MSCI Inc (MSCI) — Q2 2019 Earnings Call Transcript

Thank you, Shannon. Good day, and welcome to MSCI's 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 and a second quarter update. A copy of the release, second quarter update, and a slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You're 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 our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, 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 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.

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 Linda do her first quarterly report to you all on MSCI. I hope you treat her well and she does a good job, right? 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 from peers. 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 plan dynamics, industry developments, and all of our MSCI capabilities, with the 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 MSCI, and we reaffirm our belief that we are only scratching the surface of what is possible to achieve with this franchise. The data management, advanced analytical models, and sophisticated technology are becoming increasingly critical to the investment industry, and the role and the value of MSCI is growing every single day. An important discussion internally has become how we fuel the investments necessary to pursue the many opportunities we have while preserving 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 across 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, while change-the-business investments relate to enhancing the system business and, even more importantly, creating new growth areas for us. A top priority for us is to increase investments allocated to change-the-business activities. We do this by improving efficiency and productivity and, therefore, squeezing and reducing expenses across run-the-business activities. This way, we can continue to allocate 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 this at the Investor Day. We see a long runway of opportunities and growth for our current run-the-business activities. But we are 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 such as ESG and factors for both equity or fixed income. Fixed income analytics and indices and real estate and other private asset classes. A second example is new client areas such as wealth management and key geographies such as Asia. New index licensing opportunities such as futures and options listed on exchanges, and, obviously, derivatives issued by banks and broker-dealers. The 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 these change-the-business investment areas. Let me highlight a few of these developments. First, across content creation dimensions. In the first half of the year, 40% of inflows into all U.S. exposure equity ETFs went into ETFs linked to MSCI indices, primarily driven by a $9 billion inflow into EPS linked to our factor indices. Globally, there was a total of $14 billion of inflows into ETFs linked to our factor indices. By leveraging our cutting-edge fixed-income factor model, we rolled out a new tier 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 granular ones across any asset class and within one cohesive tier framework. In fixed income analytics, this quarter we have a series of new corporate credit curves, which enhanced our fixed income and multi-asset class capabilities. An example in this content creation category is that we have internally launched a series of fixed-income factor indices that 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 give us conviction about our investment plan. We continue to deliver double-digit organic subscription run-rate growth of 13% across Asia, 11% within realty, and 19% and 25% for indices and ESG products sold to wealth managers, respectively. All the cases that I 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 existing trajectory of growth in the run-the-business areas. Let me now turn the call over to Baer, who will do a deeper dive 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 the index ecosystem and the critical role that index-linked derivatives can play in that.

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 investible products to advertise cash and manage their exposure relative to the benchmark. These asset owners and active managers will use exchange-created and OTC index-linked derivatives to hedge their investments, achieve customized exposures, and manage risks relative to the benchmark. The OTC derivative markets for equity indexes have become larger over the years but have high carrying costs for sell-side market participants. The transition from OTC to listed markets helps these products reduce costs. As volume and liquidity grow in these derivatives, the increased liquidity facilitates the participation of the trading community, benefiting the ecosystem of ETFs and the OTC market. Success in any one of these pillars of our ecosystem creates a virtuous circle that helps drive demand in the others. Within this MSCI index ecosystem, the pillar that has been least developed is derivatives. This is a relatively new growth area for us that we believe could be substantial over time. Historically, the market for listed index-linked derivatives was almost entirely focused on single-market, single-currency derivatives where the trading hours and currencies of all the underlying securities were the same. Over the last decade, trading technology has progressed, and our exchange partners have had increasing success at educating the global trading community on how to trade in listed futures based on our indexes, which are mostly multi-market, multi-currency in nature. To help accelerate the growth of this opportunity, we have invested in building out a team comprised of several key individuals focused heavily on licensing our indexes for listed and OTC 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 aimed at fostering 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 notes, swaps, and options. Most of these are based on our market cap indexes but increasingly are also used for factor overlays as well as thematic ESG tilts. The incremental revenue to MSCI from licensing these products should be high-margin over time with lower cost growth as we leverage our existing IT. 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 could have a long trajectory of attractive growth and profitability. As one measure of 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 MSCI. 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 ETF licenses are scheduled to expire in March of next year, subject to relatively short-term evergreen renewal provisions. We are now engaged in advance constructive discussions with iShares around the new long-term agreement. Our objective is to continue to expand our successful partnership by balancing the price-volume mix in order to maximize long-term revenue growth. Please note that we 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.

Thanks, Baer, and hello to everyone on the call. MSCI's second quarter was another quarter of strong financial performance. On the operating side, our performance was solid but a tough lap given the exceptional second quarter in 2018. Double-digit organic subscription run rate growth was driven by strength across regions and major client segments. Specifically, the Americas 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, saw organic subscription run rate growth of 9%, 10%, and 10%, respectively. Our strong focus on continually adding value to our clients has helped us achieve a retention rate of 95.5% in Q2, the highest level 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 half was up 11% with Q2 down 3%. As I mentioned previously, the lower growth rate in the second quarter was the result of lapping a very strong Q2 2018. Also in Q2, we saw continued momentum across product segments. I'll now discuss specifics for each of the product lines. First for ESG. We continued our exceptional run across client segments and geographies. Within client segments, run rate growth was 24% for our larger segment, asset managers, which was complemented by exceptional growth of 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 ESG. Second, Index delivered another quarter of double-digit subscription run rate growth, with Factors growing at 25%, ESG growing at 48%, and custom and specialized modules growing at 14%. We continue to see consistent performance in our core market cap products, which had 10% growth. Additionally, we have a strong retention rate of 97%. Third, for Analytics, as we repeatedly mentioned in previous calls, operating metrics can be lumpy quarter-over-quarter, especially as we're seeing larger and more complex deals being closed. Our recurring sales for the quarter were $14 million, lower than the 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 continue to have positive momentum with a strong retention rate of 94% and continued strength in multi-asset class and fixed-income analytics, which collectively had run rate growth of 7%. Finally, for Real Estate, our organic run rate growth was 11% with strong traction in our market information offering. Lastly, we'd like to spotlight our nonrecurring or onetime sales, which were up 7% to $9 million versus the prior year period, primarily driven by increased sales in our index derivatives and RiskManager product offerings. Next, turning to our performance in ETFs. We continued to benefit from our focus on derivatives with listed futures and options revenue growing 20% driven by 17% year-over-year volume growth. Most notably, volume and listed futures linked to MSCI's EM and EFA indices together grew 24%. ETF ABF revenue was down about 1%, with a modest increase in year-over-year average AUM in equity ETFs linked into MSCI indices offset by a year-over-year decline in average basis points. Equity ETF assets under management linked to MSCI indices ended the quarter at $819 billion, up 10% versus the prior year driven by market appreciation across all geographies and continued flows into U.S. exposure products offset by outflows from emerging market exposures. Overall, we saw more than $7 billion of inflows into ETFs based on our Factor and ESG indices. Additionally, there was an inflow of $5.9 billion in funds based on U.S. exposure indexes, where half of the flows were in ETFs based on our Factor indices. These flows were directed primarily into low volatility products, while more than one-fourth of the inflows into ETFs were based on our ESG indices. 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 $0.68 from $0.58 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 at our cash balance. Our cash balance at the end of Q2 was $771 million. Our policy is to maintain a minimum of approximately $200 million to $250 million of cash globally for general operating purposes. Turning to free cash flow for Q2. This was $177 million, down $23 million from Q2 2018. The primary drivers of this decline were the timing of collections, higher payments for interest, and cash expenses, particularly offset by benefits from lower tax payments. Our approach to capital allocation remains the same, with no changes to our dividend policy, our leverage target, or our approach to repurchases. 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 in 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 of $685 million to $705 million for EBITDA expenses and $45 million to $55 million for CapEx. With regards 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 divesting of certain multi-year PSUs 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 will open the line to take your questions.

My first question is just around the ESG initiatives. Obviously, some impressive growth rates there you guys called out. But maybe just more broadly, we've seen a lot of other names in that space due to make some tuck-in acquisitions, put together their own initiatives, a lot of PR around it. I was just wondering how you look at the competitive landscape? And if there are just bunch of white spaces that may be everybody has an opportunity here.

So thanks, Manav, for that question. Purely the opportunity on ESG or sustainable investing in the world is enormous. Over time, as ESG factors get integrated into mainstream investing, we may not be talking about ESG investing or sustainable investing; it will be all investing. If someone is not taking sustainability into account, it will be the base of their fiduciary duties, right? So it's a huge white space. We have had incredible success and continue to do so. We've had a lot of investments into this area that have propelled significant growth. We have a product set that cuts across the board from ESG research for exclusions and screening to ESG ratings, to ESG indices, to ESG as a factor in risk models. We are now taking all of that ESG content and putting it into our technology platform, distribution channels, and the like. We are also expanding from ratings into equity and large amounts of ratings into fixed income, which is an area that we want to focus on. Some of this fixed income indices that I have mentioned that we have launched internally, our own factor indices, but the team is also working on ESG indices as well, and the like. We feel pretty good about 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 value-added for us with the right financial returns. I'm sure this area will attract a lot of providers and competitors, but we feel pretty good about the leadership position that we have and we're maintaining in the space.

Okay. Fair enough. And then maybe just for Linda, and welcome to the call. The comments around the lumpiness in the analytics sales. 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, Manav. And I'll let Baer add to this. But as we've said quite a few times and we mentioned in the prepared comments that we've already made, lumpiness is 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 Baer has anything else he wants to add.

No. The only other comment I would make would be about the retention rate, which is 220 basis points year-on-year. That's always been an important indicator for us for the health of the analytics business. Overall, there's no change in the trend, and there's no change in our previous comments, and we're carrying on as normal.

Henry, historically, you've had a different profile in your Index business and your largest competitor there. And basically, they've had sort of a bigger piece of their business and asset-based fees and traded products. And now it seems like you have a real opportunity in the traded product space to get increasingly larger there. I guess that's an observation, but my question is, how do you see MSCI's business model changing over time? Do you see the subscription component going down because of the bigger opportunity in the traded products area? Anything you could add there would be helpful.

Yes, so as Baer indicated, the three legs of our stool that keep the stool together, right, is active management, passive management, and derivatives. We traditionally started with this subscription part, which is active management and grew that and continue to grow that enormously. That 10%, 11% growth in index subscription is all from active management with a lot of new products, a lot of new clients, and a lot of new use cases, etc. We were the inventors of the international ETF business by licensing them to Morgan Stanley, and that has grown enormously. Now we are not only international across borders but we're also domestic, with domestic indices in many areas like we mentioned about the U.S. exposure indices through factors, ESG, and all of that. We continue to grow, and that will be another big runway in our growth. The third part is derivatives. We have always been licensing and broker-dealers about over-the-counter derivatives, but the absence of listed futures and options in multi-country, multi-currency indices was a slowdown, which was a difficulty in the explosion or potential growth of over-the-counter derivatives. A few years back, maybe 5, 6, or 7 years back, the model was broken because we were able to find a path for this multi-country, multi-currency index futures with our change partners to trade in a time zone in which the underlines are sometimes sleeping. The success of the MSCI emerging market futures contract, which is now the third largest futures contract in the world in open interest, the EAFE contract, and all of that has created a path forward for this growth of this industry, which would be more logical to have because the investment process is global and regional. We anticipate that in 10 or 15 years, multi-country, multi-currency derivatives may become larger than national ones. We want to be one of the leading providers of indices in that area. This ecosystem that Baer indicated, the more derivatives you have, the more trading in ETFs and over-the-counter, and, hopefully, the more active management that takes place. It all creates liquidity and reinforces one another across the world.

That's very helpful. You mentioned launching fixed income factor indices. Congratulations. Obviously, fixed income has been an area that you've been investing in and focusing on for some time. What has changed that has enabled you to provide this now? What has changed internally that has gotten you to this place?

Sure. Yes, Toni. What's really different is if you think about the equity indexes, they were global and market cap weighted or in fixed income currency issuance weighted. We've taken a different strategy in fixed income, starting with clearly differentiated, more specialized indexes, which will serve very particular client needs and product needs. We felt that in this space, we could use some of the thought leadership and content that we have from fixed income analytics and also the infrastructure that we have there. This has been an exciting venture within the firm, and we should be bringing this to market as we said later in the year. We're having exciting discussions with some major market counterparties about this. For sure, this will not be a major business line in the short run, but we think it will be innovative, it will be different, and I think that's 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.

I guess just coming back to the analytics sales question from earlier. 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 acknowledged the consolidation in the industry. Obviously, you've been very immune so far, but just curious how the environment is getting tougher? What are you experiencing out there?

So Alex, look. For sure as you're aware, all of our various client bases that we deal with are focused on efficiency and operating their firms and allocating their expenses in the most efficient manner. That has actually been a central pillar of our analytics sales strategy. It actually goes not merely with an analytical offering to give them better understanding of their portfolios but to work on creating efficiency in their organizations through better data management so that they can use more technology and fewer humans, etc. I would say that our response to or our strategy has very much catered to that environment that you referred to. The result is that we continue to be confident with the analytics story. We continue to be confident in the matter that we described a steady progression of growth, and at present, even though, as we said, there's this lumpiness, there's 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 managing it and the growth trajectory is unchanged.

I would add that, first of all, it's important that we say one more time, we're very comfortable where we are in the trajectory of this. If we saw any alarm bells or whatever, you're going to be the first one to tell you. And all of that. Secondly, we're very optimistic about all of this because the clients we're having along the lines that Baer described are pretty positive. The high level of retention rates that are almost record levels of retention rates in this area, which in the past sometimes you all have questions about, are another proof that our offering is sticky to people and they're therefore, not subject to competitive pressures, for example. So that's a second area. And a third area is that as we improve our technology, not only our content but as we improve our technology, it's going to unleash a lot more value of that content in the hands of the clients. That's the area we're putting a lot of effort into because we believe that for every unit or content in our space, we should be selling a lot more but that the handicap there has always been the enabling technology to make the use cases work.

Fair enough. And then just shifting gears actually to Linda, first of all, welcome to your first earnings call. Great to have you, but semi-personal question here. Obviously, you've been there for three months now. This is your first earnings call. Would be very curious to hear what you've been focused on? What you're seeing from a bigger picture perspective, particularly as you kind of make your mark on this organization? MSCI has become a very, very well-oiled machine over the last few years, so it seems like there’s not a lot of room for improvement. So curious what you think you can do and where you've been spending your time?

Alex, thanks for the very kind question. Working for Mr. Fernandez here, there's always room for improvement, which I think my colleagues would agree with. The real challenge here is to keep the growth trajectory moving forward and to really take advantage of these incredible opportunities ahead of us. It's been a great first 90 days. I've been spending my time 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 payoffs, and that we focus on the areas that are valued most highly by the shareholders. This place is quite a well-run machine, but there's always opportunity for improvement, and I look forward to that as we move into the operating plan part of the cycle.

So Linda's middle name is ICAAP. Linda Aycock Huber, which is internal capital allocation.

This is Drew Kootman on for Joe. Just wanted to touch on the M&A front. You guys have talked about continuing to expand the new initiatives. Just seeing how the pipeline looks for that?

Good question. The focus on MSCI has traditionally been, in the last few years, on organic growth, and we're very proud of that and we want to continue that, especially because as our franchise grows and our infrastructure grows. Think about the platform of data, content, technology, and research; the incremental investments in that platform get lower for every unit of revenue we can produce. Therefore, the more organic we build a virtuous circle, the higher the rate of return on those investments because they are made at the margin. So that's one reason why it's imperative to look at mostly organic growth because we're not going to find those rates of return anywhere else in the marketplace. Having said that, there are always a few strategic areas we're looking at to add to those capabilities, but they have to be extensions of what we do, not going out of our field, and they have to have very high rates of return because the returns in buying back our shares are extremely high as we proved last year; the internal capital allocation and returns to these projects are extremely high. Therefore, the cost of putting capital to work is a big acquisition with great returns but not as great as the organic ones. That's why we're so focused on this area. We look at everything, obviously, because it's our fiduciary duty to do so.

Got it. Just wondering if you'd talk about any shifts you're seeing in the demand environment and how AUMs are shifting? What do you expect moving forward?

I think we have been very pleasantly surprised that after an incredible run-up in '18 in AUM and ETFs and part of '17 with some volatility at the end of '18, of course, the AUM levels have held up extraordinarily high and continue to do so around the world. There's been a lot of shifts; obviously, emerging markets have not done as well. The U.S. market has done incredibly well. Some developed market areas are stronger, some other ones are weaker, but we're very proud of the diversification we have in all of that, because if the U.S. market is doing well, we have a lot of factor and indices. If developed markets do well and the emerging markets do well, we're the big kahuna there. We have a lot of these flows coming into all these ETFs. This is a great franchise, and the key is to continue to feed it, diversify it, and innovate constantly. That's the reason why the fixed income, factor, and ESG indices are big building blocks into that.

Perfect, thank you.

You highlighted Asia as a growth geography, and I just wanted to ask, how much revenue do you generate from Asia today? And how much revenue do you think you'll generate from Asia in five years?

Asia is an area that we have not been happy with, even though it was growing at a healthy pace before. During the enormous amount of savings that are going into institutional asset owners in Asia and the enormous wealth creation in individuals and the growth of wealth management in the region is something that we look at and say, why can we not be growing double or triple what we're currently growing? We've always been an Asian house. In terms of the total subscription run rate, we have about $1.2 billion in subscription and about $200 million of that is from Asia or about 13%. Over the next 10 years, that number has to be a lot bigger and it won't happen because EMEA and America are going down. It has to be because the rate of growth of Asia needs to be a lot bigger than the other regions, and we are now very well positioned to attack that in a big way.

I was wondering how long it was going to be before we got some ESG derivatives?

Very shortly. We've got some launches coming up, and for sure you'll see more of those. We've had some recent launches in the category, which we're very confident will grow.

Congratulations and welcome.

Thanks very much, Bill. We dug up the Asian run rate number; it's up $200 million. We're looking to improve on that. We're making some investments in the Asia region, particularly in coverage, and we think there's more to come there. Thanks again, Bill.

Thank you.

I had one here with regard to the nice business win displacing a competitor's standard benchmark with the MSCI U.S.A. Index. Also noted just some of your expertise in factors helping to win that. I wanted to get a sense of how you think about mitigating displacement risk with areas that you have very strong name brand recognition in? How do you think about solidifying your moat to reduce any displacement risk?

A few comments. I think all the remarks that Baer went through about the ecosystem create a huge moat around our indices because if you're an asset allocator or pension fund, you are at an MSCI shop with respect to your policy benchmarks. You can give active managers, do passive, do overlays through futures and options, and therefore you don't have to deviate from taking basic risk from your benchmark. The second big area that we worked on is in Malaysia. Productivity and new product development and don't underestimate how hugely important that is in the market cap indices, is the continued process of security inclusion and country inclusion, working closely with various countries to see who's opening up. Third, we have the services that we provide to clients, especially our asset manager clients, in helping them build internal indices for managing their own processes. Some clients want to do their own indices themselves; they can rent our entire infrastructure to do that.

That's helpful color. I appreciate it. Also noted that in the drivers for the ETFs, we're seeing a shift in demand toward U.S. equities. The long-term outlook is very favorable for your products and services. Are you guys expecting that in the near term, though, that it will likely continue to be skewed toward demand for U.S. equities relative to international?

Well, clearly it's been a relatively new category for us. We're really excited by it. For sure, successes have probably been at the high end of our expectations. We view it as a product-driven bottom-up approach, seeing asset owners making decisions they may not have made a few years ago, and we see the trend continuing. We think we've got increasing interest from many of our partners, whether in ETFs or derivatives areas, so we believe it's a good trend, and we anticipate it will continue.

Sounds like you're spending a little more time thinking about M&A and inorganic opportunities. Maybe just getting a little more specific regarding how you think about rates of return and payback periods. Fair to say the stuff that you would consider would likely be more of the tuck-in variety types of deals?

No, Chris, I would not say we're spending more time on it. I think we're spending the same amount of time. What is changing is that MSCI is an open architecture business. We want to develop many more partnerships. We have great partnerships with our clients, and we want to have partnerships with distribution channels and data suppliers. For example, in the private asset class base, we’ll have to buy the data or buy the company; we can have a partnership to use the data. We do that in fixed income indices. We want partnerships with technology providers, academic institutions to help build new models. We're not out there fishing for big transformative deals, but if someone comes to us with a strategic and very low price, we're not going to say no.

Okay. And then speaking kind of big transformative deals, there was one announced this morning, with LSE and Refinitiv; any high-level comments you can provide on impacts to MSCI, good or bad, from that deal?

First, kudos to them, both of them and their owners because it sounds like a great deal for them and the market reaction has been pretty positive. We've had extensive relationships and some partnerships with both parties in various areas, and every indication is that will continue and in some cases expand. The implications for us, there's no change in our strategy. We are staying our course. There's nothing that we say we have to go do or buy as a result of that.

Thank you.

I had a question around—there were a lot of cool products that you guys are building and it's very exciting all the different markets that you're going after, whether ESG or factors. I wanted to ask about some comments you made around prioritizing based on ROI or return on investments. How do you think, beyond just the quantitative metrics, how do you think about these data products? How do you think about the returns and whether it's the size of the market or the ease of creation? What's your framework for that?

So first of all, for all of our mix, we track all of them, the expenses and financial returns through our operating process, our monthly business reviews, etc. We're constantly on top of those. Certain categories of content allow for existing infrastructure. We can typically make a pretty good judgment about a modest investment and a relatively fast return. If it's some variation of existing content or tweaking methodologies or developing new ones. Clearly, we look at a broader market opportunity and the competition when we're looking at more substantive investments. The scale and time horizon are fit for purpose depending on the investment. Linda, any other observations from your recent observations?

Sure. Henry, it's appropriate to say that the rigor and discipline around this area is extraordinary, and that will continue. There's a remarkable array of very high return investments we can make. You've heard a lot about what we're doing in index with new products. We are looking to make appropriate investments, as Henry has spoken about, in Asia, particularly, to drive our coverage capabilities there. We were just looking at the run rate in Asia; it's up 13% for the quarter year-over-year, showing that starting to pay off is great. Lastly, our technology team is driving capability with new hires lately, approaching an exciting period of expansion in technology. Everything feels pretty good; we're cautiously optimistic about the market tone.

One last point because this is such an important area. All of our investments are not because we want to be bigger, have more people, or have more revenues or profits. All of those are means to an end. All of our investments create shareholder value. If the investment will not make shareholder value, it doesn't go anywhere. We clearly focus first on the strategy, but once you're beyond that, what is the return; what's the payback. The quicker the payback the better. Importantly, what is the valuation of those? Not every dollar of EBITDA has the same value, and therefore, we got to go to investments that have high multiples.

A broad question here. What's worrying you the most as CEO of your company right now, put aside the obvious of a potential bear market down the road; taking into account macro issues, what's worrying you most?

A lot of people ask me that question, and Craig, the answer I give consistently is that I feel fortunate enough to work at a company that can change the investment world and create an enormous amount of value for our shareholders and our clients. What worries me and keeps me up is how do I not mess that up.

Okay. That was quick. I appreciate that.

The organic growth in analytics has been high single digits for the last three quarters. Can you tell us briefly what sort of change from your end to help accelerate growth? How sustainable do you think it is to have growth above mid-single digits for a while to come? Look, I think the nature of analytics, the quality and innovation, the analytics themselves, are helping our clients communicate with their clients, helping them build better portfolios, but also very importantly, to stress this again, helping them be more efficient. A lot of what we do is in the form of reporting and services that help them with data management. That's an increasing part of the analytics run rate and continues to be so. This is a solid, steady progression, where we're focused on executing every day. If we continue to do so, this trajectory should continue. We've been able to describe that consistently, so that's our ongoing message.

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 all of you. We look forward to keeping you posted on our progress, and have a great day. Thank you so much.