Q1 2021 MSCI Inc Earnings Call
Okay.
Okay.
Good day, ladies and gentlemen, and.
And welcome to the MSCI, Inc. First quarter 2021 and earnings conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session.
We will limit purchase it then.
One question and one follow up.
And you will have 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 Sally Schwartz head of Investor Relations and Treasurer you may begin.
Thank you operator.
Good day and welcome to the MSCI first quarter 2021 earnings conference call.
Earlier. This morning, we issued a press release announcing our results for the first quarter 2021 it's.
This press release, along with an earnings presentation, we will reference on this call as well as a brief quarterly update are available on our website MSCI dot com 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 day on which they are made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer and our most recent form 10-K and and our other SEC filings.
During today's call. In addition to results presented on the basis of U S. GAAP.
We will also refer to non-GAAP measures, including but not limited to.
Organic revenue operating revenue growth rate.
Adjusted EBITDA.
Adjusted EBITDA expenses adjust.
Adjusted EPS and.
And free cash flow.
We believe our non-GAAP measures facilitate meaningful period to period comparison.
And provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures and the earnings materials.
And and explanation of why we deem this information to be meaningful as well as how management uses these measures and the appendix of the earnings presentation.
We will also discuss run rate, which estimates at a particular point and time.
The annualized value of the recurring revenue under our client agreement for the next 12 months.
Jay Q, a variety of adjustments and exclusions that we detailed in our SEC filings.
As a result of those adjusted 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 or 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.
They're pettit, our president and C O L and.
And Andy Wichmann, our Chief Financial Officer.
Finally, I would like to point out that members of the media may be 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.
Hello, everyone and thank you for joining us today.
When we spoke on our Investor day in February.
Pointed to our 50 plus year track record of building standards.
And our continued role in transforming the global investment World.
And Misty eyes mission remains to enable investors build better portfolios for a better world.
Our excellent first quarter performance demonstrates the financial benefits of our mission.
And the ongoing and strategic and disciplined investments, we have made and the client experience and our plan and segments.
And our solutions and capabilities.
For the quarter, we achieved total revenue growth of 15%.
Adjusted EBITDA growth of 21 per cent.
And adjusted earnings per share growth of 30%.
We also generated free cash flow of $205 million doubling year over year.
At Investor Day, my colleagues and I.
Spoke about MSCI strategy to support the investment process needs of various client segments.
With highly differentiated solutions.
Supported by best in class capabilities.
I would like to highlight recent selected advancements within each of these areas.
Within clients I would like to emphasize the wealth management segment.
We're industry trends towards digitalization.
The signing of model portfolios.
And incorporated sustainability, Great theory, you continue to drive significant demand for MSCI as offerings.
A growing interest and direct indexing and wealth management is creating opportunities for MSCI.
This first on our lives portfolio solutions leverage MSCI as models.
Data and technology.
From across the entire franchise.
Including our index capabilities.
Demonstration tool.
And the ESG and climate data.
And staying on clients, let me also touch on corporates, our newest client segment.
We now serve 53 corporate east worse.
42, corporate adviser entities.
And two distribution platforms.
We continue to see strong corporate interest related to our ESG and climate offerings.
Corporate needs range from benchmarking against underlying ESG and climate data.
Two licensing our ESG ratings for news sustainability and link financings.
I would like now to highlight our progress expanding and deepening our solutions and climate change.
Which is increasingly recognized as an existential threat to our planet.
And a major investment and portfolio risk.
Put simply we believe that address and the impacts of climate change will require the largest reconstruction of the global economy since the industrial Revolution.
Capital markets are and essential and critical force to drive the transition to a net zero world.
With concerted actions from all participants.
These actions range from a reallocation of capital by asset owners.
Effective channeling of funds by asset managers, some banks to green their investments and innovation.
Two decarbonising operations by companies.
Last week, my colleagues and I put forth our call to action to all participants and the global investment community.
To support and net zero Revolution.
We urge asset owners and asset managers to decarbonize their portfolios.
If they change on companies through voting and shareholder engagement.
And transition to investment policy benchmarks that reflect a pass to net zero.
Providers users and intermediaries on capital.
Our fundamental responsibility.
And the reduced their impact on the planet.
And joined the journey to a decarbonize economy.
As quickly as possible.
Failure to identified the investment opportunities.
On risks related to climate change will resulting missed opportunities.
Unavoidable losses.
We're also holding ourselves to the same high standards.
MSCI is a company <unk>.
We recently committed to reach net zero carbon emissions before 'twenty 40.
This commitment is in addition to our prior blades and reduce by 2035 hours.
Our scope, one and it's got two ambitions by 50%.
And our scope three emissions by 20%.
This past quarter. We also became an official supporter of the D. C F D.
We integrated climate risks into our internal risk management framework.
And announced our commitment to the UN sustainable development goals.
As we said in our call to action.
The time to act is now.
Regulators.
I said owners and managers.
And societies are all encouraged to adopt.
And adapt and net zero emissions targets.
Especially before the cop 200 and seek conference.
Later this year.
Supporting the investment industry as it on their takes this enormous paradigm shift makes.
It makes investing in our climate franchise.
Critical triple Crown and investment priority.
At MSCI, we have and ignore most opportunity.
To be a leading provider of all the necessary data.
Models and technology to help all capital market participants and accelerate this significant economic transformation.
Let me now turn to our critical capabilities.
Where I would like to highlight and recent strategic development.
Last week, we announced a strategic collaboration with royalty pharma plc.
The largest buyer or biopharmaceutical royalties and a leading funder of ignore vision across the lives sciences industry.
Together, we will develop thematic indices for the biotech and Biopharma Mega trend.
Royalty pharma will provide MSCI with expertise on various medical conditions and clinical trials.
Transformative therapies and technologies that may lead to breakthrough medical treatments.
This knowledge and expertise will assist the MSCI in the design of a classification framework.
And and index methodologies.
Joseph MSCI has become a standoff and market cap weighted indices we.
We are building a strong brand ignored market cap weighted indices, Inc.
<unk> E S G.
Net and factor indices, and now the Baltic indices, and capturing the major megatrend opportunities and the world.
If you consider the sizeable business, we have built and market cap weighted indices.
And the significantly larger and broader range of applications for non market cap indices.
You can quickly see why we are so excited about this opportunity.
You already have a sense for the potential for ESG and climate and factor indices.
Let me therefore take a mineral twos quite what we believe is possible with thematic indices.
Our thematic indices provide investors are really may way to tap into social science, all mega trends that are creating both disruption and opportunities.
And three most significant mega trends, we have identified include high Tech.
And for which we have partner with arc and best.
Biotech for which we have now this new partnership with royalty pharma.
And clean energy and increasing area of focus for investors and therefore for MSCI.
You will see yields continued to build partnerships and this areas and others to ensure we have access to best in class subject matter expertise.
Before I turn the call over to bear and on B.
I'll take a few moments to describe our observations on our global operating environment.
Notwithstanding the ongoing and risks associated with the continued pandemic.
The rollout on vaccines provides hope for our collective health and.
On nish.
Precedent.
Pent up economic activity is.
Starting in the U S.
Many financial markets are already reflecting this expectation.
MSCI is very well positioned to benefit from this.
In addition to these secular trends that are accelerating MSC is opportunity set.
We need to continue to scale MSCI to ensure we appropriately capitalize on this significant opportunities ahead of us.
And as we continue to 2021 would remain deeply committed to investing responsibly and triple crown opportunities in order to leverage I'm builds on the established the scale of our business.
We are confident we can continue to create long term value for all of our various stakeholders.
With that I will now like to turn the call over to Barry.
Baird.
Thank you Henry and greetings everyone.
Echo Henry's enthusiasm for the strong momentum with which we started the year.
Total subscription sales across MSCI reached a first quarter record high.
Asset based fees also achieved a milestone surpassing $500 million and run rate.
And as I highlighted during our Investor day presentation, our very deep client relations are central to our successful commercial model.
And our 2020 client survey MSCI global net promoter score a leading indicator of client retention and loyalty increased to 45 points of six points compared to two 2019 and above the average scores for the financial services Enterprise software and SaaS industries.
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And the first quarter of 2021 net new recurring subscription sales were nearly $34 million growing 46% year on year, driven by ESG and climate as well as double digit growth across analytics index and private assets.
Accordingly, MSCI subscription run rate expanded 11% or nearly $140 million versus the prior year.
This included a remarkable 42% increase or nearly $44 million in ESG and climate and run rate as well as a more than $60 million increase and index as subscription run rate.
MSCI is total retention rate and the first quarter was 96, 3% up 130 basis points year over year.
Henry noted our efforts with wealth managers.
As you are aware this is one of our newer but very promising client segments.
At the end of the first quarter, we had a 64 million dollar run rate from wealth managers up 28% year over year.
We also continued to see strong growth and continued momentum and our more established client segments for.
For example, subscription run rate from asset managers and asset owners, which together comprise about two thirds of total subscription run rate were up 11% year over year.
Let me make a few observations about this quarter from a regional point of view.
In EMEA and MSCI generated 16% subscription run rate growth driven by strong growth across product segments, but with particular success and ESG and climate as the forthcoming Cop 26 conference the need for Tcf T reporting and the significant.
Increases in net zero alignment spurred strong client activity.
In APAC, new subscription sales are regaining momentum and grew 36% year over year and the first quarter.
Business activity is returning to normal subsequent to the pandemic and Japan opportunities were created by new regulations on liquidity.
Total subscription run rate growth was strong across the regions growing 16%, 9% and 8% year over year, and EMEA APAC and the Americas, respectively.
On the back of a great start to the year, our global sales pipeline remains healthy across both products and regions as well as above levels of last year.
As Henry noted the rapidly growing attention to climate risk has been a significant contributor to our sales pipeline.
As msci's expertise is well recognized.
To that and we continue to enrich our suite of climate data models and technology.
Let me provide a few examples.
Following our successful introduction of MSCI climate scenario analysis models, including climate value at risk, we are developing climate models for new asset classes, including fixed income.
We also continue to enrich our datasets, including for scope three emissions and to strengthen our T. C F D reporting solutions.
We have completed Tcf day reporting project for some of the worlds most prominent asset owners and institutions.
Aging from climate risk portfolio level reporting to temperature alignment comparisons to benchmarks.
We recently launched MSCI climate, Paris aligned fixed income indexes. Following our successful launches of MSCI fixed income climate indexes and MSCI climate, Paris aligned equity indexes.
Finally, and coming soon we plan to introduce cloud native climate risk focused application that showcases MSCI climate models and data.
This offering leverages, Microsoft tools, and AI technology and connection with our broader efforts to deliver investment solutions as a service.
And as Henry referenced we are investing to capitalize on the sizeable addressable opportunities and climate.
Including in areas like bank stress testing and corporate needs to capture climate stress tests.
It does have the potential to become mandatory requirements and the future.
Overall MSCI as a run rate from climate now totals over $20 million across the franchise. We expect this part of the business to continue to grow rapidly as we help investors evaluate manage and address climate risk and their portfolios.
Before I move on from solutions and I'll provide a brief update on our progress and fixed income.
And analytics, our fixed income portfolio management run rate has expanded nearly 60% off a small but very rapidly growing base.
We are gaining traction by bringing to market fresh solutions that improve upon the quality of models workflows and usability of legacy solutions.
We're also benefiting from the investments we've made over the years to improve our single security analytics factor models and performance models.
In ESG and climate, we're developing physical risk climate scores for U S municipal bonds.
We're also building new applications for our climate value at risk tool, including for sovereign bonds.
And index, we have seen our clients continue to attract assets and fixed income Etfs linked to MSCI and Bloomberg Barclays MSCI indexes.
And those Etfs reached more than $20 billion at the end of the first quarter of 2021 growing more than 200% year over year.
As you can see our strategy and fixed income is to differentiate ourselves by providing high quality products that play to our specific areas of strengths.
Our ability to integrate offerings across the MSCI franchise also continues to be and important differentiating factor and driver for clients to turn to MSCI for fixed income solutions.
Yes.
Across asset classes products and data, we continue to prioritize and open architecture approach to enhance the client experience and flexibility across MSCI.
Recently, we integrated Msci's ESG research into our hedge platform such that we can now provide ESG and climate metrics calculated on position level holdings, allowing hedge funds to support asset owner net zero goals.
We're also further enhancing climate data integration capabilities, and our risk management platform with it and analytics.
Given the strong momentum with which we've begun this year, we have accelerated the pace of our investments in key growth areas, such as ESG and climate fixed income and private markets to enhance our data research technology and client coverage has always we will make these investments and the con.
Text of our rigorous triple Crown framework.
Let me now turn the call over to Andy He will speak more to our outlook as part of his review of our guidance as well as further discuss our recent financial performance over to you Andy.
Thanks, Baer and hi, everyone.
It's Henry and Baer noted, we are encouraged by the favorable economic and market backdrop.
And we are seeing a fairly healthy client environment.
We're excited by the strong start to the year and the momentum we have developed across the business and.
And index, we recorded subscription run rate growth of nearly 11% now market and the 29th consecutive quarter of double digit growth.
And as Baer noted asset based fee run rate surpassed $500 million.
And analytics, we saw a nice improvement and a retention rate to a record level underscoring the leading and mission critical nature of our solutions.
Furthermore, analytics continues to be a key enabler of our integrated franchise, and helping build and distribute products and index ESG and climate and private assets ranging from calculation tools commodity and engines and flexible content delivery.
This was the first quarter, we presented ESG and climate and all other private assets and a separate reportable segments.
Yes, Jay and climate experienced further acceleration and growth growing 38% and revenue and 42% and run rate.
Run rate and all other private assets, which currently consist of our real estate business grew 15% and we're seeing strong traction with our revamped enterprise analytics offering and Europe.
We showed operating leverage across all segments during the quarter.
And index, and ESG and climate revenue growth outpaced investment spending and and analytics and real estate, we had relatively flat expenses benefiting from continued savings and lower travel and entertainment expenses.
Within our asset based fee revenue, we saw solid performance across all components with 27% growth year over year fueled by exceptional growth and Etfs linked to our indexes.
Assets under management and Etfs linked to our index reached.
We reached a record level of more than 1.2 trillion at quarter end and a further record up approximately 1.26 trillion as of last Thursday.
The exceptional growth and AUM during the quarter was driven by cash inflows of nearly $62 billion into equity Etfs linked to MSCI indexes, representing 23% of all cash inflows into equity Etfs with continued strength in both developed markets outside the U S and emerging market exposures were recaptured more than 30%.
And and 50% of all inflows during the quarter respectively.
On a product level Etfs linked to MSCI ESG and climate equity index has experienced cash inflows of nearly $25 billion during the quarter, representing 70% market share of all global ESG and climate equity ETF flows.
We were pleased to see the broader adoption of FX factor objectives with $10 billion of inflows into value and momentum factor Etfs linked to our indexes, which more than offset the flows we saw out of minimum volatility products.
Our strong commercial and top line success during the quarter translated into strong financial results.
Our 30% adjusted earnings per share growth year over year was primarily driven by the significant revenue growth with additional benefits from operating leverage and share repurchases at attractive prices.
Turning to our balance sheet, we ended the quarter with a cash balance of approximately $1 $75 billion. After issuing $500 million of notes due 2030 at a coupon of three and five 8%.
In mid April we used the offering proceeds along with cash on hand to redeem all $500 million over 2026 notes that had a coupon of four and three quarters per cent.
Pro forma for the redemption, we had about $1 $2 billion of cash and a total debt to adjusted EBITDA leverage ratio of three three times within our targeted range of three point O to three five times.
With our leverage and the middle of our targeted range I want to highlight that we continue to monitor the markets and may raise additional debt, if we see an attractive opportunity.
We continue to be highly confident and our capital position and our capital allocation priorities have not changed.
We remain focused on reinvesting in the business as a first priority.
Dividends growing with adjusted EPS and truly opportunistic.
<unk> and P&A and share repurchases with a strong focus on maximizing returns to shareholders.
This quarter, we returned more than $200 million to shareholders through dividends as well as share repurchases at an average price per share of $407 70.
I'll now turn to our guidance as we mentioned last quarter and net Investor day, our pace of investment may flex up or down based on the trajectory of our asset based fees.
More specifically, we highlighted that our initial expense guidance was based on the assumption of relatively flat market levels for the year.
The strong trajectory year to date with AUM up nearly 15% as of last Thursday, together with a favorable outlook gives us confidence to activate our upturn playbook.
We have therefore increased our expense guidance range, reflecting our intent to continue to invest and triple crown investments to support future growth.
As you know continued investment and triple Crown areas remains a top priority for us.
At the same time, we remain committed to positive operating leverage and modest margin expansion.
We also reduced our tax rate guidance, taking into account the low rate and the first quarter and large part driven by a windfall benefit from the vesting of stock based compensation as well as our current view on a number of discrete items.
We increased our free cash flow guidance, primarily to reflect our strong asset based fees and collections and the first quarter.
In summary, the overall operating environment with many parts of the investment industry is healthier than it has been in recent quarters and.
And MSCI remains uniquely positioned to help investors across their most mission critical needs.
The first quarter was very strong very strong start to 2021 for MSCI.
And the environment is likely to remain somewhat volatile. We believe we are well positioned for the longer term with our attractive all weather business model client centric approach and laser focus on establishing and solidify and standards for the investment industry.
With that operator, please open the line for questions.
If you'd like to ask a question. Please press Star then one.
And for your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Manav Patnaik with Barclays. Your line is open.
Henry I was hoping you know just on your cash.
And that's on the kinetic.
And I think priority.
Can you just help size and perhaps how big that is for you guys and how we should think about.
The potential there really.
It's fairly large and might have.
And when we sit back and look at the great business that.
We have built.
And.
And in market cap indices for equities.
And then we'll look at what we can bill with non market cap indexes, ranging from you know ESG and climate and factors and on.
On commodity and the combination of all of that and.
And equities and we translate all of that to fixed income and eventually translate all of that to equity and fixed income to weather and balance and this is the opportunity is massive.
And if you work to think about the ultimate goal is every investor has a portfolio on every portfolio Nathan index of some sort. So we believe that the opportunity per market cap indices should be much bigger than for what we have built and there, particularly on it for non market company and this issue will be much bigger than the on.
Too many for market cap and it says that we've created.
Okay got it that's helpful and.
And then just on capital allocation and it sounds like obviously triple Crown and investments.
One.
The partnerships, obviously continue to be a focus for you guys. I was just curious like in terms of just outright and they need like is that.
How much of the pipeline on priority is debt even for MSCI at the moment.
Okay.
So we continue to be extremely focused on organic investment opportunities we have.
You know a very wide deeper on higher range of investment opportunities that we have ever seen and honestly I think the debt.
The net set of opportunities and all aspects of what we do are accelerating from climate with G to non market cap and that the fixed income to what we can do with more technology to the data, especially in ESG and climate and.
Et cetera, so very very focused on organic investment and accelerator of the organic investment is clearly the partnerships we cannot do it all together. So we will look for partnership with people that have data models that have technology that have distribution et cetera and.
And some of those partnerships may involve some you know.
And then on our part and their capital structure and a lot.
And that hasn't traditionally been the case, but we may we're open to that.
Now we'll review the overall M&A landscape.
Always and always a.
Our fiduciary duty to do that both small and large companies.
And obviously, we look at it we analyze it but we continue to remain very focused on our <unk>.
Do a building one MSCI with a with organic investments on selected bolt on acquisitions.
Alright, Thank you very much.
Our next question comes from Alex Kramm with UBS. Your line is open.
I think you may have addressed some of this already but the strengths and ESG and climate sales can you flesh this out a little bit more you, obviously mentioned some of the regulatory changes and Europe and it seems like those have benefited but can you maybe isolate those was that a very big contributor or do you think that's sustainable for the near term is.
I guess more people have to get ready to comply or or is it really just more of the same when it comes to ESG sales. So just just a little bit more color would be helpful.
Sure Alex So look.
I think that in terms of ESG it is and acceleration of the debt everything we've discussed previously on these calls.
And what was really striking as we had on asset owners survey and the last quarter.
And.
It's actually and the North America, and the U S and Canada that ESG and climate are.
And more the number one concern of asset owners, so that is for sure and important.
I would say change or acceleration.
In addition to the things you mentioned, the regulatory context, and Europe et cetera, and I think the other thing Thats clearly happening is that the weight of climate, increasing in the ESG and climate mix.
We've had an extraordinary amount of interaction with clients related to climate adjusted portfolios transition risk one five degree alignment et cetera. So the ESG trend is strong and is continuous and the conversations.
And the client interest related to climate are are going up.
Even more dramatically in tandem.
Alright, great and and then secondarily also coming back to the thematic.
Points that you made this this quarter I guess one of the things I'm curious about is on the market cap weighted indices, you've done a great job, obviously, establishing network effect and that's why you have great economics. They are and you know and some of those areas on thematic like factor and ESG. It seems like you're establishing that network effect and its very institutional.
But and some of those new areas like I don't know a high tech and and pharma that you talked about it seems to me a little bit more like retail is and maybe I'm, taking the wrong approach here, but I just wonder how easy it is to really establish network effect and actually extract good pricing or if that kind of stuff gets competed away as they may be.
Like 25 different pharma indices and 30, it is taken to seasoned nobody really cares what they do so I guess.
Just talk to that a little bit more of like why you think you would have a special sauce and those areas. Thanks.
Yeah, No. That's a good question, Alex because that we ask ourselves that same question over and over again and the first thing to note.
Is that.
There has been significant institutional investor interest in these areas.
And the way that I normally would explain that is that there are.
And the compare to maybe 10 20 years ago or so there are very large structural changes going on.
And the global economy, and and the global investment and the universe that are not totally reflective in market cap and that's it for example, so the traditional way that institutional investor and Beth will be the benchmark to our market cap index and MSCI for example, and their equity portfolios, but those those new areas.
Clean energy and biotech on more high Tech and all of that are not yet reflected in the asset allocation of those indices.
They are on the come so what we are seeing and there's a lot of those institutional investors are looking to put a segregated amount on their assets into those fees.
Teens and those areas in orbit in order to sort of anticipate what is going to come and the future. So so a lot of a lot of what we're doing and they're all in these areas is largely for institutional investors not necessarily for for retail investors, hopefully, we'll get that as well, but that's that's the direction of.
Travel and.
And therefore, we believe that weekend and built a large network effect.
It relates to that because it is similar to ESG and climate and a lot of investors are are taken parts of their portfolio of institutional investors are taking part of their portfolio and allocating to ESG bias and all.
Our investment products with our indices or climate biased portfolios and so on the network effect associated with that so we are we think we can continue to build that this powerful franchise across the board now the other part of the ecosystem is how do we built benchmark for active.
And this is for passive and then the construction and also of.
And the development of derivative products with a structured products or whether it is.
Over the counter and all the options on swaps and listed options and futures with the dialogue that we're having with our partners and the broker dealer community and the investment banking community and the exchange Camille and that it would respect to ESG and climate and thematic is off the chart its always been and the path.
Market cap weighted indexes the button and majority of the discussion today is about the biotic and this is and it's about ESG and climate and Mrs.
Yes.
Alright very helpful. Thank you.
Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thank you.
And this isn't too much of a repeat of a prior question, but Henry you mentioned the with climate. We're looking at a paradigm shift until maybe you can just expand on how you see this sort of playing out. So is this a significant bump and the next couple of years as per.
People integrate climate and ESG into there.
And on investing or is this something that over time, you can keep building and new solutions and and you know what what you do best you know like just trying to understand how sustainable. This is or if this is just a massive like couple of year growth spurt.
Well all it.
It is.
Fairly front loaded.
Uh huh.
And but it's not drone loaded and then theatres out or slows down and we're gonna be talking about this for the next 10 20 years and a big way.
Point and one on and point to is that it cuts across everything we do from indices to analytics, where re positioning a lot of one on analytics for climate.
And our impact on climate risk and the portfolio's climate reporting on all of that.
And clearly affects the private asset classes, we talked about our real estate and how do we decarbonize.
How do we how do we look at climate change and the context.
Appropriate this and coastal cities and all of that.
And of course, and the ESG and climate segment as well so it cuts across everything that we do and this is if you were to think of what is the number one.
And our dress.
Opportunity or MSCI and on the next few years and going on for a decade or two he will be climate.
And therefore, we want to position MSCI as the leading provider or a leading provider of climate solutions to the whole global investment industry.
As a whole and we also have an opportunity to expand significantly into the east where a market, which has not been traditionally a place where we have been with corporate and other forms of issuers to help them and this incredible conversation that will take place. So while this is a massive opportunity for us and it's not like.
<unk> data is not like back and as it is now and.
And youre seeing the dialogue and that is going on you're seeing the momentum and our sales from obviously, a very small base, but it's going to be a massive opportunity for us and is now.
That's great and maybe Andy this might be for you just looking at the guide for a second your range free cash flow by about 5% at the midpoint for the full year I don't know what your <unk> expectation was but I'm guessing that <unk> came in better.
Just is the higher guide or a reflection of the beat like why wouldn't that trends that you saw.
And do really well and <unk> continue for the rest of the year.
Yeah Yeah.
Yeah. Thanks, Toni so maybe I can spend a second on Q1 and answer your question about the strong performance and then I can extrapolate to the full year.
As you alluded to we did have very strong cash flow performance and in the first quarter.
And the story was really around collections for us.
On two fronts, one business growth with stronger so very strong growth across the business, but to also a very strong collection performance for us.
The first quarter also we did benefit from some shifts and interest payments.
Which.
Was affected by the recent financings that we've done.
But those will normalize throughout the full year the biggest impact for the full year.
To your point is that the picked up business growth I think the collections activity will normalized quarter to quarter, but the bigger impact is really just the.
The stronger business growth, which we tried to reflect and the guide.
Thank you.
Our next question comes from Craig Huber with Huber Research Partners. Your line is open.
Thank you My first question can you Henry or can you maybe touch on this your futures and options here.
And just give us an update there if you would please in terms of going forward, what we should expect there or are there new.
Additionally, exchanges for example, you look and take it get involved with there.
Game play here to get this theory and moved because one of your major competitors, obviously gets a lot more revenue and north of 15% of the revenue from this area and you guys just much smaller, but it's a heck of an opportunity for you. So I view it. Thank you.
Yeah. So let me give you the best and sensor on the Mandy can provide some commentary on the financials.
This is an area of significant expansion and old MSCI.
With our exchange partners around the world.
And so we have noted before most of the market for listed options on futures and the World is it's a single country single currency index futures on and some cases when there is multi country is single currency.
Futures and options so.
This is an area, where I'm for innovation and Brian for expansion and creativity, which is what we're going with our exchange partners.
And in all regions of the World and we're now also increasingly doing.
Certain partnerships and in emerging markets.
We announced obviously our partnership with the Colombia and exchange for example, we've had a partnership with the Saudi and change and delight. So up. So that's also and that will continue on up and Inc.
Well, we're now talking to a lot of our exchange partners as I said and the prior my prior comment or how do we go from market cap weighted.
Weighted indices to ESG index futures and options too.
And Mike we recently.
We recently launched our China Tech Index for example that we're in the process of licensing to on exchange for listed futures and options.
And that will be and example of the expansion of the thematic into derivatives and the only thing is that all of that is also related to the activity, we have with banks and broker dealers and and their activities and in our structured products and.
And swaps and and over the counter options on all of that which that's also expanding significantly we are becoming a large provider of basket trading basket building indices for broker dealers and banks for them to then do their up there over the counter and a structured products so as a whole.
<unk> ecosystem that we're building and the on the financials.
Yeah, So Craig as we've talked about in the past and as Henry just underscore and continue to be very bullish about the opportunity for us longer term and both listed and over the counter derivatives.
In the current quarter there there was some points to flag here.
Importantly, the comp it's a tough comp so when you look at the first quarter of last year that was the period of highest volatility and as a result highest volume and and derivative contracts traded and so when you just do that comparison, there was a drop in year over year volumes and.
Given that we price.
And get paid based on the contract volume that will impact that the revenues that we receive.
It is it is worth noting.
The run rate and pick up which you probably noticed that was as a result of some of the repricing of agreements with our exchange partners. It's worth noting this is the last quarter, where you will see that benefit so that was baked in as of Q2 of last year.
Going forward, you won't see that pricing benefit and our run rate and will be much more tied to the contract volumes.
I would highlight that specifically, what one area, where youre seeing contract volumes pick up but it's still behind is the.
The transition from SPX, the Hong Kong exchanges.
And we're seeing that the franchise and complex on Honky, Hong Kong exchange and start to build up but relative to where the volumes were on SPX, it's a little bit lighter today and so when you start to do historical comparisons volumes will look a bit lower but over the long term. We continue to be very bullish in this area and that will translate not only through to the <unk>.
So based fee component, but also helping to drive some of the index subscription revenue as well, which is where we see the over the counter piece.
And then also guys if I could just ask you institutional passive products and a direct index that can maybe size that force as a percent of your.
Your revenue saw how big of an opportunity for you that right now and is the game plan and in Europe, how is that evolving versus the U S. Thank you.
Yeah, I mean, non ETF passive as we call it which is it's really comprised of a few areas.
When we call institutional passive Theres also index based mutual funds, which are more retail oriented.
Generally and then increasingly there are areas like direct indexing.
Which will show up or could show up and that revenue stream. It's an area that's been <unk>.
Strong growth and extremely resilient.
Which you can see by the growth rate, which we've seen actually double digits.
Growth in each of the last six quarters within the non ETF passive line despite the market volatility.
Relative to ETF, we actually see fewer redemptions and outflows and periods of volatility and as we've mentioned in the past the fees have been quite resilient and this areas, we're seeing tremendous growth and non market cap.
Mandates and and non market cap non ETF launches and products, there where the fees tend to be a little bit more resilient or in certain areas actually we get we get higher fees.
Just to dimension. It for you there's now about $2 seven trillion dollars of assets under management and non ETF index funds linked to our indexes.
And just you can tell by the run rate continues to be a strong growth area for us and it's a big focus for us and increasing focus for us and we see enormous opportunities across all regions and and one of the big drivers here really is the transition to ESG and climate.
And so we're seeing tremendous growth and the non ETF.
AUM bucket and ESG and climate indexes. So overall area, we're focused on and and should continue to grow for us.
Great. Thank you.
Our next question comes from Owen Lau with Oppenheimer. Your line is open.
Thank you. Thank you for taking my question. So MSCI continues to gain traction in corporate and when you mentioned some numbers on the prepared remark could you. Please talk about what specific products driving the growth there and also the outlook. Thank you.
Yes, so on a lot of.
A lot on what we're doing there so far is.
Is selling the the underlying.
Baytown and ratings.
Which is and all are organized alone in the storylines sector lines.
Two up to the corporate so if you're on a corporation and you want to know what your rating is and you want to compare that rating and the underlying sort of the underlying information and the reports to other participants in your sector and your industry and if you wanted to cross growth sector. All comparisons for example.
And then than that.
That's why you're getting so on so that's the corporate themselves now we also as I noted sell the information on the on the ratings to the corporate advisors and all.
That could be accounting firms could be investment banks could be.
It could be a strategy consulting firms.
And I could be specialized advisers that are trying to help those.
Entities figure out how to deal with all the ESG disclosure or ESG.
Data capabilities on it.
And increasingly obviously as time goes by there are they're a net zero pledge is.
And that they need to make et cetera. So so this is a very fertile ground for us as you know just a knock we IMI their 9000 companies.
And therefore.
Calling on or having 50 out of the 9000 is a small very small penetration not increasingly we're also going to be but we're not there yet, but we're also going to begin to help many of these corporate entities.
I think through with respect to climate what their debt.
There are based on projections should be what their position with respect to emissions should be with debt.
Data models and analytics that was what's up.
And bear was referring to on that platform that we're building on top of Microsoft. So again, another area of FERC tile growth for us.
That's very helpful and then.
For the adjusted EBITDA expense guidance, Sandy you waste or guidance by around $15 million to $20 million could you. Please talk about how much of debt what's driven by.
Top line growth and how much of debt a script and by the opening of the economy like Hyatt T N E and maybe healthcare cost. Thank you.
Yeah, well the two.
Two are related.
It was it was definitely driven by the topline growth and and most notably and acceleration in the.
ETF growth rate and the AUM and Etfs linked to our index as well et cetera is acceleration and key parts of our business like.
Climate and ESG as you can see by the tremendous success that we're having there.
Just as a reminder, when we set our guidance at the beginning of the year. We said that was based on the assumption of relatively flat market levels clearly markets have improved thus far this year and we feel.
Pretty bullish about the outlook for the balance of the year and so those two inputs feed into our calculus in terms of how much we want to go to our upturn playbook.
And so the increase in guidance is really reflecting the momentum, we're seeing and our business, but also the more bullish outlook that we see.
And the economy and the markets and our clients more broadly and so we are turning to our upturn playbook to invest and and the triple Crown areas and we've talked about and have passed and the areas that are driving our growth. So it's in areas like non.
Non market cap weighted indexes and areas like climate and ESG as well as the data and technology that supports both of them.
And areas like research and and go to market that are going to help continue to fuel. These growth engines for the company and so we're really as we've said and said we would do and as we've done in the past.
Accelerating our investments when we see the opportunity to do it and we think this environment and lends itself to it.
Got it that's it for me thank you.
And next question comes from Simon clinch with Atlantic Equities. Your line is open.
Hi, everyone. Thanks for taking my question I was wondering if I could follow on from the the opportunity on the corporate customers side.
Kind of curious as to.
And how to think about how those customers are coming.
Entering this business with you.
In terms of size. So when you take on a new corporate customers and they keep coming in and is the ultimate opportunity for that individual customer to spend multiples of what they spent a day is that very much present.
And the real opportunity for you as well as just growing the number of customers and all of a follow on to that as well.
Yes, so the.
Clearly since we are this is a new client segment for US we're trying to start with a very direct and.
And value added on a narrow set of offerings, which is the.
And is the ESG ratings.
And all the all the information on the data that goes with the ratings of that particular corporate on the comparison of that ratings to the warlords and theirs and their industry and on.
And our growth industries.
And we have established a specialized sales force and all.
A lot of a handful of people around the world to do that and as we build momentum and more success, we're going to reinvest.
A lot of the incremental revenues into expanding the sales force on the client coverage.
On that.
On top of that there are significant opportunities to expand on and have multiples large multiples on the revenue that we're getting as we as we go into other products and services that we can provide those companies and such.
And what I was talking about and climate.
But we're not there yet we're trying to make sure. We go on a systematic approach to this.
And one step at a time and a new and a new area that we are that we are covering but I would anticipate that they will be at fairly and rapid expansion of on.
And our products up there are our sales force.
On our on our run rate and our sales on a run rate and obviously more to report on that and coming quarters.
That's great and <unk>.
Just to follow on with that I mean, when you talk about.
The advisory entities that Shaw setting too as well and the distribution problems do you are you viewing those as as.
Effectively yes.
Our opportunities to expand much faster without.
Given the limitations of your existing sales force or do you view them as completely new separate customer sets to those corporate customers to direct corporate customers that you're targeting as well.
No we clearly view those as separate right. So I think when you refer to the advisory firms. That's in the wealth segment overwhelmingly so thats a discrete from the corporate segment and.
And it's a it's really are we we believe it's a pretty large opportunity for us if that's what you meant by the.
Sorry, yes.
Alright.
Yeah that makes sense.
Let me just clarify and let me just clarify a few on mine.
B I.
I think what you were referring to or just the comment that I made is there our advisers to companies.
So just the accounting firms such as the investment bank suggests and all of that debt or their advisers to the CEO to the CFO and the pressure on the board of directors of those companies.
And prime to.
I'm trying to understand.
Keep in the landscape the rating their disclosures.
And what data they need to provide et cetera et cetera. So what we view the corporate advisory entity, it do category and the category.
And then thing and our sales force into the corporate and secondly.
And for them to provide advice with this with the data and the tools to the companies that were not in a position to be advice and them as to what to do two and has the ratings or change or a hunter and their disclosures and things like that so that that's the yard and we have different type of advisor networks.
And like financial advisers and investment advisors on whatever and the corporate Advisory segment, we're talking about the advisor to the company and is in both categories, where our main thing.
What we're doing and using them as a channel and therefore, hopefully and relying on them to be providing advice to the company as to what to do with the data on the ratings right.
And that's true that's really useful that's exactly what else.
Okay.
As a reminder to ask a question. Please press Star then one.
Our next question comes from Keith and there's some with Northcoast. Your line is open.
Good morning, guys, Hey, Andrew just trying to unpack the upturn playbook, a little bit more on trying to understand.
And a $25 million and additional expenses.
As you think about the rest of the year, how does that compare to I guess, what your original plan was in terms of I guess, how much percentage growth and then what is also taking consideration I guess are returned to a more normalized work environment if any.
Yeah, so it it.
Just just to dimension that I said before and we've mentioned the original guidance was based on the assumption of relatively flat market levels.
<unk>.
AUM is up nearly 15% on the year non ETF passive is up strongly and we expect to continue to rally strongly and so just those two line items alone are dragging some pick up and our revenue above kind of that baseline assumption when we set the guidance back at the beginning of the year and then we're seeing strong growth and <unk>.
Areas like ESG and climate.
And so when you look at the growth the increase and expense guidance, the midpoint going up to about $20 million to your point, that's an increase and expense growth rate of two 5%, which is relatively modest and the grand scheme of the impact on revenue that the pickup and ABF has.
For us and so we continue to be able to drive strong positive operating leverage, but really continue to drive investment and in these key growth engines for the firm and continue to accelerate these triple crown and opportunities.
To your second question about the return.
Do you kind of a pre COVID-19 world.
I would highlight and the first quarter there was.
A $3 million benefit.
From a COVID-19.
COVID-19 related expense benefits.
Obviously that starts to go away and future quarters, where a year ago, we were getting those benefits as well, but we do have some.
<unk> and about a return to normalization, but it's not a full return.
So just to give you some numbers to dimension that.
Gotcha, and then come back to that 20 million increase and the upturn playbook.
If you look at your operating expenses how much of your operating expenses are currently invested in future growth as the data centers and new solutions new products.
Yeah, I brought it and it too you are and and we talked about this at Investor day.
Two our investment portfolio or change the business expenses expenses, which is about $150 million of expenditures.
And so that's against our total expense based plus Capex and we define our expenditure pool, so of that total pool and call. It about 150 million is and these kind of change the business Triple Crown areas and these are the areas that we're going to really be accelerating.
Okay, great. Thank you.
And would that also is that the.
The expense growth in our and our business as usual and.
To maintain the business.
It's not very high relatively muted and.
Therefore, our game plan and the context of continuing to have modest leverage or operating leverage expansion on margin expansion right.
Is due to increasingly squeezed the operating expenses.
Of the of the running the business in order to transfer more and more of a of investment of money into the investment plan. So and so therefore, the investment numbers are growing clearly much more rapidly than the overall.
The overall expenses and and running the system business.
And all of you and all of these but I'd just like to clarify one more time is that sometimes we talk about expenses.
And I just want to be there pointed that the large majority of this incremental EBITDA expenses, our investments in triple Crown.
Investment types and as you know the Triple Crown is and in areas of high growth like index, and ESG and climate with high rates of return and fast paybacks and hopefully in areas that have high multiples and valuation.
Great. Thank you.
Our next question comes from Samir culture with Deutsche Bank. Your line is open.
Hi, Thanks for taking my question.
And.
And I wanted to get some color on was the investment solutions and service initiative that you announced on the on the Analyst Day, you and I was there for services that we're going to be launched in 2021.
Just wondering if the launch was on track.
That's one and number two what.
The pricing be any different.
And customers use your solutions as a service horses regular contracts that they have right now.
Would there be any difference and.
And and pricing and margins.
So to alert to some extent some of them.
And of that.
Is that with labeling on what we currently do.
And.
Solutions and service data management as a service data as a service.
And and and in some cases, it is a new Bravo and and new service. So for example, ESG data as a service.
It is definitely a major expansion of what we're trying to do during the.
During the lead up to Investor day.
As you know we had a number of discussions with shareholders and analysts as to what they would like us to consider and work on and the number one.
Sure It was.
For us to expose our ESG and climate data way beyond the ratings broke on the screen and put all looks on the index products right. So so that will be and expansion another area of expansion and data management as a service.
Two are two many of our clients, including our analytics clients and wage job data management and their internal workflows one on their biggest pain points. We're very good at that and you know so.
So we are expanding that capability.
To do that not only.
And I support to the selling of our products and services like analytics and on risk.
Performance analytics, but also on a stand alone basis, so that that would be an expansion and so when you think about that pathology.
What is and Relabeling oversee the day.
The price it will be about about the same as before and what is the new service, we will definitely be looking at a new pricing.
That all of this falls into the category of cells and that we had talked about before which is what we call <unk>.
Colloquially at MSCI and rented the kitchen right, we have a great teacher and that creates great food great experience, we want to expose that kitchen to people as well right.
Got it thank you.
Our next question comes from Greg Simpson with BNP Paribas. Your line is open.
Hi, Thanks for taking my question is it possible to find out if you have any updates on the partnership with Jay I think you've said you've got quite a few products and solutions you've been working on so I'm wondering if you have any more color on the timeline around any launches and it seems the industry trend towards private market seems to really be intensifying.
Right now thank you.
Sure. So I think the same thing we've been focusing on and it's just working with Burgess on.
Running running and optimizing their business day to day, we Theres, a new president and Burgess as we've mentioned before Jay Mcnamara he used to be at MSCI. So a lot of our emphasis is just is it working with them as a partner to two to grow the business every day every week. Additionally, there.
This quarter, we've been doing a lot of work on our on our private market strategy.
And that that has a variety of different avenues and it related to both working together on their data platform.
Working on plans for ESG and climate for private companies and.
And and and our future path and in areas, such as real estate, which span across both asset that we have at MSCI and those and barges. So there's a lot of work coming on there and we'll likely have more products coming out during the second half of the year that come out of the work.
What we're doing at present.
Thank you and then just quickly on the on the same wide ESG and climate run rate, which I think is now $254 million.
Most of those have some color on how this splits by geography and.
And if it's possible.
Okay.
Yeah.
Yeah.
I'm going to we'll have to follow up on that question I'm not going to provide the exact breakdown right now bye.
And by the two components.
As you would imagine on the index side. There is a heavy component that is asset based fee related and a lot of that tends to the U S listed products and very attractively a lot of that is.
Flows into U S exposure funds, which as you know is a place where we historically haven't had a strong presence, but it continues to be a driver of growth capturing market share on flows into U S exposure products overall, I'd say that the run rate is pretty well spread across geographies with a heavy emphasis on EMEA and.
Americas'.
But they're all growing at a nice clip and as Barry mentioned in his prepared remarks, the EMEA run rate on the climate and research side.
It has been growing at an incredible clip.
Alright, thank you.
Our next question comes from Patrick O'shaughnessy with Raymond James Your line is open.
Hi, Good afternoon, just one question from me is there an opportunity for MSCI to develop crypto indices and other crypto solutions and how might the massive energy consumption on the crypto economy impact your decision, making on that front.
Yeah, So we have been.
It.
And studying that deeply investigating all of that and and.
As you know well at the top of the house and the top of the.
The thing is and there are two types of currency there is the central bank.
And digital currencies.
And with China, obviously is leading the pack there and we're evaluating what impact that.
That would be on the pricing on financial assets. For example, and then there is the crypto currency, which is a little more and more like a goal type of investing so so we're definitely looking into that to see what impact we have and comp.
Come up yet with the right products on the right and it says we're analyzing that.
Importantly, and as the second part, yes, no crypto currencies have on role to play and climate change because of the energy consumption. There so and so that's another area that we're looking into is how do we combine the topic of the currency with the topic of climate change so more to come on that and the future.
Thank you.
There are no further questions I'd like to turn the call back over to Henry Fernandez for closing remarks.
Well, thank you everyone.
And for listening as you can see we have enormous opportunities in front of US we are very relatively bullish on the operating environment.
And therefore, we'll step up our pace of investing and continue to do that at the same time is.
Having some modest margin expansion. So thank you very much on and we'll look forward to your question and your comments also.
On to Sally and on.
And the team.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
And then.
Yes.
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