Q2 2019 Earnings Call
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Later, we will conduct a question and answer session, where we will limit participants to one question and one follow up.
Further instructions will follow at that time.
As a reminder, this cost call listening recorded.
I would like to now turn the call over to Mr., Andrew Wilson, Chief Strategy Officer, you may begin.
Thank you Shannon.
Good day and welcome to the MSC <unk> second quarter 2019 earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the second quarter, which is available on our website along with our earnings presentation in a second quarter update.
A copy of the release second quarter update and the slide presentation that we have prepared for this call may be viewed at MPCI dotcom under the Investor Relations tab.
Let me remind you that this call contains forward looking statements.
You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer.
Most recent Form 10-K , and our other SEC filings.
During today's call. In addition to results presented on the basis of U.S. gap. We also refer to non non-GAAP measures, including but not limited to organic operating revenue growth rates adjusted EBITDA adjusted EBITDA expenses, adjusted EPS and free cash flow.
We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance.
We'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on pages, 21% to 28 of the earnings presentation.
We will also 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 with me today are Henry Fernandez, our chairman and CEO Baer Pettit, our president and Linda Huber, Our Chief Financial Officer with that let me now turn the call over to Mr. Henry Fernandez Henry.
Thank you Andy.
Hello, everyone.
And thank you for joining us today.
Before I start I would like to say that we're very pleased to have leaned that do her first quarterly report to you all on him Sci.
Our hope.
You trade her well and should those good job.
Yes, so our strong performance and momentum in the quarter is being driven by continued strength in all of our offerings.
Accelerated by the incredibly attractive opportunities, we see across a broad range of new growth frontiers.
During the first half of each year.
Our board and the management team conduct an annual strategic planning process.
Where we explore in great detail relevant client dynamics industry developments.
And all of our MPCI capabilities.
With a goal of prioritizing the most attractive focus areas for the firm.
This year, we came away from the process with an overwhelming sense of excitement about the future of our Missy.
And we reaffirm our belief that we are only scratching the surface of what is possible to achieve with this franchise.
We see data management.
Advanced analytical models and sophisticated technology, becoming increasingly critical to the investment industry.
And the role and the value of Sci.
He is growing every single day.
An important discussion internally then has become how we fueled the investments necessary to pursue the many opportunities we have.
Well per serving our high profit margins.
As we have discussed in the past we have a very rigorous focus on allocating our capital to the highest returning projects.
Through our internal capital allocation process.
We think of our internal spending our gross two broad categories.
Run the business expenses.
And change the business investments.
Run the business expenses relate to supporting the existing products and capabilities in their current form.
Well change the business investments relate to enhancing.
The existing business and even more importantly, creating new growth areas for us.
Our top priority for us is to increase investments allocated to change the business activities.
We do this by improving efficiency and productivity.
And therefore as squeezing on reducing expenses across run the business activities.
This way, we can continue to relocate.
Investments to the highest returning projects and consequently grow faster and be even more profitable.
We spent a little bit of time talking about all of these at our Investor day.
We see our loan runway of opportunities and growth.
For our current run the business activities.
But were also extremely excited about the growth potential for the change the business activities.
Some examples of these are first new high growth areas of content creation.
So just is GE and factors for both equity and fixed income.
Fixed income analytics and in the process.
And real estate and other private asset classes.
Our second example is new client areas such as wealth management.
Key geographies such as Asia.
Our new index licensing opportunities such as futures and options listed on exchanges.
And obviously, the remedies issued by banks and broker dealers.
And a third example is new distribution channels.
A new content, enabling technology that allows for those distribution channels to prosper.
These are all very attractive investment areas in their own right.
In addition to complementing and driving even more value to our existing index analytics franchises.
Over the last several months, we have had several notable developments that reinforce our conviction.
Around this change the business investment areas.
Let me highlight a few of these developments first our gross content creation dimension.
In the first half of the year.
40% of inflows into all us exposure equity tiers.
Well into Etfs linked to MSCI indices.
Primarily driven by a $9 billion inflows into Etfs linked to our factor indexes.
Globally.
There was a total of $14 billion of inflows into it the etfs linked to our factor indices.
By leveraging our cutting edge fixing compactor model, we rolled out a new peer multi asset class factor framework.
Which allows clients to seamlessly analyze their portfolios from the highest level of factors all the way down to the most glandular ones.
Our gross any asset class.
And within Amy.
Of these and within a one cohesive thier framework.
In fixed income analytics. This quarter, we are a series of new corporate credit curves, which broaden and enhance our fixed income multi asset class capabilities.
One last example in this content creation category.
Is that we have internally launch a series of fixed income factor indices.
Now we expect to release to the market later this year.
In looking at the client and product dimensions, let me highlight a few of the new developments that have give us conviction about our investment plan.
We continued to deliver double digit organic subscription run rate growth.
A 13% across Asia.
11% within real estate.
And 19 and 25% for investors Angie is chip products sold to wealth managers, respectively.
In Q2, the notional value traded in listed futures and options linked to MSCI indices reached a record level of 1.4 trillion dollars.
With contract volume, our near record levels of 29 million contracts.
This has been fueled by a strong traction and listed futures and options based on our flagship indices such as the merger market on the finances.
Which together grew in total 24% year over year.
But in addition to that we also have new launches in futures contracts, especially in the Msai, Saudi Arabia index.
We think the market for multi country multi currency listed and over the counter derivatives is potentially very significant.
And we intend to be one of the largest index providers in this area.
All the cases are have cited are good examples of areas, where our recent investments and innovation have driven highly profitable long term growth.
In relatively new areas. In addition to our door existing trajectory of growth in the run the business areas.
Let me now turn the call over to bear who will do a deeper drive into one of our specific areas of growth that I briefly mentioned.
Which we're extremely excited about.
In this quarter this focus will be on and the index ecosystem and the and the critical role that index linked derivatives can play in that bear.
Thank you Henry.
As we've talked about in the past there are three important pillars to our index franchise active management passive or what we call indexed management and derivatives.
These three areas reinforce each other creating an ecosystem of investment and trading activity around our indexes that is globally interconnected.
Asset owners, who use our indexes as benchmarks will use investable products to equitize cash and manage their exposure relative to the benchmark.
These asset owners and active managers will use exchange traded and LTC index linked derivatives to hedge their investments achieved customized exposures and manage risk relative to the benchmark.
The odisi derivative markets for equity indexes have become larger over the years, but have high carrying costs for sell side market participants.
The transition from Otcs to listed markets helps these products reduce costs.
As volume and liquidity grows in these derivatives the increased liquidity facilitates the participation of the trading community benefiting the ecosystem of EFS and the LTC market.
So success in any one of these pillars of our ecosystem creates a virtuous circle that helps drive demand in the others.
Within this amitai index ecosystem that pillar that has been leased developed is derivatives. This is a relatively new growth area for us that we believe could be substantial over time.
Historically the market for a list and index linked derivatives was almost entirely focused on single market single currency derivatives, where the trading hours in currencies of all the underlying securities were the same.
Over the last decade trading technology has progressed and our exchange partners have increasingly had success in educating the global trading community on how to trade in listed futures based on our indexes, which are mostly multi market multicurrency in nature.
To help accelerate the growth of this opportunity we have invested in building out the team comprised of several key individuals focused heavily on licensing our indexes for listed and LTC derivatives.
This team is broadening and deepening our relationships with exchanges and broker dealers, who are generating a healthy pipeline of new index linked derivative product launches and an elevated focus on promoting index linked derivatives.
Investments in building. This team have already provided returns and a quick payback.
We are seeing our exchange partners invest in marketing sales coverage sell side partnerships and market maker programs, which came to foster liquidity formation.
Within broker dealers, we see our clients finding numerous new opportunities to serve their retail and institutional clients with structured products like index linked note swaps and options. Most of these are based on our market cap indexes, but increasingly are also used for factor overlays as well as dramatic NDS in G. tilts.
The incremental revenue demonstrated from licensing these products should be high margin over time.
With lower cost growth as we leverage our existing IP.
In 2018 revenue from listed futures and options based on our indexes was $17.1 million, having grown at a CAGR of 37% from $4.8 million in 2014.
The notional value of the open interest on listed futures and options based on our indexes has grown at a CAGR of 54% over the last three years.
We believe this area you could have a long trajectory of attractive growth and profitability.
As one measure the potential opportunity in this area. Many futures contracts based on single market single currency indexes from other providers have meaningfully higher traded notional values relative to their ETF AUM linked to those indexes than those of MSC API.
Our active focus on index linked derivatives highlights just one strong example of how we are investing to capitalize on the wide range of new growth frontiers in front of us.
While we are discussing the pillars of index growth I thought it would be important to provide a brief update on our ishares relationship.
The current terms of our EPS licenses are scheduled to expire in March of next year subject to relatively short term evergreen renewal provisions.
We are now engaged in advanced constructive discussions with our ishares around a new long term agreement.
Our objective is to continue to expand our successful partnership by balancing the price volume mix in order to maximize the long term revenue growth.
Please note that will not be able to answer questions or provide more information about the negotiations until we have a final agreement, which we expect to occur within the next few months.
And with that I'll turn the call over to Linda to take us through the financial highlights and discuss guidance for the remainder of the year Linda.
Thanks, there and Hello to everyone on the call.
And the second quarter was another quarter of strong financial performance.
On the operating front, our performance with solid a tough lap given the exceptional second quarter in 2018, but double digit organic subscription run rate growth was driven by strength across regions in nature client segments. Specifically the Americans were up 8% EMEA was up 11% and Asia was up 13% asset owners asset managers and broker dealers, which collectively comprise more than 80% of our subscription run rate third organic subscription run rate growth of 910 and 10% respectively.
Our strong focus on continually adding value to our clients helped us achieve a retention rate of 95.5% in Q2, the highest level in in the last decade.
Our consistently high retention rates have helped drive organic subscription run rate growth of approximately 10%.
For the last seven consecutive quarters for recurring net new sales. The first step was up 11% with Q2 down 3% as I mentioned previously the lower growth rate in the second quarter with the result of lapping a very strong Q2 2018.
Also in Q2, we saw continued momentum across product segments I will now discuss the specifics for each of the product lines first for SSG, We continued our exceptional run across client segments and geographies.
Within client segments run rate growth was 24% for our largest segment asset managers, which was complemented by exceptional growth more than 50% for hedge funds and broker dealers across geographies, we had run rate growth of 50% in Asia, 27% in EMEA and 18% in the Americas.
It was also our second highest quarter ever in terms of both recurring sales and recurring net new sales for ASG second index delivered another quarter of double digit subscription run rate growth with factors growing at 25% SG growing at 48% and custom and specialized modules growing at 14%.
And we continue to see consistent performance in our core market cap products, which had 10% growth.
Additionally, we had strong retention rate of 97%.
Third for analytics as Weve repeatedly mentioned in previous calls operating metrics can be lumpy quarter over quarter. This is increasingly so as we are seeing larger and more complex deals being closed our recurring sales for the quarter was $14 million lower than second quarter of 2018, which was itself up 44% over Q2 17, making for a tough comparison. However, recurring sales were up 7% compared to the first quarter of 2019, we continued our positive momentum with a strong retention rate of 94% and continued strength in multi asset class and fixed income analytics, which collectively had on rate growth of 7% and finally for real estate, our organic run rate growth was 11% with strong traction in our market information offerings.
Finally, we'd like to spotlight, our nonrecurring or onetime sale, which were up 7% to $9 million versus the prior year period, primarily driven by increased sales in our index derivatives and risk manager product offerings.
Next turning to our performance in EMEA, we continue to benefit from our focus on derivatives listed futures and options revenue growing 20% driven by 17% year over year volume growth, most notably volume and listed futures linked to MSCI ITM and ebay indices together grew 24%.
EPS ABF revenue was down about 1% with a modest increase in year over year average AUM in equity ETF linked to MSCI indices offset by a year over year decline in average basis points.
Equity ATM assets under management linked to MSCI indexes ended the quarter at $819 billion of 10% versus prior year driven by market appreciation across all geographies and continued flows into us exposure products offset by outflows from emerging market exposures overall, we saw more than $7 billion of inflows into Etfs based based on our factor in ESG indexes.
Additionally, there was an inflow of $5.9 billion in funds based on us exposure indexes, where half of the flows were in EPS based on our factor indexes.
These flows were directed primarily into low volatility products, while more than a quarter of the inflows into F where based on our ESG indexes.
Turning now to capital allocation, we're continuing our commitment to returning capital to shareholders with a 17% increase in our quarterly dividend or an increase.
To 68 cents from 58 cents per share we have consistently increased our dividends to shareholders, which has grown at a CAGR of 30% for the last five years.
We had no share repurchases during the quarter as it is our policy to repurchase Opportunistically. As a reminder, however, we have returned more than $1 billion through share repurchases since the beginning of 2018.
Looking now at our cash balance our cash balance at the end of Q2 was $771 million.
And note that our policy is to maintain a minimum of approximately $200 million to $250 million the cash globally.
For general operating purposes.
Turning to free cash flow for Q2. This was $177 million down 23 million from Q2 2018, the prime and Mary drivers of this decline where the timing of collections higher payments for interest payments.
And cash expenses, particularly offset by benefits from lower tax payments.
Our approach to capital allocation remains same with no changes to our dividend policy, our leverage target or our approach to repurchases.
And lastly, I'd like to provide an update on our guidance for the year.
Given our strong business performance and our focus on driving growth. We will continue with our plan to invest on a number of high returning growth opportunities.
These investments are expected to drive our adjusted EBITDA expenses and Capex to the high end of the guidance range or 685 million to $705 million for EBITDA expenses, and 45 million to $55 million for Capex.
With regard to our tax guidance, we expect our full year effective tax rate to be between 8% and 11%. This includes the income tax benefit related to the vesting of certain multi year PS used in the first quarter of approximately 11 percentage points.
Which has been excluded from adjusted EPS.
Excluding this benefit we expect the effective tax rate used for our adjusted EPS to be in the range of 19% to 22%.
And with that we'll open the lines to take your questions.
Thank you, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one on your custom telephone. If your question has been answered or you wish movie or suffer any clue. Please press the pound key to prevent any background noise. Please. Please your line on mute. What's your question has been stated we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Manav Patnaik with Barclays. Your line is open.
Thank you good afternoon everybody.
You know Mike My first question is just around.
Key initiatives, obviously, some impressive growth rates that you guys called out, but maybe just more broadly weve seen a lot of other needs MSP.
Okay that makes them tuck in acquisitions.
Put together their own initiatives lot of PR around it I was just wondering like how you look at the competitive landscape and if they're just a bunch of white spaces that maybe everybody has an opportunity.
So thanks for that question on the job.
Clearly the opportunity on the SG or sustainable investing.
And the world is enormous.
Over time.
Yes, yes, GE factors getting integrated into mainstream investing we may not be talking about.
She investing or sustainable investing you will be all investing in which if somebody's not taking sustainability into account will be.
The base in their fiduciary duties right toys of huge white space.
We are we have had incredible success. Some continue to do so we've had a lot of investments into these area that have propelled significant growth. We have we have folks at diabetes growth across the board from his year reserves for exclusions on a screening to his two ratings to ESG indices do we as GE as a factor in risk models.
We are now taking all of that is gee content on putting it into our technology platform our distribution channels.
And the like so we are on the we're also expanding from our ratings into equity two large amounts of ratings into fixed income.
Which is an area that we want to focus on this some of this fixed income indices that I have mentioned.
That we have lunch internally are on factor indices, but there with the team is also working on his Gi in business as well.
And the like so we feel pretty good where we are.
A lot of what we're doing is organic growth.
We will also look at.
Acquisition opportunities that present themselves, but they have to be very targeted and very value added for us with the right financial returns.
And I am sure. This area will attract a larger providers on competitors, but we feel pretty good about the leadership position that we have on that we're maintaining in this space.
Okay Fair enough. Thank you and then.
Maybe.
Just for Linda and welcome to the call the comments around the Lumpiness in the analytics deals I guess is that just implying that there was a bunch of contracts that maybe got pushed out I was just wondering if you could elaborate on that a little bit more specific to the quarter.
Sure might have and I'll, let their add to this but as we've said quite a few times that we mentioned in the.
Prepared comments that we've already made lumpiness is that it's a factor of the analytics business.
Specifically, if a couple of deals had moved a few days we would have found the results to be a bit different so nothing particularly.
Unusual going on there and I'll see if there has anything else. He wants to know the only other comment I would make would be about the retention rate, which is up 220 basis points year on year. That's always been an important indicator for us for the health of the analytics business and so I think overall you know theres no change in the trend Theres no change in our previous comments and.
Got it thanks.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley . Your line is open.
Thank you.
Historically, you've had a different profile in your index business.
Your largest.
Competitor there and.
Basically these have sort of a bigger piece of their business.
At the peak season traded products.
Now it seems like you have a real opportunity in the treated products would be to get increasingly larger there and so I guess, that's an observation, but my question.
How do you see I Miss the Ais business.
Model is changing over time like do you see the subscription component going down, but the bigger opportunity in the treated products area.
Anything you could add there would be helpful.
Yes, so as Barry indicated the three legs of our stool that keeps the stool together right is the active management passive management on derivatives management, right, our exposure management or Asian management.
And and we've traditionally we started or was it with with this this description bar, which is active management.
And grew that and continue to grow that enormously additive than 11% growth in index subscription.
You saw is all the Doctor management with a lot of new products a lot of new clients a lot of new use cases et cetera.
Then obviously way back.
A we we were the inventors of the of the international it the ETF business by licensing them to a Morgan Stanley on and that has grown enormously and and now were not only international gross order, but we're also domestic.
Domestic in this as in many areas like we mentioned about the U.S. exposure indices.
Future lift the futures and options in multi country multi currency in this as well.
It was a slowdown was a difficulty in the explosion or the potential growth of over the counter derivatives.
So a few years back maybe five to seven years back the the model was broken in this ends up below the we were able to find a buyer for these multi country multi currency index futures with our exchange partners to trade in a time zone in which you know the other lines are sometimes sleeping on now and therefore, the success of the MSC emerging market futures contract, which is now the third largest futures contract in the world and open interest the Doe the FHFA contract on all of that so that has creative our path for for these are the growth of this industry, which will be more logical to have because the investment process and not single country.
Single currency the whole investment grade is global and his regional so why should the ruble has not be that we anticipate in 10 years time 15 years bond that actually multi country multi currency derivatives trading may become larger than national ones.
And we want to be the leaving one of the leading providers of in this as in that area. So.
And they are not spare indicated this is all an ecosystem that the more of the revenues you have the more trading you meet the apps on the more creating an over the counter and hopefully the more active management that takes place. So it's all an ecosystem of liquidity and reinforce in one and roller across the world.
That's very helpful and you mentioned launching fixed income factor indices.
Congratulations.
Fixed income has been an area that you know you've been investing in spokesman for some time and.
So I guess my question is.
You know what what.
Teams that.
Enable it to to be able to provide you know like what has changed internally.
That has gotten used to that please.
Sure.
A little different than.
Okay.
Yes, so tony's, what's what's really different is if you think about the equity indexes.
From the very outset, it they were global and market cap weighted or in fixed income terms issuance weighted so what we've we've taken quite a different strategy in fixed income which is to start with.
Clearly differentiated.
You could call the more specialized indexes, which which will serve very particular client needs and product needs. So so so we felt that in this space. We could use some of our the thought leadership and the content that we have from fixed income analytics and also the infrastructure that we have there. So we this has been kind of an exciting little entrepreneurial venture within the firm.
And we should be bringing this to market as we said to later in the year, we are having really exciting discussions with some pretty.
Major market Counterparties about this and you know for sure. This will not be a major business line in the short run, but we think it will be the using this model of driving it from a licensing business.
We hope to then develop the income to then to sell finance this.
This this venture so that it becomes self financing through licensing income from a very early the early stages. So it's small but I think it said it will be innovative and it will be different and I think thats, what we hope to do to bring something new and innovative to this space.
Thank you sounds like you have a lot to look forward to.
Thank you.
Our next question comes from Alex Kramm with you Yes. Your line is open.
Yes, Hey, good morning, everyone.
I guess just coming back to the analytic sales question from earlier.
I appreciate the Lumpiness in the business, but would love to hear updated thoughts on the environment more broadly some of your competitors not competitors, but other players in the space have certainly acknowledge the consolidation in the industry in our obviously struggles and under the sell side in some areas. So.
I know you have been very immune so far but just curious how the all the environment.
It's getting tougher or what are you experiencing out there.
So Alex look for sure.
As you are aware the.
All of our all the various client bases that we deal with are focused on efficiency and operating their firms in the India and allocating their their expenses in the in the most efficient manner that that has actually been a central pillar of our analytics.
Sales strategy is actually to go not merely within analytical offering to give them better understanding of their portfolios, but to work on creating efficiency in their organizations through better better data management.
No so that they can use more technology and fewer humans et cetera. So so so so I would say that our response to.
Our strategy has been very much catering to that environment that you referred to and consequently. The result is that we are we're we continue to be confident with the analytics story, we continue to be confident in the manner that we've described.
Steady progression of growth.
And and and at present, even though you know as we said two of these lumpiness is sometimes a big deal that doesn't make it in a given quarter fundamentally our guidance that we've given before on this product area and how we're how we're managing it and the growth trajectory is unchanged.
I would add.
To that also Alex that the first of all it's very important that you're.
That we say it one more time, we're very comfortable where we are in the trajectory of this on.
If we saw any.
Any alarm bells or whatever.
You are going to be the first one to tell you right. So.
There are no that secondly is that we are very optimistic about all of this because the client dialogue that we're hiring along the lines of what Barry described.
It is pretty positive is the these these are the high level of retention rates in all that are.
Almost record levels of retention rates in this area, which are the five sometimes you will have questions about this are another proof that our offerings is stinky.
To people and therefore, not subject to competitive pressures for example.
So thats off a second area on a third area is that as we improve our technology they not only.
Our comp in but our fleet improve our technology is going to unleash a lot more value of that content in the hands of the clients and.
That's that's the one area, we're putting a lot of refereeing to it because we believe that for every unit of content and analytics, we should be selling a lot more but that the handicap. There is always being the enabling technology to make the use cases worker.
Fair enough. Thank you very much and then just shifting gears actually to Linda first of all welcome to your first earnings call.
Great to have you.
But you know.
Semis personal question here, but obviously that you've been there for three months now does your first earnings call, we'll be very curious to hear.
Once you've been focused on what you're seeing from a bigger picture perspective in particular as you kind of make your mark on his organization NSPI has become a very very well on that machine over the last few years. So it seems like.
There is not much room left room for improvement. So curious what the what do you think you can you can do and we've been spending our time.
Alex Thanks for the very kind question.
Working for him Mr. Fernandez here, there is always room for improvement.
So I think my colleagues would would agree with that statement.
It's been it's been a great first 90 days.
I've been spending my time and traveling learning the business and the big focus here is on our internal capital allocation process as Henry said.
We want to make sure we get these investments right that we put them in the right places where they have strong returns relatively short pay offs and that we focus on the areas, which are which are valued most highly by the shareholders. So.
This this place is a quite a well run machine, but theres always opportunity for improvement and I look forward to that as we move into the operating plan part of the cycle.
Thanks.
So Linda Us middle name is Icap.
[laughter] is Linda I'd cap year over ridges internal capital allocation.
Thank you. Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line is open.
Hi, this is through recruitment on for Joe just wanted to touch on the M&A front you guys have talked about continuing to expand the new initiatives are just seeing how the pipeline looks for that.
Okay.
The good question I mean, the the focus on home Sci has traditionally been in the last X number of years on organic growth.
And we're very proud of that and we want to continue that especially because.
As our franchise growth and our infrastructure gross I think about the the platform of data and content on technology and research on top of that.
The.
The incremental investments in the platform it gets up into it we'll get gets lower for every unit of revenue that we can produce and therefore, the more organic you we build our virtual circle that the more organic investments the higher the rate of return on those investments because they are made at the margin the causes of the margin and the revenue expands dramatically. So that's one reason why is bidding imperative.
To to look out mostly organic growth because we are not going to find those rates of return anywhere else right in the marketplace, having said that there are always a few strategic areas that.
That we're looking at to as to those capabilities.
But they have to be extensions of what we do not going out of our fuel and they have to have very high turnover rate of return because the the return to buying back our shares are extremely high as we approvals last year, the internal capital location and return for these projects are extremely high and therefore, the cost of putting capital to work in an acquisition that is great returns, but not as great as the organic wants is high. So that's why we're so focused on this area, but when look at everything overseas because our fiduciary duty proposal.
Got it and then just wondering if you could talk about any shift you're seeing in the demand environment.
And how are you under shifting where you expect moving forward.
Well I think we look we have been very pleasantly surprised that after an incredibly runup.
18, WFM on MTS on auto 17.
It was on volatility at the end of 18 of course right but.
That the AUM levels have held up in oil extraordinarily high.
And continue to do so in around the world there's been a little shifts obviously merger markets haven't done as well.
The U.S market has done incredibly well.
Some developed markets areas are stronger some other ones are weaker bought out we're very proud of with all with the diversification we have in all of that because it because our.
If the U.S market is doing well, we have a lot of factoring the USG and this is a new assay developed markets the well on the merger Mark is the well we're the big funnel Governor there right and if we are and we have a lot of these self flows go my name into all this at the airport so.
I think data this is a great franchise on the keys to continued defeated on diversified on.
On the I mean, innovate innovate constantly and thus the reason why the fixed income are factoring TSG indices is a big building block into that.
Perfect. Thank you.
Our next question comes from Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone.
Thank you.
You highlighted Asia as a growth geography, and I just wanted to ask how much revenue you generate from Asia today, and how much revenue you think you will generate from Asian five years.
So look the Asia is an area.
That we have not been happy with.
Even though it was growing up.
In auto healthy base before but given the enormous amount of savings that are.
Being golf and got going into.
Institutional asset owners in OECD Asia on the enormous amount of wealth creation and individuals on the growth of wealth management in the region all of that is.
Is it something that we look at them when we say why can we not be growing double or triple what we are growing today.
And we've always been a nation house in O I for one been visiting Asia for four years now consistently and we always had a big presence in Asia and all the countries. So if anything today most of our employees are in Asia right.
Just two.
We'll put that in there. So so therefore, we beat a wholesale change of the client coverage team.
And the last sort of 18 months in Asia.
With the appointment of.
Oh senior manager for the whole region.
The current some of the country heads were changed some we reorganized the region, we're putting broke our heads on all of that on.
We are sole.
Actually pleasantly surprised how fast that impact.
Hi, it's been hot in the that's why the quarterly report highlights the growth in Asia, even though is some of these managers have just arrived in the last few quarters. So so I think that there will be great I think in terms of US fleet right now of the say no.
Okay. When you look at the total subscription run rate, so not including a bid the f. for a minute we have about 1.2 billion subscription.
On about 200 million of that is a show or about 13%.
Over the next day near that number has to be a lot bigger and he will not be because EMEA Latin America is going down.
It has to be because the rate of growth of Asia needs to be a lot bigger than than the other regions and we're now very well position to to to attack that in any way. The other thing that I would highlight is that when you look at the ETF market clearly the vast majority of the ETF linked to MSCI indices are listed in the us.
But a large.
A minority of those efforts are purchased by Asian investors.
There are some statistics that maybe in the order of 20% to 30%. So times 15 20, 30% of those ETF, sometimes are purchased by Asian investors in the U.S. time zone. So be it a big number maybe is not as high as that but it is a meaningful number it's hard to predict its hard to analyze all of this in all going underneath the EPS right.
Yeah.
Well the other the other question that came to mind as you were discussing all the derivatives was I was wondering how long was going to be before we got some SG derivatives.
Yes.
We've got very shortly we we've got some launches coming up and so for sure you'll see you'll see more of those we've got we've got some recent launches.
And Thats, a category, which we're very confident we'll grow.
And then of course, a shout out to Linda just saying congratulations and welcome. Thank you.
Thanks, very much bill we.
Got the Asia run rate number except $200 million.
Obviously, we're looking to improve on that we are we're making some investments in the Asia region, particularly in coverage and we think theres more to come there.
Thanks, Kevin Thank you.
Our next question comes from Hugh Miller with Buckingham Your line is open.
Hi, Thanks for taking my question had one here with regard to you noted a really nice business when displacing competitors standard benchmark with.
USA Index and also noted your some of your expertise in factors, hoping to win that.
Obviously, I think you guys enjoy benefits from being the name brand Medtronic in several geographies.
Wanted to get a sense of kind of how you guys think about.
You know just mitigating displacement risk with the area you have very strong brand recognition and how you think about solidifying your mode, you're just kind of reduce any displacement risk out there.
Yes so.
A few comments I think the older remarks that.
The bear went through in terms of the ecosystem.
Creates a huge mode around our indices because.
If you are if you're an active manager of euro than asset allocator, a pension fund or silver well fun.
That have the euro to the Missy I shopped with respect to your policy benchmarks. You cannot you can give of active managers, who can do passive you can do can overlay through features and options you could do over the counter.
Derivatives like swaps and the like and.
And therefore, you will have to be deviating from they can basis risk from your benchmark, So thats a big huge mode.
In or around that the second big area that we are.
We we worked on is innovation, we know on.
On creativity, and new product development, and the don't underestimate how being hugely important that is.
In the market cap indices.
Is that continued process of.
Of of security inclusion on country grew Sean on on the like in which we work closely with the various countries around the world to see who is opening up on.
How do we are we you go to our investors and both of those countries to be included.
Secondly is all the innovation within any as GM factors and all of that but it presents where different bills of the portfolio.
As well so that that's a second part on the third part is services in all the services that we can provide to our clients, especially our as I said on our asset manager clients in terms of helping them build internal indices for managing their own processes internally. So that sometimes it will be Bob talked about self index as being a threat, it's actually a big opportunity for us because they can some clients that want to do their own indices themselves to build their own portfolios. They can rent our entire infrastructure to do that so there are a lot of the lot of drivers of continued growth and profitability in this space.
That's very helpful color I appreciate it.
Then just as a follow up you know you noted in the U M drivers for the Ts that were seeing just a shift in demand towards us equities that the long term outlook is very favorable for your products and services.
I guess as we think about your expertise in factor investing and we'll make that et cetera.
Are you guys expecting that in the near term, though that there will likely continue to be kind of a skew towards demand for us equities relative to international.
Well clearly it's a it's been a if you look at a historical context, it's a relatively new category for us.
We're really excited by it for sure it's been a focus of ours, but the what we've seen as as successes have probably been.
The high end of our expectations and I think it's the way we view it as kind of a flanking strategies to have this specialized content. This innovative content to then be more president in us equities.
That's kind of if you like a product driven bottom up and then top down.
As we see.
Asset owners mandates when when they look at their total portfolio based on equity and then drill down and give out mandating, we're seeing more and more of those going out with MSC, our USA benchmarks rather than some of the incumbents. So so we think that this is a this is a space where where people's perceptions are altering their making decisions that they may not have made a few years ago and we see that trend continuing so we're pretty excited about that and I think we've got increasing interest from from many of our partners whether it's in each.
Or the derivatives areas to help support that because they they love seeing this type of innovation and change as well. So so I think we're on a good trend and we we believe it will continue.
Got it thank you very much.
Our next question comes from Chris Shutler with William Blair. Your line is open.
Hi, everyone. Good morning.
Sounds like you're spending a little more time thinking about M&A and anoro inorganic opportunities, maybe just give a little more specific regarding how you think about rates of return and payback periods and.
Fair to say the stuff that you would consider what would likely be more of the tuck in variety types of deal.
No Chris I will not.
I will say, we're spending more time on it I think we're spending the same amount of time.
What is changing door.
Is that.
RMS CPI as an open architecture.
In our business.
We want to develop meaning many more partnerships. So obviously, we have great partnership with our clients.
We want to we have certain partnership with distribution in all channels.
And we want to do.
Threesixty partnership we want to have many more partnership with suppliers of data. So for example in the private asset class base.
We don't have to go by the data or by the company. We can have a partnership to.
In order to use the the data for example.
We do that in fixed income indices say no were not vertically integrated in fixed income and this is where partnerships that give us the terms and conditions on the evaluated prices. Unlike Greg so.
We won partnerships in.
Sideways in terms of technology providers, our academic institutions and also to help us build new models and the like so the area, where we are really exploding in activity is in the area of those partnerships which is.
Yes, they have kind of M&A components to them because you've got to understand.
What the nature of the partnership based on was the property and what are the royalties on how do you structure. The agreement Oh on not under like a but there have been a meaningful outlays of money on and you have to look at returns in the time and effort they put into them and the like so we're not out there fishing for big transformative deals.
If somebody comes to us and say can you bias and a strategic on these extremely low price, we're going to say not right.
But but we're not actively looking at any of those.
All right. Thanks, Henry and then speaking of Big transformative deal there was one hour this morning with.
LSC and definitive just any.
Any high level comments, you can provide on impacts to MSC, good or bad from that deal.
Thanks, So look first the.
Kudos to them both of them and their owners because it sounds like a great deal for them and over to the market reaction has been pretty pretty positive.
We've had extensive relationships some partnership with both parties.
In in various areas on every indication is that we will continue on in some cases are sprinting.
For example, so so that.
So that's what the implications to that too was.
There is no change at all in our strategy obviously when this came out we've talked about it.
We had a board meeting earlier this week, obviously because of the earnings release, So we talk to our more.
And there is no change in the strategy there and we are staying our course varies on a result of that there is nothing that we say we have to go door by.
There will there may be some deals that happened as a result of that some good deals. Some this interim shareholder destruction deals.
But we don't want to partake in any of those free.
Right. Thank you.
Our next question comes from Henry Schein with BMO. Your line is open.
Hey, good morning.
Henry Linda Bear.
I had a question around so there's a lot of cool products that.
You guys are building.
It's very exciting all the different.
The markets are you going after or whether he is here factors I wanted to ask about some of the comments you made around prioritizing based on ROI or return on investment.
Hi, how are you kind of.
Beyond just the quantitative metrics, how do you actually think about which.
Like data products are or how do you think about the returns whether it's the size of the market or like the ease of creation just how do you.
You kind of what's your framework for that.
Sure. So first of all you do for all of our make so for all of our ongoing projects we track.
All of them the expenses and the financial returns we through our operating process, our monthly business reviews et cetera.
We're constantly on top of those.
There's clearly.
A broad range there are certain categories of content, where we allowing for our existing infrastructure. We can typically.
Make a pretty good judgment about that that will have a modest investment and a relatively fast return.
If it's some variation of existing content or tweaking methodologies are developing new ones.
And clearly when we're looking at a more substantive investments.
If we look at let's say our technology infrastructure et cetera, you know, we're we're clearly looking at both broad market the broader market opportunity. The competition. Those are tied to me that the discussions that we have in our in our strategy meetings with the board et cetera. So I think it's it's really kind of.
Fit for purpose, depending on the scale and the time horizon, Linda any other observations from your recent observations.
Sure Henry.
I think it's appropriate to say the rigor and discipline around this here is is extraordinary and that will continue as we go forward.
There is.
A pretty remarkable array of really high return investments that we can make and let me just say a few more things about that you've heard a lot about what we're doing in index with the new products, because we think getting to market first really is a is a huge advantage.
You've heard about the investments and indexed in fixed income and in factors.
In the S.G. I think we have touched on some of the things we're doing including.
Technology and quality enhancement.
On to help drive our coverage in that area, which has been returning.
Very well for us and very quickly.
We probably didnt say enough about our go to market strategy, where.
Exploring the wealth management area, we're thinking about that and obviously, we're looking to make appropriate investments as Henry and spoken about in Asia, particularly to drive our coverage capabilities. There. We were just looking at the run rate in Asia is up 13% for the quarter year over year, which shows that that's starting to pay off which is which is really great and then lastly.
Investments in technology, and our technology team.
To drive all of that we've made some great new hires lately and I think where we're really approaching a very exciting period of expansion.
And our capability.
In the technology area, so everything feels pretty good is underpinned by the fact that we feel.
Relatively good about the market tone and tenor now were appropriately cautious, but we are leaning forward here and we think theres theres a lot of great stuff to do and if I've missed anything Henry is going to add just one one point in this this is this is what John important area.
Okay.
Weve emphasized investments in the company.
Hey.
The all of our investments are not.
Because we want to be bigger or have more people.
Or even have more revenues or even have more profits. All of those are means to an end all of our investments are here to create shareholder value.
On the if the investment is going to make shareholder value. It doesn't go anywhere.
And Thats why we focus on the returns on that investment and we clearly have to you have to focus first on the strategy is that something we want to be in or not but once you beyond that what is the return what is the payback the quicker the baby back to better and importantly, what is the valuation of those not every dollar EBITDA has the same value and therefore, we got to go to investments in which the results of the profits that bring there are brought out or that have high high multiples. So.
That's what we are and we're very mercantilist about that so.
A because that's what we're here to do.
Got it that's helpful I think.
Our next question comes from Craig Huber with Huber Research partners your line.
Thank you maybe Henry I'll start with you if I could.
Just a broad question whats worrying you is this.
CEO of your company right now the mostly put aside the obvious potential bear market down the road big macro issue Whats were you the most right now.
No people asked me that question by the way on our Craig and the.
The answer is that idea that I give consistently.
A across pretty much every aspect of it inside out I feel fortunate enough I'm pretty bullish enough to be working at our company that has an opportunity to create for change the investment world and create enormous amount of value for our shareholders and our clients on the light on what worries me excuse me up at night is how do I know mess that up.
Okay, then my last quick.
Sure.
[laughter] all methodology.
Don't mess it up it probably thought the lender as well right.
Congratulations Linda.
Let me ask you about analytics, if I could the last three quarters I guess, the organic growth there high single digits. It's been obviously a number of years coming there. It's it's good to see and stuff can you just briefly tell us what sort of changed from your your end to help accelerate growth how sustainable do you think it is to have growth or above mid single digits for a while to come. Thank you.
Yes look I think the nature of analytics.
Is that both the strategy, which I alluded to earlier, which is both the quality and innovation in the analytics themselves, helping our clients communicate with their clients, helping them build better portfolios, but also extremely importantly distress. This again, helping them be more efficient. This is a critical part of our offering.
And our and our goal is is working right.
Then I.
Another element of that is that that means that we are as much really a service to them as a seller of products.
You know a lot of what we do is in the form of reporting.
In in services that help them with their data management that is an increasing part of the analytics.
Run rate and continues it continues to be so.
Again.
Repeating the critical point from earlier the retention rate is up.
Roughly 220 basis points that is an important indicator for us because it it shows us that our clients are.
Happy happy or with with what we're offering them. So so this is a this is a I think a solid steady progression.
Where we're we're focused on on executing every day every week.
And and.
If we continue to do so.
We should continue this trajectory should continue and I'm I'm, particularly pleased that we have been I would say call. This right in our communication to you and to the market.
We you know we never said that it was going to be rapid or dramatic in its change, but we said it would be consistent over time.
And that we would deliver and that's that's the same message that we continue to give.
Thank you.
Our next question comes from Keith Housum with Northcoast Research Your line is open.
Great. Good morning, guys. Thanks for the question for you I'm just trying to understand.
We look at EPS going out for the next year or so.
If I first want to understand the history you guys have been able to move a lot of your employees from developed markets emerging markets, how critical to EPS growth over the past two three years has that band into how much more opportunity is that as you look forward over the next year or two.
So so so things look I think data in terms of the.
The overall cost structure of the company.
Our major move on location in emerging market centers, you know has been critical to the expansion of.
Of of people and capabilities.
But more importantly, it's not just about the cost is about the great quality. All these people on the ability that we have had to create new products and new services into it and by by operating and a lot of these places with a lot of more flexibility on expandability and the like so thats.
So that has driven I would say the topline and much more importantly than just the cost line because when you aggregate the cost of all emerging markets, even though a 60 plus percent of employees is a lot lower relative to the high cost centers that we operate in.
I think so so that's that's the specific answers clearly the PS has been.
As has been growing significantly over the years by the increase in revenue growth.
By the expansion of the operating leverage the expansion of the the EBITDA margin by the.
The leverage of the company.
These significant buyback of shares and oversee the major drop in the tax rate that we've seen in the last few years.
Right.
It's Linda the the number is 63% of our employees in the emerging market centers and let me just give you a bit of color.
Having traveled to many of them over the past three months I've been incredibly impressed by the quality of the people that we have in the emerging market centers.
And it is remarkable that this company already has.
A well thought out and well oiled structure to have emerging market centers really well integrated with the developing market centers. This isn't a case, where we have to go change all that it's already done and that does help our cost obviously, but as Henry said if it is more about the quality going forward on EPS I think Henry touched on we have as with most other US company has been the beneficiary of wind at our backs from the tax law changes.
We'll see what happens as the final strokes are done in terms of implementation of those changes that were announced at the beginning of this year, but.
That that driver may weaken a little bit as we move forward.
We will continue to buy back shares Opportunistically, and we will keep that discipline.
But obviously, we're optimistic as we move forward, but.
We're going to focus a little heavier more heavily on the operational part of things because the tax turbocharging.
May may fade, a bit as we move into 2020, particularly.
Yes got it. Thank you appreciate the color.
Good question earlier questions were obviously more focused on the analytical sales in the quarter as remind us that what was the average size of your analytical analytical sales.
And that number in front of us [laughter]. This quite of look it's quite a broad range is the simplest answer so typically the low the very low end of the range is like sort of 50 $75000 for some simple equity type solutions typically and then at the at the higher end for four large.
Firm wide.
Multi asset class solutions, we're into the the multiple millions right. So we can dig out the numbers, but the short answer is it's a pretty broad range.
And a good part of them.
It is you are on the good part of the revenue.
Comes from the bigger deals, but we have a really broad pipeline with a lot of number used cases, and we can take give you some.
More detail offline that the yes.
The other important part of that.
That question is that.
As time has gone by the high end of those sales the higher the high end of the size of those sales has dramatically increased our big deal used to be.
Many years ago 750 800000.
A big deal today's multimillion and therefore in every single quarter.
If one of those slips from one from the last week of the quarter to the first the first week of the cycle of the next quarter, then you say or what happened to the analytic sales were weaker there or there why they are so strong and so the best way to look at our analytic sales is on a rolling quarter basis, because otherwise you're going to get a distorted picture whats happening.
Great guys. Thank you.
Thank you and I'm showing no further questions at this time I'd like to turn the call back over to Andrew Smith for closing remarks.
Thank you everyone for joining us today as always please do not hesitate to reach out if you do have additional questions always happy to engage with with all of you. We look forward to keep you posted on our progress and have a great day. Thank you so much.
Ladies and gentlemen. This concludes today's conference. Thank you for joining and have a wonderful day.
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