grew just over 6% and recurring subscription run rate grew nearly 10%, reflecting strength in index recurring subscriptions and D.S.G.
Well, it's more modest growth in asset based fees analytics and real estate.
Turning now to assets under management assets under management equity T.S. linked to MSCI indexes ended the second quarter at $825.4 billion recovering nearly $116 billion from the end of the first quarter. All of this AIU improvement came from a rebound in market levels.
Across all exposures.
During the second quarter, we saw net cash outflows of $1.5 billion driven by each gifts with international exposures.
Only partially offset by positive inflows in TTS linked M. A C I indexes with U.S. exposures, notably sequential cash inflows into equity E.S.G. and climate.
Linked to MSCI indexes totaled $10.4 billion.
Additionally, equity linked M. A C I factor indexes, so $2.9 billion of inflows from the first quarter.
As of July 22nd assets under management linked to MSCI indexes.
Further improved more than $880 billion.
I'll turn now to asset based fees, which were up slightly 0.4%, we recorded substantially higher year over year asset based fees in futures and options linked to MSCI indexes, which grew more than 90% $8.6 million in the quarter asset based fees from non exchange traded funds linked M. A C.
Indexes were $26.8 million going approximately 7%.
Year over year, the guilt relatively flat AUM levels and lower basis point fee levels resulted in a decline in asset based fees from equity linked to MSCI indexes sequentially the basis point fee on equity linked to MSCI indexes decreased 0.04 basis points.
Predominantly reflecting a mix shift into funds with lower total expense ratios. We ended the second quarter 2.67 basis points.
Quarter and <unk>.
Linked to MSCI indexes was higher among U.S. exposure sequentially and year over year, our international market exposures in emerging markets and developed markets outside the U.S.
Year over year, but both have increased quarter over quarter.
And I'll turn now to adjusted earnings per share growth.
Your over here.
Your subscription revenue was the largest driver of our almost 15% growth in adjusted earnings per share.
Excluding the impact of FX, and including depreciation and amortization total expenses increased slightly.
It was offset by are tighter expense management in the quarter, including the hiring freeze we noted during our last earnings call.
Well is significantly lower travel and entertainment and other non compensation expenses.
The balance of our adjusted earnings per share growth was driven by favorable tax and foreign currency impacts and a lower share count.
Were offset by higher interest expense associated with the higher debt balance during the second quarter as well as lower interest income on cash balances.
And turning now to our balance sheet, we ended the second quarter with a cash balance of approximately $1.4 billion.
And in May we issued $1 billion of notes due 2031 at a coupon of 3.875% and used $800 million with the proceeds to redeem our 2025 notes that had a coupon of 5.75%.
Remain very confident in our capital position, which continues to enable us to invest selectively and strategically in our businesses and to return capital to our shareholders in the second quarter, we repurchased $31 million of stock.
Approximately $57 million in dividends to our shareholders and yesterday the M. A C. I Board also approved dividend increase of 15% to 78 cents per share for the third quarter. This is in line with our payout target, 40% to 50% of adjusted EPS.
Now moving onto our outlook for full year 2020.
We announced in our earnings release earlier today, we are reiterating most of our lines of guidance as we continue to invest in our business.
Growth in operating efficiencies, we do know expect a lower effective tax rate for 2020 in the range of 16% to 19%.
And for free cash flow.
Back to be toward the upper end of our guidance range of $540 million to $600 million, primarily reflecting the lower effective tax rate range as well as stronger cash collections.
Full year interest expense is still expected to be approximately $158 million.
However, the current low rate environment. It's also likely to drive quarterly interest income earned on cash balances to be at similar levels this quarter for the foreseeable future.
In closing I want to reiterate Henry and bears confidence in our business model people operations and opportunities, we have a solid balance sheet and ample liquidity, while the range of economic and macro economic outlooks remained broad.
We will continue to take proactive management decisions in the best interest to their employees shareholders clients and other stakeholders and with that operator. Please open the line for questions.
Thank you as a reminder, Taski question Press Star one on your telephone to my question press. The bulky please send Bali Kampala Kuni roster.
Our first question comes from Tony Toppled with Morgan Stanley You May proceed with your question.
Thank you.
The retention rate stepped down a little bit this quarter, but the new sales were very strong, especially in U.S.G. and analytics and I think that's the opposite of what I would've expected just in the current environment too you mentioned the restructuring within client businesses, just wondering if you're seeing that contain.
When you into the third corridor, and just any sort of extra color on the drivers of retention and new sales that you were seeing this quarter and if those are continuing thanks.
Hi, Tony a bear here, so look I think that the the sales numbers reflect the positive actions that we were able to take it in the quarter and the fact that we were really up able to get up and running very strongly.
And continue our client outreach activities et cetera. So clearly you know the pipeline for somebody item is it was longer so I'm not suggesting that business was all originated within this quarter or the tail end of the previous one but overall you know the you know we found that the.
We really had a pretty strong quarter for sales activity and we continue to see that and we're pretty pleased about it. So when we look at the councils you know as we as we mentioned a bit earlier in our comments the a certain amount of those were more related to the current environment as for.
Perhaps you had thought.
Notably a little bit on the notably on the on the hedge fund side with small or medium hedge funds.
And and a few other categories, but the the they're just sort of restructuring appliance business that we alluded to the art. We're typically longer term things there were a few cases.
Both.
Sell side, an asset manager clients removing themselves from certain lines of business and those those things were not necessarily things that had occurred because of co bid or or short term market circumstances. Unlike the hedge fund there were some structural.
Cases, you know one example was the sell side from that had reduced a lot of its activities in equities and similar things of that kind of were happening over time.
And then additionally, as always there are few there's a I would say those were the larger percentage on a smaller percentage of normal competitive type of things so looking forward.
No I would say that are there there are two things which are.
Little bit in contradiction to each other but not entirely the first is based on our current view of the pipeline. We do not have you know strong evidence that cancels will continue in.
Direction, we don't have that evidence that I just want to reinforce that point equally in view of the extraordinary circumstances were in which include the fact that you know the pandemic is certainly not over unfortunately in the United States and while it appears somewhat better and other parts of the way.
World It could recur and the macroeconomic indicators are clearly very poor and and a number of these sort of supporting the macro economic support.
For for individuals and companies will you know will will cease toward the tail end of year. So so those things mean that we continue to reiterate what we said last quarter that we expect that the cancels will likely continue to be a challenge, but we don't know where that will come from at this stage, we're just being caught.
Washes in view of the environment. So that's kind of a a little bit of a summary for you there.
That's very helpful and hopefully on a brighter now could you give some additional color on a strategic alliance with Microsoft is there way to sure. That's fine I know you talked about quicker speed to market on some new product development until any sort of quantification be helpful. Thank you.
Sure so not by the way the border note also did include sales right just to reiterate that we were pretty happy about the outcome and you know in view of how we would the extraordinary changes we went through during the quarter. You know, we really do view that as a positive so look on Microsoft <unk>.
I did.
It's been a fair amount of my personal time on this along with your good soccer or or our CTO. So there's both the element if you Wanna called the mechanical element of the cloud migration, there's enormous amounts of things that Microsoft can do with us in terms of creating efficiency and speed to market noted.
Early in our Dev ops, which which are on different standards because of history across the company, where we're already seeing in certain categories that were just bringing software to market much more quickly than we were even six months ago. Because this relationship with Microsoft has already started didnt a few areas such as that we also.
They can do help us a lot on our internal what people typically call corporate technology, where there's a lot of efficiencies we can gain.
And then additionally, two more categories. One is with he is g.. We think there's some really interesting things there in view of Microsoft's global touch with corporations and the huge focus the corporation tab on E.S.G. and then finally with with advanced technologies, which by the way one.
Are you were using a lot of those advanced technologies, such as AI natural language processing et cetera is any as GE, but also in other data operations, we think that they can bring a lot of value. So it's really a holistic thing or you know we just need these discussions have been going on for quite some time and we're delighted with the out.
And we think this will be you know a great deal for embassy API and a great partnership with Microsoft.
Thanks, Barry sounds great.
Thank you. Our next question comes from went up Putnam with Barclays. Please proceed with your question.
Thank you good morning, maybe I can just follow up on that question and if you guys could you maybe a refresh another small you called that you called out the ongoing technology transformation. So maybe just give us a kind of snapshot of where.
And they see I used to be and what that technology transformation actually yeah go ahead.
Heading towards.
Sure. Okay. So just carrying on from my previous observations. So look one major theme in this is creating both a innovation and if you should see a across China.
So because of the various you know the history of some of the acquisition that we've done over time, you know we had we have a lot of different applications in front of clients.
And and those were seeing a path, where we're creating much greater commonality in the in the underpinnings of those both in our data environment, where where Weve. You know we've already made a lot of progress in the last few years, but we think we could make even more progress going forward in.
Our client applications, where where I think the the look and feel of the client experience with MSC technology in lets say, even a year from now let alone two or three years will be much more uniform much more standard and much more user friendly a where were.
We're also so data is the first one the client experience is the other and then I think as I said the the third one is in terms of the way that we operate internally you know all of our processes, which link from the client through the client coverage organization through to finance you know those.
Also an area, where we see a lot of efficiency coming so so just as we you know as as we set a number of years ago going back even for five years ago that the one in a T.I. story. It was both a client focus story and I think we've shown that by the unified segments. We've we've started to create with yes, GE and with.
Factors. So I think we're on a we're on a kind of a second wave of bad going forward and technology is a huge enabler of that.
Got it thank you for that and maybe just a quick question around do you think youre expanding client segment that you called out I mean, what is typically E entry feel to get into an insurance company or the other corporate two examples. The is it has been from you know the traditional just wanted to get some clean the there.
Yeah, so be it terms of our plan segments, we traditionally have been very strong.
And pension funds.
[noise], a clearly all forms of asset managers.
Long only and long short asset managers.
On on buying some I'm broker dealers.
So we want to expand further with the banks and the broker dealers are especially on the heels of all this listed futures and options to help them create a large variety.
To license Irene this is to create a large variety of is structured products on or do you see a you know swaps.
No I know to see options on the light.
On insurance companies, we have been in the back a bit challenge in in.
[noise] penetrating insurance companies for the on principle account not necessarily only there I said managers, but they don't bring to pull accounts, because we were not as strong and fixed income portfolio management and as you know you know insurance companies have a very large percentage over there.
There are assets in EM in in fixed income products as we have been launching fixed income risk models fixing come into says with eight years. She overlays on factor overlays on the light up presents a significant opportunity for Ross to expand into.
<unk> into a life insurance companies as well as without real state real estate product line.
On corporate.
The up the big impact those right now is is Gee, we already are collecting a meaningful amount of data.
From corporates in terms of Baird disclosures about his GE and specifically on climate change, which we sent back to them to review and not on life. So there's an on going series of operational relationships that were developing a with them on and we're now looking to sell down.
Data sets for is cheap for them to understand their own ratings on and compare themselves to each of the other participants in their industry on Ah Onez G. On on climate change. Eventually you know this partnership with Microsoft It will be another there and then.
Direction to see if we can create a bit about beta platform that will benefit corporates and investors alike.
Thank you.
Thank you. Our next question comes from Alex Kramm, Yes, you May proceed with your question.
Yeah, Hey, everyone quick ones from me I think on the expenses Linda you didn't change your guidance, but it's still fairly why.
Yes, it's doing much better than is it a quarter ago. So eight soon to push up expenses, a little bit too in terms of you know.
Performance compensate early or what you see that has remained off the year shaking out what's given how business is doing right now.
Alex as you noted we've done a pretty good job of expense management, we have been able to do a number of things including maintaining.
The investments that we're planning to making the company at about $140 million and everything that we've talked about on the call today is already baked into the expense forecast. So nothing is incremental part of this will hinge on how the rest of the or looks and that's why we're leaving arrange that might be a little bit toward the wider.
Side and performance has been pretty solid given everything that we're facing so we continue to be very selective about hiring.
We continue to be very focused on our expense base a t. any of courses is reduced.
Sort of around $2 million a quarter given that were largely staying in place right. Now so I think we'll keep that range and.
We'll see how the back half of the your comes together, but we feel pretty good about everything that we've done and the way the business is running right now.
Okay. So it's too early for not just than any sort of.
No and higher and does something like that at this point, yeah I think so.
And then maybe for bear I mean, you noticed the the strong U.S.G. sales quarter.
I think you talked about a variety of different things, but can you maybe just force rank kinda like the where the where the sales came from in terms of like largest buckets of new sales, what kind of products and that's particularly on the subscription side obviously.
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Yeah. So the the pattern of the sales is it's been pretty consistent so we continue to.
You know heavily focused on the you know the ratings data area. That's the really main driver of of the sales or the area, where we continued to see you know a pick up is is in climate and I would say that does.
Discussions in client that they have increased very fairly significantly in the last six months, including during you know with all client types and so you know all those things take a little bit of time to come through and become more become more material, but I would say that you know the.
Main story remains you know the broad wanting to have going deeper and broader with clients and look the the one element that I would would would highlight that you know that that is probably.
You know well.
First of all we had a we had we had a very large sell side deal during the course of the quarter and I would say generally be discussions.
That we're having are going more broadly with the sell side.
As well.
As you know the traditionally the asset managers and the asset owners and that in turn is is that I know you mentioned that it was mostly on the subscriptions that I'm, though that you asked a question about but I do think it's important to note that that is also heavily linked to the various financial products be there.
Structured products EG AFS, where you saw that we continue to have a lot of which ones because because in turn those people who deal with the you know with those with creating those products in turn they need more data and they need all of that for their infrastructure and.
And sometimes for creating their own ratings as well. So so that's kind of the you know the pattern that we're seeing and you know and very broad in across the board.
You know ER and I would say still primarily heavily in the Americas and in Europe, but we're putting more focus.
You know on Asia, and putting more client coverage resources, there and we hope that you know that we'll see more coming from there and the second half of the year.
Sounds good thank you.
Thank you. Our next question comes from Bill Warmington with Wells Fargo. You May proceed with your question.
Thank you good morning, everyone.
Price has historically been an important part of revenue growth for the subscriptions and index and I wanted to ask how you're finding success or if you're finding success and continuing that trend in this environment.
I think it's the same you don't know up no different than that pattern at this point the a this also.
Of additional revenues for additional sales that coming from price versus volume.
Continues to be a this and mix.
So no nothing really new to reported there Chris.
Okay. So for my follow up question you'd mentioned the retention rate on the real estate was was strong at 96%.
But the organic revenue growth was down.
About 10% I just wanted to ask what a you know that seems like a disconnect I want ask a cupboards, perhaps the volume component to the model.
Yeah, Yeah. So look I think you. The there was one sort of if you'd like mechanical challenge. We've had we've been somewhat under stopped in real estate client coverage.
We've now almost entirely remedy that.
And you know those people take a while to come onboard and be trained et cetera. I think we may still have one open headcount for real estate sales, but we're pretty much now got all those people onboard most of them have not entirely all of them are out selling yet, but most of the enough transition.
And in two or you know it into a into productive role. So for sure. We would hope that on the sale side, you know that would be the major change that would create positive movement. There I think the retention rate is I think really a positive reflects.
One of the enormous efforts that the real estate team has made in the last year, reaching out to clients.
And you know we've actually you know how do I think a pretty good quarter overall for let's say, our research and thought leadership outreach to clients research real estate did it particularly excellent job with many client panels. So at Emmis research person than a client.
And you know a lot of.
Interest in all of that so I think that you know the general client satisfaction that we're seeing in real estate. A you know is reflected in a in the retention rate. So look we'll see clearly you know in this environment real estate as an asset class could be challenged a bit but I think there there are quite different drivers one.
It is more longer term the retention rate is more longer term efforts and the soundness of the business and then the other one was a little bit just short staffing in sales and then finally, there was just a little bit more technically the you know we had a a slight drop in the revenue was due to.
Some timing of deliveries in some FX stops, but you know that's a little more of a marginal point in time thing.
Got it thank you very much.
Thank you. Your next question comes on Craig's Lewin Sumit Research you May proceed in English.
Thank you want to ask on fixed income in the past you guys are described your run rate of revenues into fixed income being less than 5%.
Just want to hear if I could you would you guys views the opportunity there booking analytics area is watching to see business long term I mean for example, five years or sort of a number in your mind what percent of revenues is aspirationally fixed income could keep your revenues could be 710% I used for thinking about that.
Follow up thank you.
Yeah. So we're very excited about our.
Our significant foray into fixed income portfolio management.
Analytics on index and noted that I'd say a portfolio management, because we traditionally have been fairly strong in fixed income odd risk on fixed income performance attribution for the for the Middle Office, you know they central risk management office of many of our client.
Yes.
The areas that we see a lot of opportunities are to begin with is a fixed income.
In the says.
But not in the traditional sense of each one is weighted or market cap weighted the indices, but more with an overlay of U.S.G. on those fixed income and this is on a on factors or a combination of U.S.G.M. factors.
And that's an area that we just launch a variety of indices and the last say six a eight nine months and and there is a good pipeline or Bob of licenses.
For them and it the F. son in Olivia passive products on and structural problems on the like so so I think that the overhead that takes time to build up into a large revenue source, but we are we're very excited about that we're also very excited about fixing come on analytics, particularly.
No they knew the new generation of Rob a factor models that we have lunch you know in fixed income, which obviously feed into the factor.
Korean Decison fixed income a and that's an area that job that we're putting quite a lot of where for it also liquidity you know metrics has been a big driver of sales and analytics and data has always had fixed income components associated with it.
Lastly, fixing them analytics itself not only content you know in terms of the models a the factor models, but also on the workflow tools on the like so that's another area, we think that clearly a company like him as he I would they footprint that we haven't the on the client base that we have not to be one.
No the largest provider so fixed income on a mix tools on in business in the World is is not in Oakland is not great. We we think that there is there for quite a lot of wrong way in that direction.
But also wanted to ask you on the futures and options side as you think forward here both investing in that that business can you just touched upon the opportunity. There particular as you sort of expanded your various relationships I guess around the world theories exchanges out there for you just touched on the opportunity futures and options long term. Thank you well, that's a very very low.
Arch unfairly immediate opportunity by immediate meaning.
You know as you as you have seen meal that Ron they run up in the run rate.
And note on the overall based on the volatility that we saw but much more importantly.
I'm much more importantly, the the a the normal volumes on the repricing of a lot of our licenses. So we started on this ah, but a year ago and we reported that you know the first.
Yeah agreement was done last year in North America. The second agreement was done in Europe and this is the third agreement now in Asia. So we know how the complete complete sort of a three major regions of the world. We have smaller agreements with you know smaller or changes in emerging markets, but the big ones are in place.
And and that's all that's going to be big because not only the market for multi country multi currency.
Equity index futures and options is developing a significantly but but also the the structured products market.
The older but good Ben it do your benefit of all of this is the growth that we do here, it's extremely profitable growth because clearly this is all IP that has been created already on.
On the cost associated with a with old is licenses is the team the structure in I was just said the over the counter team.
On the structural <unk> team and our broker dealer Klein calibration.
To license or indices and over say the features and options theme, but there's no. There's no cost of goods sold so to speak gets old is highly profitable. So this would be hundreds of millions of dollars.
Revenue in the next you know.
510 years.
Great. Thank you.
Thank you. Our next question comes from Chris Shutler with William Blair. You May proceed with your question.
Hi, everyone. Good morning, I'm on expenses, they grew less than 2% year over year in the quarter. When do you mentioned 2 million a corner of a lower.
T any impacts which would help reduce expense growth by about 1% per year I know that you're.
Slowing the you did slow or the hiring but it looks like developed markets employees are still up about 4% year over year. So maybe just talk about where you have cut back expenses in where you are finding efficiencies.
Sure.
The most important part of this is we've been as we said very very selective with hiring and you can probably state see that the balance of our employees are still very much located in emerging markets versus developed markets. So we are managing everything very closely and in addition to the head.
Which still generally has to run through Baron Henry to be approved for hiring we're thinking about discretionary expenditures on consulting fees projects things like that so with all of that we've been able to manage our expenses a pretty flat to the same quarter last year, which has been.
Pretty great achievement.
At the same time, we're focusing very hard on our cash flow you'll note that.
We've been able to move our cash flow guidance up toward the high end of the range, which is a really good thing that's.
Dependent on the tax rate being lower as we talked about in guidance and then also the fact that we're doing particularly well with our collections were being very careful about our working capital in our collections. So that's been been very very helpful. So hopefully that gives you enough color, but we're quite proud of what we've been able to do on.
On expense management, particularly this quarter.
Okay. Thanks for that window and then.
On a different topic I wanted to come back to a direct indexing just because it is so topical are increasingly topical these days and I know I'm Henry if you've talked about this in the past I just wanted to kind of come back to it and better understand that.
The puts and takes pharmacy, I mean, I always think from the negative would potentially be for your fee rates of comparing versus your average GTF fee rates today, but on the other hand, if more assets are indexed against your indexes. That's clearly good thing. So is this just another example of potentially trading price for volume.
Well, that's a sub Chris.
And we now have critics I'm, sorry up to build that they.
I thought it was good asking the question earlier, but it was built.
So look I think the they the answer is the same which is.
Oh, whether is directing index in or whether its self indexing or whether its third party indexes index and you know like like cost.
IDN you know the overriding philosophy over <unk> is that we're not in the basin is creating indices were in the business of helping our clients build better portfolios, which happens to be with our branded proprietary indices, but if up if the direction is gonna be that you know they want.
To build a lot of their own indices to build their own portfolios, we will rent our entire infrastructure to be able for them to achieve this and purpose a have a building in a building portfolios and the Oh and therefore, there is a wide variety of clients I didn't know if they want.
Good to do that you know that more than happy to rent into our infrastructure as we probably will make more money rented the entire infrastructure than just license in the end broke that comes out of that infrastructure. So so I don't we don't see that as a threat, we actually see that as a big opportunity and we have a number of clients already that they're doing that.
Then we'd being actually bush another clients in that direction, but it's slow going.
Barry UBS <unk> comments on that as well.
Bear I think your muted.
Yes, the other part I would add to that is.
The you know the direct indexing opportunity actually does all does involve benchmarks.
Not like it doesn't meet them and additionally, the typically the people who are.
Our involved the need a lot of other I missed the I tool tools. So we're we're actually looking at some very interesting opportunities.
Henry said, we're in the portfolio, we're helping people build better portfolios at precisely the type of people involved in there.
Our heavily quantitative use a lot of different models used a lot of different portfolio software. So you don't really good as a threat to index that we typically do there's also a big opportunity and other at her for.
And by the way one on the things that up there were a we're beginning to embark upon is that the next generation Navarre.
Of our what we called Index factory is going back to do that thing the logic of transformation that we talked about earlier is how do we create.
An index factor it doesn't lend itself to all sorts of Oh of use cases, similar to the one which was talking about in helping our clients build better portfolios you know through indices.
Alright, thanks liner.
Thank you Chris.
Thank you. Our next question comes from Andy Johnson with BMO. You May proceed with your question.
Everybody. Good morning, I wanted to ask a little bit more about.
And 140 million in investments I'm not sure if you talked about it before but.
You can give an update on on no that kind of key areas that you're focused on in any progress.
So far and does areas.
So let me up Mr.
It would the broke the landscape and then now bear will will come in in some of this specific areas of investing EM.
That's it.
Yeah, we traditionally haven't mentioned you know the numbers. So if you're thinking about 100, <unk> hundred 40 blows million dollars out of a an expense base of 700 to 700 and.
I'm $50 million that that gives you a you know a pretty sizable part of our all of our in Hawaii expenses, you know look at it to these so you know they won 40 can be divided up more or less 80%. Our operating expenses on those are the ones that are compared to.
The the 700 750 and 20% our capital expenses grew a capital expenditures on all of these is baked in into the into the guidance that we gave you in expenses on capital expenditures at the beginning of the year. So up so no no change from from any of that.
You know, we we see enormous really really enormous opportunities for for very high return investments.
In our company with our clients they win isn't our backing so many different areas, where there's more into says where there's more risk models, where there's more is GE or climate change.
Private asset classes of course, you know fixing come in a variety of the from a flavors as I've mentioned before.
When you when we tell you how many of these investments.
No not on a priority you know many of them our investments that are in the triple digit returns over a shorter period of time any one to three years. So we're not we're not talking about long pay off on relatively little lower returns. These are significant and the reason for that is because a lot of this embed.
Cements, our made already on top of an existing infrastructure. So for every dollar of incremental revenue that we can get out of this investment we increasingly have to put less dollars incremental costs associated with its always the is very much of a virtuous.
Circle of success in this investment and up there do you want to walk through a little bit over the breakdown or qualitatively. Yeah. So I think so Henry was a fairly comprehensive there. So just just a few maybe other slight ways to sort of skinned the cat as it were.
So the first one is well actually first as an overriding observation and Henry alluded to this but where we are extremely disciplined in looking at through all the the the expected returns on all of our investments and at the beginning of this period, when we refi slowed down some of them and pause that the.
Beginning of the of this price as a we actually kind of refreshed and re examined.
The premises of all those things, which we had not yet started of investing in and and so I think we're we're pretty confident about our process and trying to be cold blooded at looking at the return profile. The three big buckets. If you think about it functionally are inclined coverage.
The product areas for typically new feature functions and in technology I alluded to some of those technology things earlier it as it relates to to the Microsoft partnership and some of the earlier comments I made about technology and those in turn have a fairly large.
Overlap with analytics.
In particular, where we think we can drive more sales through both a greater efficiency speed to market and in some of the additional content that Henry alluded to such as you know fixed income that we discussed earlier.
And and other analytics.
In terms, we're we're we're making significant investments in the index infrastructure and building what were you internally, we have kind of a jargon for which is index 2.0, which is a new world of client experience for index, including again in this context linking it to what we said earlier when we talked about direct indexing when we.
Talking about helping clients build better portfolios. It that it's that whole infrastructure of customize indexes complex indexes like such as the Maddox and and all of that clearly as GE is a critical category.
And we continue to invest in DSG, both technology and content.
And so those those are some of the big buckets across across the board and look you know clearly we don't have a crystal ball, but you know, but we're very I think fairly confident about at least the process. We've been through to ensure that we're allocating capital to.
What we believe will be you know hopefully strong returning investments.
Got it okay, great. Thanks, Thanks, so much.
Thank you our next question comes from.
Keep Muslim with Northcoast Research you May proceed is of course.
Good morning, everyone. Thanks for question in terms of the Microsoft arrangement Conceptualize, perhaps are you thinking about in terms of no. Just say net cost is going to be in that savings I guess over the next several years and if it's not savings are you really investing back my business as I go to the bottom line.
Yeah. So they are there are two parts.
If you want to think about it will be three parts the Microsoft in a partnership.
The out the first part is clearly moving.
Although our production on on broke a in a production environment and delivery.
To the cloud.
Starting with a index analytics and then subsequently go into other product lines. So that's gonna be up that's definitely cost neutral to a two cost savings.
With the caveat Dole and I'm glad you're asking that question, where the caveat that over the next door to put three years. There will be is switched from capital expenditures on a more decision to operating expenses.
Because obviously, we'll be paying Microsoft the you know what will be for all operating expenses and we will not be investing in our up in our server data centers and all the technology associated with that right. So that's our cost neutral to cost savings. The second part is up.
Of the Microsoft.
Their ability to help us.
Bill new products, such as client facing technology.
As an example in order to drive more volume on more production into our indoor processes.
And in addition to out over say the use of newer technologies to capture beta like AI and natural language processing and machine learning to capture data for models for a data capture for U.S.G. for example them for a production not quality in our index effect or under third part is clearly the intent.
To be able to work together on a one and these two platform.
So the second and third party, who has been that cost than for you guys.
Well they know the answer is that kind of the third or will the second one of the third will have their own you know business plans with them, but did obviously they did revenue associated without a will will need to surpass quite a lot. The expenses he will be subjected to the out what we called the triple Crown investment.
Great theory, or that we have a inside him and <unk>, which is very high risk adjusted returns Secondly, short paybacks and then three in areas of our business is on how high multiples.
I appreciate it and then just circling back to 140 million in investments that you guys highlighted how does that compare I guess the prior year it and what would it have been this year if not for you know all their bunch the first quarter to carry on today with Covance.
It's about 15% higher than last year, and it's exactly the same dollar amount as we had at the beginning of the year. What did change was some minor adjustments in the focus we deemphasized certain products into second quarter on certain areas in order to put the money in other areas that were more relevant given called <unk>.
And could give us a higher return enough there payback.
Great. Thank you.
Your next question comes from Alex Kramm, Yes, you May proceed with your question.
Oh, Hey, again, sorry to drag it out one quick follow up but it's multi part on the on the Hong Kong Exchange relationship couple of this one I know I think you excited about that partnership in Asia, and and obviously gave way to China and all that stuff, but the is it fair to assume that the economics.
Also better then with your prior partner in the in the region and then secondarily anything that's already in the run rates for.
The another quarter or from that relationship and then lastly is it purely volume driven or how big is any potential component off kinda.
I guess, a regular ongoing fees that are not volume driven thanks.
It's the that's definitely much better economics for sure.
Secondly, none of it has yet to hit the the run rate on the BNL they'll start this current quarter.
And then three it is a you know is mostly volume driven was with some but some minimum fees in case the volume goes through a certain thresholds.
And in addition to that obviously is not only the 37 futures and options contract up but obviously the desire to launch a more particularly.
The ability at some point to launch I missed the I try not a futures and options in Hong Kong.
Excellent supervision answer thank you.
Thank you. Our next question comes from Chris Shutler with William Blair. You May proceed with your question.
Thanks, just one follow up Henry you mentioned working with Microsoft on SG platform. Just just curious what you envision that could eventually look like down the road.
Well, it's too early to tell and oversee you know it's still early in our discussions but the.
We both recognize on an are very keen on ER.
On understanding not only as GE book climate change on and how do we.
How do we cannot be basically providers are capitals on uses of capital into a platform that they can both use to understand the beta.
That can be supplied by companies and be used by investors on the models on the and the ratings and all of that so but again is early days, so I don't want to.
Gives the impression that any of this is a coke or or anything like that and we'll be reporting more so the discussions go on but there's a very strong intent them both applies to try to work something out.
Alright, thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Henry Fernandez for any closing remarks, Henry just a second we wanted to do a few housekeeping matters before we ended the call a number of you had asked some questions about the below the line items. So just before we close.
We wanted to note that interest expense was slightly higher in our second quarter by a $2.2 million for the duplicate costs of our old 2025 notes and our new 2031 notes for 30 days, while we waited out the redemption period, and we have maintained interest expense guidance.
For the rest of the year on interest income would just like everybody to take a look at the fact that in a low interest rate environment.
Earning less on our cash balances a than we had before that's right now for a quarter, where earning about a million dollars per year, maybe a bit less and in the previous quarters, that's been a bit higher so everyone should.
Should take a look at interest expense in interest income the other questions. We got around the tax rate and or 17.3% tax rate for the quarter was largely due to that loss on the debt as debt extinguishment, which you can see and no 10.
Financials, Secondly, we had a higher income tax benefit related to some equity awards, which vested and third we had a favorable mix of earnings everybody can take a look at that also wanted to call everyone's attention to our increased dividend 68 cents has now been increased and we'd just like to make sure.
That everyone models that correctly.
Going forward to 78 cents, which was set yesterday, so with that I think we'll turn it back over to Henry.
So once again thinking for joining us today and for your continued interest and I missed the eyes a lot of great questions.
There you had four also no hope a we're able to answer them a as best as we can oversee don't hesitate to reach out to us. If we have the other questions or comments about though what we could be a you know doing better hopefully all stay safe and have a great rest of this summer and we look forward to updating you for our.
Third quarter earnings call.
In October operator, this concludes our call today.
Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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