MSCI's CEO Presents at Morgan Stanley Services Summit (Transcript)

| About: MSCI, Inc. (MSCI)

MSCI, Inc. (NYSE:MSCI)

Morgan Stanley Services Summit

May 8, 2012 8:10 a.m. ET

Executives

Henry Fernandez - Chairman & CEO

David Obstler – CFO

Edings Thibault - IR

Analysts

Suzi Stein - Morgan Stanley

Suzi Stein - Morgan Stanley

So first up this morning we have the management from MSCI. For those on the webcast, I'm Suzi Stein, head of Business Services at Morgan Stanley Research. I am joined by my colleague, Toni Kaplan.

As many of you know, MSCI used to be part of Morgan Stanley but was completely divested in 2009. We have Henry Fernandez, Chairman, CEO and President who has been at the helm of MSCI since 1998. We also have David Obstler, the Chief Financial Officer, who joined MSCI when it acquired RiskMetrics in 2010. We also have Edings Thibault right here in the front row, Head of Investor Relations. Thanks so much for being here today.

Why don't you start by just giving a very brief overview of the company, and then we will dive into the Q&A.

Henry Fernandez

Can you hear me now? Okay. MSCI is an investment decision support company, and we have been with that objective since the inception of the firm. And a lot of people ask us, are you an index company or data company or analytics, or technology, and we say all of the above. But more importantly, what we try to do is really address the fundamental investment problems that the clients around the world have with some kind of model that derives data and then gets coupled with technology to be able to deliver that solution to those clients. So I would rather leave it at that so that we can spend more time on the Q&A. And by the way, I’d like this forum a lot better than go through slide after slide of the same old thing.

Suzi Stein - Morgan Stanley

So there’s obviously then an evolution from data to analytics. What do you think the next step is in terms of growth for MSCI? Where do you see the company headed?

Henry Fernandez

I think it’s all of the same which is more data. We have an immense repositories of data within our company. For example, more than half of the underlying positions of the largest hedge funds in the world are sitting in our databases for us to be able to aggregate and the like and create new products around that. Every piece of data is proprietary to the hedge fund client and in aggregate we could be able to use it in a lot of different means. So that’s an example of more data usage that over time can become available. More analytics, because technology is option that will be able to help us leverage the solutions, investment solutions on the models and the data that we provide and can embed those processes in our clients’ internal universe and therefore we’re going to see a lot more of technology being used as well.

Suzi Stein - Morgan Stanley

One of the few things that we are going to focus on today is differentiation and can you talk about how – what differentiates MSCI from competitors on both the analytics side and on the index side?

Henry Fernandez

The first and foremost, we are in the business of creating standard. So standard for measuring performance, for measuring equity portfolio risk in the form of Barra, Barra tracking error or Barra risk numbers. We are in the business of measuring standards or creating standards on multi-asset class risk portfolio with RiskMetrics. We for sure are the standard for voting practices with ISS. We are now trying to create a standard with ESG, environmental, social, governance criteria for investment portfolios. So that’s what we – that’s our first differentiating factor.

After that, and those standards by the way are branded. So English is a standard but it’s not MSCI branded, at least not yet, right. So GAAP is a standard but again it’s not branded and the like. So therefore we are fortunate that we have branded standards but you will have to back them up with service, with quality of products, with innovation, with enabling technology that is going to be able to help our clients’ investment processes.

Suzi Stein - Morgan Stanley

What about particularly on the analytic side, what are you seeing as far as competition and what are you doing there to really distance yourself from competition?

Henry Fernandez

Competition always exists in one way or another. It’s always been in our universe of companies and products from their inception. I think for us more important than competition is to focus on the needs of those clients around the world that we have and the prospects that we can get, and be able to come up with the solutions to what they are looking for. And our business is a rapidly evolving business. The needs of our clients are evolving quite dramatically. If you think about Europe right now, many of our clients will plug in their sovereign bonds that’s AAAs and forget about it in the context of credit risks and all the kinds of risks. That’s no longer the case. So we’ve got to develop new models that are going to be able to take those pieces into account.

So these are evolving and therefore we stay very focused on serving those needs. You don't have to worry about competition. It's always going to be there but the clients are going to follow you and your products and services.

David Obstler

Particularly in analytics, one of the things you mentioned earlier is one of the great differentiators which is the handling of the data problems for the clients, the integrating of the analytics with the data and providing as a service model. So the fact that in performance or risk of reporting data is handled by us and not on the client side and then match with the analytics and then report it, it’s a big differentiator and something clients are quite demanding.

Suzi Stein - Morgan Stanley

I guess in the past when you’ve had conversations with clients, does price come up as far as how they are thinking about MSCI competitively?

Henry Fernandez

The price always comes up in any transaction with the client. They get to get a budget approved with their internal people and the like. So more important than price, we focus on the value proposition. What is that we are providing to those clients, and does that justify the service that we provide? So for example, we recently sold a risk management system to a wealth manager in the U.S. And the wealth manager came back to us thinking of for the product that we are offering them, and what they said was that in the first few weeks of having installed this and operate with their wealth management client, they have gathered about quarter of a billion dollars in assets. And they could attribute that specifically to the way that they were reporting the performance and risk in the portfolios of those clients. So that’s an example of the value proposition. There is no amount of money that people can pay to be able to look at that.

So over and over again when you look at our indices, for example, and an ETF provider picks our indices and they can capitalize on a part of the $7 trillion of assets that are following the MSCI indices. Then you say, yes somebody else can provide those indices at a lower price but who cares. What they are really doing is following a standard that has an incredible amount of following around the world and a lot of assets embedded in them, and they can benefit significantly from having those indices embedded in their ETFs.

Suzi Stein - Morgan Stanley

And you brought up here, so given what’s going on in the market today, I figured I’d ask. Can you just talk about your exposure to Europe and how much the volatility in the market would potentially matter to your results?

Henry Fernandez

We have a significant business in Europe, something in order of 30 plus percent, I believe, a lot of revenues come from all of Europe. What has been pleasantly surprising to us is that we are doing well in Europe, in the sales, in high levels of retention, you would have thought differently given the earthquake so to speak that is going on especially in continental Europe. But I think it goes back to the issue of our tools are standard, the mission critical to what people do.

So unless many of these firms really go out of business, they keep our tools and if any, then in a highly risky environment like this, the board of directors and their senior management on many of these places are asking their team what tools do you have to be able to understand what is happening in the marketplace either performance tools like slicing and dicing the equity markets with the MSCI indices or clearly risk management tools with RiskMetrics. So we are fortunate that we are probably among those few firms that our business is good. It’s not great, or outstanding but it’s good.

Suzi Stein - Morgan Stanley

Can you talk a little bit about the distribution or your solutions and how that’s evolved?

Henry Fernandez

We started way back when I took over 16 or so years ago with data being sold in books and in floppy disks and shipped it around the world in many different formats. We then moved to supplying the data to people who were installing software in client desks and the like. Most of what we do today either directly or indirectly through our distributors or vendors is through ASP solutions, through web-based technology.

In the case of lot of the MSCI indices, they are being delivered to organizations that are using web-based technology to distribute our products worldwide. In the case of RiskMetrics, all of it is web-based. And the Barra business, still has a majority of its technology being client hosted especially in the form of Aegis. But that is also changing with the Barra portfolio manager which is an ASP solution, and I think over time next three, five years, we will see a migration of all those clients from Aegis to BPM, Barra portfolio manager, again taking advantage of the new way of doing it. Not all of it is going to be like that. There are places in the world in which they have a significant fear of the web and therefore for those clients, some clients, for example, in China and the like will have to have installed solutions in their servers and in their data centers.

Suzi Stein - Morgan Stanley

A key issue that investors have been focused on since last summer was BlackRock filing to have their own indices. Can you discuss how that could potentially impact your business or your relationship with them? I know you’ve talked about it before but maybe you can give us an update on how you’re thinking about that.

Henry Fernandez

Yes, we can’t comment on what BlackRock may or may not do. What we do know based on fairly intense daily dialogue at all levels of our organization and BlackRock is that we have an enormously strong relationship with them. They are a very important and valuable client to us. Every opportunity especially in the ETF business, we sit down and we say, we depend on one another in a lot of what we do. Do we try to diversify from one another, or do we try to get closer to one another, and in every one of those circumstances a decision by them and by us is to get closer to one another.

That’s not to say that we’re not close to a number of other ETF providers and other asset managers that we always do that because we are open and transparent company. But the relationship with BlackRock is very strong. Now they also have repeatedly told us that they value the standard we’ve created in the MSCI indices. They value the, as I said before, the significant amount of assets that are benchmark in the world. They value the strong brand that we have and in every one of their products, there is not even a discussion as to whether they should be putting our brand or not.

So I think it is a relationship that is based very strongly on mutual recognition of the value that we bought bring to the relationship as opposed to they have an exclusive of – also we have an exclusive of them or we’re playing some kind of game with one another. I think it’s based on the recognition that they are a large ETF provider on our part and on their part we bring quite a lot of value to their own value proposition to the clients.

Suzi Stein - Morgan Stanley

You talked about Europe a little bit but can you also about what you are seeing in terms of sentiment in your end markets both in other parts of the world as well and a different sub-client type?

David Obstler

We have a fairly diversified business geographically and by end type. And in in different micro quarters, one segment takes the lead sort of in the pace of business but overall we found it to be solid across the board. We have had periods where the alternative market has had been a little more volatility but that’s come back as we said on our call. The banking business has pockets of strengths in wealth management et cetera and the asset management business has been very solid but not very buoyant. So that’s where we have been and in different periods of time we’ve had one segment that become a little stronger than the other but over time, it averages out. And we’ve had solid type of demand across the board.

Suzi Stein - Morgan Stanley

Want to see if there are any questions from the audience? Anyone?

Question-and-Answer Session

Unidentified Analyst

So Henry, question for you, one of the themes we’ve been talking about is correlation, and the equity markets have been much more correlated over the last roughly 12 months, 12 to 18 months. And so as I step back and think about themes that are relevant for you, could you identify the one macro headwind and the one macro tailwind that you think could drive your business as people try to think to the upside and the potential downside, where you could be meaningfully impacted?

Henry Fernandez

I think the themes are -- on the opportunity side are the same and very significant. The globalization of investing continues unabated. It’s interesting how we’ve gone through the ’07, ’08, ’09 period, the sovereign debt crisis, so periods of enormous turmoil, a great recession on everything, and nobody has challenged -- even in the world of high levels of correlation, nobody has challenged the globalization of investing. Nobody has said, hey we should try to slow this down. There have been obviously economically pockets of resistance to globalization of trade and services because of the impact on employment in various countries. But globalization remains intact and accelerating.

We have about 6000 clients institutions in something like 70, 80 different countries. Our employee base is very diversified, we have about 2500 people in about 20 countries and it’s kind of almost evenly distributed within the Americas and EMEA and Asia. So we travel around the world and we see a lot of clients, we see a lot of people, and when you go to places like South Africa or Korea or Brazil, globalization is just taking off. I mean people want to invest across all various classes of markets and the like. So risk management is only in the first innings, the first one of the two innings of its existence.

In terms of third party risk management system, obviously some form of risk management has been in place for a period of time. So that’s another huge trend that is going to carry a company like ours for decades to come in a lot of what we do. And an incipient trend that we have capitalized on it but there’s still quite a lot we can do is whole trend of governance. Clearly a lot of what do and I’ve said, is proxy voting, which is a small component of the entire governance landscape. What we are trying to do with that business is to transform in addition to proxy voting to create the tools for investors to make investment decisions on the basis of governance criteria associated with the companies that they are investing in.

So we recently launched a great product on executive compensation data and analytics. And it looked very far in the first 12 months. So those are some of the – now the headwinds are if the world were to slow down dramatically, we are a global company that has, as I said before, many clients in many places, and if asset values were to get depressed for a long period of time, any kind of conflict or turmoil would exist, that clearly would dent our growth in many different ways in all of our products.

Suzi Stein - Morgan Stanley

Can you talk about how you think about reinvesting in the business versus growing margins and how we should think about that over the long term?

David Obstler

Yeah, as Henry mentioned, there is quite a number of secular trends behind us. We’re a growth company, we see clients demanding more and more products. And so we want to be able to take advantage of that given our leadership position. So the way we’ve been thinking about this is our businesses do have economies of scale by delivering our products off the common platforms. And given that demand, we believe the right thing to do is to invest that marginal profitability back into the business. So with our margins being in the mid-40s in this environment where we are, this revenue environment, our strategy is to maintain those margins while investing back in the business for growth.

Suzi Stein - Morgan Stanley

What does that mean for top line growth? Would you expect to accelerate over time or just as you get bigger will that sort of trail off?

David Obstler

Yes, definitely the top line and the ability to increase margins are related. So in the environment we are in today, we don’t give top line guidance but the broad environment we are in today, our strategy is to maintain those margins. Certainly if there is upside to that in terms of the environment, the AUM or otherwise, that gives us more flexibility in a number of different degrees, including potential more investment and potential more opportunity on the margin line. So right now where we are today given this environment and given the growth, that’s where we are looking at in the next couple of years.

Henry Fernandez

Let me add to that because this is a topic that we always get asked and repeatedly, and we see enormous opportunities for secular growth in our business, for sure in an environment like now you see cyclical challenges. But what we have experienced in the past is that as challenging environments begin to recede and clients’ budgets get more flexible, more generous, they come crashing down on us so to speak to and demand that we give them and supply all the things that they have wanted to buy during the bad times. And therefore if at that moment in time we said, okay good, now we’re going to go build them, and we’ve got to wait a year or two, it’s not going to -- they’re not going to be happy people. We have seen that repeatedly in our business.

So a lot of what we try to do is look beyond the current set of challenges and say what do we need to be working on so that when the environment gets better, the demand is going to be even more robust than what we have today. So and therefore that’s on a cyclical versus secular basis. On the secular basis, we continue to see great demand for decades to come in a lot of what we do. So for some people who said, gee, why don’t you let the margin rise and return cash to – much more cash to investors and the like. That’s a short-term view really of our business. That is not what we want to do. We want to – we have a lot of clients around the world that are depending on us to give them growth and the tools, innovation and the like, and we have a major responsibility to be able to do that with our clients. So that’s something that is important.

The second question that gets asked very often is, is most of your investment because you didn’t invest much in the past or because you are facing competition or because you are – there is a lot of different ways. And the answer is none of the above. Most of what we do today, it has to do with sitting down with clients and them telling us, what is that they would like to see from us, over time that is not because we want to ward off competition or because we had a lower pay for investment in general in the business. There have been few businesses here and there in which clearly we play catch-up because we were investing somewhere else. That’s more of a portfolio decision among our products more than anything else.

So what I want to leave you with on this question is one, very significant growth in our businesses and we need to rise to the occasion to meet it over time. And then secondly, most of the investment we are making is to capitalize on that growth offensively and not defensively. And then three, we want to do it in an extremely disciplined way to try to preserve and marginally improve the current margins in the business that we have.

David Obstler

As I think we talked about on our earnings call, we have been very efficient in our expansion of resources. We’ve utilized emerging market centers and have a critical mass in those. And that’s enabled us to get a bigger bang for the buck, to hire more people, most of their investments are people, and yet still controlled that cost line and delivered the strong margin.

Unidentified Analyst

Do you have any plans to address the fixed income market?

Henry Fernandez

Fixed income to us is two different things but related. Inside MSCI there is a very large fixed income business that is embedded in the multi-asset class risk management business. Clearly as a multi-asset class risk management analytics business, the two largest classes in the world are equities and fixed income, and therefore you have to be excellent on both to be able to – to do what we do. So that is something that we have and we continue to grow and nurture and invest significantly in that asset class.

I think the second question which is probably one that you are referring to is what is our strategy with respect to fixed income either indices or analytics, as it relates to fixed income portfolio managers or the fixed income portfolio management process. I think on the index side, we have been cautious in our approach to that. There are number of participants in that space, and having wanted to have it on the front end because the value propositions are very challenged there. But we have done selected things. We recently announced a partnership with Barclays on the BarCap indices to provide the ESG component of all their fixed income indices, so we’re going to have a co-branded product, them and us providing ESG overlay to their entire fixed income indices. So that’s something that we are very excited about.

And we have also migrated many of the clients that we have in Cosmos, which is our all fixed income analytics software, to BarraOne and therefore there are quite a lot of users of BarraOne that are using it for fixed income purposes. Again, not – it’s hitting inside many of our reporting but that is growing from a small base. I think at this point, given the significant number of investment opportunities that we have, every time – every year we try to budget more investment in and even more aggressive in fixed income portfolio management analytics and it falls off because we have so many other things that we are doing. So we are hoping that, one day we have more funds to invest than we currently have and so we can put some investments in that area, or more likely that we grow via an acquisition or some form so that instead of trying to do it every year, just do it in one month type software (ph).

Suzi Stein - Morgan Stanley

What do you find to be the most misunderstood about MSCI from investors?

Henry Fernandez

I mentioned the first one which is, are you data company and index company, and so on and so forth. I think the second one is that, and we have seen in last week and this week, I think many investors have not totally calibrated the diversified model that we have. So given that we talk about a lot, we talk a great deal about emerging markets. I come from one to begin with. So I would like to talk about them. Secondly, about 40 plus percent of our employee are in the emerging market, and then thirdly, clearly the emerging market index is a flagship of our equity index universe.

But when there are -- downdrafts in emerging markets are starting to go down significantly in related to that, and that is not reality. I mean the reality is the vast majority of our revenue do not come from emerging markets to begin with. We are trying to change that, we are trying to figure out more ways that we can penetrate emerging market clients but that is something that is not well understood. The third one is that, given our strong presence in ETFs, when there is any kind of announcement like the BlackRock announcement on ETFs, there is huge focus on that at the exclusion of many of our other big businesses. So that’s something that is overplayed.

And lastly, I think in the past we’ve also seen that the equity analytics business which is a medium sized business for us, $120 million of run rate compared to $900 million of run rate for the entire company, when we lost one client for $1 million or $2 million, there has been a disproportionate negative reaction on the entire valuation of the company. So again, I think that we probably have to do a better job in making sure people fully understand what is it that, where the revenue is coming from and the breakdowns and the like, and we are taking steps in that. Hopefully in the next 12 to 18 months we can come back with more data breakdowns and analytics as it relates to our own business that we can make available to investors.

Suzi Stein - Morgan Stanley

Okay. I think we’re just about out of time. So Henry, David, thank you very much for joining us.

Henry Fernandez

Thank you for having us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!