Yahoo Finance MSCI Inc. (NYSE:MSCI) Q1 2024 Earnings Call Transcript
MSCI Inc. (NYSE:MSCI) Q1 2024 Earnings Call Transcript April 23, 2024
MSCI Inc. misses on earnings expectations. Reported EPS is $3.22 EPS, expectations were $3.44. MSCI Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen and welcome to the MSCI First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investors Relations and Treasurer. You may begin.
Jeremy Ulan: Thank you. Good day and welcome to the MSCI first quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter of 2024. This press release, along with an earnings presentation and 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, which are governed by the language on the second slide of today’s presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements.
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 also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run-rate and retention rate. Important information regarding our use of operating metrics such as run-rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; and Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer.
As a final housekeeping item, we want to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry?
Henry Fernandez: Thank you, Jeremy. Good day, everyone and thank you for joining us. In the first quarter, MSCI delivered solid financial results that demonstrate the resilience of our business and our ability to maintain profitable growth supported by durable secular trends. Our operating metrics included some key product and segment milestones. But new recurring sales were flat from last year’s levels and reflect the lagging effect of market pressures on client budgets and cancels were meaningfully elevated in some concentrated areas. On the financial side, MSCI achieved organic revenue growth of 10%, adjusted earnings per share growth of 12%, and free cash flow growth of 14%. Meanwhile, our ABF revenue grew by 13%, powered by record AUM balances in both ETFs and non-listed products linked to MSCI indices.
We consider AUM levels in MSCI index-linked products as a leading indicator of improving client conditions. Operationally, we delivered our highest Q1 recurring sales in analytics in a decade at $14 million, our best ever Q1 of recurring sales among hedge funds at nearly $11 million and another quarter of double-digit subscription run-rate growth of 11% among asset owners, driven by index and analytics. Non-recurring sales of $18 million were up 16%. At the same time, our first quarter results show the lingering impact of market volatility, changes in interest rate expectations and pressures on investment and financial firms, especially active equity managers. Notably, MSCI witnessed elevated cancels which reflected a concentration of unusual client events.
Roughly $7 million worth of cancels came from a single client event, a historic merger of two major global banks in Europe that affected us across index, ESG and analytics. While some client pressures may continue, we do not expect this high level of cancels to continue. In fact, we remain greatly encouraged by our high levels of engagement across all client segments and all geographies. Despite the tough Q1 operating environment for us, we delivered double-digit organic subscription run-rate growth among asset owners, hedge funds, wealth managers and corporates. Among asset managers, redemption, outflow and fee pressures continue to weigh on some managers, but we were able to deliver 7% organic subscription run-rate growth with that segment.
In addition, we achieved 39% climate run-rate growth across our product lines, driven by APAC and EMEA regions. Likewise, APAC and EMEA helped stabilize our ESG run-rate growth at 12%, amid continued headwinds in the Americas. Meanwhile, amid a strong U.S. dollar, the benefits of our non-dollar expenses helped offset FX-related revenue headwinds. MSCI’s all-weather franchise supports our financial resilience. Our diverse mix of clients, products and geographies helped stabilize our performance in difficult environments as we experienced in the first quarter. Looking ahead to the extent equity markets and high AUM balances and liquidity levels remain supportive that should mitigate certain pressures that have weighed on client spending on MSCI products.
We remain keenly focused on capitalizing on the biggest secular trends reshaping our industry such as portfolio customization and indexation, the growth of an increasing allocations to private assets, and the global sustainability revolution. Just last week, we closed our acquisition of the London-based index provider Foxberry. This will give us a new technology platform to accelerate custom index production while providing simulation and back testing capabilities for the creation of indices for institutional investors and intermediaries. Turning to our other recent acquisitions, combining the Fabric platform with MSCI factor risk models, ESG and climate data and indices, has dramatically enhanced our capabilities and solutions for the wealth segment.
Finally, the MSCI carbon markets team, formerly Trove Research has expanded our climate solutions and deepened our engagement with existing and prospective clients beyond institutional investors, such as corporates, trading desks and banks. Considering the lagging effect of market volatility that our clients and MSCI are faced, we expect our all-weather franchise to continue to withstand external challenges such as the client events we saw in Q1. This makes us confident that MSCI can maintain high levels of revenue growth and profitability in 2024 and beyond. And with that, let me turn the call over to Baer. Baer?
Baer Pettit: Thank you, Henry, and greetings, everyone. In my remarks today, I will discuss some of the key sources of strength in our first quarter results at both the product and segment levels while putting our results in a broader strategic perspective. First, I would like to expand a bit on Henry’s comments about our elevated cancels. As he noted, the vast majority of our first quarter cancels stem from kind events such as industry consolidation, cost pressures, fund closures and reorganization. Excluding the single client event from a bank merger, our Q1 retention rate across MSCI was 94%. Clients who use multiple MSCI product lines account for 85% of our total subscription run rate. The Q1 retention of those clients on average is 93% or higher.
Turning to our product and segment results. As demand for Index Investments continues to grow, the product ecosystem linked to MSCI indexes remains a competitive advantage, especially as more-and-more investors push for customized products. In the first quarter, assets under management in equity ETF products linked to MSCI indexes hit a new record high of $1.58 trillion, while AUM in non-listed products linked to MSCI indexes also set a record of $3.23 trillion. We also delivered index subscription run rate growth of 9.3%, including 12% growth in Asia-Pacific and 24% growth among hedge funds. The 24% subscription run rate growth in index among hedge funds was driven primarily by our Float Data Product and Custom Index Sales. Meanwhile, our custom and special index run rate growth was 19%.
MSCI’s recent acquisition of Foxberry will further enhance our wide range of custom index solutions and provide a new client-centric interactive experience. The trend towards greater customization cuts across all product lines and client segments. For example, wealth managers increasingly want to customize their client portfolios using advanced technology platforms. That is what motivated MSCI acquisition of Fabric whose platform is now part of our analytics offering. Combined with our total portfolio toolkit, the Fabric platform has already boosted our ability to serve the wealth segment and the feedback from clients has been extremely positive. Our run rate among wealth managers has now surpassed $100 million, growing over 15% year-on-year.
The push for customization is closely related to another shift in the analytics space. Clients have always depended on us for risk and performance attribution tools but they now want highly specialized insights and deeply integrated content, all supported by leading-edge technology, including generative AI. Our analytics team has massive demand through products such as our multi-asset class factor models, our risk insights and risk manager solutions and our MSCI ONE platform built on Microsoft Azure. As we have recently seen, these tools can become even more relevant amid market volatility, cyclical pressures and geopolitical uncertainty. In the first quarter, Analytics posted revenue growth of 12% and our highest Q1 in a decade for recurring new sales.
At the product level, recurring sales of our RiskManager tool were up by 60% and included a large strategic win with a major global alternative asset manager facilitated by our Risk Insights offering. At the segment level, Analytics achieved recurring sales growth of 27% among banks, 20% among hedge funds and 15% among asset owners. Rising demand for highly specialized analytics tools intersects with growing client needs for climate and sustainability regulatory solutions. This represents an attractive opportunity for MSCI, and we have doubled down on our efforts to capture it. Our first quarter run rate growth for ESG Regulatory Solutions was 33%. To build on this momentum, we have enhanced our solutions for the EU sustainable finance disclosure regulation while developing a new solution with the Corporate Sustainability Reporting Directive, or CSRD.
In addition, we will continue exploring untapped opportunities in APAC, where we achieved 18% ESG run rate growth in the first quarter. In MSCI Private Capital Solutions, we achieved a run rate growth of 17% over Burgiss performance in the same period last year prior to the acquisition and a retention rate of close to 96%. We had early momentum in EMEA, which accounted for over half of new client wins in the product segment. We continue to drive new recurring sales of key existing products such as private capital transparency data and total plan portfolio management. We’re also making progress on our integrated product road map, including evaluated pricing for LPs and GPs, leveraging MSCI’s data models and research. In summary, MSCI remains laser focused on translating our long-term strategy into near-term delivery while harnessing competitive advantages and secular trends.
And with that, let me turn the call over to Andy. Andy?
Andy Wiechmann: Thanks, Baer, and hi, everyone. In the first quarter, we delivered double-digit organic revenue growth, a 11% adjusted EBITDA growth and 12% adjusted EPS growth. We delivered 10% organic revenue growth as well as record asset-based fee revenue driven by record AUM balances in ETF and non-ETF products linked to MSCI indexes. The solid financial performance highlights the resilience of our business model, even in the face of headwinds reflected in our operating metrics. As we have mentioned previously, we are seeing the impacts of a slow-moving business cycle as the prolonged period of muted flows into active equity strategies have resulted in a lengthening of sales cycles. And in this quarter, a concentration of client events on top of what is typically a seasonally softer quarter for us.
To provide a bit more color, if we compare our cancels to the first quarter of 2023, the two product segments with the biggest increases were index and ESG and climate. Within index, nearly the entirety of the increase or roughly $7 million of the increase related to a higher contribution from corporate events. From a client segment index, $5.2 million of the year-over-year increase in cancels came within the broker-dealer and hedge fund client segments, including roughly $4 million from the previously mentioned large global bank merger. Similarly, within ESG and climate, nearly $4 million or 80% of the increase in cancels came from a higher level of corporate events, including $2.5 million from the large global bank merger event. The large majority of cancels related to this global bank merger occurred in Q1, although there could be some smaller items that come through in future quarters as the integration is completed.
Across all product segments, the retention rate with asset owners and asset managers was a 95% and 97%, respectively. While we do expect some elevated levels of client events to continue in the near-term, we do not expect to see cancels continue at this level in the coming quarters, and we expect retention rates to rebound through the year. Additionally, we have a solid pipeline of new sales opportunities. In Index, we had 8% subscription run rate growth in our market cap weighted modules and 19% growth in custom indexes and special packages. As a reminder, in Q2 of last year, we had a large non-recurring revenue item related to unlicensed usage of our indexes, which drove an unusually large level of non-recurring revenue. ABF revenues were up 13% year-over-year, benefiting from about $21 billion of cash inflows and about $93 billion of market appreciation so far in 2024 with an ETFs linked to MSCI equity indexes.
Most of the MSCI-linked ETF flows were in developed markets outside the U.S. and emerging markets products, which together were over $22 billion. In Analytics, organic subscription run rate growth was 7%, which reflects the benefits from the investments we’ve made in the innovations such as our next-gen models and our Insights offering. These have helped us to drive strong sales and enterprise risk and multi-asset class models across client segments. We also had several client wins in fixed income analytics. Analytics revenue this quarter included a large contribution from catch-up revenue items, much of which related to large client implementations. In our ESG and Climate reportable segment, organic run rate growth was 13%, which excludes about $4.8 million of run rate from Trove and the impact of FX and run rate growth for the reportable ESG and Climate segment was nearly 18% within Europe and close to 22% in Asia, while the Americas growth was 9%.
In real assets, run rate growth was about 4% with subdued net new subscription sales continuing to reflect lower transaction activity and other commercial real estate pressures. We continue to be pleased with our progress on the integration of Burgiss, which, as a reminder, is referred to as the Private Capital Solutions operating segment within our all other private assets reportable segment. Retention was strong at nearly 96% and contributed over $24 million of revenue for the quarter. We continue to have a vigilant focus on disciplined capital allocation and our cash balance at the end of March was over $500 million, including readily available cash in the U.S. of over $200 million. Last week, we closed on the acquisition of Foxberry for approximately $22 million of upfront consideration.
The transaction also has the potential for additional performance-related payments tied to the achievement of key milestones. Our 2024 guidance across all categories remains unchanged and assumes that AUM declines slightly in Q2 and rebounds gradually in the second half of the year. I would note that our first quarter effective tax rate of 13.5% benefited from favorable discrete items and higher excess tax benefits recognized on stock-based comp vested in the period. For the remainder of the year, we expect the quarterly effective tax rate of 21% to 22% each quarter before any discrete items. Overall, our client centricity and multiyear investments position us well to drive growth throughout 2024, and we look forward to keeping you posted on our progress.
With that, operator, please open the line for questions.
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