Q3 2020 MSCI Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the <unk> third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and 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 would now like to turn the call over to Salli Schwartz head of Investor Relations and Treasurer you may begin.
Thank you operator, good day and welcome to the M.C.I. third quarter 2020 earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the third quarter 2020.
The press release, along with an earnings presentation, we will reference on this call as well to brief quarterly updates are available on our website and Sci 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 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 a discussion of original risk and uncertainty.
See the risk factors and forward looking statements disclaimer in our most recent form 10-K and in our other FCC filing.
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, adjusted EPS and free cash flow.
We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures in the earnings materials.
And an explanation of why we believe this information to be meaningful.
Power management.
Measures in the appendix 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 our SEC filings.
As a result of those adjustments and exclusions 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 left me were forecast recurring revenue.
Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are Henry Fernandez, our chairman and CEO.
Their credit, our president and COO and anyway Schmidt, our CFO and Chief strategy Officer.
Finally, I would like to point out that members of the media maybe on the call. This morning in a listen only mode.
With that let me now turn the call over to Henry Fernandez.
Henry.
Thank you Sally.
Hi, everyone. Thank you for joining us today.
My colleagues and I hope you on your families all remaining saves unhealthy.
During the third quarter.
Despite the challenging environment for our clients and mystery I had strong financial performance.
Looking for revenue growth of nearly 8%.
Run rate growth of 11%.
Adjusted EBITDA growth of 13%.
On adjusted earnings per share growth of 31%.
Ever T I couldn't be news to play a central role, helping investors build better portfolios for a better world.
We are executing our mission is to keep it there really two ways.
Creating indices that service for underlying components for client portfolios.
And equipping our clients would be essential ingredients for them to build their own optimized for you.
Indices, such underlying born infant plan portfolios include benchmark for active managers.
Replication tools for indexed managers.
I'm on the line and this is for listed futures and options it's structural problems.
And what do you see the Rubens.
This is a decision can cover a very wide spectrum of client portfolio construction needs.
I'll make what do you still think Siegel.
Our market cap weighted two years GE on line, but overlays.
I'm from fucked or fields to the body Mega trends.
Consequently instances as underlying components, how about bosh number of use cases.
Therefore, our business opportunities in this area are enormous.
The official ingredients to equip our plans to construct their own optimized for 40 those include our <unk> risk.
Rich I'm performance models.
Our U.S.G. ratings and screening.
Our climate metrics on Baidu on risk models.
On tools for somebody on Mega trend exposures.
Of course these stores into related offerings, we see incredible opportunities studies bank, you probably will carry us.
New client segments on.
A new capabilities.
You broke areas <unk> fixed income he is GE and climate under.
The remedies to name a few.
New client segments, including wealth management.
Corporates for U.S.G. offerings.
And insurance companies for fixed income offerings.
New capabilities in support of our new Rogerio second player you play in segments. He grew the enabling technology.
Yes. Good did you partnerships that were looking in a wide variety of different area with different entities.
In my comments today, I will focus on opportunities for new broke areas, including years GE employment.
Fixed income and liquidity.
Somebody can best be.
The rebrands.
In future calls I will comment on all the areas from a strategic focus for him as yard.
I'll start with our views on climate franchise. This.
This quarter, you have reached at $192 billion growing nearly 50% year on year.
Approximately $15 million this run rate relates to climate and has grown over 100% year on year.
We continue to firmly believe there will be a large scale real occasional capital and repricing of financial assets over the next few years.
Climate change they moved to a low carbon economy.
Diversity and inclusion in the workplace.
I'm older environmental social and governance ships will deeply you park, where capital is invested.
It makes your <unk> is uniquely position to the LIBOR diesel machines to navigate these massive shifts.
Specifically in the marketplace, we continue to see the launch of new years GE on climate equity, yes, they do M. A C I indices.
At the end of the third quarter.
Assets under management. This yes, how grown an incredible hundred 86% year on year, reaching $71 billion.
Our acquisition of Powerball Delta a year ago has also helped Boston Super charge, our climate capabilities.
We now offer climate value at risk for investors across multiple asset classes, including most recently for real estate investors.
As you can see we're aggressively expanding our capabilities in these g. on climate I will continue to build on our stylists leadership in this space.
Our fixed income franchise continued to grow this quarter.
Our strong position in the U.S.G. and climate enabled us to capture more opportunities.
Hey, ramps you need the apps that are linked to Bloomberg Barclay inmates Yardi you. Just you fixed income indices ended the third quarter nearly $12 billion more than doubling from a year ago.
During the quarter, we launched 22, and Betsy I proprietary fixed income indices, including eight yes, Judy on climate change and this is.
With this launch we now offer the market a total of 40, M.S. <unk> proprietary fixing bromine business across the U.S.G.
Alignment Dr.
Dr. on each ones Wade.
As you can see our strategy of fixing called me emphasis is to partner with older index providers, including Gilbert Barclays I.
I books, I trucks, and others on to launch our own proprietary indices.
In fixed income we have also seen great progress with our liquidity analytics.
We and our partner or you're just markets are delivering most have solutions that help investors understand managed fixed income liquidity risk.
This has been critical for investors to be growing regulatory requirements.
Hey, Mr Guy hasn't really be well positioned to support our clients with its my belief that regulations in Europe that went into effect in the third quarter.
Looking forward were also favorably position to help clients with potential we'd be reporting requirements enrollers jurisdictions around the world.
I know it broke area of strategic focus for us is the body investing.
It meets the eye has built partnerships with arc in best on a number of other experts specializing you'd said mottaki besting.
These relationships have generated indices focus on disruptive innovation.
Long term structural changes or make a frame.
We are seeing excellent traction across a range of use cases for meet the licensee.
Two structural products, which bear will discuss.
Finally, I will comment on the remedies.
We continue to drive the strong growth of multi country multi currency impacts the <unk> index derivatives.
This is a massive opportunity in its own right.
But it would also reinforce the strength of our index franchise for both active and index the investing.
We are experiencing great success with these partnerships and listed futures and options with some of the world's most prominent global other changes.
Additionally, we're seeing tremendous opportunity to license, our EBITDA says to broker dealers and banks for the creation of or do you see the remedies and structural problems.
This enforce reinforce the Burch was equal system opened my C. I think change great products.
Before I turn the call over to bear.
I am excited to announce we're planning a birch won't be best or day event.
Okay February 24 next year.
Please hold that morning, Youre fine open on your calibers.
We'll have additional event details for you over the coming weeks.
We very much look forward to sharing with you the many significant opportunities and Mr. Guy has to serve our clients needs globally.
On to grow with the investment industries and strong underlying secular trends.
Back to you for many of those sure hold their value opportunities for us.
We will talk about our expansion plans in products and client segments.
The capabilities, we need to build out I didn't see guidance.
Capitalized on this significant potential.
To make the band as complete as possible.
We will continue our active dialogue with all of you on all of our investors, including through surveys and listening George.
We look forward to hearing your views on how we can continue to optimize the MSC eye franchise to achieve even greater shareholder value.
Let me now turn the call over to bear.
Thank you Henry and greetings everyone.
I'll start by noting an exciting milestone for our index segment, which reached $1 billion in run rate for the first time.
We achieved this through growth in both the new product areas that Henry discussed.
And more established products like our market cap weighted indexes.
Across M. A C are high we continue to find many opportunities to produce content one.
And to find multiple uses for it to address a number of different point need.
I'll give a few examples within some of the product areas that Henry highlighted.
Leveraging our broad SGN climate content has enabled them to see eye to contribute to further transparency and standardization and he has G disclosures.
In September we launched a tool to help investors evaluate their portfolio exposures and alignment across the 17, United Nations sustainable development goals.
Our real estate climate barge service has gained immediate traction with several new sales during this quarter.
This combines our real estate data with climate change related calculations to create new value for real estate investors.
An added benefit to the launch of real estate climate bar is that many of our real estate clients now view M. A C I in a new and innovative light.
As a second example, this quarter, we launched a new suite of M. A C. I fixed income climate change indexes, which leverage our existing data any SGN climate and apply them to fixed income benchmarks.
These indexes enable institutional credit investors to build more climate resilient portfolios.
They also allow investors to implement strategies that consider opportunities and risks associated with the ongoing transition to a lower carbon economy.
Another product area, we have frequently reference on these calls is the re licensing of existing M. A C. I indexes for the creation of listed and Otcs derivatives and structured products.
As an example, this quarter, we saw new LTC product creation from our broker dealer clients in the form of total return swaps on our E S.G. leaders indexes.
This activity was soon followed by the establishment of new positions in listed derivatives on M.C.I. emerging market. The S.G. leaders futures we.
We believe the potential for further growth in the U.S.G. derivatives space is very strong.
Another great area for derivatives growth systematics.
Earlier this year I mentioned, we were working with a partner on a series of chromatic index is focused on the important areas of innovation engine Nomics in robotics.
This quarter, we want a license with a European bank for a new Otcs swap based on an M. M. A C is the magic index related to the circular economy and renewable energy.
This swap is expected to drive structured product issuance in the region and is another. Good example of the M. A C I linked derivatives opportunity.
As of the end of the third quarter run rate for exchange traded futures and options contracts linked to M. A C. I indexes was $49 million growing over 60% year on year.
We see significant potential in this space and believe the opportunity could represent hundreds of millions of revenue several years from now.
Just as we are leveraging our content for multiple use cases, we are actively pursuing an open architecture strategy to push that content declined through a variety of distribution channels.
Earlier this month I missed the I.E.S.G. ratings were introduced on Bloomberg terminals, which are already a major distributor of our index data clients now have another ready mechanism to incorporate MSC IC S.G. ratings into their portfolio analysis and investment processes.
Let me see always adapted quickly and well to the remote working in virtual engagement model.
In the third quarter across the company, we drove over 10% subscription run rate growth.
This result reflected strong contributions from across our client base, including both established and emerging client segments.
I Miss you guys client centric approach has provided ongoing benefit not just the sales, but also to the retention of our existing business.
Let me see I overall retention rate for the third quarter was 94.5% improving approximately 100 basis points compared to the second quarter.
Analytics retention rate had a notable improvement increasing 180 basis points sequentially and 20 basis points year over year.
Our teams creativity and dedication to solving problems for clients has been critical as global engagement models continue to evolve during the ongoing pandemic.
We have previously spoken with you about our senior account manager and key account management programs to engage with the C suite level executives at our largest clients. These clients collectively represent 65% of emmis the ice total run rate.
And the retention rate for those clients was over 96% in the quarter clearly demonstrating the power of our focused and integrated pine approach.
I'm encouraged by these milestones and look forward to keeping you updated as we continue to make progress on our key growth areas.
Let me now turn the call over to Andy who will discuss more specifics of the financial aspects of our quarterly performance over to you Andy.
Thank you Barry and Hello to everyone on the call. This morning.
I still kind of Oh, I'm excited to lead our talented finance organization and Reengage with our shareholder community.
Will be especially focused on further aligning strategy and finance to deliver even greater value to our clients our employees and our shareholders.
It's Henry and Bear noted the third quarter was another quarter of strong execution for an upside.
Operating revenues grew nearly 8% and recurring subscription run rate grew over 10%.
Reflecting solid performance across the business.
Assets under management in equity ETF linked to MSCI indexes ended the third quarter at $909 billion.
This reflects strong cash inflows of nearly $27 billion across all geographic exposures during the quarter.
Over 75% of these inflows were allocated to EPS with international exposures, which is a reversal of the trend we saw in the first half the year.
Approximately 7 billion up the inflows into MSC idling funds went into U.S. exposure funds, where we continue to have strong market share capture flows driven by continued flows into yesterday in fact or products.
In fact, the equity <unk> equity Etfs linked to MSCI, I yesterday, and climate indexes experience cash inflows of $11.4 billion. During the quarter. Additionally, you I'm levels were supported by improvements in equity market levels with $57 billion of appreciation from the end of the second quarter.
As an update since the third quarter as of October 21st assets under management in the equity ETF linked to MSCI indexes have further improved to approximately $942 billion.
I will now review our asset based fee revenue results, which were up 4.5% year on year, reflecting higher results across the board, including from EFS Nannizzi of products and features and options.
Sequentially. The nearly 117 billion dollar improvement in quarterly average AUM levels and equity ETF linked to MSCI indexes aided in driving 15% higher asset based fees from ETF products versus the second quarter.
Average basis point fee on equity ETF linked to MSCI indexes remained unchanged quarter over quarter at 2.67 basis points.
A proportionally higher mix of value I am in international exposure funds provided support to maintain this level.
Additionally, asset based fees from futures and options increased sequentially with results, reflecting improvements in economics, we receive from our exchange partners.
I will now turn to our adjusted earnings per share growth year over year.
Underlying business performance drove nearly half or 52 cents improvement in adjusted EPS. This included both operating revenue growth and relatively flat year over year expenses. The expense controls we put in place earlier in the year as well as continued benefits from lower travel and entertainment expenses have largely offset or on go.
In investment initiatives.
The balance of the adjusted EPS improvement was primarily driven by a lower tax rate than our third quarter and year to date repurchases of MSC I shares.
The lower tax rate in the quarter was primarily due to a change in estimates as regulations were released relating to 2017 tax reform.
Turning to our balance sheet, we continue to have strong confidence in our capital position and liquidity.
Client collections have been healthy that's.
You've seen from our results investors continue to turn to MSC I for mission critical tools.
This strong liquidity position affords us the flexibility to continue to be highly opportunistic in pursuing our capital allocation strategy as we've done in the past.
During the quarter, we completed nearly $207 million of share repurchases and returned over $65 million in dividends to our shareholders.
Since the end of the quarter and through October 23rd we've repurchased an additional $51 million of our shares.
Before we moved to Q in a I will highlight some of the changes to our outlook for full year 2020, which we announced in our earnings release earlier today.
We now expect adjusted EBITDA expenses to be lower for full year 2020 in the range of $710 million to $730 million.
Our expense outlook reflects lower expenses in areas like travel and entertainment as well as the impact of the continuation of Triple Crown investments that we're pursuing is the environment stabilizes.
Our continued investment in these triple Crown opportunities could result in an uptick in expenses relative to the last couple of quarters.
We also expect a lower effective tax rate for 2020 in the range of 11 in the house.
13.5%.
Our adjusted tax rate should run approximately one percentage point higher than our effective tax rate as it has year to date through the third quarter.
Capex when they will be in the range of $50 million to $55 million and for free cash flow. We now expect to be in the range of $650 million $700 million, primarily reflecting stronger cash collections.
Full year interest expense is still expected to be approximately $158 million. However, as we have pointed out to you before the ongoing low rate environment is also likely to drive quarterly interest income earned on cash balances to be at similar levels to this quarter for the foreseeable future.
From where we stand today, the sales pipeline remains strong and client engagement remains robust and dynamic Nonetheless, we remain cautious given that the operating environment remains unpredictable.
Just a couple of days to go before the U.S. elections, as well as the backdrop of the ongoing pandemic the range of outcomes in global markets and operating environment remains broad.
In any case, we continue to believe our durable all weather subscription based business model will hold up well as it has to date we've.
We therefore remain focused on continuing to support our clients innovate and ultimately drive forward MMC outgrowth algorithms, creating compounding value for all.
And with that operator, please open the line for questions. Thanks.
Thank you as a reminder is asking question you'll need to press star one on your telephone to answer your question press. The pound key please stand by we compile the June a roster.
Our first question comes from enough.
With Barclays. You May proceed with your question.
Yes, hi, good morning.
Just wanted to ask how you guys were thinking or how we should think about you know this this new leads the I guess consolidation that thing to have happened also Oh, you talked about a lot in the past with the large asset manager is really a big clients and I was just hoping you could help us understand how are you.
Anything to send the visas they get it.
Yes, hi, good morning, it's fair hair. So look I think that you know our experience and this is somewhat mixed.
And and certainly not as negative as it might look on the cover so first of all you know we the consolidation has not been that large this far in so far as we have seen.
Some cancellations, notably an index related to Ed.
As a general rule overtime when firms consolidate we sometimes have initially a little bit of a negative hit but then typically we're able to grow the combined.
The combined company larger company, you know and in very healthy ways. So you know as of today, we're not seeing a significant impact and and as a general rule historically the outcomes have been pretty positive overtime.
Okay. That's helpful and if I could just ask you know around the investments back in March April.
And you guys, obviously cuts on the response to the co that Penn Danny you know how is how are those investments doing today or are they coming back are they still on hold I guess potentially in that space can afford to lock down just curious how youre thinking about you know the comfort level isn't going to some of these investments.
So the first thing that dog, it's important to note a mine I mean is that the.
The set of opportunities that we have.
Those two are sold for client problems.
It is very significant and he has actually increased.
Very large the since the start of the pandemic.
Obviously, you know we can point to yes, GE as an example.
But but also in fixed income.
As well and that Maliki besting oversee the pandemic on the economic dislocations have created significant changes in the way industries, our structure and the business models on the likes of those shifts.
And get reflected in some of these mega trends on the emphasis on reporting on that somebody may have to make up for any investing in order to create in business and structural problems on things like that.
So the number of opportunity has increased now you know at the star of the pandemic like <unk> like everyone else, we rein being a bit into the base of investments that we had a few months later say two three months later, we we felt very comfortable with where we are.
In the financials of the company on the outlook.
We were seeing this increased demand for our products and services and therefore, we have stepped up on that on the renewal.
Or the Rebasing of that investment program.
Some of that increase hiring I mean gross investment is reflected in the EBITDA expenses in the third quarter, obviously offset by by by decline of expenses in marketing and on travel and entertainment and a lot of things in the due to the to the knockdown.
Yeah, but you know we did see a pickup on that we will likely see an increase picked up on that in the fourth quarter. I mean 2021, because we feel that this significant opportunities that the operating environment is presenting towards needs to be capitalized with a.
Lot of new products on a number of new client segments on a lot of new capabilities in the company. So so yes, the investment plan a continuous and suddenly there is a few percent that just one below where we wanted it to be at this point, but we're stepping up significantly on increasing it.
Thank you Bill.
Sure.
Thank you. Our next question comes from Alex Kramm, when you'd be US you May proceed with your question.
Yes, Hey, Hello, everyone I'm just quickly on the on the retention rates nice pick up quarter over quarter. As I think you you had hoped for but still I think on a year over year basis, I think cancels are still little bit elevated. So just would be interested to hear some comments is this is this pandemic related you made obviously some comments around that.
As a management M&A I think it's a little too soon for that but any anything else. It gives us confident that that cancels will continue to trickle lower from here.
Yes, Hi, Alex Bear here, yes, so I think we the simplest way to answer. Your question is we were sort of continue the guidance from last quarter I see we are doing everything we can to service our clients.
We are in an environment that is still a bit choppy and noisy in various client segments. There can be some consolidation as manav mentioned there can be some certain client specific events. So so directionally. We're clearly pleased with what happened this quarter, we're going to keep trying to do the best we can to keep the.
Attention rate as strong as possible, but we are in circumstances, where you know the market and what's happening to our clients may put a little pressure. So hopefully in the balance of all that will get you know, we'll get some good outcomes and that's what we'll be working towards.
All right fair enough and then second one also quick one here on the on the asset based fees.
You know DTF number is pretty self explanatory, but can you can talk a little bit more about the other two components on the I guess index mutual fund side surprised to see that tick up quarter over quarter I think that's usually on a delayed.
Like.
Charging and I I think twoq. It was obviously a bad quarter, so surprised to see that tick up quarter over quarter, and then on the futures and options.
You know wondering how much they were any sort of one time fees related maybe to the to the Hong Kong exchange coming online anything that may not be recurring because that wasn't outsized quarter again here on futures and options.
Hey, Alex it's Andy Good morning, maybe just start with the second question first on the futures and options run rate as we noted in our remarks, we are benefiting slightly from improved economics from our exchange partners, most notably in Asia versus the prior quarter I would highlight that.
We continue to be very optimistic and excited about the broader derivatives opportunity even.
Even though we saw volume ticked down quarter over quarter, we are seeing big opportunities in both the listed derivatives markets as well as the the over the counter to market, which is showing up in more the index recurring and nonrecurring revenue side.
On the non LTL passive front I would highlight it's more than just index mutual funds actually a meaningful component of the revenue we see there.
It's coming from what we call institutional passive revenue.
And so its more dynamic than than just the index mutual fund trends that you might be seeing more broadly.
If you highlight we tend to recognize revenue on a quarter lag where we depend on our clients to report to US average at you I'm levels and usually we get those that you went in levels reported to us on generally a quarter, but it can be sometimes more than a quarter.
So it's not a kind of a direct a quarter lag correlation if you will the other things I would highlight is it's a very dynamic equation, where we can see.
Some some positive movement in price, particularly in some of the big growth areas like institutional passive mandates for U.S.G. indexes or custom indexes are factor indexes, where in many instances we might have more attractive economics and those types of indexes. So long winded way to say that it is a very.
NAMIC equation there is some relationship.
Related to the U.M. moves in the prior quarter, but it's much more complex than that.
Fair enough. Thank you very much.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley You May proceed with your question.
Thank you Henry I wanted to ask a broad question on E.S.G. The market's been growing really nicely you grew your U.S.G. and climate run rate at 46% this quarter and continue to be the first mover. There could you just talk about what you view as your most important differentiators and higher.
Then able to build on those I think the question that I get a lot as you know how and I see I can keep the number one position as more competitors try to grow it in the space and so if you could just talk about what differentiates your data capabilities on index side relation chat anything you want to add there. Thanks.
So Tony the competitive advantages that we have or not is GE and now obviously, a major step up in climate change tools.
Our job.
Our significant a lot of a multiple number of competitive advantages.
As I as I indicated in my prepared remarks.
A lot of what we do and I Miss you I guess, capturing two big interrelated trends right. When we take all of our capabilities and put them into indices, which form on their line components for up for portfolios on one hand and on the other hand, you know provide all the ingredients.
We essentially ingredients to build portfolios by our clients themselves.
From from scratch so to speak so so on he is cheap.
Think about all the capabilities. We have we are the largest rating agency in the world for U.S.G.. So we provide huge amount of you noticed you ratings in our own an instrument or investment by investment basis. So all of that then gets so we're the largest equity a cross border.
Equity index provider in the world. So we can combine DST ratings with the equity indices were now putting all of that you know DSG information that we get into risk models, which were the largest provider of equity risk models in the world. So we can monetize on that we are we are putting all of that together into the sales.
Income space.
Wait job, we were we've got what they called the ratings on our on our fixed income.
In the fixed income instruments around the world and putting in there.
And the like so we have a whole problem ecosystem that feeds from one another from a structural products to futures and options to indexed indices to a single security out information about ratings on all of that two factor models in equity and fixed income and on the other side on the fly and.
Hi, we are compared to some of our other competitors our client base is the investor.
And therefore were the highest demand for Iasci tools is from investors not from corporates at this point in or issuers, the highest supply and demand as investors. There are very few people in the world like costs, we are well positioned on the investor side to capitalize on that but having said that we're in.
Bounding into the corporate sector to provide a lot of this is Jude weightings, when I sectorial basis to a lot of our corporate to corporate entities. So that they can look at it and figure out how to how to provide disclosures on improved.
The information that they provide in order to to get better ratings, you know from from people like AWS. So multiple is that is that we were all borrows that is going to be very hard.
For anybody to break you know that's a huge mode that we have in this business and lastly, we have a first mover advantage.
The whole world right.
That's great and.
Andy I'm not trying for you just congrats on your new role I'm not expecting that there'll be dramatic change in strategy, especially since you've been part of the leadership team for a while now on just maybe you could talk about how you think about the potential for margin expansion from here over time just given.
Operating leverage but also investment needs you know truly be thinking about sort of a X basis points per year of expansion or EBITDA growth and low double digits or what kind of framework do you think of when you're thinking about margins and the potential for.
For the business. Thanks.
Thanks, Tony I appreciate the remarks.
As you said no real major change in strategy, particularly given my experience with the company and.
My Rolling strategy previously if.
If anything I think the.
The combination of strategy and finance creates opportunity to us opportunities for us to create even more value I think where we are as a company right now is faced with enormous opportunities across all aspects of our company and so the next leg of value creation for the company is going to be really prioritizing where we are.
Facing our incremental bets and were replacing other incremental investments to chase those opportunities and as Henry just talked about with U.S.G., making sure we're being proactive in capturing these these very attractive markets and really continuing to differentiate ourselves and so.
Yeah, if you will the financial algorithm I'd say is is.
Not changing significantly at this point other than to say, we have an intense focus on investment here.
Going back to Henry <unk> comments to the first question the margin in this current quarter was higher than what we would like I think thats a reflection of some of the.
Some of the activities, we took earlier in the year and reduced expenses in areas like like TV and professional fees and marketing, but those are masking some of the accelerations and investments, we're making and so as we continue to make those accelerations in these investments we go to our upturn playbook and weren't.
Tensely focused on our Triple Crown framework, where we are investing in those opportunities that have the highest return the shortest payback in are our most valuable to us and our shareholders.
We are going to continue to to invest in those attractive opportunities. So I think you'll see likely a pickup in expenses in the fourth quarter and that will trickle through to next year, where you will continue to see I think an acceleration and investment through next year and higher expense growth.
And so it's not a dramatic shift other than to say be the emphasis is really on driving investment here and I think thats going to be the core source of long term value for us and as you'd imagine, we'll we'll probably talk more about this at Investor day in February.
Sounds great. Thanks, a lot.
Thank you. Our next question comes from Chris Shutler with.
Blair you May proceed with your question.
Hi, everybody good morning.
A question on the U.S.G.. So many large asset managers are using.
Multiple providers DSG data is kind of at an initial screen.
Which then feeds into more proprietary yes. She analysis analyses they put put in place in house. So the question is do you think that yes, the U.S.G. business remains.
Fairly fragmented with asset managers using several providers at the same time just given how.
Subjective yes, she is and how different some of the ratings can be amongst the providers.
Or do you see that changing overtime and do you think that the desire to work with multiple providers places any kind of.
Cap on how much asset managers are willing to spend money SG.
So definitely a good question and let me try to explain how we view it.
In everything that we do other miss yard.
Hey, we want to position ourselves as.
Most to the investment decisions by our clients as possible.
And therefore.
What we're trying to do is to give clients rarely may.
Really analyze already thought through solutions to solve their problems and to capitalize on the opportunities.
So we are uniquely positioned to do that in creating.
S.G. equity indices is to fixed income indices BSG had risk models are in and that's exciting.
Equities and fixed income and we're starting to to look into and developed plans to to do that in the private asset classes as well.
And all of that in order to achieve that you clearly need the underlying data.
The underlying ratings on all the research associated with those ratings you you need the this gleaning some the exclusion research that we do.
And all of that but it is not sufficient is a necessary condition, but is not sufficient for success. So where you see competition for all isn't that provision on the underlying data.
And on a lot of our clients are subscribing to various social data for sure, but ultimately that data needs to be translated into into a tool for an investment decision.
Therefore, we will see some competition and providing underlying data is perfectly fine with us, but we are where our position is very leading I'm very prominent in providing the right. The tools that are derived from that data in order to help people make better investment this.
Vision in that space, they're not going to be too many people like us.
Henry just a quick follow up on that would you be I mean, as you think longer term around that he or she franchise do you see yourselves.
Developing some kind of a tool that integrates other third party, yes, she data into with with years of combined at all as a solution.
But definitely that that could definitely happen, we're not working on Dod this very moment, but that definitely happen and this isn't the spirit of the strategic partnerships that are the at the core of our MSC on strategy you know, we we want to.
Partnered up with everyone in the world that wants to to do with that with those in order to serve our clients and for everyone to win on to make money in all of these and that will that will definitely be the case in his chief data, we already are partnering up with a smaller institutions.
That provide data in an example of that is the car build Delta acquisition. It started as a partnership in which carbon belt that was providing those with climate metrics and climbing by newer books to create joint products as we develop that partnership they we became very very.
Very close to one another on the carbon belt, a management team and the shareholders decided that it was better that would that would join forces with us that do they have to happen, but that was an example of a partnership and we have a few more of those and we would like to do those with the bigger providers.
Obviously information as well, but it obviously there may be viewed as competitors on that may not want to do that but our intent is to is to do that.
Okay makes sense, thanks, a lot.
Thank you. Our next question comes from current Huber with Huber Research you May proceed with your question.
Good morning couple of a couple of questions. One can you talk a little bit about the ERP.
Pricing environment from your perspective revenue growth.
Speaks for itself can you just talk about the pricing both within analytics that you're able to get in this environment and also with an index subscription every please have a follow up.
Hi, Craig Yes, so look my simple headline is great stability in pricing, we're not really seeing any you know I would call it unusual pressure or any fundamental changes in the pricing environment at present, so now that could change in the future, but right now nothing to suggest that our pricing power is.
Been affected.
In any material way.
And then secondly can.
Can you size for us your institutional passive products area, I guess, including a direct index and area, whether it be a UN basis or as a percentage of revenues within indices for example, [noise].
Yes, Craig it's it's Andy.
So we haven't put out the institutional passive.
At U.M. levels in the past.
I can say that it is larger than the F.U.M. just the nature of that market. These are these are big assets.
In the fees tend to be lower generally than than the pricing we get on EPS.
You've obviously seen the revenue that we put out so you can dimension how big the the revenue is to us, but this is a significant opportunity, particularly on the institutional passive front that I alluded to earlier, where.
We are increasingly institutions are investing directly into an index and in many instances those are kind of customized indexes to help them achieve their objectives.
So many times those warm fall.
Yes, she overlaid factor overlays increasingly things like them attic type considerations.
So we're very excited about that opportunity you alluded to the direct indexing opportunity I think it's very similar but but for a different client base. So with the rise of direct indexing.
Particularly in certain channels like the wealth channel.
We are in a very unique position to Henry was talking about in his opening remarks, either either provide.
The index that the client can invest directly in or provide the ingredients that the wealth manager can use to create a an index.
That's directly suited to that client and so we think we're very well positioned to capitalize on opportunities.
Great. Thank you both.
Thank you. Our next question comes from online.
Oppenheimer you May proceed with your question.
Yes. Thank you for taking my question.
Could you please give us an update on your partnership with start with purchase.
So what are the new products in the pipeline and maybe which product you think can move the needle longer term. Thank you.
Yes, so at the beginning of this year as you know we announced the deal.
The equity investment.
In Burgess.
And we had a spin.
Meaningful amount of time in the prior years working with bird.
Berges, our data bases to create risk models.
And.
In private equity for example for our multi asset class.
Bob Enterprise risk and performance our product line, so up on the heels of that equity investment. We have now launched into a wide range and a discussion about many other areas, where we can partner and the use of that data and up.
That got slowed down in the second quarter, we started in earnest in the first quarter and slow down in the second quarter and through the summer because of the disruptions on the on the pandemic.
But it's now back back on track and on.
Examples of that in the last month and a half or so we have held.
Very significant very.
Very senior level.
Discussions with with the biggest job in alternative investment managers.
In in ways in which we can partner up with them is strategically and help them.
With that with a lot of their needs on data and analytics tools to capture a bigger pie of of investment opportunities from the institutional investors or DLP clients. So so that has not yet monetized, but for sure. The dialogue that we have is that the most senior level.
Extremely extremely high levels of interest you know to do this on the like the other thing that happened is as you. So Jay Mcnamara was a long time executive vitamin C. I.
Who was named President of Burgess Onda on his mandate is to build a state of the art you know a a client coverage organization.
For Burgess.
In terms of sales and relationship managers and consultants on and marketing people and put all the commercial middle management people and all of that so.
Jay is very busy at work in building that and would that front office organization in a much higher state is going to coordinate very closely with the MSC I play in coverage organization in order to.
You know to expand significantly the the sales on the penetration that the mergers and in the C. I have enough clients around the world. So lots of there are they're kind of two areas of collaboration there is the sales and penetration with clients and the second one in on the problem.
<unk> trying to up to Joe to do joint products into their evaluated pricing or is the expansion of the data sets or or risk models or the like.
Got it Thats very helpful and then for the demand from a broker dealer or.
Otcs there were gifts and structure products linked to MSCI indexes could you. Please help us understand the world a little bit more here and I think you mentioned, one example for that which the new product but was it.
What's the growth mainly driven by volatility with the same client base or you can actually increase the penetration here. Thank you.
Yeah sure so I.
I think it's really a a strategic shift clearly market volatility doesn't hurt, but I would say that if we look back on this segment historically.
Our approach was much more to just take our existing indexes and license them.
Today, so it's more like a product sales type of relationship today, we're in much more of a service mode. With these clients were typically involves much more in customization.
Some of that customization is also involving our analytics tools as well as our our indexes and on a variety of new methodologies. So I think it's really a pretty significant shift in focus.
A step up in servicing and you know, we we hope to continue to be able to see pretty attractive growth from the segment based on that.
All right that's very helpful. Thank you very much.
Thank you. Our next question comes from Keith Housum with Northcoast Research you May proceed with your question.
Good morning, guys you up here I was hoping you might be able to provide some color on the sales environment in terms of how comparison algorithm as they say a normalized environment I mean, it certainly looks like your sales are doing fine, but would you guys say that you are able to sell without any issue even with the work from home constraints of all your geographies or something.
The short answer is yes, I must say its you know it has been both.
Both I would say in a large effort and a pleasant surprise. So you know we've we've put enormous focus on ensuring that we have all the right focus first of all just purely keeping the teams together keeping the team's motivated you know from a managerial point of view Weve.
Enabled.
With technology, so that pretty much everything that we can do in terms of demos of our products et cetera can be done online.
And and in many instances we found that for example for for client events.
We we actually have more attendance than we did in the sort of physical attendance days. So so I think in terms of the sales process.
Were you know things are going really well I would say the mechanics of it and I think that that's reflected in you know pretty pretty decent sales that we've been having in view of the circumstances.
Got it. Thank you and then maybe just a little more geography here you know you talked about the investments that you guys have made and if we look at the income statement is most of that investment going to be any R&D or in the cost of goods sold I am, but where can we kind of see that investment.
Success.
Yeah, it's it's kind of spread across the board. So clearly there is an element that shows up in R&D and you've seen some modest growth there.
But there is also an element that goes into cost of selling.
And and sales and marketing as well so when you think about the nature of these investments, it's mainly head count and the bulk of our cost our compensation compensation related and that's the case for investments as well so its hiring technologists that hiring researchers and its hiring salespeople to.
To go after these new opportunities and so depending on the exact role as you will see those spread across mainly those three buckets.
In the income statement.
Yes, Thanks I appreciate it.
What I would also I is that the over the next two or three years Youre also going to see you all geography change in terms of all our.
A move from our on data centers, and our own production and bar man in which a lot of the investment is capex.
Two up to the Microsoft Cloud, which we mentioned in the summer on our announcement.
And therefore, the up there we see a significant amount of savings on a significant amount of the scalability of our production environment.
And in terms of the expenses associated with that they will they will go from Capex and therefore depreciation more.
More into our EBITDA expenses.
As time goes by and we'll we'll keep you apprised of up.
Those changes so that there is no confusion in terms of what's happening to the EBITDA expenses.
Great. Thank you.
Thank you. Our next question comes from Henry Chien with BMO. You May proceed with your question.
Hi, everybody good morning Henry.
And congratulations Andy on the on the new role.
I wanted to I mean, I wanted to ask a little bit about the strategy.
It sounds like.
Especially with the partnerships.
And it seems like there is a lot of new solutions being developed.
Of each call.
It just isn't as significant.
Why is that.
Is this a change in strategy to enter that how we should think about it in terms of.
Going through more partnership.
I guess it seems like it's more of a light model has been more of a service model.
Yeah, if you could just explain that a little bit how should we think about that and.
And I guess, you know with some of these new products.
Where where do we see that in terms of there.
The metric.
Assuming most of it that index, but just trying to understand how to.
Got it tracks that as well thanks.
It is definitely a job I wouldn't think of it as a quantum jump on strategy.
But it's definitely a change.
In the evolution of this strategy on you could think of it is.
In the in first of all in the concept that I mentioned in the prepared remarks, which is how do we capitalize on these two big areas that we are operating on there which is provide indices as underlying underlying four portfolios.
And the opportunity said there is immense because pretty much every portfolio in the world can have can have an index to serve as a guide a benchmark to be paid on passive replication or could be for the creation of baskets for a foreign structural products or four up four or PC derivatives or oil.
Obviously in business of any kind on all types for futures and options. So up so thats and then what are all the ingredients. Some of them are off the shelf. Some of them are customized some of them are market cap. Some of them are on factors and you know on a knee as gene some of them are climate.
Some of them are there Mike in terms of the big Mega trends in the world.
They could be equity so it will be fixed income and eventually there will be private asset classes that can be used in a variety of ways. So that's that's a big I think is more about a recognition of the role that we're playing in the investment industry and how that role can become even bigger by also having this mindset.
On this the second part is obviously the ingredients that we use those ingredients ourselves to build those indices. So you might as well have all those ingredients amenable to to the client base you know on on that so therefore, that's one part of it the second part of it is that when we see orders buying companies.
No longer you normally say should we'd be buying a lot of those companies should we'd be buying all those capabilities and some cases, we will.
Especially in smaller bolt on acquisitions that will accelerate the work that I just described but in many cases.
Our inorganic tools don't have to be an outright acquisition in a in a competitive bidding process with very high prices nor returns on time execution risks and all of that we say why don't we partnered up with a lot of those firms. Many of those firms don't want to for the number of firms that want to sell themselves there are.
War that we would like to partner up with us to create a joint opportunities. So we have made that partnership central partnership with clients of course, we always done that but partnerships with people that gain was data set that we don't have a partnership that you will see distribution partnership that gives us ability to her.
Thanks.
Knowledge and expertise like informatic investing that we may not have let's say biotechnology were not the world exports biotechnology why don't we partnered up with the biotechnology invest and firm. So we can create those scenes and those on the line in this the indices for underlying for portfolios and all of that so central to what we do with our answer to.
We don't have too long the whole world. We're a small company with limited resources. So why don't we partner up with people in order to jointly serve the needs of our clients on everyone wins.
Maybe just to add.
Henry touched on.
Vinay and the potential for tuck on tuck in acquisitions or bolt on acquisitions.
As you know we are extremely disciplined financially disciplined but also strategically disappointing to the points that Henry made.
And capital we are we are very protective of our capital.
And we look at the returns we can get across all uses.
And I would highlight that disappointed as you can see on the share repurchase front, where weve repurchased to date year to date over $600 million of our shares.
Prices on average less than $300 per share and so it's always a trade off in terms of the uses of our capital.
Yes, okay, Okay makes sense yeah.
Like a bad expanded and I guess, just a quick follow up so when you when you mentioned.
Bank financing strategy I.
I guess I guess, what do you mean by that.
Like the partnerships are taking minority stake there.
Just had to.
Well, what I guess, how should we think about that I just don't know it.
It's a fair it's a fair question and probably a novel concept, but it's mainly focused actually on the organic prospects and so when we think about what is going to drive the most value for the company over the next several years.
There is.
There are some important trade offs were going to have to make as we've talked about gear, we have a wealth of opportunities in front of us.
And so where we place every incremental dollar of capital, it's going to be extremely important and so we need to have very robust frameworks that we use like our triple Crown framework to think about what is going to be the best return on that incremental investment dollars and what's going to be most strategic for us over the long term. There's also an element of an intense.
Focus on efficiency and I'll call it strategic efficiencies so thinking about how we can position the company from an infrastructure standpoint from a process standpoint.
From a technological standpoint to create scale.
And really turn turn what we do into a competitive advantage for the company going forward.
Okay got it all right. Thanks, a lot guys.
Thank you. Our next question comes from Jake Williams with Wells Fargo. You May proceed with your question.
Good day or good afternoon, everyone.
Okay I'm appreciative to appreciate all the color on.
Yes, she provided a one follow up question, we had is within the U.S.G. indexes revenue.
Can you break out what is our asset base and what is subscription based or at least directionally.
So.
Just to be clear Jake within the U.S.G. research.
Reporting segments, which shows up in all other that.
That is purely just our ESG research and ratings. So that's things like our screening tool our ratings.
There is no asset based fee that is running through that segment all of the asset based fee revenue is coming from ESG indexes, which is reported within our index segment now when we show the integrated ESG run rate, which which you've seen.
Which is a run rate figure the portion.
Coming from index, so that yes. She index run rate does contain a asset based fee component, but we have not we have not broken out that detail at this stage.
Is it fair to assume that within that.
He is she index.
Run rate section that it's half and half or is it more heavily weighted towards subscription or asset based.
I would say, we hopefully we can give more detail on the future I don't want to dimension. It right now other than to say they are both meaningful they are both growing and just looking at the growth in the assets under management in ETF linked to our ESG indexes, which have grown.
Hundred percent year over year, you can imagine asset based fee component is growing at a very robust growth rate within there.
But the the other.
Point of reference I would highlight as you can see on our slides, we do highlight the index subscription run rate growth with them yesterday and factor modules and you can see that that is growing at 21% now there's there's competing dynamics there between factors in the S.G., but you can tell the subscription component is growing at a very.
Healthy growth rate as well.
Got it thank you very much.
Thank you and 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 further remarks.
Well. Thank you very much everyone for all for attending.
In the run up to our Investor day in February of next year.
As we said earlier in the call.
We will be reaching out.
To many of you are either directly ourselves in listening tour type of environment.
Or some of our.
Some of the people that we work with we'd be reaching out to you for surveys on opinions on how best to optimize our franchise. We encourage you to take full advantage of that to provider I provide us with feedback ideas on.
And the like and.
Even if you don't get rich please do not hesitate to reach us directly as well if you have ideas on thoughts we welcome them to put them all into into our thinking as to the best way that we can describe our company what we're doing.
Our opportunities our investments during that.
Critical Investor day, Thank you very much on to stay well unsafe.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
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