{ "docId": "019dd923-622c-750b-8b99-781d6376c0a8", "docSlug": "9250edf61831", "documentTitle": "MSCI Inc. (MSCI)", "authorId": "54_Spruce_Point_Capital", "authorName": "Spruce Point Capital Management", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2024-01-17 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 7, "pageCount": 123, "prevPage": 6, "nextPage": 8, "slideType": "key_messages", "function": "diagnose_problem", "density": "overcrowded", "nDataPoints": 12, "notes": "Uses expert interviews and financial metrics to argue that MSCI's growth is stalling and margins are being artificially supported.", "elementsJson": [ "headline_text", "paragraph" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b99-781d6376c0a8/7", "deckHref": "/decks/019dd923-622c-750b-8b99-781d6376c0a8", "deckJsonHref": "/decks/019dd923-622c-750b-8b99-781d6376c0a8.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b99-781d6376c0a8#slide-7", "components": [ { "bbox": null, "kind": "callout", "text": "Lastly, we observe that MSCI is increasing its cost capitalization of development expense, which has the obvious effect of flattering margins.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-1ac4-74a6-be20-776ef52a5179", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.2, "w": 0.13, "x": 0.01, "y": 0.65 }, "kind": "paragraph", "text": "Analytics Segment Is Also Under Pressure And Anchored By Commoditized Solutions", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1f895b59-4775-473b-95ab-4422f84b7e3a", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.2, "w": 0.13, "x": 0.01, "y": 0.25 }, "kind": "paragraph", "text": "ESG & Climate, MSCI's Recent Growth Driver, Is Now Under Increased Pressure", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7f267033-6874-4307-8861-2198088865ea", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.35, "w": 0.84, "x": 0.15, "y": 0.16 }, "kind": "paragraph", "text": "Since 2020, ESG and Climate solutions has been a growth engine with run rate revenue increasing from $138 to $297 million, and margins expanding from 20.5% to 34.8%. We believe the growth spurt is ending not only from ESG pushback, regulatory uncertainty, and ESG's market underperformance, but also MSCI-specific issues that are resulting in client loss. In 2023, MSCI changed its representation that it has a \"Unique Track Record\" to a \"Long Track Record\". To say that something is unique means that it is one of a kind, or unlike anything else. We view this modification in choice of words, along with MSCI expanding disclosure of competitors such as Bloomberg and Moodys in the recent 10-K, as an indicator that its ESG and Climate business is coming under increased pressure. MSCI also added a pop-up box on its rating page to be used as a sales lead generation before providing its public ratings. When we interviewed a former MSCI executive we were told, \"ESG competition is definitely increasing, especially Bloomberg. MSCI was one of the first but that doesn't mean competitors aren't going to eat away at it. As early as 2023, people were leaving the ESG team. To grow, you have to have consistent sales. They were under target and didn't hit their goals. That business line was struggling.\" Lastly, we observe that MSCI is increasing its cost capitalization of development expense, which has the obvious effect of flattering margins.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "ab0d7ec2-81dc-4f37-bba8-29646d124659", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.45, "w": 0.84, "x": 0.15, "y": 0.53 }, "kind": "paragraph", "text": "The Analytics segment is ~26% of MSCI's revenue and ~18% of Adj. EBITDA. As one former MSCI employee with 18 years experience developing models said, \"It's less about brain power - lots of physics PhDs in quant land - and more about the difficult and unglamorous job of sourcing, curating, managing and QA'ing data and the 24/7 operations to ensure updates are there every day, on time, for every asset class, for every model, for every client.\" Spruce Point believes artificial intelligence will automate and improve the data management to drive down competitive barriers and fees further. In 2016, MSCI stated its intention to accelerate Analytics revenue growth rate from low to mid-single digits to the upper single digits over the long term. Seven years later, the growth rate has increased modestly to the 6% range (aided recently by punitive fee increases) but has averaged just 4.5% over the time-period. The bulk of the segment was built with acquisitions dating 15 - 20 years ago and are still anchored by RiskMetrics and Barra solutions. Not surprisingly, some industry expert interview opined that MSCI's models are becoming commoditized. Recent results indicate that the segment is under increased pressures. For example, Spruce Point observes that for the first time in recent years, MSCI experienced year-over-year declines in the organic sales growth, Adj. EBITDA margin and client Retention Rate metrics. Retention rate has fallen in three of the last four quarters while Adj. EBITDA margin growth is declining after a period of strong expansion. Now, MSCI is referencing higher compensation costs across cost of revenue, selling and marketing and G&A, offset by lower R&D compensation expense after a period of cost capitalization. Our interpretation is that MSCI is likely experiencing wage pressures retaining employees who may be looking to depart while customers churn.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d8525b10-8e6c-417c-94c6-3026b3fb8bce", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "\"ESG competition is definitely increasing, especially Bloomberg. MSCI was one of the first but that doesn't mean competitors aren't going to eat away at it. As early as 2023, people were leaving the ESG team. To grow, you have to have consistent sales. They were under target and didn't hit their goals. That business line was struggling.\" — Former MSCI executive. \"It's less about brain power - lots of physics PhDs in quant land - and more about the difficult and unglamorous job of sourcing, curating, managing and QA'ing data and the 24/7 operations to ensure updates are there every day, on time, for every asset class, for every model, for every client.\" — Former MSCI employee with 18 years experience.", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-1ac4-74a6-be20-7953f454ba78", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.68, "x": 0.305, "y": 0.02 }, "kind": "title", "text": "Multiple Pressure Across MSCI's Segments", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0abe58a0-a1ce-497c-8c82-330e6b832cdd", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 76, "from": 4, "beatId": "5c97492b-d3b4-46d9-8bf6-e685ece94ea2", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "Cite Precedent", "beatSlug": null, "evidence": "Spruce Point cites its track record and various precedents to support its claims.", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 123, "from": 1, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "96af0651-6de6-4b30-ba3b-77cee8001437", "evidence": "The loop is implicit, as the document builds a case for selling MSCI shares.", "position": 0, "objective": "Highlight the cost of inaction for investors not selling MSCI shares", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.7, "description": "Quantify what happens if the audience does nothing" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }