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MSCI (MSCI) Q4 2021 Earnings Call Transcript

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Q4 2021 Earnings Call
Jan 27, 2022, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the MSCI fourth quarter 2021 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ms. Jisoo Suh of investor relations.

You may begin.

Jisoo SuhInvestor Relations

Thank you, Elizabeth. Good day, and welcome to the MSCI fourth quarter 2021 earnings conference call. Earlier this morning, we issued a press release announcing our results for the fourth 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.com, under the Investor Relations tab.

Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the 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 10-K and in our other SEC filings. During today’s call, in addition to results presented on the basis of U.S.

GAAP, we’ll also refer to 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. You’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 in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time, the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings.

As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate 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; Baer Pettit, our president and COO; and Andy Wiechmann, our chief financial officer.

[Operator instructions] And with that, let me now turn the call over to Henry Fernandez. Henry?

Henry FernandezChairman and Chief Executive Officer

Thanks, Jisoo. Hello, everyone, and thank you for joining us today. MSCI delivered exceptional results in 2021, especially in the fourth quarter, demonstrating the strength of our ambitious strategy, key long-term investments and consistent execution. The results also reflect unprecedented demand for our solutions and enormous growth opportunities for the years ahead.

To list just a few highlights. In the fourth quarter, MSCI achieved organic revenue growth of nearly 20% and adjusted earnings-per-share growth of over 28%. For the full year, we achieved organic subscription run rate growth of over 13%, record recurring subscription sales of more than $255 million and close to 95% retention. In addition, we generated free cash flow of more than $883 million, which represented a 16% growth rate.

Our strong financial results reaffirm our strategic progress. MSCI continues to expand its role as a change agent for the global investment industry while providing the common language and the tools investors use for indexation, risk management, factors, PSG, climate and other key investment categories. Across all of our business lines, MSCI is making a big impact and gaining further recognition. We saw numerous examples of this during the fourth quarter.

In October, Hong Kong exchanges launched a futures contract on an MSCI China A share index, the first offshore sector balance China A share future supported and approved by Chinese regulators. It proved to be the most successful launch ever of a futures contract based on an MSCI Index. In November, we affirm our status as a leading provider of climate solutions for investors. During the COP26 Finance Day, the UN Capital Development Fund even launched a new ETF linked to the MSCI ACWI Climate Pathway Select Index.

Before and after COP26, we rolled out several new climate tools, including an analytical tool that provides carbon emissions data for more than 15,000 private companies and nearly 4,000 active private equity and debt funds. This is in addition to the carbon emission data we provide on nearly 10,000 public companies. As the global rate to net 0 accelerates, we’ll see enormous opportunities to provide data, tools and solutions to support investors and companies’ decarbonization initiatives and the resulting asset repricing and capital reallocation. Our ongoing and incremental investments will help us maximize these opportunities and drive climate progress across the whole of the capital markets industry.

Climate is just one example of the historic changes reshaping the global economy. At this time, MSCI’s products and services have never been more important to investors and business leaders around the world. Across most client segments and regions, we currently see a strong operating environment. Among our clients, we’ve seen more confidence than at any point since the 2008 financial crisis.

Our intense client centricity has enabled us to add wallet share organically and emerged as a go-to partner for clients seeking to differentiate themselves. That includes asset managers and asset owners, MSCI’s largest installed base of clients. Last year, our subscription run rate among those two client segments increased by 11%, excluding acquisitions. We’re also rapidly expanding client segments and end markets such as wealth managers, case funds, broker dealers, insurance companies and corporates.

We generated close to $78 million of incremental subscription run rate from those groups in 2021 for a growth rate of nearly 20%. Within our products and services, we continue to address the enormous market for indices across asset classes, exposures and investment thesis. In indices, MSCI remains a go-to provider for tools to support asset allocation, portfolio construction, performance benchmarking, indexation and customized telecom as we modernize the client experience and capitalize on growth opportunities as MSCI continues investing in and executing on our data transformation strategy. This strategy was a direct result of the feedback we received from many of you more than a year ago and before the last Investor Day.

To put this data transformation in context, MSCI has traditionally used third-party data to create indices, risk models and other products. We will continue to do that in the future, while creating new pathways for clients to access and interact with our products. But we will also source and collect much more data from alternate and direct sources on areas ranging from private equity and fixed income to real estate and climate in order to generate more meaningful and richer insights for our clients. In effect, MSCI has always been a data processing factory.

Now we are rapidly becoming a data building machine. The value of this transformation cannot be under — overstated. In a world that increasingly runs from data, MSCI’s new capabilities will dramatically enhance our competitive advantages and boost our long-term growth potential. Our new data strategy is closely connected to our technology transformation.

We recently launched MSCI developer community, a cohesive platform for clients to access our APIs and our code. This platform will help developers and quant customize and improve their offering and scale various use cases such as integrating front and back-office applications. We’re also pleased with our accelerated migration to the cloud. Last year, we successfully exited one of our on-premise data centers, and we are on track for another exit this year.

Looking at the larger picture, MSCI’s, all with their franchise and mission-critical solutions, position us favorably in every type of operating environment. That includes periods of sector, factor, geographic and ESG rotation due to our diversified product line; periods of elevated inflation due to our pricing power; and periods of market volatility due to our franchise in risk management and index derivatives around the world and, of course, our approach to repurchase of shares. Today, with a strong momentum in a constructive environment, MSCI continues making investments that we are confident will deliver tangible near-term benefit. These investments are fueling robust business growth and helping us modernize the client experience.

We believe that they will also help us build on this historic achievements of 2021 and reach even greater highs in 2022. With that, let me pass the floor over to Baer. Baer?

Baer PettitPresident and Chief Operating Officer

Thank you, Henry, and greetings, everyone. As Henry alluded to, our Triple-Crown framework, emphasizing the highest returns, fastest payback and most highly valued business opportunities is driving accelerated growth across the board, as you can see from the record numbers. On today’s call, I will provide more detail on some of our investment areas and growth opportunities. Most of our investments will be in areas where we have demonstrated leadership and see incredible demand.

Let me start with index where we are uniquely positioned to serve the global investment community. We are transforming the ability of our index clients to access, monetize and leverage our indexes and calculation capacity. MSCI currently calculates more than 260,000 indexes per day. With our investments, we expect that number could reach several million indexes calculated over the next few years.

Our forthcoming client application called Index Builder will provide investors with the opportunity to create, customize and test indexes around MSCI’s world-class frameworks and content. This will put an index calculation solution at our clients’ fingertips for the first time, accelerating our ability to meet their demand. Customized index subscription modules overall continued to show excellent momentum, growing by 18% to $93 million of subscription run rate. Additionally, customized indexes are a key driver of new growth opportunities within index-based products.

We’re also investing to stay ahead of clients’ needs for direct indexing as demand continues to grow in the wealth industry for personalized tax-aware portfolios at scale. Our strong brand across indexes, ESG and climate, factors and analytics, coupled with our portfolio construction and tax optimization tools, are helping us land several big wins, including with clients who are licensing our indexes and expanding their use of our ESG content and risk models. In fact, the AUM of direct indexing licensed to MSCI indexes is now roughly $60 billion, while our run rate for index — direct indexing offerings across the firm is roughly $10 million. In the climate space, clients continue to adopt MSCI’s Paris-aligned indexes, climate data insights, physical and transition risk models, implied temperature rise measures, our net zero tracker and our TCFD-aligned and other reporting tools.

Our climate-related run rate across the firm now totals $45 million, well more than double from last year. Following the successful product launch of Climate Lab in October, we signed several new clients during the quarter, including asset owners in EMEA. These wins also benefit the Analytics segment and leverage their reporting infrastructure. One of our largest current priorities is to build and enhance our core products, including Climate Lab and our climate models, data and research.

As you can see from the numbers, ESG at MSCI continues to perform strongly and is a central focus for us in 2022. Our ESG franchise serves different types of investors including ESG integration investors, impact investors and values-based investors. Some focus only on the financial impact of ESG issues, while others concentrate more on ethical and sustainability concerns. We offer data and solutions to support each of these use cases.

New clients in the ESG and Climate segment comprised more than 50% of new recurring subscription sales during the quarter. We’re proud of the role we have played in the investment ecosystem as the largest ESG ratings provider covering over 14,000 resource. We will continue to expand and deepen our large securities coverage universe and high data quality. We believe our focus on rules-based and transparent methodologies, financial materiality of ESG risks and assessing resiliency to those risks has enabled MSCI to transform the investment process for our clients.

Recent conversations about the need for standards and common definitions in ESG integration and sustainable investing present further opportunities for MSCI to help our clients. I’d now like to highlight some successes in Analytics this quarter. Our subscription sales grew 72% quarter over quarter. Year over year, they grew 36%, and our retention rate improved to 93.4%.

This resulted in record high net new recurring subscription sales of $18.2 million for the quarter. The wins were broad-based, including with asset owners and asset managers for use cases where we have leadership, such as enterprise risk and performance and equity models. We’re also leveraging our traditional offerings for target client segments such as our enterprise risk platform for insurance firms and our fixed-income factor models for broker-dealers. Our business wins also consisted of new offerings to solve new use cases, including, as I mentioned previously, in climate reporting within Analytics platform and Climate Lab.

Across Analytics, we continue to benefit from the enhancements we have made to portfolio construction and the reporting tools that we have developed, including factor and risk models, optimization engine and performance attribution tools while providing our Index, ESG and climate franchises with critical and differentiated IP. We’re also adding to our coverage footprint and leveraging our existing offerings to serve newer and potentially significant client use case. Our recent success scaling the hedge fund client segment is a great outcome of this approach, where our subscription run rate totals $143 million, growing over 18%. Before concluding, I’d like to say a quick word about our data capabilities.

We continue to rapidly incorporate new proprietary third-party data sets to expand and enrich our existing content, improve interoperability with external sources and establish deep network effects and client stickiness. This is evident in fixed income indexes and modules where we have added data on roughly $53 trillion worth of additional fixed income assets. Meanwhile, through our climate investments, we are rapidly adding data on physical assets, target emissions and other key metrics. We’re also investing in the data consumption experience for our clients.

To that end, we recently launched MSCI Data Explorer, our new cloud-native data search and exploration application, which enables clients to access and download data sets across all product lines in index, ESG and climate, analytics and real estate. Looking ahead, we remain confident that our long-term investments will drive future growth opportunities. With that in mind, we will continue investing and continue meeting client demands for our offerings using MSCI’s rigorous Triple-Crown framework as our North Star. With that, let me turn the call over to Andy.

Andy WiechmannChief Financial Officer

Thanks, Baer, and hi, everyone. The record results for the quarter and for the year reflect the enormous opportunity set available to MSCI and our long-term actions to identify, invest in and capture those opportunities. Each of our product segments, index, analytics, ESG and climate and all other private assets recorded their highest quarter ever for recurring subscription sales and net new recurring sales. We drove very strong double-digit sales and subscription run rate growth in each of the Americas, EMEA and APAC regions, reflecting our ability to unlock the significant addressable markets in front of us.

Our One MSCI ESG and climate franchise delivered 58% run rate growth year over year, adding $129 million of additional run rate during 2021. And looking forward, our longer-term sales pipeline across products and regions looks quite healthy. Across the firm, our 13% organic subscription run rate growth was fueled by strength across nearly all dimensions, geographies, client segments and product segments. Index subscription run rate grew more than 12% year over year, our 32nd consecutive quarter or eighth consecutive year of achieving double-digit growth.

Market cap-weighted subscription modules, which represent approximately 75% of index subscription run rate, grew 9% while we recorded strong double-digit growth in our investment thesis index modules, particularly in areas like factors, ESG and climate, which collectively drove 28% year-over-year subscription run rate growth while customized index subscription modules grew 18%. Analytics recorded 5% organic revenue growth and 7% organic run rate growth with double-digit organic growth in both equity portfolio management tools and fixed income portfolio management tools, reflecting the strategic business wins Baer described earlier. Importantly, our strong profitability growth across analytics is fueling companywide operating leverage and enabling us to make investments in key growth areas across the firm. In ESG and climate, we drove outstanding organic growth of 53% in revenue and 47% in organic subscription run rate with strong demand from new and existing clients alike.

To put this in context, since MSCI’s acquisition of risk metrics in 2010, it took almost 10 years for the products in our ESG and Climate segment to cross $100 million of run rate, which happened at the end of 2019. In the two years since, we’ve doubled that, and in 2021, with nearly $200 million in run rate. Within all other private assets, we are building momentum with organic revenue growth of 13% while benefiting from growing traction with our climate offering. Additionally, we’re seeing strong early traction from RCA, which added $76 million of run rate as of 12/31.

As we had indicated previously, we expect the annualized adjusted EBITDA margin for the all other segment to be close to the mid-teens for full-year 2022, impacted by some employee retention and integration expenses as well as the reallocation of certain internal costs to the segment. Turning to asset-based fees. Despite year-end volatility, we observed healthy cash inflows across geographic exposures and product areas and equity ETFs linked to MSCI indexes. This included healthy inflows into products with emerging markets, developed markets ex-U.S.

and U.S. exposures. AUM equity ETFs linked to MSCI ESG and climate indexes as of year-end was $227 billion, growing a tremendous 114% from a year ago, with cash inflows of nearly $34 billion during the quarter, resulting in more than 75% market share in global ESG and climate equity ETF flows. The period-end basis point fees were 2.54 bps.

The quarter-over-quarter decline was almost entirely driven by…

Read More: MSCI (MSCI) Q4 2021 Earnings Call Transcript

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