Q2 2021 MSCI Inc Earnings Call
Second quarter 2.
2021 earnings conference call at this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session, where we will limit participants to 1 question and 1 follow up we 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 per day and welcome to the MSCI second quarter 2021 earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the second quarter 2021.
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.
What 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 additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer in our most recent form.
Okay.
And in our other SEC filings.
During today's call. In addition to results presented on the basis of U S. GAAP.
We also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates adjusted EBITDA adjusted EBITDA expenses.
<unk> 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.
Youll find a reconciliation to the equivalent GAAP measures in the earnings materials.
And an explanation.
It's why we deem this information to be meaningful as well as how management uses these 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.
All subject to a variety of adjustments and exclusions that we detailed in our SEC filings.
As a result of those adjustments and exclusion the actual amount of recurring revenues, we will realize over the following 12 months will differ from run rate.
We therefore caution you not to place undue reliance on run rate to.
On state or forecast recurring revenues.
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.
S Baer Pettit, our president and COO 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.
Hello, everyone I'm Jay.
Thank you for joining us today.
MSCI delivered exceptional results in the second quarter.
This outcome was the direct result of our vision to be a change agent for the investment industry.
Our Miss.
So help investors build better portfolios for a better world.
On the Triple Crown investments, we are making to support this effort.
For the quarter, we achieved total revenue growth of 22%.
Adjusted EBITDA growth of 25 per cent.
On an adjusted EPS growth of 38%.
Last month, we held our annual strategy session with our board of directors.
Our board on our management team are a great doubly excited about the many opportunities we have to significantly accelerate.
Gross.
Including in solutions like investment thesis in this is <unk>.
Fixed income.
Robert assets.
And of course ESG on now even more so climate.
We are making great progress with the new word client.
Our radar that we have previously highlighted to you.
Including wealth managers.
<unk> companies on corporates.
And with respect to capabilities, we continue to transform on it makes barron, our technology and data infrastructure to align with our clients.
<unk> seats.
Let me now highlight 1 area within each of solutions clients segments on capabilities.
Within solutions MSCI intends to lease all participants in the investment ecosystem.
In addressing climate.
The change on car body 10 city in their investment portfolios on in their business operations.
We believe that addressing the impact of climate change will require the largest record structure of the global economy.
Since the industrial Revolution from 200.
<unk>.
Institutional investors will need to reallocate their enormous pools of capital to Decarbonize and companies that are on track to keep the world on there a 1.5 degree Celsius rise.
And away from those companies that are moving too slowly.
Lee or not acting at all.
In our stores on our stakeholders are all really exciting influence on company boards and management teams to transform their business models to reduce their carbon emissions.
Assets will be massively repriced.
And we believe.
Your zero Revolution will produce spectacular winters.
Some losers.
Moreover, this robo Lucia will touch every company in the world on.
For that matter every part of our societies around the world.
We believe this transformation will occur.
We're much sooner than companies and investors may see common.
On a number of market participants need to act faster.
More decisively than they may appreciate.
As you can imagine.
This presents the MSCI with enormous opportunities.
The net we want to be the premier provider of all tools evolve and portfolio decisions related to climate.
In the near term, we look ahead to the Cop 26 conference to be held in Glasgow later this year.
And we.
<unk> SEC policymakers regulators and market participants on various other constituents to bush for more extensive climate related disclosures.
MSCI, we're Blake, it's Bart and will join with the Glasgow Financial Alliance for net zero in.
We expand icing on net zero financial service providers Alliance.
This new alliance will galvanize the World index on data providers.
Credit rating agencies on that.
Accounting firms to lay the tracks that can take investors and companies through a net zero world.
We are fast and reaching our suite of climate products on aggressively investing to provide the market with a climate models on reporting capabilities that can contribute to or even drive developing broader standards.
We're also pursuing a bolt on.
The asset class coverage strategy within climate, which is beyond public securities.
<unk> strategy is strategy will include real estate private equity on per.
Private debt.
Within client segments, how will the spotlight our ongoing success with corporate.
World, where we're providing public and private issuers of capital on their corporate advisors with solutions for D. C F. The reporting on ESG and climate benchmarking.
Our Greenfield success in this client segment and in others, such as wealth managers.
Insurance companies directly reflects the investments we have made not only in our brother offerings, but also in our client coverage organization.
Our value proposition also remains very strong with asset managers and asset owners.
We're just still.
<unk> represents the largest part of our client base.
We are honored to have been selected by the California State teachers retirement system to provide their policy benchmark.
<unk> adopted a cost on MSCI all country World.
Investable market index displacing as prior domestic benchmark.
The primary reason was to simplify their benchmark and process by moving away from a weighted calculation of separate U S and non U S exposures.
Using 1 index also simply.
Spies performance attribution on better reflects cows theres goal to target on Manish active risk.
Within capabilities I would like to focus on how data is playing a critical role in our vision of revolutionizing the investment industry.
David is the core building block of investment analysis reporting and all the processes and a competitive advantage for MSCI.
For many years, we have made use of various technologies like artificial intelligence machine learning and natural language processing.
<unk> to harness the power of big data.
More recently, our investments to develop MSCI data explorer and data Lake aimed to address our clients' strong appetite to ingest rich and extensive data in their operations.
<unk>.
Clients want to leverage our data for a variety of use cases, including custom indices.
Was it the reporting factor analysis, among many others.
They also want to easily expose download and manipulate.
Massive volume of underlying data for MSCI, ESG ratings, SSD or metrics on climate models.
Before I turn the call over to bear on Andy I would like to take a few moments to note our current views on the global operating environment.
We continue to be encouraged by the global economic recovery on their way.
Well Mark gets May also late day to day, the underlying trend is a positive 1.
Accordingly, we are aggressively position MSCI to take advantage of its many opportunities.
On this and we will continue to increase our level of investment in the Triple Crown areas, we see for our company.
With that let me pass the floor over to bear bear.
Baird.
Thank you Henry and greetings, everyone, we have quite a number of exciting era.
Or is that I can cover here today, but I will focus my comments on 3 <unk>.
1 our technology strategy and within that our transition from V on.
2 climate, where the market's focus on needs are accelerating and 3 data.
On technology flexibility.
Ability is paramount.
And we are pursuing a modular open platform strategy across MSCI.
As part of our enterprise wide integrated investment solutions, as a service or Ics offerings.
We are moving our analytics products into modular components.
<unk> integrated true AP eyes, and delivered through a consistent client experience.
This allows us to offer clients access to offerings from across MSCI on a common infrastructure.
Given our plans for and progress with this initiative.
As we announced earlier this morning, we are discontinuing our investment and beyond.
Be on was originally conceived to consolidate analytics applications and distribute content in a unified way to our clients.
With the investment industry increase.
Increasingly converging around the use of cloud based technologies for content production distribution and consumption. We will instead over time offer a range of new experiences through the integration of existing and planned I SaaS services.
On climate.
Henry noted we continue to enrich our suite of climate data models and tools.
Our solutions help investors measure their portfolio companies and assets against emissions and temperature alignment goals.
Minimized transition risks and physical.
Risks.
And identify opportunities associated with the decarbonization of their portfolios.
MSCI is climate tools are strongly resonating with clients and we have seen robust uptake of our climate value at risk solutions climate.
<unk> changed metrics and climate indexes.
<unk> run rate with climate offerings, now totals more than $30 million, nearly 2 and a half times year over year.
We also continue to launch new tools and products to address the quickly evolving.
All being landscape.
We recently published a quarterly MSCI net zero tracker.
This tool gauges the level of climate change progress in meeting the 1.5 degree warming target.
It currently covers the existing universe of public companies.
Comprising the MSCI all country World Investable market index.
Coming soon we are.
Introducing an implied temperature rise tool.
Which provides investors with an indication of how companies in their investment portfolios aligned to global temperature.
Temperature targets.
MSCI is also helping address gaps in climate data in private assets.
We have been collaborating with our partner Burgess to school source scope, 1 and scope 2 carbon footprint estimates for private companies.
And see significant all.
Opportunities to serve investors in these markets.
These are all good examples of how MSCI contributes to transparency and standards as investors reallocate capital to lower carbon assets.
Each of these tools as intended.
Spawned 2 the increasing need for high quality dataset that clients can access directly or via various tools and applications that MSCI provides all.
Or through platforms outside of MSCI.
Henry referenced SSD are with you.
Tourist is mandatory ESG disclosure obligations on asset managers and other financial market participants.
MSCI has expanded its toolkit of climate data and reporting capabilities to address clients' S. S. Dr related needs.
Included.
Posing issuer level S FDR metrics for more than 10000 companies and 175 sovereign issuers.
We also provide index level metrics that enable investors to easily report S. FDR indicators for the benchmarks of their financial.
<unk> products.
Yeah.
Given the strong market backdrop, and our financial performance year to day.
We have increased our upturn playbook investments in areas, such as ESG and climate.
Fixed income.
And private markets.
<unk> as well as to enhance our data and technology capabilities.
Our research and our client coverage.
As always we will make these investments in the context of our rigorous triple Crown framework.
Let me now turn the call over to Andrew.
Andy.
Thank you Baer and hi, everyone.
It's Henry and bear have noted the exceptional performance in the quarter highlighted the massive strategic opportunities in front of us and our continued ability to execute.
We had our best quarter ever for net new recurring subscription sales and the best second quarter on record for recurring subscription sales.
On the client coverage footprint investments we've made in targeted subregions are also yielding strong business momentum.
In EMEA, we had our best quarter ever for recurring subscription sales in APAC had its second highest quarter on record for recurring subscription sales.
The operating environment remains constructive and our sales pipeline.
<unk> remains healthy across products and regions.
And we continue to see strong momentum in our key franchises.
Index recorded subscription run rate growth of over 11%, marking the 30th consecutive quarter of double digit growth.
We continue to experience steady index subscription run.
Run rate growth of around 9% within the asset management client segment.
Complemented by outsized growth within the hedge funds broker dealers and wealth managers.
Collectively growing approximately 17%.
In the ESG and climate segment, we witnessed a further acceleration of growth as we continue to broaden.
Adoption and use cases within existing clients, while successfully expanding into new clients with over half of subscription sales in the quarter coming from new clients to ESG and climate.
In all other private assets run rate and revenue growth both benefited from solid new sales growth and FX tailwind and revenue growth.
We also benefited from an elevated level of service deliveries relative to last year.
I would note that a portion of our real estate business recognized as revenue upon delivery of service and typically sees more revenue in the first half versus second half of the year.
Although the timing of the deliveries can shift between quarters, resulting in some swings in year.
<unk> net revenue growth rates.
Turning to asset based fees, where revenue grew 55% year over year.
The strong market rally as well as healthy cash inflows drove record AUM levels with continued strength both in developed markets outside the U S and within U S exposures.
Over year, when a product level Etfs linked to MSCI ESG and climate equity index has experienced cash inflows of nearly $17 billion during the quarter continuing to represent the leading market share of global ESG and climate equity ETF flows.
Turning to our balance sheet, we ended the quarter with a cash balance of approximately.
<unk> will be $1.97 billion after issuing $600 million of notes in may our.
Our strong balance sheet affords us flexibility to support both organic investments in our business and other capital allocation opportunities.
This includes actively pursuing both partnerships and potential acquisitions in key strategic.
Proximal areas.
It also includes shareholder capital return, including dividends, which continue to grow with adjusted EPS.
Yesterday MSCI is board approved a 33% increase to our quarterly dividend to $1.04 per share.
As we go forward I would like to highlight that we continue.
Growth there the markets and may raise additional debt, if we see an attractive opportunity to do so.
Before I turn to guidance all review the impact of the B on write down which was included in amortization of intangible assets. As a reminder, this was a $16 million noncash pre tax charge that has been excluded from adjusted.
Mono P S.
Importantly, it does not impact the opportunities we see for our business, nor our high single digit long term revenue growth target for analytics that we shared with you at our Investor day in February.
Turning to our guidance as we mentioned throughout the first half of this year and at Investor day, our pace of investment.
Adjusted he may flex up and down based on the trajectory of our asset based fees in the business more broadly.
The strong trajectory year to date in equity markets, and ETF AUM exceptional topline growth and ongoing improvement in the macro backdrop give us further confidence to execute on our upturn playbook opportunities and continue to drive growth.
Investment. Additionally, the strong business performance has led to increases in incentive compensation accruals.
We have therefore increased our expense guidance range.
We would note however that we remain committed to driving positive operating leverage and modest margin expansion.
Our increased interest expense guidance range takes into account our made notes.
A $600 million.
We reduced our tax rate guidance taking into account.
The second quarter, and our latest view on a number of discrete items.
And we increased our free cash flow guidance, primarily to reflect our strong asset base fees and collections in the first half of the year as well as lower interest expense, partially offset by higher operating expenses and cash taxes.
In summary, we continue to monitor risks from the pandemic.
Offering but are encouraged by the improving economic backdrop.
We are pleased with the strong quarter, we delivered the investments we continue to make in our growing franchise and the many opportunities. We see ahead of us and with that operator. Please open the line for questions.
To ask a question. Please press Star then 1.
If 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.
Thank you.
My first question is just on the decision to stop you know they'd be on.
Our initiatives.
I guess the high single digit long term growth rate I think I can appreciate that stays the same but I think beyond was supposed to be the difference between that and low double digits. In the past do you think low double digits is now out of the question for the analytics business. Just curious on you know the other moving pieces.
Yeah.
Hi, I'm on a bear here. So look no. We in fact I think the path that we're on now is 1 that is.
Much more likely to lead to stronger results across MSCI as a whole.
And in analytics.
So if you look back in time.
You know before jigger joined us as CTO, we developed applications in a very product specific environment and in a rather siloed way.
From a technology point of view.
So subsequent to his joining and bringing in various new leadership.
We we were basically in a position where we were ready to launch be on.
But in parallel we had created or are in the process of creating.
<unk> a much more industry standard.
<unk> standard a common architecture and infrastructure debt will be used for example in launching our index builder and that will be used for our new ESG manager.
So we're going to use that from an infrastructure for analytics.
It's less idiosyncratic.
It is much more industry standard and it's what much more 1 MSCI.
And we're very confident that in doing so we can create.
Create a great user experience for our clients going.
Forward and that you know the opportunities for analytics will be the same or greater than we had previously assumed.
Yeah.
Okay, and just a quick follow up on on the climate business you talked about I mean, obviously, some pretty good growth and I can understand the focus given all the press out there but do.
Going from the tool set to keep that going on is that there may be partnerships and M&A will play a role as well.
Well look partnerships and M&A certainly play a role on everything we do but our organic investments are the absolutely key thing.
Here, we really believe that we have a lot of the right data.
On infrastructure and talent to make this happen. We as you know we we had made an acquisition in the climate field roughly again 18 months ago I can be correct.
Corrected time flies, but on top of that.
The key thing we want to do is to invest in our people in our models in our data coverage and we believe if we do so we have a very attractive opportunity ahead.
In this category.
All right. Thank you.
Our next question comes from Alex Kramm with UBS. Your line is open.
Hey, good morning, everyone.
Wanted to ask a question that I think I asked maybe last quarter already but definitely have asked on the.
Which is the impact of new regulations have debt.
Having on ESG and climate growth whenever vascular previously.
On a set that new regs like as if they are not having an impact on new sales et cetera, but you know clearly you know you're starting talking about a little bit more so I guess my question.
As you know all regulations, helping.
And if they're not helping yet do you expect that that could drive maybe exploration from these high growth rates in the future of on when we talk to some of your competitors, they're definitely acknowledging that that regulation is a game changer. So maybe maybe you can comment on that day.
Yeah sure.
Hi, Alex So look.
Look maybe we understated it somewhat in the past.
Or maybe it was a point of emphasis but you look you're absolutely right.
And by the way this is changing rapidly right. So I don't know when we last made that statement.
The changing environment and for sure the regulatory demands are driving it.
Increasing amounts of uptake for transparency from corporations were reporting from banks and risk management from banks from from reporting from asset managers. So we.
We definitely think that this is an area that is going to drive a lot of growth for us.
And and it's both.
I'd say, it's it's a it's an exciting opportunity because it brings together both the new.
Information the new models, the new data.
Data that we have in climate, but as you know we have been in the regulatory risk reporting and other reporting for many years. So I think it's a really great opportunity for us to bring together, our traditional risk management capabilities with the new climate.
Emphasis which plays to both of those strengths.
Okay. Thanks for acknowledging it finally, I guess secondarily, just as a quick 1 but you highlighted the <unk> win and you know, maybe that's small or not but like on the 1 hand, you know good that you're replacing some of our some competitors I guess, but.
Is there a network effect of something like this and I don't know how much cultures outsources investments but.
It does somebody like a cal so switching they are.
They are they are I guess primary benchmark now drive incremental sales from maybe some of the asset managers that are trying to.
2.2 to sell to them or or is this kind of like a 1 off and it doesn't really have a network effect, maybe you can flesh it out a little bit.
It definitely has a fairly large.
Net work effect and that's 1 of the reasons why we focus so much energy.
On this benchmark wins as we call them on benchmark displacement on and Theres, a little bit of revenue associated with the with the asset owner when when they do this.
But much more importantly dwarfs is.
It's all the investment products that come out all that by either.
There are.
Active or passive managers, ETS futures and options et cetera. So on the case of cows theres itself.
They are as you know there.
The second largest pension fund in the United States.
Our largest teachers pension fund and the world 11th largest.
Pension fund in the world as well.
And you know they they run about 100 on 75, or so billion dollars I'm, sorry, $150 billion of assets under management in equity out of a total of over 300 billion of assets.
And of that 150.
We were already benchmark internationally on <unk>.
Half of that the other half of about 75 billion is now is now coming to dwell on MSCI benchmark displacing domestic benchmark and a lot of that money will be managed passively.
Bye.
Bye Bye bye bye bye as a manager by index managers, and therefore, you will have a direct.
Effect to all to our revenues in all in assets and asset based fees right.
But this is a custom index right. So I guess its new custom sales coming out of that that was that was my point right.
Yeah, Yeah, obviously.
Revenues from the creation of all of our custom index is there.
But it is the monetization of this as largely as the asset manager level on the asset owner level.
But whether it's on where there's a standard benchmark off the shelf or a cost on benchmark or a symbiotic benchmark or ESG.
The right benchmark the concept that I just described applies across the board.
Okay helpful. Thank you.
Okay.
Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thanks very much on.
Your cash balance is up to.
ESG, a $2 billion and historically, you've been opportunistic with repurchases and I guess, there haven't been too many opportunities to repurchase stocks of that probably led to the debt 33 per cent dividend increase so just help us understand just given the large cash balance.
Just update us on your.
Roughly throw deployment priorities and if you were to look at M&A.
Would it be sort of more tuck in and what type of assets you'd be looking at.
Sure Hey, Toni it's Andy.
I would say no no major change to our approach to capital allocation more broadly.
We continue.
<unk> to pay a regular dividend, which generate a steady return of capital and then we use the balance of excess cash for opportunistic share repurchases and opportunistic M&A.
On the share repurchase front as you know, we really factor in 3.
Our cash 3 components 1 is firstly volatility in the shares secondly is value on the shares and thirdly is availability of cash.
And so we continue to use that discipline around the pace at which we repurchase our shares.
<unk> would say we continue to be active in pursuing both acquisitions and partnerships.
And our focus is really intensely on strategic growth areas for the firm and so its the areas you've heard us talk about in areas like real estate private equity ESG and climate.
As well as.
Fixed income and within those categories generally looking at assets that have unique and proprietary data.
As well as analytics and workflow software applications.
So no major changes I would say generally we're focused on we call them strategic accelerators switch you might.
Scenarios all tons, but its the acquisitions that are going to further our kind of current strategic endeavors not be transformative type acquisitions.
Great I also wanted to ask about on your fee rate on the ETF business move down a little bit over the past few quarter 2 quarters.
Is this a matter of more funds hitting the caps or is it the U S mix element or just any other factors that would explain that.
Yeah, Tony it's really.
Complex equation I would say the decline in bps. This quarter was really a combination of both mix.
Shift and fee changes.
And the mix shift equation is is quite dynamic to your point, there's a geographical factors that can drive moves either up or down.
There can be.
Product area shifts so if there are big disproportionate shifts into ESG.
And factor in certain areas that can also influence the overall rate.
And then as you said that it can be just a broader blend of products that you have a varied range of fees.
And then the fee changes.
Sometimes it can be just an unusually as the case its contractual changes.
It is.
Debt can adjust based on AUM levels and sometimes.
Our partners are adjusting fees to just better position products on the market. So I'd say all of those are those considered considerations factored into the move this quarter.
Thanks, a lot.
Our next.
Next question comes from Owen Lau with Oppenheimer. Your line is open.
Good morning, and thank you for taking my question, So Andrew Investor Day, MSCI estimated that the Tam of ESG, it's about $3.9 billion. So given the recent trend in ESG and quite make.
Do you think the Tam has expanded especially when we start talking about climate being somehow separate from ESG.
And also.
Remind us how MSCI as to make the time. Thank you.
Yeah.
It's certainly Ah.
Is increasing on increase in rapid.
As.
As we have seen in the last 18 months.
Theres been a huge embrace on ESG investing in on the world.
Some of the evidence of that have been the performance of the EPS.
That are linked to MSCI ESG indices.
As 1 example, but you can see that in institutional passive and active management et cetera.
And therefore, the addressable market.
All of ESG investing is going to continue to increase.
And people ask us all the time, how far well I.
I think ultimately there won't be any such thing as he is Jay investing every investment.
Decision that is made needs to be taking ESG into account. So the addressable market will be the entire global investing process.
With respect to climate is the same on.
<unk> be even bigger than ESG.
ESG clearly is very important to the world. Both climate is an existential threat to the world and it needs to be solved in the next 2030 years and a lot of that solve it needs to be from ended.
Cause of when all markets are discounting mechanisms and theyre going to start.
And they have already started discounting.
COVID-19 companies on penalizing them on and putting more money into a green technology clean energy and unless car modernizing companies. So the market. The Tam for climate tools. It's got to be the same is every investment needs to take climate.
Emissions into accounts every company that you're investing private public every real estate investment that you make special and real estate and coastal cities.
Every bond everything so I think the addressable market is extremely large now in terms of weird MSCI will spend a great deal of time trying to measure.
And report on on that time on.
On the sort of comments on going so that we.
We don't think is a very useful exercise is just huge on we're just at the early early stages on penetration of all of them.
Yes, just to put a finer point on that Owen.
To your question about how.
How we came up with a Tam that you referenced.
Much was what I like to call it tangible addressable market. So it's looking at each client type and then cohorts within those client types what are they willing to pay.
For the products that we have today based on the largest sales that we can.
Measure with with each other's client categories.
And then we extrapolate too if we were able to sell to each of the clients in those coke cohorts, how big would that be.
To Henry's point, what debt debt Mrs is.
New use cases, new client types and new products that are that we continue to.
General and climate scenario, given how new it is.
Where we're just not even.
Starting to gauge how big the opportunity to compete with them in any single client.
And then ultimately across all of the potential products. So we can issue.
Got it that's very very helpful.
Okay.
All of them up on.
Crypto currency impact could you just talk about.
MSCI has been interesting on thing Andy Crypto currency impacts do you think I missed that.
Yeah.
Yes.
Yeah very good question, let me just start by saying that we on MSCI.
Issue as we all know are at the Nexus at the leading edge of the of the investment process between us or owners managers and financial intermediaries.
And therefore, a lot of our clients always come to us first with new ideas new concepts.
That are not even beginning to be investing so.
I always exploring every single type of opportunity about.
Enhancing our tools on our investment.
Products and services for all for taking clients due to that leading age of investing.
Examples are obviously thematic investing on obviously with the with what we're talking.
We are emerging market investments and over the decades and all of that so so crypto currency is 1 example of that that.
We've had a number of institutional clients come to us on say tell us more about this but how could I make an investment in this what are the are the potential implications of this 2 climate for example.
Thinking about on there's a lot of carbon emissions associated with the mining of crypto currencies.
What is the disruption associated with the underlying blockchain technology on who are the winners and losers et cetera is a broader it all.
Sort of universe on ecosystem that just crypto currencies. So we are evaluating.
There is all about analyzing that we are we were talking to a lot of experts we're looking for partnerships with some of those experts in order to then launch a variety of models and data on.
This is a per cent as well on more to come in over the next few months about all of them.
Okay.
Thank you very much.
Our next question comes from Simon Clint with Atlantic Equities. Your line is open.
Hi, everyone. Thanks for taking my question.
I'd love to follow up on on the climate business as well can you hear.
In terms of the split.
How of your customers of the ESG and climate side.
Between the providers of capital from non financial intermediaries and uses of capital what is the actual split back and on the corporate side in particular.
I think companies are really sort of early now just starting to get to grips.
Grips with collecting the data for climate and reporting it how what is your relative.
If the right word is market share, but in terms of how many of those companies.
Do you actually touch when that.
They're actually delivering in already reported and that kind of information.
Yeah.
So all of them.
Sure.
I don't have all the data.
But let me paint a picture.
Yeah.
We can flesh that out further.
The.
Sure.
Between the asset managers and owners that we play.
Okay.
No.
Both the adoption of information.
Cash marks.
To create portfolios.
And.
Good day.
Roughly.
Revenues from <unk>.
The the asset owners.
Yes.
Yeah.
It's roughly the same.
For instance from your opportunity.
EMEA up.
Liber, let me interrupt you obviously get their mind because your call is.
Your line is is broken if you want to dial back.
Gain on let me, let me answer the question, while you do that.
So the first thing to recognize is that the climate tools applied to ever 1 asset.
I said owners managers banks, and obviously corporates on.
On the light so.
We are present across the entire spectrum. So they it is theres, obviously with helping the asset owner the pension fund Endowment and foundation the sovereign wealth fund understand how are they going to to decarbonize their portfolios on up and therefore, we do a.
On a week on lateral research as to how what what do they intend to do there on especially.
What kind of policy benchmarks, they need to have that are going to measure the impact of that so that is a benchmark when similarly to what we talked about in the context of all of the Cal stairs.
On a web transition, but not in climate, but in terms of just in general on and it doesn't generate a significant amount of revenue adapt point, but then that benchmark debt gets into operation by the asset owner looking for the the asset managers that are going to run portfolios. According to these.
Paris aligned for example, climate indices and the like and therefore, that's the way we're monetizing that so a great deal of net revenues currently the majority the large majority of our revenue come from asset managers that are no debt.
Helping the asset owners Ron.
On climate aligned portfolios.
On the last couple years, there's been a particular last 18 months, we've had in a rapidly growing presence with banks in all.
In which a lot of the the banks are incorporated in our core pointing climate into there.
2 there.
There are couple of markets at all in terms of Green bonds. For example on Ipos and all of that is there also on creating a.
A variety of other investment.
Vehicles like swaps and options on all of that and clearly they are incorporating a climate into their equity research.
Area. So in summary, right now on the majority of the revenues as our managers.
Probably second best second number is banks and growing rapidly and then thirdly is the is the asset owner, but you know.
The importance of the asset owner is way beyond that revenue because they are the 1.
Start the food chain in imposed on this.
We also have an increasing amount of revenue coming from corporate because we're helping corporates understand they're up their carbon footprint.
Or how is it that day they need to use closed their own carbon data how is it that they can measure.
Sure their temperature alignment on the light.
And just just to give you some figures on net of the $30 million of climate run rate.
On the bird mentioned earlier about 9 and change million is coming from asset based fees.
Which is by its nature almost entirely asset managers.
And then the balance the subscription portion et cetera. He said it is the largest but the majority of that is coming from asset managers as well.
Okay, great that's trees well, thank you very much.
If I might just put in just 1 question just quickly on on retention.
Rates have rule.
I was just wondering is there is there anything any changes or any dynamics going on in the market that's causing.
Volatility on say the analytics that retention rate on scene.
Yeah, I'd say no.
No. Notable changes this quarter is as we've said in the past analytics will.
Tend to be a little bit Lumpier, where are we in certain periods may have large cancellations and it can bounce around I would say there were no.
<unk> segment specific indicators.
Of note within analytics or across any of the other other segments here.
I'll turn on it.
Our next question comes from Ashish <unk> with RBC capital Your line is open.
Thanks for taking my question and congrats on the solid quarter.
I had 2 questions on ESG allows them on both a.
Frank first 1 is just on the competitive environment on ESG obviously.
S N b with the acquisition of IHS market, increasing their presence there, but also there's just a lot more consolidation happening in this space. So how do you expect that the competitive environment to evolve as we going forward. So that's 1.
All right. Thanks, and second is there was.
Our other global regulator I always feel is looking to regulate the USG leading providers and do you expect that to are you expecting that to have any influence on the market going forward and how does the.
That helped the MSC acquisition much better thanks.
<unk>.
Yeah, So our ESG offering in.
In terms of our competitive positioning.
It's extremely advantageous because is across the whole spectrum, we all.
The only provider of ESG tools that goes from ESG screening.
ESG ratings.
ESG indices.
Incorporation of ESG into factor models.
We're doing all of that across the <unk>.
D a spectrum.
We have significantly.
Expanded our capabilities in the whole fixed income sector as well for ESG.
Especially in the partnership with Bloomberg Barclays for all 4 assets for index funds and delight.
So.
Equity quite a broad category.
In terms of competition.
A lot of the competition that we have is in the various sectors. So there are certain competitors in the screening part there are other competitors on ratings.
And the like we are.
The large.
Why does provide a by far of ESG indices, both equity and fixed income so there's competition, but not as much compared to the screening part for example.
And we are among the few if not the only 1 that is incorporating ESG is a factor and risk model on ESG in analytics.
Large boarding 4 portfolios. So so so we believe that the summation of all of these.
And the availability of all these tools is going on was is going to make us win over over the competition over time, clearly there'll be more competitors coming our way.
But.
We believe that given our leadership on given our completeness of the product lines that would be a debt that will be an advantage to us.
<unk>.
The regulation.
His comment there are a lot of Securities Commission there on the world that are trying to watch to see what what gets included in terms of ESG and some of this industry.
We are on especially in it.
And the investment products. So I think there's direct regulation on indirect regulation. It will it has started with indirect relation many of the clients that we license or in the store.
Being regulated in a wide have been regulated so they need to report on certain things and we need to help them.
This is and then they may be direct regulation of the ups or the index providers or the ESG rating entities.
Regulation is it's always a winner for us because it shrinks the number of competitors in the market because we have the ability to deal with the regulation is scale up our business dramatically.
Would that create efficiencies in doing that so.
So that is something that we don't necessarily asked for.
Or or or bush for it but by when he comes is a competitive advantage for us.
That's very helpful color and congrats on the songs strong momentum in ESG. Thanks.
Thank you.
Thank you for them.
Our next question comes from Craig Huber with Huber Research Partners. Your line is open.
Thank you. My first question can you just touch on further the futures and options area and the opportunity there you see going forward here and maybe touch on maybe some more.
Partnerships from the exchanges out there globally and I have a follow up thank you.
Yeah. So this is an area that we are extremely focused on growing on building.
It's a lot of white space as you know list.
Index futures and options around the world are.
Largely a.
Domestic meaning up country exposures on.
In the case of that that is multi country exposure. There are single currency like in the euros on where the euro. So we are developing with our partners the exchanges the market for multi country multi currency index futures.
On options.
<unk> been added for a for a bit on time, we have been very successful in futures are as you all as we've reported in the past we are looking to expand that.
In a non.
Not only are continuing with the market cap indices and in equities, but without.
Our ESG indices for example climate change in the SaaS.
So on and so forth.
The area that we're now very focused on Richard because it's very small and incipient is is listed options.
The market for a multi country multi currency listed index listed options.
It's very very small we're thinking it can be a huge market and we're taking steps to strengthen our partnerships in developing that especially in the U S.
As you'll have noticed this quarter index.
Futures and options on the on the license fees that would generate.
<unk> from that are definitely counter cyclical to the AUM levels.
And that is 1 area that we're focused on because we are.
The AUM if you are a bull market on the AUM goes up dramatically in the F. On index up all of our index products. They've made there may be a lot less volatility.
And therefore, a lower volume in this up in these areas.
But but but the other way around as well.
Also going to happen when they are bearish markets are highly volatile market, we will be making a lot more money and not in derivatives compared to up to a to the cash flow. So that's something that we're.
Doing it not only because it's a great growth area on revenue, but also in order to diversify this great all weather franchise that we have out of Missy items.
And Craig Craig 1 point to keep in mind there.
As Henry alluded to volumes have been light given the low volatility in the market generally, but 1 very encouraging trend for us is the continued growth.
Growth in open interest in futures contracts based on our indexes, which is up 50% year over year. So we continue to see kind of healthy adoption and use other products. Despite the lower volatility.
I appreciate that and 1 other quick question, if I could ask about your hedge fund.
Business can we just.
Touch on that how all that's 2 on how do you feel about the health of that market and are they adopting your your.
Your products.
Yeah. So I would say that there is not a fundamental change from previous quarters.
You know, there's there's been nothing.
Nothing that has changed dramatically.
Since we last spoke.
There has been I would say we have good growth in index.
It's a little more patchy and good growth in ESG.
Not really been a change in the environment as it relates to analytics. So I think the main headline is no dramatic change since the last time, we spoke.
Great. Thank you guys.
Yeah.
Our next question comes from Keith Hughes from with Northcoast Research. Your line is open.
Hey.
Good morning, gentlemen, a question for you on the the upturn playbook in the investment from the business.
Yes.
Can you just remind us there is a how quickly can you guys you know.
To turn up and turn down that as investments and all these investments more on people or is it in technology, how should we think about that over the next several quarters.
Sure Yeah. So they're there typically is a little bit of a lag, especially when the driver of the upturn is asset based fees.
Which can move up quite significantly in a short period of time.
And while we can bring in some expenses, namely some some non comp expenses the comp expenses. It takes some time to ramp up here.
And so we.
We are as you know going to actively or upturn playbook now as we've said in the past the.
The asset based fees continue to grow at a very rapid growth rate and the broader business health continues to be quite strong and so that's the driver of our guidance going up where we are turning to the upturn here and it's investing both in people in key areas as well as in technology and other non comp areas.
I would highlight 2.
Factors that relate to the all weather franchise that we have.
1 is around compensation.
Based on the better business performance that we're seeing relative to where we started the year compensation accruals naturally go up.
To highlight that the opposite happens when when we enter a challenging period and so that's.
Nice all weather franchise hedge and similarly on the FX side.
So we have seen some FX headwinds on the expense side as the dollar has depreciated against several currencies.
And so that's put some pressure on the year to date expenses as well as factored into the guidance.
And that's something that also.
So moves in the opposite direction, sometimes the nice thing about that is we get an offset on the revenue side. So we have benefited a bit on the revenue side.
From the U S dollar depreciation.
If I if I can spend just a minute highlighting where the investments are going these are really around the key growth.
Can I guess of the firms. So we are we are very much sticking to our triple Crown framework and putting the incremental dollars to those areas that are going to drive growth for us.
So an index that's areas like the new index platform.
Innovative new index product development.
In ESG significantly.
Both their estimates, which you can see just based on the ESG growth expense growth rate.
Where we are using some of this improved business inform its performance to really double down in ESG. So we're investing in areas like data sourcing and data quality as well as Barry alluded to earlier, our new ESG.
Platform ESG manager platform and then go to market on the sales side and then more generally in the technology area continuing to invest in our cloud migration and areas like Dev ops.
So it's similar messages to what we've delivered in the past just we're enacting it right now to a higher expense.
Great.
And just a final question if I may.
Assuming that businesses do come back on line in employees coming back to work.
How does that affect your business is there anything you were able to do over the past year because customers weren't there or are you guys in the after that perhaps gives you new opportunity is assuming we go back.
Do you think of people go back to work.
Before the end of the year.
So the day impact.
That we had.
Last year for example, in the AR and the Lockdown was in the large enterprise analytics deals that require a fairly large Gordon nation.
And the client organization between the C level on the mid levels on the more junior levels.
So a lot of that dried up.
For us is gradually returning but he's not on the level that we have seen it in the past so that will be a benefit as people come back to the office.
Overall.
Overall in general we are we have done exceptionally well in a in a.
A virtual world.
And in general our clients are being very receptive, we'd been except for the large enterprise deals on the implementation of those deals by the way the implementation fees, which would normally recognize win.
And all of that once the sale is done when we put all of that true up to works that has slowed down significantly. So the 2 areas that just to summarize that we were hurt where the large sales in all areas.
Enterprise analytics, and the implementation and therefore, the reclamation of those fees, but in general after that.
We're putting all we've been very effective at communicating with clients relating to clients on it.
Turning on the productivity levels from our people working virtually has gone through the roof.
It's been quite a great experience in the context from a horrible pandemic with the.
A lot on loss of lives on and disruption.
It all in People's lives on employment.
Great. Thank you.
Okay.
Our next question is a follow up from Alex Kramm with UBS. Your line is open.
Yeah, Hey, thanks, sorry for dragging out the call just a couple of quick follow ups, 1 Andy you talked about.
All its preserving operating leverage and margin expansion. So can you just remind us when you think longer term do you actually have a range in terms of margin expansion that you think about I know you've laid out all subscription growth and EBITDA cost growth, but like where does that arrive in terms of margin expansion on an annual basis.
Yeah.
A very very dynamic equation. So we have not been prescriptive about targeted operating leverage or margin expansion there going to be periods like we've seen in the last couple of quarters, where ABF just runs up significantly and we can't adjust our pace of investment.
To keep up with it.
And you'll see the margin go up similarly, there will likely be periods at some point, where the market goes on the opposite direction and we continue to invest in we might see at times the margin go down and in periods.
But our longer term objective is to drive that positive operating leverage and as we've said it's going to be.
At a more modest pace than what we've seen in the future. Our core focus here is driving long term growth and to do that we want to continue to invest at a healthy rate.
So I'm not willing to put numbers.
Around what modest means from a long term perspective, and a hearing right now.
Yeah.
<unk> seen our you've seen our long term targets on what we've said on the expense side and you all haven't been more prescriptive on them.
Fair and then just 1 quick follow up to the.
Competition question on ESG and climate, maybe particularly on climate and not just single out 1.1 from particular, but.
I know you have a big.
Relationship with Blackrock on a lot of areas and I think they all also talk a lot about climate and when it relates to the Aladdin.
<unk> et cetera on like is that more of a partnership or are you viewing them as a competitor when it comes to these climate opportunities on climate modeling.
Yes.
So it's the same on the overall relationship.
With with Blackrock, which is on 1 hand, we're strong partners.
And index and all the.
All the tools all the climate tools on <unk>.
Models on all of that go into construction of indices.
On the other hand clearly.
Analytics, all business competes with our analytics business and embedded in there are a number of models on tools and analytics and reporting and on all of that.
So that all that is oversee a bit more competitive, but having said that 1 on this you know 1 other thing to emphasize MSCI is on.
They're up in architecture.
Company and therefore, all of our content is available in any platform that wants to work with us.
Even if those platforms are in competition with our on software platforms. So in that vein, we have a number of collaborations.
And on partnership with Blackrock in their analytics, allowing our business in terms of putting a lot of our content.
ESG content climate content.
I'm on models on all of that in there in their platform. So so there is an element of partnership there as well in the context of.
On the competition on the overall workflow software platforms.
Okay no. Thanks for helping all of that thank you.
There are no further questions I can try on the call back over to Henry Fernandez, CEO and chairman for closing remarks.
Well, thank you for joining us today as you have heard.
We have enormous opportunities in front of all settlement Ci.
Therefore, we are stepping up our pace of investing on.
And on the same time overseas tried to achieve modest margin expansion.
We like the on the revenue growth that we've achieved and the performance and we're going to like it even more.
Her invest more to achieve even higher levels of revenue growth. So we look forward to speaking with you further on the meantime place I enjoy your summer and stay safe.
Yeah.
This concludes our conference you may now disconnect everyone have a great day.
Okay.
Okay.
Or if we have been reported.
[music].
Andrew.
No.
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