Moody's Corporation — 2024 Q1

Yes. Heather, maybe let me start with the Q1 revenue performance and what we're seeing for the rest of the year, and I'll pass it to Rob to provide some color on pipeline and sales. In the first quarter, we delivered revenue growth of 8% and ARR growth of 10%. We had strong demand for our data solutions and KYC. Those are the 2 that grew, respectively, 13% and 24%.

Yes. Heather, just to double-click a little bit, I mean you asked about retention. I'd say we're seeing, obviously, at the MA portfolio level, very strong overall retention. I'd say we do see a little bit of pressure from banks and asset managers. We saw a little bit of an uptick. Noémie just mentioned it in the research business, but some improved retention in other areas.

I just wanted to follow up a little bit on that in terms of if you could help us with some of your end market exposures maybe in MA in terms of the client pressures. We're seeing a lot of the other financial information services companies obviously call out pressure from both the buy-side and the sell-side. So just if you could help us out there going forward, if we should be keeping an eye out on anything.

Yes. Manav, let me take that. I guess I would kind of come back and say, while certainly, there are cost pressures at financial institutions, corporates, like the one on the phone at the moment, everybody's focused on having discipline around expenses. I'm sure we can all understand that.

Very strong 1Q issuance quarter. Obviously, that was expected. And you raised FIG and structured marginally, but kept corporate sort of the same. And you're calling out sort of improved M&A activity and you're seeing the guide being towards the high end of the range. I guess what gives you sort of reservation not to fully raise the MIS guide? I know you talk about sort of election uncertainty and rate uncertainty later in the year and the comps get harder. But just talk through the factors because I feel like 1Q would have given a little bit of room for having cushion in doing that.

Yes. Toni, thanks for the question. And I think part of this just comes back to it's 1Q. So let me talk to you maybe, Toni, about kind of what we see in the year in terms of both what I think could be tailwinds for issuance, so where there could be some upside as well as where we maybe have a little bit of uncertainty or caution.

I just wanted to follow up on the pull forward comment. As we understand the second half pull forward in the first half, but I also wanted to better understand the pull forward from '25-'26. How does the refi wall look now for '25 and '26, even with the pull forward? Is there still a much bigger refi wall in '25-'26 compared to what we are seeing in '24? And then as we think about the M&A, where are we trending? Or what's the assumption for M&A as a percentage of overall issuance this year? And how does that compare to an average year?

Yes. Ashish, we'll have a little bit better insight later in the year when we publish our updated maturity refinancing study, as we always do. But I would say that, certainly, you've seen issuers who are addressing upcoming maturities, particularly in loans. And there's still some maturities for 2024 that have got to get done, not a lot, as you'd expect. It's possible that we start to see some additional pull forward from 2025 perhaps and beyond in the second half of this year if markets remain supportive. So we're going to be looking after that.

I wanted to ask about the AI frameworks that you outlined in the presentation on the webcast deck. And I think, Rob, you made mention of there being kind of different monetization strategies across each one of those buckets. So I was hoping you could expand on that comment and maybe on progress in terms of monetization or even a better understanding of the type of impact that could have, whether it's in '24 or in the out-years.

Yes. So the first thing we wanted to do is make sure we had a framework. We have a lot of innovation going on, and we wanted to make sure that we're able to be thoughtful about how we go to market with that innovation for our customers.

the navigators, again, I talked about that as probably being table stakes. This is making our solutions much easier to use. And I think that will be -- that will support the value proposition, and ultimately, the pricing...

And retention.

But also the retention, exactly. I think that's where that's going to -- and again, I think we're going to see that will be table stakes. Everybody is going to have -- use chatbots and other things to make their solutions easier to use. It's the skills where we're taking the proprietary Moody's content and then delivering that into the workflow for our customers and then aggregating those skills and prompt engineering into an assistant for people in banking, for people in insurance, for people in compliance.

Yes. The other thing I would add, reflecting on the conversations we're having with customers, they want to partner with firms that can be trusted when it comes to data integrity that have a strong reputation for robust analytics and modeling skills. They're still assessing their own framework when it comes to dealing with vendors on GenAI-enabled solutions. And that's why I think we differentiate ourselves given our reputation, our history and all the work we've done to build that framework. So I just want to add that.

That's helpful. And welcome, Noémie.

Thank you.

Thanks. I can maybe take that. We've increased the MIS adjusted operating margin by 50 bps for the full year. We've maintained our MA adjusted operating margin unchanged despite a bit of revenue headwind. That's because we are very mindful in our spend. We're investing strategically, but we're also building efficiencies into the system.

Yes. And I guess the only -- the double-click on that is given what we've seen in the first quarter, we have not upsized our investment program.

I wanted to go back to MA and the change in the revenue guide. Just want to clarify, like is the change entirely FX? Or is there something else to keep in mind as it relates to just to converting ARR to revenues? And I'm curious if you can talk about how much FX impacted MA this quarter.

Yes. I'll take that. On the first quarter, we didn't see any material impact on FX. It's really for the remainder of the year as we saw some strengthening of the U.S. dollar. The update in the outlook for MA revenue, it's primarily FX driven. There's also a little bit of sales linearity that's more geared towards the back half of the year than what we initially thought in February. But what -- as Rob talked about, our pipeline is very strong. We have -- can you hear me? Yes. We have a strong pipeline. Our meetings -- sales meetings are very -- going very well. So it's primarily FX with a little bit of sales seasonality as well.

Okay. So just to be clear, sorry, just to -- there's no change. You're not sort of lowering the -- within the low double-digit range per ARR. ARR is still pretty much in line with how you...

Yes, that's correct. We -- the ARR is a forward-looking measure of the health of our recurring revenue business, and the underlying health of that business hasn't changed from what we said before.

Yes. So over the past year or so, we have seen a little bit of deceleration in ARR growth in Research & Insights. And obviously, fixed income research is a pretty mature market. And that's really one reason that we focused on these 2 new enhancements to CreditView that we have talked about over the last quarter or 2. That's the Research Assistant and the unrated coverage expansion. It is going to take a little time for us to see the benefits of that in ARR growth.

You mentioned seeing some pull forward in refinancing issuance, some from the second half of 2024 and some from beyond 2024. Can you talk about how much opportunistic issuance may have been pulled forward into the quarter and what that could mean for non-refinancing-related issuance in the back half of this year and beyond?

I guess George, maybe the best way I could quantify it is still the meaningful majority of issuance in the quarter was refinancing. So the new money, there was a combination of -- I do think there was some pull forward of new money transactions, but a lot of what was getting done was refinancing activity. Does that give you some -- does that help?

Yes. Yes, that helps. And I guess, what's the view on new money over the next several quarters in the back half of the year?

Yes. George, so that's where I come back to. If -- for us to really have confidence that the first quarter is not kind of a one-trick pony of pull forward of issuance, either in new opportunistic issuance from the second half of the year or a pull forward of maturity walls, what we really want to see is the mix of refi to new money start to pick up. And that's why I go back to that M&A. I think that's going to be an important driver because there is a mountain of money at these private equity firms that has got to get deployed. So there's actually two things going on.

Noémie, I'm curious, you're new CFO here. You're following roughly 20 years, very strong, the prior 2 CFOs, your company there and stuff. What are you thinking you can improve upon at the company that you're willing to talk about publicly here?

Thanks for the question. I think the -- if I think about stepping back a bit about the company's priorities and where we're headed, I think my priorities are very much aligned with where the company is going and what we're focused on to accomplish our medium-term targets and beyond.

Yes. And Craig, I will add. I think Noémie is also going to bring a wonderful perspective and I think help communicate to the market the real value of this business and using the perspective that she's had from software and SaaS businesses in the past. So we're really excited about it.

Yes. Jeff, great question. RMS is really turning into a nice story for us. And I guess I would -- maybe I'll call it core RMS ARR, that is now growing in line with MA ARR. And that is a far cry from the quite low single-digit percent growth when we acquired the business. And part -- there's a couple of things going on there just with the core business, excluding the synergies.

I just wanted to get with the current guide for credit issuance. Are you assuming that issuance on a transactional basis will be down in the fourth quarter this year? And also, I just wanted to check your pulse on if you thought we were in the midst of a multiyear issuance recovery following the pullback in '22?

Andrew, great questions. So thinking about, I guess, year to go. Obviously, we've held the issuance forecast range. I mentioned that we expect to be in the higher end of that range. And so obviously, that invites questions about, okay, given the strong first quarter, what does that imply then about the second half? And it does, in fact, imply a, I'd say, for year to go, so that's 3 quarters a, call it, mid-single-digit decline in issuance for the balance of the year.

Issuance recovery given the pullback in '22.

Yes. I do think we are. And I think that's consistent with -- we obviously updated our medium-term targets for MIS, and I think that's part of that. And I will go back to that point, Andrew, around what -- one of the things I -- that leads me to that conclusion is -- and while we may have -- again, we may have a little volatility in the quarters here in the year, but I think the trend line is up.

Wanted to ask a balance sheet-related question. I see that your gross leverage is now down at around 2.2, which is the lowest level we've seen from you guys in years. And you also slowed the pace of the buyback in Q1. Perhaps that cash on the balance sheet went up by about $300 million in the quarter. That actually was quite stable through 2023, so that's a break in trend there. Is there a change in how you're thinking about capital allocation or the cash you need to hold on the balance sheet? And are you perhaps making room for acquisitions here? Can you just give a bit of color there?

Yes. On capital allocation, we are maintaining our approach, and it's my intent to continue that. We -- on the share buyback, which I think is where you're going, we -- it's just been 1 quarter of execution. The pace isn't out of line with our planned cadence. We expect to catch up in the second quarter and the second half to hit our targets, so I wouldn't read anything into that. And then last year, we focused on deleveraging because we had ticked up in 2022.

So I have two housekeeping questions for modeling purpose. The first one is I want to go back to the margin. Would you be able to provide more color on the seasonality for the margins of MIS and MA for the rest of this year? And then the second one is on the migration to cloud revenue. My understanding is it will impact your upfront revenue growth, but you'll be better off longer term. Should we expect your MA revenue growth to run below your ARR growth until you completed your migration in like RMS and also research?

Owen, this is Rob. I'm going to take the first one. No, I don't think so. I don't think you're going to see us kind of have what I would call kind of a big valley as we're moving from customers from on-prem to SaaS. So that's not something I would anticipate.

Yes. MIS margin, we saw a -- the top line, we expect this to be growing low single digit in the remainder of the year. For the margin for MIS, we're forecasting the expenses to decline slightly in the second quarter in the low single digit sequentially from the first quarter. Our first quarter MIS adjusted operating margin of 64.6%, and expanded full year expectation implies an adjusted operating margin in the range of 53% to 56% on average for the remainder of the year.

You sort of touched on this, but can you just talk a little further about your expectations for the whole company for your cost ramp for the remaining 3 quarters in light of your guidance for cost here? That's my first housekeeping question. The other thing I want to ask you, in the past, you guys have given us your incentive compensation that you booked in the quarter. What's your outlook for the year there?

Yes. On incentive comp, first of all, we recorded $105 million for the first quarter. We expect, on average, $100 million for the second and third quarter and slightly up in the fourth quarter. So that's for the incentive comp.

And I have one more quick thing. Your private credit as a percentage of revenues and ratings right now, Rob or Noémie, where is that sitting at right now? How small is that?

Craig, it's -- that's an interesting question because I think we could get into a bit of a battle of definitions here. As I kind of step back and think about serving the alternative asset managers, these are the Blackstones, the Apollos, they're both in the public markets and the private markets. And we have, as you'd expect, very significant relationships with a broad range of players in that market.

Yes. You went a couple of different ways I didn't think you were going to go, but yes, that's helpful.

Rob, can you talk a little bit about the KYC growth? It was 18% in 3Q; 20% 4Q; 23% in -- now this last quarter. You're kind of accelerating on a larger revenue base. If you can give us some idea as to what's driving that. And then also, at the same time, you're seeing the revenue growth, but you're seeing the ARR kind of still around the 18% -- 17%, 18%. And maybe you could talk about that in the context of the revenue growth.

Shlomo, thanks for the question. Yes, this is a powerful growth engine here. And it's -- they're just -- there's a number of demand drivers. You probably heard me talk about on the call before that I've gotten to a point where I think KYC is not doing this justice in terms of the name because it talks about know your customer. And you heard me earlier on the call say, a theme with literally every customer I talk to is know your -- who you're doing business with and being able to connect the dots. So that is a big opportunity for us. And KYC is right in the middle of it. And we are broadening out our solution set, leveraging all of the content that supports KYC. So that's the massive company database that we call Orbis. It's all of the people and PEPs information. It's the AI-curated news. That supports what you would think of as traditional KYC.

Should we see the ARR kind of ticking up a little bit? Where we're seeing the revenue ticking up, should we see ARR ticking up as well? I know it's pretty healthy as it is, but revenue is moving ahead of that.

Yes. I mean we don't guide on that, but I think...

I'd really look at the ARR as the best indicator of the underlying trends in that business, as with every other line, by the way. I think that's the best way to look at it.

I'd say, Shlomo, we've got some positive momentum there in the ARR, I believe.

All right. Well, thank you, everybody, for your questions. And I appreciate you joining the call, and we'll talk to you next quarter. Have a great day.

Thank you.