Good day ladies and gentlemen and welcome to the MSCI First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you operator. Good day and welcome to the MSCI first quarter 2020 earnings conference call. Earlier this morning we issued a press release announcing our results for the first quarter 2020. This press release along with an earnings presentation we will reference on this call as well as a brief first quarter 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 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 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 30 to 37 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 today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Linda Huber, our Chief Financial Officer. Andy Wiechmann, our Chief Strategy Officer will also join us for the Q&A portion of the call. Like many of you, we are in various remote locations today. If we have any audio quality issues we appreciate your patience as we work through them. And finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. With that let me turn the call over to Henry Fernandez. Henry?

Thank you, Salli. Hello everyone and thank you for joining us today. I hope everyone is staying safe and healthy in this difficult environment. Before I turn our call over to our first quarter results, I would like to acknowledge these unprecedented times and share a few of the actions related to our people, our clients, and our shareholders that we have taken to manage successfully through this challenging environment. Across MSCI's 35 locations in 22 countries around the globe, we have deployed our business continuity plans in full force. Almost 100% of our 3500 employees are currently working remotely. They remain engaged and productive with the right tools to work effectively across all functions of the company. Our data processing production environment remains extremely resilient and reliable with an uptime of over 99.9%. Because we have been able to seamlessly transition to this new working environment, we have stayed keenly focused on our clients, supporting the challenges that they're facing in managing their portfolios and businesses. Our sales consultants and our client coverage representatives have provided immediate expanded access to our products and services. One example is by removing location restrictions of our products and services to support our clients as they work from home. We have delivered more frequent content updates and offered select free trials across our product suite in an effort that has been widely praised in the last few weeks. And our research team has mobilized rapidly to create a wide variety of insights and research analysis. This has been delivered to the market timely through social media, podcasts, and our dedicated coronavirus web page. The accolades we have received from clients tell us that we're doing the right things to support them at this crucial time. I am incredibly proud of the way my colleagues have stepped up to work with our clients to serve whatever their needs may be, keeping faithfully to our mission of providing critical tools and insights to help clients build resilient portfolios, regardless of market conditions. And finally, we have taken a series of concrete actions to ensure MSCI remains well-positioned financially and that our shareholders continue to benefit from their support of the company. Let me now turn our focus to Q1 and how we will continue to navigate during this crisis. During the first quarter, we delivered strong financial performance across our franchise with year-over-year growth of 12% in operating revenues, 16% in adjusted EBITDA, and nearly 23% in adjusted earnings per share. Since the beginning of the year and through April 24, we bought back $357 million of MSCI shares, a total of 1.4 million shares at an average price of $250.65. We also paid to shareholders approximately $58 million in dividends during the quarter. And our Board has approved the upcoming second quarter dividend payment of $0.68 per share. These actions are consistent with our stated objectives of managing our business with the most optimized capital structure possible and of returning excess capital to our shareholders. Our share repurchase program since the start of the year is consistent with our practice of taking advantage of periods of volatility in our stock price. And our dividend declaration is consistent with our policy of paying 40% to 50% of adjusted EPS in the form of quarterly dividends. As stewards of your capital and as important shareholders ourselves, we are highly driven to manage our company carefully through these times of economic stress and market uncertainty with an ongoing keen drive to innovate and strategically grow the business for the benefits of our stakeholders regardless of market conditions. As you know, compensation costs are the most significant part of our expense base. Currently, we have a hiring freeze in place and only very few headcount additions are being made in critical areas. A significant part of our compensation expense is variable and meant to be flexed up or flexed down depending on the financial performance of the company. We are more focused than ever on driving productivity improvements and ensuring that our operations are appropriately scaled for the opportunities and challenges we see in front of us this year. As we continue to navigate this unprecedented and evolving environment, we are confident that MSCI's content, analytics, and technology applications remain must-have tools for our clients, underpinning the resiliency of our franchise. The enduring secular trends and drivers supporting our business also propel our confidence and belief in our ability to add significant value to our clients and create more value to our shareholders. I will now turn the call over to Baer, who will provide more color on what we are seeing and hearing from clients as well as examples of our ongoing innovation.

Thank you, Henry. I share your confidence in our durable business model and in our colleagues' abilities to deliver significant value for our clients even in environments like this. Our focus therefore remains to engage with our clients in detail about their businesses and investments and to run our own ship tightly to ensure total operational integrity. We continue to closely manage expenses. I am personally reviewing every request for headcount and additional non-compensation expenditure to ensure prudence in using the resources entrusted to us. At the same time, we want to create catalysts for our clients to continue to rely on our tools particularly in the context of the ongoing uncertainty around the depth and duration of the pandemic and its economic effects. Over the past several weeks, we have intensified our engagement with clients providing research insights and tools to help them perform stress tests on their portfolios, identify key factors that reflect their investment views and rebalance their portfolios to achieve their objectives. We are delivering daily research content including pieces on liquidity, hedging risk exposures and the performance of various asset classes, factors, and other strategies. Responding quickly to events in the market, we have upgraded certain of our modeling tools to enable clients to more closely monitor recent liquidity constraints. For users of our multi-asset class risk tools, we have provided access to model portfolio stress tests to simulate outcomes across equity, credit, oil, foreign currency and commodity shocks. Many of MSCI's products and services have important risk management capabilities and these features become even more critical during periods like this when economies and markets are under stress. We had several bright spots in the first quarter. One was the continued adoption of ESG investing. We observed a 120% year-over-year increase in assets under management in equity ETFs linked to MSCI ESG Indexes, which reached $37 billion at the end of the first quarter. Year-to-date, we've observed $11.6 billion of cash inflows into ESG equity ETFs linked to MSCI indexes. Looking forward, we expect investors to continue demonstrating an appetite to implement these kinds of long-term sustainable investing strategies. And our research indicates this has been a successful approach during the crisis so far. MSCI ESG Indexes have shown resilience even more notably in the first quarter of this year. Another bright spot I would like to highlight is our growth in index licensing for futures and options, which is part of our asset-based fees revenue and run rate within our Index segment. The first quarter volume in futures and options linked to MSCI indexes grew approximately 54% year-over-year reaching over 40 million contracts. With ongoing market volatility, we believe clients will continue dynamically trading and utilizing the unique multicurrency, multi-time zone derivative products linked to our indexes. Our run rate for futures and options linked to our indexes based on annualizing our results from quarter end; now totals nearly $50 million which has more than doubled since last year and continues to be one of our fastest-growing opportunities. In fact, our continuous innovation efforts will benefit a variety of facets of the ongoing growth in the company. As one example, we are currently working with a partner on a potential new series of thematic indexes focused on the important areas of innovation in genomics and robotics. This will add to our existing suite of thematic indexes ranging from digital economies to disruptive technology. Climate change remains another front-of-mind topic for investors. Most recently, we launched our Climate Value-at-Risk product in ESG. This effort has been a direct outcome of our successful acquisition of Carbon Delta in late 2019 and we expect will be an important growth driver for MSCI not only with new and existing clients in ESG, but also for our real estate clients. Before I turn the call over to Linda, I'd like to share what we are seeing and hearing from our clients and how that might translate into opportunities or even headwinds going forward. Our asset owner clients are proving to be a resilient part of our franchise. The ongoing trend of insourcing assets continues to catalyze them into upgrading their risk management tools and embracing factor investing and ESG integration even in this environment. Banks and broker-dealers remain generally well capitalized and eager to improve their tools in index derivatives related areas, ESG and liquidity risk, all areas of strength for MSCI. Clearly, the breadth and depth of the crisis will have a bearing on this going forward. I'm also encouraged by our progress within wealth management, an area we have targeted for growth. The crisis has heightened demand for more transparency and analytics among wealth managers. In response, we have had the opportunity to sell across new use cases that bring value to advisers. We are working to integrate our content into their platforms and reporting driven in large measure by areas where we have expertise such as ESG factors and Thematics. With regard to hedge funds, some strategies have suffered greatly from the onset of the crisis and experienced outflows as has been widely reported. Established players and selected other strategies have fared better. These firms have been keen to acquire more of the content analytics and technology applications MSCI can provide in order to better navigate the crisis. We are acutely aware that this operating environment could evolve to create challenges in generating new sales and avoiding cancellations. Thus far, we have seen deals pushed out later rather than pulled completely. Procurement processes have become tighter and may become more so. Additionally, we could see even more lumpiness in some of our larger ticket product sales notably in analytics. At this point, the pipeline remains quite healthy and retention rates indicate that the must-have nature of our products holds fast. We are certainly focused on doing everything we can to maintain this position of strength as we progress through the year. The continued strong level of client engagement and the variety of client problems and opportunities we are addressing continues to highlight the strength of our franchise. Let me now turn the call over to Linda, who will discuss more of the specifics of our first quarter performance as well as our current outlook.

Thank you, Baer, and hello to everyone on the call. Let's start with a review of the first quarter's results and then move on to our capital position, our current guidance and our downturn playbook. For the first quarter focusing on operating revenue, MSCI recorded nearly $417 million, up 12% from the prior year. Looking at each of our business segments, first in Index operating revenue grew approximately 16%. Growth in asset-based fees was a meaningful contributor at 22.5% year-over-year. In addition, we saw close to double-digit growth in recurring subscription revenue driven by continued momentum across modules. Second, Analytics operating revenue increased more than 3%. We saw higher subscription revenue in our multi-asset class and equity analytics products. But noting Baer's comments, we would also remind you of the lumpiness we continue to see in this business. Finally, for the all other segment, operating revenue grew nearly 20%, reflecting robust growth across our ESG ratings and screening offerings and higher subscription revenue in real estate. We ended the first quarter of 2020 with assets under management in equity ETFs linked to MSCI indexes of $709.5 billion, a decline of $225 billion from the fourth quarter of 2019. However, it is important to note that more than 96% of this sequential decrease was driven by market declines and only 4% of the decrease was driven by cash outflows. The impact is most severe in international markets, notably in the last part of March. In the last few weeks, we have seen what appears to be a potential initial recovery in AUM levels across all equity ETFs linked to MSCI indexes. As of Thursday, April 23, these assets under management had increased to approximately $744 billion. In asset-based fees, we grew quarterly revenue nearly 23% from the prior year. Because we saw record AUM levels earlier in the quarter, even with the downward trend in March, we were able to drive higher asset-based fees from equity ETFs linked to MSCI indexes. As Baer noted, we were excited to see record quarterly volumes in futures and options linked to MSCI indexes, which grew approximately 54% to more than 40 million contracts. This helped to more than double our asset-based fee revenue from futures and options linked to our indexes, which was approximately $11 million for the quarter. Sequentially, the average basis point fee on equity ETFs linked to MSCI indexes decreased by 0.11 basis points. This decline reflected a continued mix shift into funds with lower total expense ratios in line with our expectations. It also included among other items the most significant phase of the implementation of our contract renewal with BlackRock. Looking at our quarter end exposures by geography across ETF assets under management linked to MSCI indexes. As I noted earlier, we observed more severe market declines in emerging markets and developed markets outside the U.S. This happened to mid turbulent markets triggered by the pandemic as well as volatility in oil prices compared to the greater resiliency we saw in U.S. exposures. With regard to the year-over-year drivers of our adjusted earnings per share growth, approximately 80% of our $0.35 adjusted earnings per share increase came from growth in our business. The balance was largely the impact of our lower adjusted tax rate. And now, I'll turn to our balance sheet. We ended the first quarter with a cash balance of approximately $1.1 billion. In February, you'll recall that we issued $400 million of notes, due 2030 at a coupon of 3.625% and used $300 million of the proceeds to refinance our remaining outstanding 2024 notes that had a coupon of 5.25%. As of the end of the first quarter, our gross debt to latest 12 months adjusted EBITDA ratio was 3.6 times, while our net debt to latest 12 months adjusted EBITDA ratio was 2.4 times. You may also notice in our 10-Q filing that we drew on our revolver in the quarter. We borrowed approximately $5 million and then repaid it in April solely as a part of our business continuity testing. We have a strong capital position that affords us the opportunity to continue to both invest selectively and strategically in our businesses and to return capital to our shareholders. As Henry noted, since the beginning of the year and through April 24, we've returned approximately $416 million of capital through a combination of share repurchases and dividends. Now, I'll review our current outlook for the full year 2020, including select guidance metrics, we have revised based on our best view of the environment as of today. For the full year 2020, we now expect adjusted EBITDA expenses in the range of $700 million to $750 million versus our prior guidance of $750 million to $770 million, capital expenditures in the range of $50 million to $60 million versus our prior guidance of $60 million to $70 million, and free cash flow in the range of $540 million to $600 million versus our prior guidance of $580 million to $640 million. A full list of our guidance is included in our earnings release published this morning, as well as in our earnings presentation for this call. Both are available in the Investor Relations section of our website at msci.com. It's important to emphasize that these numbers reflect our best estimates at this time. As we gain additional information and experience, we will be able to further assess the implications of the pandemic and its impact on global economies, our clients and our business. And finally our updated guidance reflects a thorough review of our downturn playbook, as we continue to closely monitor the operating environment. As both Henry and Baer referenced earlier, we remain highly thoughtful regarding both headcount-related spending and non-compensation expenditures with a focus on our most critical areas to support the long-term franchise. We have identified up to $50 million of adjusted EBITDA expenses we can cut if needed. In fact, we have already taken certain proactive actions. As Henry said, we have a hiring freeze in place and only a very few headcount additions are being made for critical areas. And as we have noted previously, bonuses could also adjust depending on economic conditions. We have significantly reduced discretionary spending, such as travel, entertainment and marketing and expect that this spending generally will not return in the near-term. And while we continue to continuously innovate, as Baer noted, we are spending investment dollars much more cautiously with various initiatives seeing changes to the timing, cadence and/or amount of spend we will commit. And the same is true of capital expenditures. Despite these actions, I nonetheless share Henry and Baer's confidence in our business. In fact, I would like to close by pointing back to our long-term targets that we shared with you last year at Investor Day. As Henry said earlier, we continue to believe that these trends and drivers will support our business and propel our team's execution of these targets. And with that operator, please open the line for questions.

Thank you. The line is now open for questions. Our first question will come from Toni Kaplan from Morgan Stanley. Please go ahead.

Thanks very much and congrats on the quarter and glad to hear that you're all safe. Just wanted to ask about, if you could give us some color on what you're seeing in April in terms of new sales on the ESG front. Just wondering if the new sales pipeline has been building more slowly in the period of market volatility or if it's held up really well? Thanks.

Hi, Toni. Baer here. So look, we really haven't seen a dramatic change. Across the board, we've seen in all products a little bit of slowness, particularly in the procurement process. I think you would expect that in the current environment that people need to go an extra step to get signatures, et cetera. And that's we're seeing in different degrees and it's not a very clear pattern. But ESG certainly has held up well. So I would say that the simplest headline would be we've really seen no dramatic change in ESG and continued high levels of activity with clients moving in the right direction.

That's great. And then for my follow-up, just trying to think about long-term impacts on the business in the aftermath of COVID-19. Would you expect anything to just meaningfully change in terms of industry trends or any strategic changes within your company just as you think about all that's gone on with the current situation?

So, Toni, I believe we see no significant long-term changes, especially no negative changes to the franchise and our client interactions or the underlying drivers and trends of our business. In fact, over the last 25 years, Baer and I have worked together for over 20 years, and in each crisis we’ve faced, we've managed to stay closely connected with our clients, innovate quickly, and develop products at a faster pace. Each time, our franchise has emerged stronger from the crisis. I would expect the same outcome this time, particularly since almost all of our product lines benefit from trends like sustainable investing, factor investing, risk management, and risk analytics, especially in a volatile environment, as well as passive investing and private equity. Additionally, the foundations of our business rely on three key elements: large amounts of data, extensive analytics, and advanced technology. As clients increasingly work remotely and depend less on personal interactions, we should see an uptick in our engagement with them.

Sure of it. Thank you.

Thank you. Our next question will come from Alex Kramm with UBS. Please go ahead.

Yes. Hey, hello, everyone. Just wanted to come back to the updated guidance for this year. So you've taken your expense guidance down, and you've also taken your cash flow guidance down more. At the same time, all your comments here sound pretty positive still in terms of retention and resilience, et cetera. So I guess my question is, are you just lowering your expectations for the asset-based side that you can obviously observe and can change real time? Or are you building in any sort of reduction in subscription revenues? And if so, what are the areas that you're I guess the most negative near term? Thanks.

No, I think we clearly have a business that is about 80% subscription-based, which tends to be very resilient and sticky. It experiences a lag both when it goes down and when it goes up. The remaining 20% of the business is primarily asset-based fees, although a portion of those fees is transaction-based, pertaining to futures and options. We plan to differentiate between these two areas in the future. Currently, we are responding to the decline in asset management fees related to ETFs and other passive forms to safeguard our profitability. If the markets continue to perform well as they have in April, we can definitely adjust positively. However, in times like this, it’s wise to be cautious and thoughtful. The outcome of this crisis, especially in economic terms globally, remains uncertain. While we have been pleasantly surprised by the performance of equity markets given the state of the global economy and we hope this trend continues, we must be prepared to tighten our belts if it does not. Additionally, we are reallocating resources from previously important projects to current priorities, enabling us to continue investing and innovating. Lastly, crises like this tend to challenge the weak elements in the market, making it essential for us at MSCI to focus on efficiency and productivity, which can lead to savings that we can reinvest. Linda, do you have anything to add to Alex's question?

Sure, Alex. Let me walk you through what we're observing with ABF. You're correct that free cash flows have decreased more than cost cuts. As Henry mentioned, our subscription revenue makes up 80% of our business, and ABF constitutes about 20% of total revenue. The run rate for ABF as of March 31 was $350 million. If we break it down, roughly $200 million comes from ETFs, around $100 million from non-ETF passive, which is reported on a quarter lag and remains stable. The remaining amount, just under $50 million, derives from futures and options. Regarding the ETF run rate, we experienced a $225 billion decline, primarily due to market depreciation, accounting for 96% of it. Non-ETF passives have remained stable despite some outflows and the quarter lag in reporting. Futures and options have been able to compensate for some of the decline in the ABF run rate, but not entirely, and we expect that trend to continue. We see a decline in asset-based fees while passives hold steady and futures and options perform well. Additionally, there are cash flow factors to consider. Last year, we had significant stock-based compensation that vested, which we do not have this year. We've also anticipated some slowdown in collections as part of our conservative planning, which could impact our cash flow. Nonetheless, we’re committed to maintaining our day sales close to previous levels. It’s primarily a case of conservative planning, and I hope that clarifies things for you.

Thank you. Just to confirm what you said, regarding the basis points on the ABF and ETF fees, you mentioned that the BlackRock renegotiation is now completely reflected in the run rate. Is that correct? Should we expect any additional reductions as you potentially adjust some contracts related to floors, or is everything accounted for now?

Sure, and Baer may want to comment on this after me. Of course, Alex, we're not going to go deeply into this. But I think we said on the script that the biggest chunk of that reset has now passed behind us and that will have some impact as we go forward. But as we said that's the biggest piece. Baer may wish to add.

No, I have nothing to add. I think that's pretty clear.

All right. Thank you again.

Thanks, Alex.

Thank you. Our next question will come from Manav Patnaik with Barclays. Please go ahead.

Thank you. Baer, could you remind us about the customer mix from your clients? I don't believe you mentioned what you're hearing from the core asset management base.

Sure. Okay. So we can give you the exact breakdown. But, clearly, with rounding error, asset managers are our largest segment, I think we're at roughly 60%-ish at this stage. But more broadly, across the board, we've had, I think, really an excellent client response. We've been reaching out very broadly. I sent an e-mail to all the clients and we laid out a range of free trials on a number of products, which have had a very high uptick across all product lines and regions. Our research readership is I think up something like 70% over the 24-month average. We've been putting out a lot of very topical research related to market reactions, stress testing, et cetera. We've given clients enormous amounts of support related to working remotely. And, of course, even before that, as a starting point, we've shown great resiliency in all of our deliverables to clients. So, I would say that, in terms of the levels of client engagement, the outstanding job that our client coverage teams have done working remotely and reaching out to clients, continuing to do demos of our software products, etcetera, has been great. At this stage, in view of the fact that we're really only a month into the quarter, it's very hard to draw conclusions much beyond the ones that Henry laid out a bit earlier, which is, for sure the sales cycle has got a bit slower. We are seeing certain things being pushed out a bit. We are seeing things being pushed a little bit more senior in organizations to get approval. And the likelihood is that will continue. And our expectation is, although, just to be clear, we haven't seen a great deal of evidence of this, but our expectation is likely that it would be logical that if the economic consequences of the pandemic are those that we're reading about every day, that we will likely see some pressure from cancellations as certain clients come under strain. So, I would say, great client engagement, the pipeline is still healthy and the sort of marginal tensions that you would expect at this stage, without anything dramatic or anything, that's a clear pattern.

Got it. And just somewhat tied to this question, just a philosophical question. Like, how flexible are you guys willing to be, I'm not sure of the analogy to draw from 2008, 2009? Because this customer base presumably maybe feel as an impact at the lag. So once we get there, does your philosophy around pricing and working with them, giving them concessions, et cetera, does that change at all?

Yes. At this point, we don't need to consider any significant structural changes. What we've done so far is to simplify things. For instance, offering free trials is not a response to economic pressure; it's meant to help clients access the right tools quickly, like our shorter-dated models. Most of our clients, like us, have been in lockdown, but after an initial downturn, we've seen some resilience in the equity markets and support in the fixed income markets from various governments. Given this situation, it's hard to predict what might happen in the future. However, the straightforward answer to your question is that, as of now, we haven't observed any fundamental changes in our pricing or operational approach.

Okay. Thanks.

Thank you. Our next question will come from Chris Shutler with William Blair. Please go ahead.

Good morning, everyone. You mentioned the outperformance of ESG indexes this year. I'm interested in how your team has analyzed the data to determine the extent to which this outperformance is attributed to ESG factors specifically, compared to quality growth and other factors.

Yes. I hope you don't mind if I provide a broad overview. It's clear that a significant amount of capital is being directed towards ESG strategies, meaning more money is flowing into companies with higher ESG ratings. Our factor analysis has shown some correlation to quality, and in certain cases, there has been an unexpected link to momentum. While I can’t provide a precise breakdown right now, the key takeaway is the persistent interest in companies with strong ESG profiles that are expected to yield long-term returns. We're also ready to share additional research and data on this topic.

Okay. Thanks.

Yes. It's Linda. Just a quick update on that. ESG, ETFs linked to MSCI saw cash inflows across all geographic exposures and factors other than value and growth saw inflows in all regions, but emerging markets. And interestingly from a market share perspective, MSCI-linked ETFs drove 81% of global ESG, ETF flows and 165% of global factor ETF flows. Again that's excluding value and growth. I hope that helps you a bit.

And one final point. Setting aside performance, there may be others better suited to provide a detailed breakdown. Regarding the earlier question about the ESG pipeline, we are definitely noticing a strong and clear focus from clients on this matter. In the past few weeks, I participated in two senior client calls, one with a major asset manager associated with an insurance company and another with a significant North American asset owner. The ESG conversation remains very prominent, and we see no signs of that changing.

Okay. Thanks for all the color. One more and I certainly appreciate it's super early days. But any anecdotal evidence from your conversations with clients around the kind of active passive allocations whether that may shift a little bit based on your conversations?

I don't think so. With the relatively short time frame and the market volatility we've experienced, we haven't seen or heard anything that would make me comfortable drawing conclusions.

Okay. Fair enough. Thank you.

Thank you. Our next question will come from Bill Warmington with Wells Fargo. Please go ahead.

Good morning, everyone. So first question for you. I wanted to ask for a little color on the – basically, how you're able to retain such a high level of the AUM? Meaning that, in a $225 billion downtick, only 4% of that could be explained by the asset outflows. That seems like very sticky. And I think ESG could probably explain some of that, but I just wanted to get your color on that?

So Bill, I think what we have here are two or three different trends. First, during times of significant market volatility and decline, investors who want to stay invested rather than go to cash tend to prefer indexed strategies. This trend has consistently supported the market for ETFs, and there have been no significant withdrawals from institutional passive management. Secondly, regarding MSCI, there is a mix happening that I would like to mention. There is a shift towards factor investing, which has benefited us, and a shift towards ESG investing, which has also been advantageous. Our MSCI USA indices licensed to ETFs in the U.S., like the USA Minimum Volatility Index, have seen an increase in assets. Additionally, during this period of global volatility, we've seen money flowing into the U.S. markets, which has made us a beneficiary of that trend. While we are affected by our large exposure to emerging markets, which has been a negative factor, we have developed more MSCI USA indices and licensed them to ETF managers, resulting in more assets flowing in compared to the past. These are a few examples of why we believe we have outperformed other index providers and why our ETF managers have outperformed their peers.

Well, for my follow-up question. You had mentioned hedge fund outflows and I noticed on the retention rate for the end of Q1, they look fine. But should we be bracing ourselves for a tick down in the retention rates for the end of Q2?

Not really. I want to emphasize what Baer mentioned, which is that we were very pleased with the last week or so of the quarter, especially the last two weeks of March, despite significant volatility in the markets and a lot of fear and uncertainty about what would happen. A considerable portion of our sales for the quarter occurred in those last weeks, and we successfully closed most of them. A few sales did push into the following quarter, which is a normal occurrence since sometimes approvals cannot be obtained in time. So far in April, we are preparing for lower sales, more cancellations, and longer sales cycles. However, as Baer pointed out, we have not yet seen significant evidence of these issues. We are preparing for them and want to communicate openly about it, but we have yet to see substantial indications of those concerns.

Got it. All right. Well, thank you very much.

Thank you. Our next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Thank you. You reduced your cost guidance by $50 million at the low end of your range. Can you help us understand how that breaks down between the two major segments? Is it split evenly between indexes and analytics? I have a follow-up question as well.

Sure. Craig, probably the first thing to focus on is we want to reiterate we said up to $50 million. And it is our fond hope that we won't have to cut that deeply. The actual amount depends on what we do and when. If the crisis gets worse, we can toggle more toward that $50 million and if not that may be too much. Some of the flexibility is already embedded in our process. You've seen our downturn playbook. The first bucket is the self-adjusting metrics-based incentive plans. So, obviously, if we don't do as well, we don't pay out as much. So that happens automatically. We do have the majority of the expenses with the people. And so a meaningful amount of it is compensation. You heard we have a hiring freeze in place. That's across the board and it doesn't relate to any of the businesses specifically. So just making a very few critical hires. And again the bonuses could adjust based on the economic conditions. Then we have some discretionary spending that we also talk about in the downturn playbook. So T&E has largely frozen at this point. Training, professional fees, marketing those kinds of things we can limit pretty quickly and that has allowed us to pull it on our cost base. So again if things are really difficult, we can go back to having expenses being flat to last year. And if not, we will continue with less of an expense cut. But it's not really broken out specifically by businesses. We do intend to continue to invest at this moment. We're holding on to a very high percentage of our investment dollars at this point. And we're going to have to see how things go through the rest of the year. But as Henry stresses all the time, we have to be prepared. So we are prepared and we will see how conditions move. But $50 million is the outside if things are quite difficult. So I hope that helps you.

What I'd like to add to Linda's comment is that we at the moment do not necessarily have a bearish view of our environment the same way that we don't necessarily have a bullish view on the environment. What we are doing at MSCI and we always have done is to ensure that we are prepared to flex up or flex down. Flex up meaning if the AUM recovers, we will be back at putting some of the investment spending that we have talked about, which are going to benefit us in the longer-term. If things get more difficult, we will tighten the belt. And even in those scenarios of difficult market conditions, we're still doing a meaningful amount of investing particularly in short-term return projects that will benefit us. The last thing that, I will say is there should not be any interpretation to anything that we have said that MSCI is not prepared to continue to innovate and invest in our business. We will be doing that even during this crisis. It's just the manner in which we do it, is what is relevant.

My final question is about your derivatives or your futures and options business, which is significantly smaller than that of some major competitors. Could you elaborate on the innovation and efforts you're making in that area to drive growth going forward? Thank you.

There is definitely a lot of innovation taking place, with new product development underway and numerous discussions with our global partners. Many of our partners in Western Europe and the U.S. include ICE and Eurex, and we have been engaging in multiple conversations with them about potential new product launches. Notably, both ICE and Eurex are focusing on launching ESG Index futures, which we are actively working on. Additionally, we are intensifying our discussions with our partners in Asia to enhance the MSCI franchise in that region. Currently, a significant portion of our efforts there involves futures and options on Taiwan and Singapore, among other single countries. We are making substantial strides with futures contracts on the Emerging Markets Asia Index and similar offerings, indicating considerable activity in this area. We believe that, especially in the current environment, it is an excellent time to advance these initiatives to further diversify our revenue base.

Thank you.

Thank you. Our last question today will come from Henry Chien with BMO. Please go ahead.

Thanks, everyone. I appreciate the opportunity to ask my question. I wanted to inquire about the overall impact of market volatility. If we are entering a recessionary environment this year, how do you foresee this affecting the asset management industry and your clients, especially considering MSCI's history during previous downturns? Additionally, with the increased proportion of passive investments in the industry, I would love to hear your thoughts on this matter. Thank you.

I believe we're seeing a tug-of-war between two factors that often emerge during downturns. On one side, nearly all of our products in a declining market become increasingly vital to our clients' success. This certainly includes risk management and risk analytics for multi-asset class portfolios, fixed income portfolios, and equity portfolios, especially regarding factor investing as they need to grasp these concepts. We have discussed the notable performance of ESG during this crisis, which will gain importance alongside passive investing. While active stock picking can be advantageous in such an environment, a substantial amount of money typically shifts toward passive investing. Thus, the fundamental trends driving our business become more critical in times like these. Conversely, clients currently face budget constraints, and the challenge lies in how much they can allocate for the essential tools they need to enhance their existing resources. This is where we aim to be more adaptable and find simpler ways for them to work with us. Ultimately, it's a balance between these two factors, with times when the positives outweigh the negatives and vice versa. However, we do not experience a complete downturn in everything. Regarding passive investing, our reliance on it is significantly higher now—likely triple what it was during the financial crisis. Nevertheless, we remain confident that even in crisis-like market conditions, equity markets will hold up because of financial repression. The alternatives for investing in bonds deliver very low returns compared to risk assets. Thus, we are optimistic about our prospects of recovering asset management fees in the upcoming quarters, even amidst a recessionary backdrop.

Got it. Okay. Thank you so much.

Thank you. And our last question today will come from Keith Housum with Northcoast Research. Please go ahead.

Good morning, guys. First question is can you guys remind us how much of your solutions can be done remotely with the work-at-home e-access then going on now? Is it possible to implement all of your solutions when you're not at a customer site?

Yeah. Almost entirely is what is the answer, right? So we have – our products are typically no longer locally installed at our clients bar some extremely very small percentages, which are really not worth going into. So our clients have been able to continue to access all of our content, data, analytics et cetera continuously throughout the crisis, right? So I think it's been both a very strong operational outcome in terms of the – our business continuity planning and the fact that we have been able to move everyone out of our own offices and continue producing and launching new software versions and correcting bugs and doing all the day-to-day stuff. And equally, our clients have been able to move to their home locations and continue to do everything that they normally do. So in that regard, we're pretty well set up for – should this type of environment continue we feel very confident that we can continue to operate as we normally would do.

Okay. And then just as a follow-up. Obviously, the environment has changed quite a bit over the past few months. You guys got a great balance sheet. Has your appetite for M&A changed as a result of what's currently happening? And does it become any easier or harder to get it done?

So in an environment like this, we keep – we stay very close to the companies that are of a strategic interest to us. We remain and become even more financially disciplined in valuation – in values and valuation in an environment like this. And they are – as time goes by, opportunities do present themselves in situations like this. And we will be definitely analyzing them and if they meet our criteria of significant strategic value to us and appropriate rates of return and in this case even enhanced rates of return given the risk premium that is happening around the world, we will definitely pursue them. That's – we are a little more keen on following those M&A opportunities than we were six months or a year ago, but it's totally random, right? It's whatever happens become available that we can action – turn it into action.

It's Andy Wiechmann. I want to provide some additional insight. Generally, in a crisis environment, normal processes for healthy companies are often paused. Sellers are reluctant to sell during uncertain times, as they know buyers are cautious and factor that into their valuations. Consequently, we are currently seeing more sellers who must sell, particularly in our sector where many are early-stage startups facing cash flow challenges and relying heavily on their next capital raise. We are open to engaging in transactions. As Henry mentioned, we are actively exploring these opportunities. While these companies may be niche and have substantial costs, we are keeping a close eye on them to identify any potential advantages we can leverage.

It's Linda. I thought, Andy might want to just take a minute to update on the Burgiss investment that we made. And as a matter of housekeeping, I just wanted to remind everyone on the call that we're using the equity method of accounting for Burgiss. So you won't see any revenues from Burgiss this quarter because it's recorded on a one quarter lag. That the impact of the investment will show up in other expense and income net if you're looking for it. And just thought that Andy might want to comment on how Burgiss is going.

Sure, thanks, Linda. From an overall business performance perspective, I would say that things are generally stable. Their business primarily consists of subscription revenue, and like MSCI, they provide essential content services to their clients. The largest part of their client base consists of limited partners or asset owners, which tend to be relatively stable in these environments. They are very focused on assessing their exposures in all the funds they have invested in, understanding where potential risks lie, determining when those funds may call for capital, and figuring out when they might distribute cash. Burgiss is assisting these clients with all these critical areas that become even more significant in challenging environments. Overall, they are in good shape. To emphasize what Linda mentioned regarding financial reporting, there are two key points to note: first, since their closing cycle is slightly longer than ours, we are recognizing our share of their earnings with a one-quarter delay. Therefore, we did not record any earnings from Burgiss in the first quarter. In the second quarter, you will see our portion of earnings for the investment we held in the first quarter. As highlighted by Linda, this will appear in the other income line. Secondly, we will amortize the excess value above our share of the company's book value that is attributed to intangible assets. There will be a small amount of intangible amortization reflected in that other income line. Similar to our approach with acquisitions, we will exclude this amortization expense from our net income, adjusted net income, and adjusted EPS.

Okay. Thank you. As I'm showing no further questions at this time, I would now like to turn the call back over to Mr. Henry Fernandez, Chairman and CEO for closing remarks.

Once again, thank you everyone for joining us today and for your continued interest in MSCI. We sincerely hope that you and your families stay safe during this difficult pandemic and look forward to keeping you updated on our progress. So operator, this concludes today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.