Operator:

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2024 Earnings Call. At this time, I would like to inform you that, this conference is being recorded, and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for question and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. Good afternoon, and thanks everybody for joining today's call. I'm looking forward to talking about this quarter, 22% revenue growth and adjusted operating margin of almost 50% and 43% adjusted diluted EPS growth. That's great stuff. As I have said before, and I'm very proud to say it again, MIS is one of the world's great businesses and when issuance activity ramps up, like it did in the first half of this year and you maintain such a strong position with investors and issuers like we do, as well as our ongoing disciplined approach to costs, we generate a tremendous amount of operating leverage. For the second quarter, MIS delivered 36% revenue growth and a 63.2% adjusted operating margin, up 730 basis points from the second quarter of last year. Following another consecutive quarter of robust performance, we're again raising our guidance for both revenue growth and margin. On the MA side, we delivered a seventh consecutive quarter of 10% ARR growth with a 94% retention rate. ARR growth continues to be led by Decision Solutions, which grew by 13% this quarter. That said, and while we see a strong pipeline for the second half of the year, we are widening our ARR guidance to account for the potential for a bit more uncertainty in the buying environment in the second half. And Noemie will expand more on our thinking around this later and I'm sure we'll discuss it in Q&A. In addition to the MIS guidance raise, we're also increasing several of our Moody's corporation metrics, including upping our expectation for share repurchases for the year from $1 billion to $1.3 billion and raising and narrowing our adjusted diluted EPS guidance to a range of $11 to $11.40. We continue to innovate and invest, launching new products, expanding coverage, extending our partnerships, all to spur growth and position Moody's for long-term sustainable success. Now speaking of growth, MIS has truly established itself as the agency of choice and that allows us to really capitalize on a market environment like we experienced this past quarter. For the first half of the year, we grew transaction revenue by 56%. That outpaced issuance growth of 43%. That was particularly evident in our corporate finance and financial institutions rating groups, which both delivered transactional revenue growth rates north of 65%. When considering recurring revenue, overall total revenue grew by 35%. The investments we're making to streamline and automate our workflows, enabled us to meet the surge in issuance and that's double-digits growth across all asset types, while maintaining discipline around expenses. Even considering these investments, we're delivering adjusted operating margin up 760 basis points through the first half of the year. Now moving to MA, we had a strong first half generating 8% revenue growth and as I mentioned earlier, the seventh consecutive quarter of double-digits ARR growth. We continue to focus on high growth SaaS and subscription products, which are delivering mid-90s retention rates and now represent 95% of total revenue. Taking a deeper dive into MA, the businesses within Decision Solutions continue to deliver very good growth and that includes KYC, which is delivering new and innovative features and functionality and remains the fastest growing business with ARR growth at 18% as of the end of the quarter. Insurance ARR growth was 6% at this time last year to now 14%. Banking delivered 9% ARR growth and for it’s purely SaaS offerings, a mid-teens ARR growth rate. Meanwhile, data and information delivered its fourth consecutive quarter of double-digits ARR growth. Research & Insights ARR growth remains at 6%, but we continue to expect the growth rate will improve in the second half of the year, with the expectation of high single-digits percent growth range by year end and that's benefiting from the momentum with Research Assistant and our unrated company's coverage expansion in CreditView. How are we achieving all this? I mean, pretty simply, we're delivering mission-critical solutions, tapping into our risk operating system with massive data sets and analytic engines, all helping our customers navigate an increasingly complex and interconnected environment. Last quarter, I gave you a glimpse into our GenAI product roadmap, and I'm excited to share that we launched two new skills this past quarter and the first of those is an automated credit memo, which saves bankers hours of work by assembling a credit memo leveraging the bank's in-house content, Moody's content, and third-party content. Second is our Early Warning System, which is a cutting-edge, GenAI-powered solution that's initially focused on commercial real estate that we launched last week. This solution monitors breaking news, it alerts our customers and that includes lenders, insurers and asset managers to risks that could affect their portfolio and allowing them to query a broad range of Moody's data and models to quickly understand the potential impact of a given event. We've got a number of institutions using both of these solutions in private preview mode, and we're receiving some very encouraging feedback. They're both great examples of more ways that we are unlocking the power of our data, our analytics, our insights, leveraging GenAI. In KYC, regulation continues to drive demand for new and targeted solutions. This past quarter, we launched our sanctioned security screening tool, which allows asset managers to look through the ownership hierarchies of their holdings to the ultimate parent and flag those that are sanctioned. We also launched the European sanctions product. That was something that we actually launched in under a month and it will help our banking customers manage new European, reporting requirements on certain types of money transfers. Both of these solutions provide critical, timely and trusted data to our customers, helping them avoid potential reputational or regulatory issues. They're great examples of how we're broadening the use cases we serve leveraging our massive company, people, and news data sets. Now these products wouldn't be possible without the investments we've been making in our Orbis database, which we believe is the world's best curated database of public and private companies. We've more than doubled the number of entities we cover, since we first acquired Bureau van Dijk. We added more than 20 million companies this year alone. In this past quarter, we have reached a pretty incredible milestone with over 0.5 billion companies in our Orbis database. This massive coverage is a great source of competitive advantage for us. Now, turning to our ratings business. I always say that, if there's an opportunity to invest in one of the world's great businesses, we're going to do it. That's why I'm thrilled to announce that, in early July, we completed our acquisition of GCR. That's the leading African domestic credit rating agency covering 25 countries across the region. GCR really is a fantastic franchise. They've got a very impressive management team and this investment continues to reinforce our leadership in domestic rating markets around the world. We've got a 30% stake in the leading rating agency in China. We've got very strong positions across Asia, in India, in Korea, Malaysia, and most recently Vietnam. We've been enjoying great success with our Moody's local strategy across Latin America and now we've established a leadership position across the African continent. We've also achieved an important milestone in our sustainable finance franchise in ratings this quarter. When we delivered our 200th second-party opinion in MIS. We've got a healthy pipeline for the rest of the year. With the more recent launch of our net-zero assessment, we now have, I think, a very compelling set of offerings to support sustainable and transition finance and those are clear growth areas for the foreseeable future. You may recall back on the third quarter call last year, I talked about how we'd established a framework for third-party partnerships really to drive the ubiquity of our content in more and more platforms, where people are making decisions about risk, investment, and opportunity. This past quarter, we had some exciting announcements on that front. First is our strategic collaboration with MSCI around ESG and private credit. We really are excited to offer our customers MSCI's market-leading ESG scores and data through a range of our solutions and MSCI will leverage Moody's Orbis database to extend its private company ESG coverage. Together we're going to explore solutions that will leverage our company data and credit scoring models and MSCI's distribution and expertise with the global investment community to provide greater insight into the private credit markets. Just to be clear, our collaboration does not impact our ESG work and ratings nor does it affect our very extensive climate and transition capabilities across the firm. Second, in June, we announced a new collaboration with Zillow that further enhances the insights available to both Moody's and Zillow customers. Starting this month, we're adding Zillow's extensive rental property data into Moody's CRE data platform and in exchange Zillow will gain access to Moody's CRE market analyses and that will help their customers make confident decisions around their multifamily properties. We're also deepening our relationship with Google. Last month, they announced that, they have tapped Moody's to be one of four foundational data providers that will serve as grounding agents for their enterprise Vertex AI platform. This grounding opportunity is particularly exciting as it dramatically expands the audience for our content and further establishes Moody's, as a trusted data source. Finally, back in May, we announced a first of its kind enterprise risk management dashboard in collaboration with Diligent. They're a leading governance, risk and compliance SaaS company. That's going to be offered as a separate module. There are more than 700,000 board and leadership users, again broadening the audience for our content. These kinds of partnerships are expanding the reach and mind share of our data sets and analytics to thousands of key decision makers, while enhancing the offerings of our partners and ultimately in the service of helping us accelerate long-term growth. On that note, let me hand it over to Noemie to talk more about our financial performance for the quarter.

Operator:

[Operator Instructions] And our first question will come from the line of Owen Lau with Oppenheimer & Co.

Rob Fauber:

Great question. I'd say there's 2 kinds of pull forward. The first is pull forward of planned financing within a given calendar year, and the second is the pull forward from forward maturities. And I would say that we have seen both this year as I think Noemie was touching on a bit in terms of what we think in the second half. We think that the fourth quarter, in particular, I think it's going to be November and December is going to be much more muted in terms of issuance. And that's due in part because a lot of the issuers have been guided by the banks to issue earlier in the year while the market conditions are favorable and to avoid any kind of election-related turbulence in the fourth quarter. Second, we've seen some pull forward from future years from the forward maturities. That's mostly 2025 and mostly spec-grade. And I'll give you maybe just a little bit of context around that. If you go back something like a decade, Owen, it's pretty common actually to see pull forward from spec-grade maturities in the immediate year prior to maturity. And if you think about it, it makes sense because spec-grade issuers don't want to wait until the last month or 2 and risk not having market access due to a risk-off period in the market. That's much less true with investment-grade issuers who generally always have market access. So we've certainly seen some pull forward from 2025, I'd say, a meaningful amount of pull forward. But it's also within the ranges that we have seen in prior years for pull forward from the year -- immediate year prior for spec-grade. 2026 pull forward is actually a bit lower than some of the ranges that we have typically seen. And I think that's probably because issuers want to see rates come down before they pull forward those maturities, right? I would also just note that 2025 spec-grade maturities at the time of issuance were the highest on record. So there's just a lot of spec-grade debt that's got to get refinanced, that's contributing to the refi volume. So I think, Owen, I think my takeaway is that, yes, there's pull forward. The pull forward from future years appears to be in these historical ranges that we've seen. And I don't think at this point, it changes how we would feel about next year.

Andrew Nicholas:

I want to kind of follow-up on that pull forward question a little bit more. And you hit on a little bit, Rob, at the end, but it sounds like you're expecting a little bit more muted issuance around kind of geopolitical and maybe macro uncertainty and factors of that sort. But it doesn't sound like you're quite yet baking in any benefit from rate cuts. Just kind of wondering how you think about the interplay of those 2 dynamics, both at the end of this year and maybe even to start next.

Operator:

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

Rob Fauber:

Yes. So in Research & Insights, ARR growth of 6%, that's in line with what we saw in the first quarter. I think on the last call, we talked about some modest retention pressures with our CreditView offering, some of which came from some of the banking consolidation that was expected. We had anticipated that. I think Noemie mentioned that both the banking and asset management sectors are experiencing, as she said, tight conditions, cost pressures. That puts some pressure on upsell, pricing retention, those kinds of things. But it's also why we've really been focused on innovating and investing in that -- in our offerings, in particular, Research Assistant. And we talked about last quarter and I think this continues to be true. Part of what is going to drive the pickup in ARR growth in Research & Insights is Research Assistant and our coverage expansion. And maybe just to double-click on Research Assistant for a moment because that's a part of this. We've got some good, very encouraging data points. We've got a very strong pipeline for Research Assistant. We have some good sales momentum in the past couple of months. Specifically, since the first quarter, we've doubled the number of customers for Research Assistant. We've seen average deal sizes increase by 2x. We've experienced some shorter sales cycles, and usage is up and customer satisfaction is up with Research Assistant users. So all that is encouraging and leading me to believe that we're moving in the right direction, and that's going to continue to support the pickup of growth in that line.

Operator:

Our next question will come from the line of Manav Patnaik with Barclays.

Rob Fauber:

Yes. Manav, I'll start and then hand it to Noemie. I have to say, we are really excited about this MSCI partnership because I do think it's a win-win for our customers because the MSCI ESG scores and data really are considered a market standard. And we're going to be able to provide that content through to our banking, insurance, and corporate customers. And the -- as I think you know, they're going to be leveraging Orbis to expand their coverage. So it's a great partnership, a real spirit of partnership with MSCI. In terms of timing, there's a good bit of work to do to transition, to integrate the content and transition it into our solutions. I'd say that work has begun, in earnest, Manav, but it's probably going to take through the end of the year to be able to do that. Meanwhile, I think we've already got some very good ideas around what we can do in terms of private credit. And if you think about our credit scoring capabilities as well as their expertise and distribution around the global investment community, and there's a clear need and desire to have a third-party assessment of credit risk in the private credit space. So we've got some good ideas there. And I think the initial focus right now is going to be around the ESG integration into our solutions. I would say when we come back from the summer, probably sometime in September, we're going to roll up our sleeves around the private credit and start to get to work there. I don't have a time line on when we might actually get something to market, Manav. But I would say the ESG stuff came together pretty quickly. And given the market need, I think we'll work quickly here as well.

Operator:

Our next question comes from the line of Scott Wurtzel with Wolfe Research.

Noemie Heuland:

Yes. Maybe I'll take that and I'll let Rob expand as well. But we remain on track with what we've communicated initially earlier in the year. Let me give you a bit of color on where we've deployed investments so far. So let me start with GenAI. You heard last quarter, we've established a framework around our GenAI development. We have a set of GenAI tools that will be rolled out across our product suite this year. In banking, we've made a small acquisition earlier this year to accelerate the build of our banking assistant and the enablement of end-to-end lending workflow. It was a company called Able AI that really helped automate the commercial loan documentation process and filling some gaps for us in jobs to be done across the lending value chain. So that's an example of where we've invested. Internally, we're expanding our use of Copilot and other GenAI capabilities. We've completed our CSA framework in Ratings and we're rolling out a ratings copilot environment. Obviously, we've talked with our regulators, and we have very tight controls around that, and Rob can expand on that as well. We've rolled out a lot of Copilot and GenAI tools internally across the business. Everybody is using it. We have very strong uptick in usage and a lot of exciting things when we look at our internal hackathons for example that we just conducted. So that's for gen AI. On the product development area, we're bringing together our data and analytics here into a workflow platform. That's for corporate to support the use of different use cases around sales and marketing optimization, customer onboarding, and monitoring trade credit supplier risk. Those are areas that are really important for our customers, and we hear a lot of strong feedback, and we are on track to launch additional products later in the year on that platform. And last, on the technology platforming, which was the third area of investments, in MA, we have a platform engineering and architecture road map to build on single sign-on, entitlements, other functionalities to drive a better user experience, which helps retention but also helps drive further growth in our business. That gives us more insight into customer behavior across our platform, which help us build use cases that resonate and address the needs of those customers and that also reaps some efficiencies across our engineering teams as well. For MIS, we continue to deploy applications on our platform. We have the first team on our full ratings life cycle automation, and we're scaling that to a number of other teams throughout the year. And that's going to be really helpful in enhancing regulatory compliance. That will also allow us to process more efficiently issuance volumes. And you saw that already in our ability to deliver increased margin in MIS. So in general, we're doing well. We are tracking very well against the investment plan we communicated to you earlier this year.

Operator:

Our next question will come from the line of Alex Kramm with UBS.

Rob Fauber:

Yes, Alex, it's Rob. So I think I gave you some data points around Research Assistant. This is one of, if not, the fastest-growing products that we've ever launched. But starting from scratch and we've got a huge revenue base. So it's not material in the grand scheme of Moody's Analytics, but there's some really encouraging things about it. Like I said, we've doubled the number of customers, deal sizes are going up. But I think very importantly is usage and customer satisfaction is up, and that gives us a lot of confidence that we're going to be able to monetize that over time and not just in Research Assistant. So it's no longer a one-trick pony. It's not just Research Assistant, right? We've now launched several other solutions, and that's going to go on through the back half of the year and into next year. So there's going to be more and more products that will be leveraging AI coming into our solution suite. Like I said, we've already got a number of customers on private preview mode for both automated credit memo and early warning. I would also say, Alex, that we're also working on extending our partnerships with folks like Microsoft and Google in particular. And that's important because I think those are going to open up some new monetization pathways for us with our content embedded into their solutions, their Copilot solutions, their AI solutions. So that is in process. So it's still not material but we definitely see some things that are quite encouraging.

Jeffrey Silber:

You talked a little bit about, I guess, the tighter purchasing pattern that you've been seeing. You gave a little color. I was just wondering if you can drill down a little bit more. Maybe you can give some examples of what we're talking about.

Noemie Heuland:

Yes. And the other thing I would add is we're also having -- we've elevated the discussion with the C-suite at our banks and traditional customer base, and we're like a lot more plugged in into their overall digital transformation initiatives now. Now the flip side of it is, as I'm sure you know, we have also working with them to help them build their framework around GenAI adoption, and that's going to take some time because they also have to abide by regulations. They have a lot of risk considerations to take into account, and that also plays a role in the dynamic that you see with our GenAI products.

Rob Fauber:

Is the what?

Rob Fauber:

I think it's probably pretty consistent with what we've seen for the balance of the year.

Andrew Steinerman:

This is Andrew of JPMorgan. I wanted to understand better the organic constant currency revenue growth of the Data & Information subsegment, which decelerated to 8% in the second quarter year-over-year. It had been double digit in the first quarter year-over-year. It just strikes me as odd because as you know, the ARR of this subsegment has consistently been double-digit. And I just don't understand why there's variation between the organic revenue growth and organic ARR of Data & Information because I thought it was essentially fixed subscription.

Operator:

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.

Noemie Heuland:

Yes, let me take that. So as I said in my prepared remarks, the second quarter revenue growth was 7% and 8% at constant currency. It was similar to what we saw in the first quarter. But if you take recurring revenue, which is 95% of our revenue in MA, it grew by 9% for the second quarter, similar to what it was in Q1. We expect similar growth rates for recurring revenue throughout the year. Transactional revenue was down in the second quarter as we continue to trend -- and will continue to trend downwards in the second half of the year. We're shifting our focus to renewable sales, as you know. So what that means, the best way to think about the guide in the second half of the year, we expect MA to grow in the third quarter, to be more or less aligned with the growth that we saw in the second quarter before ticking back up in the higher end of high single-digit growth in the fourth quarter. So that's what's behind our guidance.

George Tong:

Within MIS, you mentioned you saw a pull forward from both within the year and also from 2025. You also mentioned that your outlook for 2025 issuance hasn't really changed. And just wanted to reconcile those statements. Has your outlook for issuance come down in any future period because of the pull-forward effect?

Operator:

Our next question comes from the line of Craig Huber with Huber Research Partners.

Rob Fauber:

Yes. So Craig, commercial real estate is obviously an area that we've got a keen focus on with our analytical teams. And we've got a lot of touch points into the commercial real estate space across Ratings. We've also got a lot of data and analytic tools across the entire company around commercial real estate. I think generally, the concerns around commercial real estate are probably most focused on office. And it's a certain type of office, too. Type A, Class A office has held up pretty well, and so I do think the type of property does matter. We see this both with CMBS. You've seen some articles in the paper looking at single asset, single borrower CMBS, which -- and then we also think about this from a banking perspective. And our teams actually put out some really interesting research. I'm happy to share it with you after the call. Really making sure we understand the commercial real estate exposure of our rated banks and how to think about stress scenarios around that. So I would say there's a lot of focus on it. Interestingly, Craig, the CMBS issuance market this quarter actually showed some signs of life. We're actually -- it's on a small base, but just given the fact that we've got it at this point, what looks like a soft landing, there is some new investor interest in the CMBS space, which I actually think is quite interesting and tells you something about investor sentiment.

Rob Fauber:

One other thing I might add, too, Craig, I mean I talked about it in my remarks, this early warning system, but it is -- the initial offering is focused specifically on commercial real estate. And this really synthesizes a broad range of our content and our models to allow you to understand, an event happens in the market and you want to start to sensitize and understand the potential impact of that event, call our models, call our data, and be able to get a sense of the impact in a fraction of the time that you might otherwise. And so you can imagine, based on that, there's some very good interest from folks in the market who want to use tools like that to be able to figure out where do they need to actually focus scarce resources in our portfolio.

Shlomo Rosenbaum:

I just want to probe a little bit more in the ARR widening of the range because of this MSCI deal. Can you explain again the -- there's a change in strategy, so therefore, some of the sales in the pipeline may not materialize this year as you're thinking of switching over to some of the MSCI products? Is that correct? And then how should we think about it on the flip side in terms of you selling stuff through Orbis? And trying to understand, is there -- is this a little bit of a slowdown but then things should pop more in 2025 when the links are kind of set up technologically between the 2 companies? Or is this something just kind of a slowdown and then we get back to what it was before? Just if you can give a little more color on this.

Shlomo Rosenbaum:

And then going the other way, the Orbis going back to them?

Operator:

Our next question comes from the line of Faiza Alwy with Deutsche Bank.

Rob Fauber:

Yes. So we don't disclose around revenues by customer segment but it's our smallest customer segment. But that said, it's been growing quite nicely over the last year or two. There's a lot of demand for -- I mean, as you said, the Orbis data supporting governments really want to understand more about entities that they're engaging with, obviously. I think we were just -- I don't want to over-rotate on this. I think we were just trying to be prudent. And we've got a few of these bigger contracts. These are one year contracts. And we've -- you hear us talking about a little bit -- the potential for a little bit bumpier environment in the fourth quarter. And so we just wanted to acknowledge that there might be some risk that some of that could slip into the following year.

Rob Fauber:

Yes. And the renewals, it's probably mostly in our Data & Information business, I would say.

Jeffrey Meuler:

Beyond the GenAI product launches and scaling that revenue, what are the other callouts that go into the assumed acceleration in MA in the medium-term framework? And I ask because KYC is doing really well, insurance already accelerated to a great growth rate, and R&I is assumed to have good growth in this year. So just with how diverse the business is, it seems hard to bank on all of the end markets doing well but one. So what are the other self-help factors?

Operator:

Our next question comes from the line of Russell Quelch with Redburn Atlantic.

Rob Fauber:

This is an interesting question, Russell. I'm processing it at the moment here. I think I would say that, so while we may have a very active extreme weather season coming up, particularly with North American hurricanes, I don't think that's going to translate into an immediate revenue or ARR bump. But I would say that thematically, the increased severity and frequency of extreme weather events and an increasing focus on understanding the impact of a change in climate and what kind of financial consequences that has, that is a theme that is driving more and more interest in our solutions. And it's going beyond simply the insurance market. I mean in some cases, extreme weather -- actually, extreme weather events can put pressure on our insurance customers. You've seen that in Florida. But in general, I would say there's -- with insurers, there's an understanding that you need better and better data and models. And by the way, that's why there's interest in our cloud-based SaaS offering because you're able to leverage a lot more compute capacity, which can run these high-definition models that are actually better than the current generation of models. But then you're seeing banks and other organizations who are also wanting to be able to understand all of this because, for instance, banks have clearly realized that they can actually have weather and climate risk. So as they're underwriting a commercial loan, wanting to understand the risk of the collateral they're taking, that's now become something banks are quite focused on. So I would say it's driving more and more interest in our climate and weather and catastrophe modeling capabilities, but I wouldn't tie it to a seasonal set of events.

Rob Fauber:

Yes. And look, back to when we bought RMS, I remember, I still very clearly remember that call. And I remember saying we got into the -- we made that acquisition for 2 reasons

Heather Balsky:

I want to ask about MA. I know you've gotten a lot of questions today about ARR and your guidance. But taking, I guess, zooming out and you think about the growth algorithm you laid out at -- back in your Investor Day, there's been a little bit more time. We're in probably a tougher environment than expected. Have you rethought the targets that you laid out? Do you think the algorithm maybe looks a little bit different than you originally thought in any way?

Operator:

I will now hand the call back to Rob for any closing remarks.

Operator:

This concludes Moody's Corporation Second Quarter 2024 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you. You may now disconnect.

Operator:

Good day, everyone, and welcome to the Moody's Corporation First Quarter 2024 Earnings Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions]

Shivani Kak:

Thank you. Good morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter 2024 as well as our revised outlook for select metrics for full year 2024. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com.

Heather Balsky:

I was hoping you could dig in a little bit more on what you saw in MA during the quarter, particularly in terms of some of your customers where you said you saw pressure and how you're thinking about that and how you think that trends for the rest of the year. Is it 1Q specific? Is it assuming that a continued part of the reason you reduced the guide there?

Robert Fauber:

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.

Operator:

We'll move next to Manav Patnaik at Barclays.

Robert Fauber:

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.

Toni Kaplan:

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.

Ashish Sabadra:

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?

Andrew Nicholas:

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.

So I think as I talk about kind of navigators and skills and assistants, maybe one -- a high-level way to think about this:

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...

Robert Fauber:

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.

Andrew Nicholas:

That's helpful. And welcome, Noémie.

Operator:

Our next question comes from Scott Wurtzel at Wolfe Research.

Noemie Heuland:

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.

Robert Fauber:

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.

Faiza Alwy:

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.

Faiza Alwy:

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...

Operator:

Our next question comes from Jeff Silber at BMO Capital Markets.

Robert Fauber:

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.

Operator:

Next, we'll go to George Tong at Goldman Sachs.

Robert Fauber:

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?

Robert Fauber:

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.

Operator:

We'll go next to Craig Huber at Huber Research.

Noemie Heuland:

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.

Operator:

We'll take our next question from Jeff Meuler at Baird.

Andrew Steinerman:

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 Steinerman:

Issuance recovery given the pullback in '22.

Russell Quelch:

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?

Operator:

We'll move next to Owen Lau at Oppenheimer.

Robert Fauber:

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.

Noemie Heuland:

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.

Operator:

And we'll take a follow-up from Craig Huber at Huber Research.

Noemie Heuland:

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.

Craig Huber:

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?

Operator:

And we'll go next to Shlomo Rosenbaum with Stifel.

Robert Fauber:

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.

Shlomo Rosenbaum:

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.

Noemie Heuland:

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.

Operator:

And that does conclude the Q&A session. I'll turn the conference back over to Rob for any closing remarks.

Noemie Heuland:

Thank you.

Operator:

Good day, everyone. And welcome to the Moody's Corporation Fourth Quarter and Full Year 2023 Earnings Call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. Good morning. And thanks to everybody for joining today's call. We're here from a snowy New York City. I'm going to start with some highlights from 2023 and then discuss our expectations for 2024. And after my prepared remarks, Steve Talinko, who is the President of Moody's Analytics; and Mike West, the President of Moody's Investor Service, will be joining me along with Caroline Sullivan, our Interim CFO for the Q&A portion of the call. And before we get into it, I have some very exciting news. As you may have seen this morning, we announced the appointment of Noemie Heuland as our new Chief Financial Officer, and she's reporting directly to me. And Noemie brings a wealth of knowledge to Moody's after nearly 25 years in senior roles at global public companies, including most recently as CFO of Dayforce, formerly Ceridian, and over a decade with global enterprise application software provider SAP, during which it transitioned to a global software as a service business model. So as CFO, she's going to lead the global finance organization that includes accounting and controllership, financial planning and analysis, financial systems, Investor Relations, strategic sourcing and procurement and tax and treasury. And her firsthand experience in scaling high growth category leading public software companies, along with her extensive global experience, I think, really make her the ideal CFO for Moody's as we invest in and grow our subscription-based analytics businesses and continue to expand our ratings business around the world. So it's an exciting time for Moody's and I look forward to Noemie jumping in beginning April 1st, and of course she's going to be a regular fixture on this call going forward. Before we get into the results, I also want to thank Caroline Sullivan, who is here with me for her immense contributions and support over the last few months as Moody's Interim-CFO and Caroline will remain as our Chief Accounting Officer and Corporate Controller. So with that, moving on to our results. 2023 really was a defining year for us here at Moody's. We delivered 8% revenue growth, we grew adjusted diluted EPS by 16% and we were an early mover in GenAI adoption and innovation launching our first ever GenAI enabled product in December. And I have to say that the energy and excitement across the organization really was palpable throughout the year as we launched new products, we entered into strategic partnerships with some of the world's leading tech companies and we increased the gap in our Chartis RiskTech100 number one ranking. And as we grew, we also increased our margin by over 100 basis points for the year, all while investing across the firm in technology, in products and in people. And amidst what was a pretty challenging operating environment for our financial services customers, MA delivered ARR growth of 10% with retention rates in the mid-90s. And looking at the three reporting lines of business in MA, that's decision solutions, data and information, and research and insights, we delivered ARR growth of 11%, 10% and 7% respectively. And as we have upped the pace of product development to meet the strong market demand, for tools to better manage risk and to digitize and transform workflows for 2024, we expect MA revenue to grow at approximately 10% with ARR growth in the low double digit percent range. MIS meanwhile delivered 19% growth in the quarter and 6% for the full year. Corporate finance, financial institutions and public project and infrastructure finance, they all achieved double digit revenue growth compared to 2022 on gradually improving market conditions. And I think I used the phrase fragile when describing the markets back on our third quarter earnings call. And this turned out to be true for the Q4 where despite a very active November, December issuance was more muted than we had expected. And we've seen a very constructive start to the year, and consequently our revenue expectations for 2024 are in the high single to low double-digit percent range for MIS and I'll touch on this a bit more on the call, as well as I'm sure some asset specific issuance guidance. So looking out over 2024 and beyond, we're really excited about the great momentum in the business and the tremendous growth potential that we've got in front of us. And to capitalize on these opportunities, we're accelerating and increasing the level of organic investment this year in three critical areas, that's GenAI, new product development and platforming and technology. And this is a delivered investment program to fully capture the power of AI across our business, to expand the reach and connectedness of MA Solutions and accelerate the technology enablement of the ratings agency, all to deliver on our ambitious medium-term targets. Now our capital allocation priorities remain unchanged. First, invest in our business whenever we see great opportunities and we are in fact doing that. And second, return capital to stockholders. And this year, we expect to nearly double the amount of capital we return to our stockholders through dividends and share repurchases. And that brings me to our EPS guidance. We're anticipating adjusted diluted EPS to be in the range of $10.25 to $11 for 2024. This incorporates a little bit wider range at the beginning of the year to capture some of the uncertainty around issuance and we would expect this to narrow during the course of the year. And of note, as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16.9% and for 2024, we're expecting the rate to be in the range of 22% to 24%. And if you look through the 2023 benefit at the midpoint of our 2024 range, our 2024 adjusted EPS represents 24% growth rate since 2022 and that's in line with the low double digit percentage growth that we've targeted over the medium term. Now looking at 2023, I want to take a moment to touch on a few data points that highlight what a powerful franchise we have, and also put our 2023 accomplishments into some perspective amidst, as I said, what was a very challenging operating environment for many of our customers last year. And despite relatively modest MIS rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company. And today, we have a base of recurring revenue of over $4 billion while our more transactional oriented revenue model across a $74 trillion universe of rated debt gives us upside as debt velocity improves. And together, this underpins our confidence in accelerating our revenue growth to the high single to low double digit percent range in 2024. And over the years, we have really built a customer base that's almost like no other company with 97% of the Fortune 100 and 87% of the Forbes 1000 being a Moody's customer today. And the world's leading companies turn to us, they trust our market leading solutions and that gives us a tremendous base to sell into. This shows up in the many external accolades and awards that we've received. We had over 150 last year alone. And I want to give a special shout out to our MIS team as we were awarded best credit rating agency for the 12th year in a row by Institutional Investor, that is great stuff. And I think we all understand our market leading position in ratings, but we've also built a market leading position with our MA business. And for the second year in a row, we were ranked number one in the Chartis RiskTech100 and that was supported by category wins in strategy, banking and insurance, and a number of solutions categories ranging from climate risk to credit risk, to financial crime data and a number more. And understanding the critical importance of attracting and retaining the best talent in this environment, we continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world's great challenges. So to sustain our growth, you frequently hear about the investments that we make in our solutions to help our customers make better, more informed decisions about risk and we achieved a number of important milestones in 2023, too many to get into on this call, but I am going to focus on just a few of the highlights. In ratings, we continue to expand the markets we serve through Moody's Local. We also developed dedicated teams in digital finance and private credit so that we're at the forefront of opportunities in the global debt markets. In private credit specifically, we're coordinating across our ratings franchise so that we have the engagement, the methodologies and the analytical and commercial resources to be the agency of choice for players in this market, ranging from BDCs to alternative asset managers, insurance companies and debt funds. To further address the private credit opportunity, we added more than 12,000 unrated entities to our CreditView research service in November that triples the breadth of our coverage and provides a new runway for growth for our research business. Another growth opportunity in our Research and Insights business that many of you have heard about is our Research Assistant product, that's our first GenAI enabled product that we launched commercially on December 1st. And it's the first of a number of Gen AI enabled tools that we’re developing and we’re excited about the initial customer feedback and early traction with this product, and I'm sure we're going to touch on this a bit more in the Q&A. We also continue to enhance and expand our massive company database in important ways to create valuable early warning signals for our customers and address the increasing demand for third party risk management. And there were really three elements to that in 2023 that I'll call out. First was integrating our predictive analytic tools and credit scores on over 450 million companies into Orbis. The second was expanding our coverage of over a million AI curated and scored new stories a day that are available in companies in Orbis. And third, leveraging our investment in BitSight over the course of 2023, we integrated over 6 million cyberscores into Orbis, and that number continues to grow. Across decision solutions, we developed new solutions and integrated more datasets to expand the utility of our offerings. And in KYC, our new entity verification tool combines real time registry content with our Orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk. With the launch of our most recent Sanctions360 tool, we are the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches. In banking, we integrated climate analytics into a broad range of workflow solutions from loan origination to portfolio management to stress testing. And in insurance, in just a year, we more than doubled the number of customers using our cloud based intelligent risk platform, that's a versatile cloud-based risk analytics platform that enables customers to analyze hundreds of millions of commercial and residential locations. It's not just being used by insurers, we are attracting a diverse set of customers who have a tangible and growing need for our more sophisticated climate data and analytics. I have to say I'm proud to report that at the end of January, we signed one of the world's largest banks as a new customer of our climate and catastrophe modeling solutions to support the in-depth climate analysis for required regulatory disclosures and stress testing. And underpinning all of this is our ongoing foundational investments in the business, and these investments will enhance our ability to integrate our data state across all of our customer use cases more efficiently and more effectively. So I hope as you get a sense, there are a lot of exciting things that are happening here at Moody's. And as I take a step back to consider the many opportunities for growth ahead, I really am energized by all that's in front of us. And there are three things that we are doing to really drive future growth, that is land new customers, expand customer relationships and then innovate continuously to deliver more value. And I just touched on the breadth and quality of our existing customer relationships. We've got a fantastic customer base, especially in financial services where we've been developing relationships for literally decades, landing new customers, expanding relationships and innovating with a proven track record of growth. And in recent years, we've been successful in growing these relationships further and diversifying into new areas like KYC and supplier risk management. In fact, our net expansion rate in the financial services sector stands at a healthy 109%, and I think that's a pretty clear indication of our ability to deepen relationships and deliver value. And now leveraging GenAI and our broader content sets and capabilities, expanding and deepening these relationships will continue to be a significant opportunity for us. Now building on these successes, we've got a great opportunity to expand in new customer segments, supporting new use cases. While financial institutions account for about 70% of ARR and MA, there's been very good demand coming from newer relationships beyond the financial services segment, 14% new sales compound annual growth rate over the last two years in these sectors and that's the corporate and public sector. And over that period, we've established significant relationships with major companies in the United States and Europe. We're leveraging our expertise for customer and supplier risk assessment. Our ratings business also has some opportunities to serve existing and new customers, and I think of those as kind of the markets of tomorrow. We've expanded our footprint in domestic and emerging debt markets where the growth is faster than it is in more developed debt markets. And interesting data point, the Moody's Local initiative in Latin America, which you've heard me talk about, it's a great example of doing that where organic revenue grew 22% in 2023. So these land and expand opportunities are supported by major secular trends that are driving demand for our offerings, and I would cite a few of those. We're poised to capitalize on the content, unlock opportunities from GenAI enablement and innovation; the widespread digitization and transformation programs across banks and insurers, the growing demand for third party risk management solutions and the ongoing growth of the private credit sector. And with our wide range and capabilities that we've put together to deliver this holistic view of risk, I think we are uniquely well positioned at the intersection of these trends. So I can assure you that we reflected a lot on these opportunities as we entered our annual operating plan cycle this fall. And not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives. On the efficiency side, we expect to generate savings from resource redeployment, alternative staffing models, automation and GenAI enablement and geolocation strategies, and we're prioritizing investment spending on areas that are enabling us to deliver at our current growth rates, including SaaS based product development, sales deployment, operational resiliency and ratings workflows. And these initiatives are really funded within our what we think of as our regular pace of operating margin expansion. But as we exited the initial sprint around GenAI innovation last year, we reflected on the opportunities ahead of us. We considered the deep customer relationships that I've just touched on, our unique data assets that you hear us talk about, the market trends that I just mentioned, together with our growth strategy. And we proactively upped the organic investments that we started in the summer of last year. And we are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas. First, and I'm sure this isn't particularly surprising is GenAI. We're increasing product related investments across MA that will continue to build on our early mover momentum from 2023 and investments across the company and initiatives to accelerate employee adoption and improve productivity. On the product side, we have a few really interesting things that are moving ahead fairly quickly. So CreditLens, which is our flagship banking origination solution will be the next to launch a GenAI enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities that is stored natively in our software. And we're going to be saving loan officers and credit professionals countless hours compiling information and generating the first draft of the documents that are produced with virtually every commercial loan. We've got our first beta customer already and we are currently in preview with a number of other customers. I'm also very encouraged by our new GenAI enabled commercial real estate early warning system that we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors. And I actually just sat through a demo of this in the last week or two. And the early warning system integrates a wide range of our data sets. It enables the evaluation of news events in real time, running scenarios and calculations that link together market forecasts, listings and property data, tenant data and valuation and credit models. And again, the early feedback has been very positive and we're already looking to extend these capabilities beyond just commercial real estate. Now from an internal perspective, we've rolled out GitHub Copilot and some other GenAI tools to more than 1,500 engineering professionals across the company. And as a result of our experience last year, we've specifically planned for efficiency gains in our engineering budgets in 2024. We're also rolling out our next generation of AI enabled tools for our sales teams across the company over the next several months. So that's the first area. The second area is product development. And as part of our land and expand strategy in MA, we are building on the success and momentum of our KYC business, which has grown to over $300 million of ARR in just a few years. And I think those of you who've been on this call for a while, you've heard me mention before that Know Your Customer is probably too limiting of a term for this business as it continues to expand. So this year, we're increasing investments to develop solutions focused on the growing market demand really for solutions to serve their customer and supplier risk needs. And we're especially encouraged by recent wins with a number of large government and Fortune 100 customers. So this year, we're going to make investments in product, technology and data and go-to-market capabilities to be able to scale in these customer segments. The ratings ecosystem also continues to evolve. In early January, we were just provided with the very first -- we just had the very first rating on a tokenized bond fund. And while digital finance is still nascent, we're going to be ready to help our customers delivering our ratings on the platforms wherever they are going to issue. So that's second. And then third is around technology platforming. So we're building on the platforming work that we highlighted in our Innovation Open House event back in September. And as we explained then, this work is critical to strengthening the interoperability of all of our data estate and improving the synergies across our solutions. By investing in our platforming and engineering capabilities, we're going to accelerate our time to market, enhance the customer experience, better enable cross sell and upsell and deliver engineering efficiencies. The faster this work gets done, the sooner we will realize the revenue and efficiency benefits, so we have decided to hit the accelerator. The same is true in ratings, where more tech enabled workflow is really key to the quality, speed, efficiency and compliance. And we've been on a journey to modernize, digitize and automate our systems. We've made some good headway but there is still more work to be done. Now optimizing our data estate and moving more of our workflow into cloud-based applications really has never been more important given the promise of AI and the digitization of financial markets. So here too, we decided to accelerate our efforts and this will be critical in achieving our medium-term margin targets. So now let me turn to our issuance outlook very briefly. We're expecting more constructive market conditions in 2024. And I'm sure, as you have all seen, it was a very busy start to the year, over $150 billion in investment grade issuance in January alone. Underpinning our MIS revenue growth outlook of high single to low double digits is an increase in MIS rated issuance in the mid to high single digit percent range. For corporates, we expect that leverage finance will grow faster than investment grade issuance, which should be favorable to revenue mix. And our outlook is built on the macroeconomic assumptions that are detailed on Page 20 of our webcast deck and notably incorporating a soft landing here in the US and rate cuts starting in the second quarter of this year. And I imagine we'll dive deeper into both our issuance and macroeconomic assumptions in the Q&A session. Now before moving off of MIS, I do want to highlight that early last year, we committed to reviewing our medium-term guidance for MIS revenue growth once we saw a sustainable improvement in the debt markets. And I'm happy to share that following 6% revenue growth in 2023 and the expectation of at least high single digit growth in 2024, we have updated our medium term revenue growth target for MIS to be in the mid to high single digit percent growth range. Now moving back to our 2024 annual guidance. Moody's revenue is expected to grow in the high single to low double digit percent range. The Moody's adjusted operating margin is projected to be in the range of 44% to 46%, that's about 100 basis points of margin improvement at the midpoint. And the Moody's revenue and adjusted operating margin guidance ranges incorporate the variability of that MIS transaction based revenue and then balanced against the subscription base in MA where nearly 95% of our revenues are recurring. In regards to M&A, we're guiding to a tighter range of approximately 10% revenue growth and low double digit growth in ARR. Now MA's adjusted operating margin is expected to be in the range of 30% to 31% this year, that's absorbing the impact of the incremental organic investments that I just talked about. In the medium term, we expect MA's adjusted operating margin to be in the mid 30s percent range. And as I have discussed with a number of you, the path to that target is not exactly linear. For 2024, MIS' adjusted operating margin is expected to be in the range of 55.5% to 57.5%, that is a 200 basis point improvement versus 2023 at the midpoint and that is solidly on towards the medium-term target of low 60s percent. Our expenses overall are expected to grow in the mid to high single digit percent range. A couple of factors worth noting, first, we closed out our 2022, ‘23 geolocation restructuring program at the end of 2023. Caroline can talk more about that. Second, we’re expecting depreciation and amortization expenses of approximately $450 million in 2024, that's an increase of approximately 20% as compared to 2023. And that growth is largely related to the cumulative effect of our shift towards developing exclusively SaaS based solutions starting back in 2021, and coupled with the increased capital expenditures associated with the three primary areas of incremental organic investment that I just talked about. And we're expecting free cash flow of between $1.9 billion and $2.1 billion and adjusted EPS to be in the range, as I said earlier, of $10.25 to $11, again, a 24% increase at the midpoint versus 2022 looking through those tax benefits that I touched on. So I'll wrap up by just saying it was a really great year for us here in 2023. I'm expecting an even more exciting one ahead. I'm energized by our strategy. We've got fantastic engagement across the company. And we believe that now is the time to invest in the opportunity that's in front of us to fully embrace the power of AI across our business, to accelerate the build out of our technology platform and to bring together our content to build new solutions with unique value propositions that will accelerate growth. So with that, I welcome Caroline, Steve and Mike to join me for Q&A. And operator, please open the call up to questions.

George Tong:

I wanted to ask about your planned incremental strategic investments in GenAI products and platforming. Can you talk a little bit more about the timing of these investments as well as benefits you're expecting and the margin impact for 2024?

Caroline Sullivan:

So we anticipate, if you look at both MIS and MA, to deliver -- MIS has delivered an operating margin in 2023 of 54.5%, roughly in line with our target of 55%. And in 2024, we're expecting adjusted operating margin to increase by about 200 basis points. MA's margin is going to remain consistent with what we saw based on 2023. Without that $60 million that we talked about in Rob's comments related to the investments, MA margins would have been on track to increase and expand by 120 basis points.

Toni Kaplan:

Rob, I wanted to take a step back for a second, and not asking about '24 at all, just in general. Where do you think a normalized level of issuance is? How much upside is there from here to get back to a more normal growth environment, and maybe particularly with rates at maybe at a higher level than they have been in the last couple of years?

Operator:

Your next question comes from the line of Manav Patnaik with Barclays.

Rob Fauber:

Manav, I think I might ask Mike to give us some color around how think about first half, second half, and then I might be able to put kind of a finer point on that.

Rob Fauber:

And I know people want to have a good sense in forming their models. So last year, as Mike said, issuance was more front end loaded. We had a rising rate environment, something like, I don't know, call it, 56% of 2023 annual issuance was in the first half of the year. And while we do expect a rate decline in the second half year, as Mike said, we still think that issuance will be front end loaded. And our current assumption for issuance is pretty similar to the pattern that we saw in 2023. Now then we got to translate it to MIS revenue, and the impact there is a little bit less pronounced in terms of first half, second half. And I would say that we're expecting just a little over half, maybe low 50s percent of MIS revenue in the first half. And that's a little lower than the issuance mix. Why? Because banks are the ones that tend to issue and do more front end loading of their issuance, and there are different economics for frequent bank issuers. So hopefully, that gives you a sense. One of the things, Manav, I might say, just specifically for the first quarter, I'd say we expect probably close to 30% of annual issuance and probably closer to somewhere between 25% to 30% of MIS annual revenue.

Faiza Alwy:

So I wanted to ask about MIS margins. I think, Rob, you alluded to some investments, but maybe put a finer point around that, because I would have thought you would have better sort of margin flow through given the revenues that you're expecting. So is it all investments, is there some mix, and just give us a bit more color around those investments?

Operator:

Your next question will come from the line of Ashish Sabadra with RBC Capital Markets.

Rob Fauber:

Maybe I'll start with that and then hand it to Steve. I'd say just in general, as you think about the return on these investments, I would say that we're investing in the highest growth parts of our business. So GenAI products, that's going to augment growth across our SaaS and hosted solutions. And Steve will touch on that in just a second. We're investing, as I talked about, in enhanced solutions for corporates and the public sector around customer and supplier risk. And I had a data point that we've had 14% CAGR in terms of sales growth over the last two years from those sectors. And we think we can even enhance that growth at scale as we invest in products specifically for those customer segments. And then lastly, platforming. We expect revenue growth from our SaaS and hosted solutions to grow something like low teens this year, that's in line with our medium-term targets. And the growth has been even higher in decision solutions, it's been more like high teens from SaaS and hosted solutions we're looking for this year. So yes, I think there's a pretty strong case for investment in these high growth parts of our business. But Steve?

Operator:

Your next question comes from the line of Alex Kramm with UBS.

Rob Fauber:

So I think we’ve learned a good bit over the last few months as we've been engaging with customers, as we've been signing customers, as we've been building the pipeline, and all of that is informing how we're thinking about our guidance. I think, Steve, why don't I hand it to you just to give some insight into what we've learned and how we think about that then flowing through the MA business.

Operator:

Your next question will come from the line of Jeff Silber with BMO Capital Markets.

Rob Fauber:

Caroline, do you want to take that?

Rob Fauber:

And while we're on the topic of -- now that we've covered MIS and MA calendarization, maybe let me just add a little bit in terms of thinking about then kind of pulling this together and thinking about what it might mean for adjusted diluted EPS. So we've got a little bit front end loaded issuance pattern that we talked about, the cadence that Caroline just touched on. From an adjusted diluted EPS standpoint, we think that the first quarter will be our strongest quarter in terms of absolute adjusted diluted EPS, followed by the second quarter. And maybe the easiest way to think about it is this. If you take the average quarterly EPS at the midpoint of our full year guide, and I think that's somewhere between $2.60 and $2.70, then given the stronger front half issuance that we've talked about, we'd expect first quarter EPS to be something like $0.15 to $0.20 higher than that average for the first quarter.

Craig Huber:

Mike or Rob, I'm curious, with the ongoing massive problems out there in the commercial real estate market out there, I'm curious what your thought is on the potential impact for your CMBS issuance for this year, ratings there? And also, more importantly, on your banking client potential impact this year on the commercial real estate market out there, what are you sort of expecting for issuance there as well? And just my quick housekeeping question, what was the incentive comp in the fourth quarter, please, and also for the full year last year?

Mike West:

So on the structured finance, just to try and put that into context. I mean, we are anticipating overall that structured finance will grow mid single digit. And when you look into that, there's different types of assets. And when we think about CMBS, let me just pick on CMBS first for your question. We believe that will still be muted given what's going on in the CRE market, particularly in office. It is a viable funding alternative to bank finance, particularly as borrowers face restrictive lending standards. But I do want to emphasize that when we look at our structured finance business we are expecting still a active market in ABS and CLOs. I'm very happy at some point on the call to talk a little bit more about CLOs. RMBS, on the other hand, again, muted because of the asset formation, which we expect to improve as the year goes on. But with that, I might just pass it to Steve about the MA side of CRE.

Rob Fauber:

There's almost like a tipping point where when there's too much stress in the banking system, it can ultimately become a headwind for us. As Steve said, when there's the need for real insight and better understanding around credit, that's a positive. And I think what we saw in March of last year was just about going over that tipping point. Caroline, do you want to answer the second part of Craig's question?

Operator:

Your next question comes from the line of Owen Lau with Oppenheimer.

Rob Fauber:

I think, Mike, why don't I hand that to you?

Rob Fauber:

And we can -- if people want to get into the asset level guidance, we're happy to do that in another question. I also -- I think it was Manav that asked a question about recurring revenue in MIS, and maybe let me just come back to that. That continues to be -- our view on that is it continues to be in that kind of low to mid-single digit range for revenue. This ties in part to first time mandates. Obviously, first time mandates are what build the stock of rated issuers that we surveil. So just a little insight there. We saw a pretty significant slowdown in first time mandates since, I'd say, third quarter of 2022. The fourth quarter, first time mandates were about in line with the fourth quarter of 2022. We are expecting that to start to pick back up. And that's not surprising given what you see as our expectations for high yield and leveraged loans. And so that will support a slight uptick, I think, in recurring revenue growth for MIS.

Scott Wurtzel:

I just wanted to go back to the Research Assistant. I understand it's only been a couple of months since you launched the product, but wondering if you could maybe share some feedback since the launch and anything you've learned about the product in the last couple of months?

Operator:

Your next question comes from the line of Shlomo Rosenbaum with Stifel.

Rob Fauber:

So on the sales cycle -- in the spring last year, we got a lot of questions around are you seeing elongated sales cycles. And I think we gave a pretty good sense for what we were seeing. Sales cycles were lengthening maybe just a little bit, nothing material measured in a number of days perhaps, but we were also seeing higher price points in the proposal and richer value propositions composed in that proposal. So it was consistent with what we'd expect. I'd say that trend has actually extended through 2023. So we're running right around the same numbers we were in the spring. I looked at this closely the other day. So sales cycles are maybe slightly longer than they were maybe a few years ago, but only because we're seeing bigger price points and richer value proposition. So pretty happy about that. Let's see here, sales cycles, yes, that's probably a good way to finish that one, yes.

Operator:

Your next question comes from the line of Seth Weber with Wells Fargo.

Rob Fauber:

And maybe I'll also go back to fourth quarter MIS, because I think we've been getting some questions about that. And I think fourth quarter to me really illustrated the tremendous operating leverage that's in the business. If you look at -- to give you a sense of what we were seeing in the fourth quarter for MIS, and then I'll take it forward into 2024 and beyond. Revenues came in lighter than we had expected, expenses came in almost exactly online in terms of what we had budgeted. I think it was something like 1.5% expense growth over the prior year quarter. So essentially, the entire revenue miss dropped right down to adjusted operating income. And again, that's what we love about this business. And think about what was going on, this was in the last few weeks of the year, there's virtually nothing we can do in regards to the expense base at that point. The majority of our expense base in MIS is people. Also, we have obviously a constructive view on 2024 issuance. And you've heard us talk about in the past that we try to think about are things cyclical or structural, and we saw that as a brief air pocket in issuance. And so that then did -- again, that dropped right to adjusted operating income. It was not an expense issue. And then you see 200 basis points of margin expansion from that jumping off point at the end of the year. And I would say this and, Mike, feel free to add. So we've got our low 60s percent margin target. We still feel very comfortable about that. We believe that this 200 basis points is solidly on track for that. But we are investing back in that business. I talked a little bit about in my prepared remarks, in particular, we've been investing in resources in some of these areas like domestic debt markets, like digital finance and private credit, make sure we've got the resources. And then we've also been investing in the technology. It's so important for us to get the technology enablement of the analytical teams for a variety of reasons that I touched on the call. Mike, anything to add to that?

Rob Fauber:

The bottom line is, as we get more technology enablement, we have surges in issuance, we'll be better able to handle that without having to to add people.

Steven Pawlak:

It's Steven Pawlak on for Jeff. I guess going off that last point, you talked about the GenAI tools that you're deploying internally. Can you describe some of the ones that have gone live, what efficiencies are being harnessed, where do you think you can get the most benefit towards the medium-term targets from those GenAI tools? And then is there like an enterprise wide committee handling decision to build or deploy or are some of these things being handled within individual departments?

Steve Talinko:

So we're doing a lot of the innovation work and trying to accelerate the innovation work through a central team, a team that is really a pretty agile team. Sometimes it's bigger -- it gets bigger and smaller, depending on which project we're working on. That team is in MA where we're doing a lot of the experimentation and then developing value propositions that we can use externally and internally. I'll just give you a simple example. Summarizing a PDF, which is something that you would expect you could do with GenAI tools, you might be able to do that with some tools that are offered through external folks, not just through Moody's. But leveraging that so you can use it in an industrial strength way, make it a part of your compliance apparatus, make it a part of the way in which you build products, the way in which you do your job every day requires some engineering work as well. So we're summarizing maybe a 300 page document. We're developing summaries across multiple documents at once. We're incorporating a document that you're reading today into our other GenAI tools in order to generate inference across not just what you might get from the OpenAI models we're working with Microsoft on, but also through the content that you're introducing to your analysis right now and you're right here. So an experiment that could see being very helpful for the folks in MIS might be I am doing work on this particular industry, there's three or four documents I might be interested in reviewing and maybe I can incorporate them into understanding, reading them more quickly, taking in gathering data from that much more quickly. So the central team is there to create critical mass in terms of engineering and roll out tools in a compliant way in a way that's been tested from an industrial strength perspective and is consistent with all of the normal processes that we would want to adopt as a rating agency where it's appropriate.

Rob Fauber:

And the only thing I would add, and I've said this when this comes up, is that we're going to be deliberate and transparent in the rating agency in terms of how we leverage generative AI. We're in dialog with our regulators to make sure that they understand how we're going to do that.

Heather Balsky:

Just with regards to your midterm margins, you talked earlier about that you didn't -- that the path wasn't necessarily going to be linear to get there. But can you help us bridge kind of as we think out over the next couple of years how it could look, especially given some of these areas that you're investing in? And how comfortable are you kind of -- if the opportunity presents itself, would you spend more now for top line growth or I guess, just the commitment to those margins given what you're seeing in the environment?

Operator:

Your next question comes from the line of Andrew Steinerman with JPMorgan.

Rob Fauber:

Let me just -- I'll start with that and then I'll turn it over to Caroline. I think, in general, what you're seeing with D&A represents the -- we've been talking about the investments that we've been making in our SaaS products, you've seen some increased capital expenditures over the last few years, that's now starting to come through in the form of capitalized software. And I also talked about the higher growth rates that we are seeing with those SaaS products. And I think that's -- you want to be able to look at those two things together. Across all of MA, we're expecting our hosted and SaaS solutions to be growing in kind of the, call it, low double digits to parts of the MA portfolio like decision solutions, we expect to be growing more like high teens. And that's where that investment in software development is going. Caroline, do you want to talk a little bit about it from an accounting perspective?

Unidentified Analyst:

And should it stay in this vicinity, DA, as a percentage of revenues going forward?

Operator:

[Operator Instructions] And your next question comes from the line of Craig Huber with Huber Research Partners.

Mike West:

Craig, I'll take the first part of your question before handing off. If I go by segment, the investment grade issuance growing at 5%, that comes off a 20% growth last year. Underpinning this, steady uptick with regard to upcoming maturities. M&A is supporting in certain key sectors but I would see that as a variable to the upside. As I mentioned earlier, the spreads at the moment are creating favorable conditions at the higher end of the rating scale and down into the Baa. So that's really on investment grade. For corporates, high yield, again, back to this market uncertainty that's subsiding, spreads have come in materially over the last 12 months. There's been some delayed refinancing that's now coming due. And these tend to be higher quality, spec-grade issuers that will get that opportunity to come into the market should those spreads remain favorable. And again, still coming off a low base, as Rob highlighted earlier. Leverage loan driven primarily by refinancing, including the amend and extends. There is also a refinancing in the public market of certain deals that got done in the private market, which is nice to see. And again, these tend to be more sensitive at the lower end. So our spreads again coming at lower end that market access to those around the single Bs is there. So again, 20% for the leverage loan. FIG, on the other hand, as we mentioned, a heavy proportion of FIG is frequent issuers. We've kept that relatively flat. There are some different variables there. There's some different central bank support facilities that will start to shrink in '24, therefore, leading banks to come to the capital markets. And that will also be a focus on their buffers and broader capital needs, but stable year-over-year. PPIF, mid single digit, largely made up of infrastructure financing and access by some of the larger US PFG issuers. When we think about the transition of monetary policy and the tightening that has occurred that we will probably see an increase in infrastructure projects that are really long dated as they want to lock into some lower rates going forward. And I touched on structured finance earlier at the mid single digit percentage. And you've got to look inside structured finance to look at the different asset classes, but really ABS leading in that particular area. So hopefully, that helps.

Rob Fauber:

Okay. One public service announcement for those of you in Europe. We're looking forward to seeing you at our London event and our offices on February 29th. I know that Steve and Shivani and some of our other senior leaders from Moody's Analytics will be there to provide a spotlight on our MA business like we did in New York in September of last year. So with that, I'm going to bring the call to a close. Thanks, everybody, for joining and we'll talk to you next quarter. Bye.

Operator:

Good day, everyone, and welcome to the Moody's Corporation Third Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions]. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. Good morning, and thanks to everybody for joining today's call. I'm excited to share our strong financial results as well as some key business highlights. And that's going to include some notable innovations and investments, progress on our GenAI strategy and a spotlight on our fastest-growing business in MA, that is our Know Your Customer business, or KYC as we commonly refer to it. And before I get started, I just want to say how proud I am that Moody's has again finished #1 in the Chartis RiskTech100. That is the most comprehensive global ranking of risk and compliance technology providers. And it is a great recognition of the breadth and depth of our solutions based on both market research and customer feedback. I also want to take a moment to recognize the incredible resilience and dedication of our people. And I've really appreciated how our people have come together recently to support each other and to continue to deliver for our customers. So as you all will have seen from this morning's earnings release, we reported 15% overall revenue growth with strong top line performance and improved adjusted operating margins from each of our businesses. And that contributed to a 31% increase in adjusted diluted EPS in the third quarter. MA revenue grew 13% while achieving its fourth consecutive quarter of 10% ARR growth. And MA's growth continues to be led by our KYC business. We now have over $300 million of annualized recurring revenue, or ARR. And that's growing at 18%. MA also produced an adjusted operating margin of 33.6%. Now MIS grew 18% in the quarter as the leveraged finance issuance markets continued to improve from last year's subdued levels, I would call it. And MIS revenue is now expected to grow in the mid- to high single-digit percentage range for the full year. And that acknowledges the current uncertainties in the capital markets. Last week, we published our annual refinancing wall study. And that showed a 21% increase in the total U.S. nonfinancial corporate debt coming due over the next 5 years. And as I've mentioned on prior calls, these refi walls are a very important component of our long-term growth algorithm. And that remains firmly intact. And as those of you who attended our Innovation Open House last month would have heard, we're moving quickly to integrate our broad data and analytic capabilities across our product suite and to leverage the power of GenAI to develop new and cutting-edge solutions to empower both our customers and our employees. And the pace of innovation is clearly accelerating across our businesses. We're investing, we're launching new products, entering into strategic partnerships, all that will enable us to continue delivering market-leading growth. And if you look just at the third quarter, we announced some really interesting things. And I want to take you through a few of those. And I'm going to start with ratings. We've talked about on prior calls about how deepening our participation in developing capital markets, and in particular, domestic issuance markets, is important to that long-term growth algorithm that I just mentioned. And that includes Latin America, where Moody's Local has grown its customer count by more than 20% this year. And the Asia-Pacific region also has some exciting opportunities, which is why in September, we further extended our domestic ratings business with the opening of VIS Rating in Vietnam. And that is a small but fast-growing domestic bond market. I also talked about how the relevance and importance of our voice in the markets is a really critical part of what makes MIS the agency of choice for both issuers and investors. And last month, we published really a groundbreaking cross-industry report on cyber risk and practices. And it leveraged our relationship with BitSight. And we had nearly 2,000 companies that provided data and inputs. And we were able to highlight the more than $20 trillion of rated debt that is at high risk from cyber threats. And that is, I think, a really great example of the importance of a multidimensional view of risk, in this case, understanding how cyber risks are impacting credit risks. Now moving to MA. We're launching our first GenAI-enabled product. We call it Research Assistant. And we've already previewed it with over 150 customers. Our strategy is to commercialize the launch as we head into the year-end renewal cycle. And initially, our thinking is that Research Assistant will be sold as an add-on to our flagship product, which is CreditView. And leveraging the power of an LLM with Moody's trusted proprietary content allows customers to generate rich credit insights in just seconds and with capabilities in multiple languages. We also expanded our coverage in CreditView to now include 12,000 new unrated names. And that allows us to better serve the private credit market. And customers who purchase that module are going to have a seamless, integrated experience that includes financials, ownership structures, credit scores, sector research, interactive scorecards and peer analysis. And I think that is a great example of content integration to serve new customers and new use cases. We're also constantly investing in our data estate that includes Orbis, which is one of the world's largest databases on companies. And we've expanded again our partnership with BitSight by integrating their cyber data and scores for about 250,000 entities into Orbis. And that enables our customers to better understand cyber risk. We also have several exciting product launches across Decision Solutions. So in banking, we launched a new module in CreditLens that will integrate a bank's own loan-level data with Moody's content. And this portfolio module really provides a dynamic view of a bank's loan portfolio by monitoring and measuring performance and providing early warning signals. We're also integrating RMS's physical and transition risk models with our proprietary ESG and climate data into a range of banking solutions. And that is empowering our customers to make better, more informed decisions around lending, portfolio management, stress testing and regulatory reporting. And these are some of the original synergies that we envisioned with the RMS acquisition. So it's great to see this in practice. And speaking of RMS, I was in Europe last month at a major insurance industry gathering with a bunch of CEOs and Chief Risk Officers. And I again came away very excited about what we're doing with the industry. Together with BitSight, we recently launched the Moody's RMS Cyber Industry Steering Group with two major market players, Munich Re and Gallagher. And we're also partnering with Lloyd's of London to develop a carbon emissions accounting platform for their ecosystem. Now in addition to these recent product launches and initiatives, we're continuing to leverage GenAI across our organization. And as you heard at our Innovation Open House last month, our colleagues are taking a really active and hands-on approach in innovating and driving change. In fact, over 70% of our people have used our in-house CoPilot tool. And that includes for things like coding, preparing a report or improving an internal process. And this adoption is also reinforcing our early-mover advantage as we're now benefiting from an internal feedback loop. And that's allowing us to share learnings from our own GenAI journey with our customers. And speaking of customers, we've been engaging extensively with customers around our GenAI strategy, including the relevance of our curated and proprietary data and research and our approach to data integrity and security. And in particular, since July, we've demoed our Research Assistant, as I said, with a number of our customers. And nearly every one of these customers believes that this product will have meaningful benefits for both their productivity and their insight. We're also revving up the work that we've been doing as part of our partnership with Microsoft and leveraging their secure Azure OpenAI Service. We're building new functionality and content sets and entitlement capabilities into Research Assistant. We're also continuing to expand the ways that we leverage Microsoft Teams to collaborate internally. And I think importantly, we're seeking to expand our joint go-to-market opportunities, broadening the appeal of this partnership to new customers and market segments. And that includes creating Teams plug-ins that will be available to Microsoft's 300 million monthly users and infusing Moody's content into their Dynamics and Power Platforms to enable CRM and workflow integrations. We're also continuing to explore migrating our content sets to Microsoft Fabric to enable entitlement and delivery of content and insights to our shared customers. So really taken together, I'd say we're very energized by the progress we've made. And we're excited about the opportunities that lie ahead. In addition to Microsoft, we're working closely with other leading cloud and software players, leveraging our respective strengths to deliver new and innovative GenAI solutions. And partnerships can take many forms. It can include joint product development, joint go-to-market activities or direct commercial opportunities. And to help maximize this opportunity, we've developed a strategy and a framework and a team for third-party partnerships. I think a good example of this is the work we announced earlier this week with Google. And through this partnership, Moody's and Google Cloud are going to explore creating LLMs and AI applications specifically to help financial professionals perform faster and deeper analysis of financial reports and disclosures and other materials. So we're certainly excited to be at the cutting edge of GenAI innovation with some leading partners. In recent quarters, we've been spotlighting one of the three cloud-based SaaS businesses within Decision Solutions. And so I want to cap off that series, if you will, with KYC. And unlike banking and insurance, which are obviously industry-specific, KYC is relevant to all of our customer base. And as I said before, a really important objective for many of our customers is to have a better understanding of who they are doing business with, whether it's making a loan, underwriting an insurance policy, onboarding a customer or monitoring a supplier. And over the years, we have tried to be very thoughtful about how we have added to our capabilities to build a business that, as I said earlier, is generating over $300 million in ARR and growing at 18%. And two significant acquisitions that some of you ask about from time-to-time, and that's BvD and RDC, really foundational elements of our KYC solutions. And they have both outperformed their original acquisition targets. And there are several thematic drivers behind the growth of the KYC business. Specifically, I would call out the digitization and automation of what are very manual and expensive in-house compliance processes; the growth in online transactions and payments; and also the need for greater breadth and precision amidst new and increasing regulations; and all of this combines with the need for better analytics and insights, again not just about customers but more broadly, who companies are doing business with. So by combining our proprietary data on companies and people with analytics and through a modern cloud-based SaaS platform, we're delivering solutions for our customers in some pretty compelling ways. And these solutions use traditional AI, you've heard us talk about that on this call before, that includes machine learning, natural language processing and integrating data on over 470 million public and private companies with more than 1.7 billion ownership links, profiles on over 20 million politically exposed people and sanctions in adverse media. And recently, based on customer feedback, we've also added an ESG scores and credit scores. So we offer access to our KYC tools and content in several different ways. And that includes via data feeds or APIs into customers' in-house systems. It also includes full end-to-end workflow with proprietary and third-party data that supports customer acquisition and onboarding, screening, monitoring and third-party risk management processes. And the front-end workflow software is what we acquired when we bought PassFort Pack in 2021. So that moved us from being just a data provider to being a full-service provider in this space. And that combination is increasingly being recognized across the industry, including the recent Chartis awards, as the only vendor that's identified as a market leader for both data and workflow. We're also seeing significant growth outside of the financial sector. And we are investing to enhance the relevance of our offerings in the corporate and government space. That includes our recent launch of something called Sanctions360. That enables customers to efficiently and effectively comply with regulatory requirements regarding their customers, counterparties and suppliers by better understanding the implications of both sanctions and sanctions by extension. And our ability to build solutions that reach a broad set of customers is really a key element of our land-and-expand strategy. In fact, approximately 25% of MA's overall new customer ARR growth in the last year came from KYC. And generating these new relationships then provides additional opportunities for us to cross-sell from other parts of MA. Likewise, our existing customer base also provides some very significant runway for future growth. Currently, only about 20% or about 3,000 of MA's customers buy one of our KYC solutions. And that represents an important cross-sell opportunity for our remaining 13,000-or-so customers. Now turning to MIS. In the third quarter, issuance was consistent with normal seasonal patterns. I'd say that activity was relatively subdued in July and August. And we certainly saw some stronger volumes in September. Growth was driven by leveraged finance on the back of what was the strongest leverage loan volume since the first quarter of 2022. And that, coupled with elevated activity from infrequent banking issuers and an improvement in project and public finance issuance versus the prior year, all of that contributed to a favorable mix. As a result, while global issuance was up about 12%, MIS transactional revenue was up 31% versus last year. And together with 5% recurring revenue growth, MIS revenue grew 18% for the quarter. And as we head into the fourth quarter, I'd say the general market sentiment remains a bit fragile. We've updated our guidance to reflect an expectation of modestly lower issuance volumes in the fourth quarter, particularly in investment-grade and structured finance, than we had been anticipating back in July. And the heightened geopolitical turmoil, combined with macroeconomic concerns around a higher-for-longer interest rate environment, will continue to drive some volatility and uncertainty around yields and spreads. And these conditions are likely to be particularly impactful on opportunistic investment-grade issuers. And that's a reason that we're lowering the outlook for investment-grade issuance to approximately 25% growth for the full year 2023. We also continue to see the knock-on impacts of lower asset generation on the structured finance sector. And so we're updating our outlook to decline by around 25% compared to the prior year. So these two forecast updates result in an overall revision to our expectation for issuance for the year. And we now expect issuance growth to be in the low to mid-single-digit range in 2023 and MIS to grow in the mid- to high single-digit range. So while there are some headwinds to accelerating issuance growth in the near term, refunding walls continue to grow. And they are a key factor supporting medium-term issuance growth. And our annual study on refinancing, which we, as I mentioned, just recently published, captures nonfinancial corporate maturities in both the U.S. and EMEA. And we look at the next 4 years as an aggregate figure, and with approximately $4.4 trillion coming due in the next 4 years, that's up by about 10% versus last year's study. And you can see that, I believe, in the appendix in our supplemental materials. I also want to spotlight the U.S. in particular. Obviously, this is the largest of all the global bond markets. And looking out over 5 years, and that's the length of the U.S. study, the aggregate forward maturity wall grew by about 21% compared to the study -- last year's study. And the main contributor to this is leveraged finance, which grew approximately 27%. So that's certainly going to be helpful to future mix over the coming years. So forward maturities continue to provide support for future issuance and continue to be an important part of the MIS long-term growth algorithm. And I would also say that overall corporate debt velocity, which is total corporate issuance as a percent of total corporate debt outstanding, remains pretty far below historical averages. So that implies the potential for pent-up issuance demand in the future. So on that note, I'm going to pause here. I'm happy to open the call for questions. Operator?

Heather Balsky:

I was hoping you could talk about the refinancing wall that you've just addressed and how you're seeing your customers manage through the higher-for-longer rate environment. Are they delaying refinancing right now? Is more getting pushed into 2024? And when you look at those potential customers who may refi, any concerns about some of that debt not getting refi-ed that maybe those companies could be under some stress?

Operator:

We'll take our next question from Faiza Alwy with Deutsche Bank.

Rob Fauber:

Yes. As I said, a couple of things that lead us to believe that there is some, I'd say, pent-up demand. I mentioned this concept of corporate debt velocity. That's just the amount of issuance over -- the amount of corporate issuance over the amount of corporate debt outstanding. And that's really at a decade-plus low and continues to be this year. So that leads us to believe that there is further opportunity for issuance. I talked about the refinancing walls. And over the medium term, they look promising. The other thing I think that tends to be a catalyst for issuance is M&A. And it's been a pretty spotty year for M&A. And it's about what we had expected. But private equity firms have a tremendous amount of dry powder. Somewhere, I think the other day, I saw they have $2 trillion to invest. I think M&A is probably not a Q4 story at this point. I think that's something that we're going to look into 2024 to see if that can be a catalyst for issuance. So I do think there are some things that at some point can change the trajectory of issuance.

Alexander Kramm:

Just staying on the ratings side for a minute, can you talk about how your commercial interactions have changed at all with issuers in this? Again, everybody is using a higher-for-longer environment here. I guess, what are you doing to drive, I guess, new issuers? And I'm asking from the perspective also -- and this is very anecdotal. But I've heard in Europe, for example, there are some companies that are, actually given the higher interest rate environment that they haven't seen in many decades, are considering ratings for the first time. So again, maybe anecdotal but just wondering what you're seeing to, I guess, feed to -- continue to feed the business outside of the, I guess, macro environment.

Alexander Kramm:

But not seeing a change there, given the higher rate environment, that was really my question.

Operator:

We'll take our next question from Andrew Nicholas with William Blair.

Rob Fauber:

Yes. These are all great questions. And I want to give you answers to all of them, but I'm probably going to be able to give you better answers in the next quarter. So I guess, the way we are thinking about it is again we're trying to preview this with our customers so that we can get feedback so that they can iterate the product, so we can think about how we want to price and package that. I expect that many of our users will get some basic level of functionality. And other users will opt in for full functionality. And as I said, we envision that as being an add-on. We're getting ready to go into our annual renewal cycle. So we'll have a very good sense on the next quarter call. We'll be able to give you some update on what that take-up looks like. And then you're going to see that then in our -- in how we talk about our digital insights business for -- prospects for that business for full year 2024. Over -- I'd say, part of the vision here is we also want to be able to expose those customers to different content sets than they might have access to today. So imagine that the initial customer is one of our CreditView customers. They're already a customer, and they decided they want to opt in to the full Research Assistant functionality. But they may not be a customer of other content sets, so let's say, some of our climate and physical risk content. We will be working over the course of the next year, and we're already working on this and we'll be working on this, to be able to provide access to customers for content sets that they find valuable to effectively kind of comingle, right? So when I ask for a question about credit and I want to understand the impact of extreme weather events on the credit profile of the company, we'll be able to return that answer. So that's why you heard me also mention the importance of entitlements. That's going to be very important for us to get that sorted out across the platform so that we can entitle customers to new content sets and ultimately monetize all that. So again, I know -- on the next earnings call, I'll be able to give you a little bit more insight into the traction that we've gotten with our customers.

Toni Kaplan:

Just given that we're in late October now, and this is usually the call where you give some color on how you're thinking about '24 issuance, Rob, maybe just give us your initial thoughts on sort of what you're seeing and how you're thinking about '24 just shaping up?

Operator:

We'll take our next question from Scott Wurtzel with Wolfe Research.

Rob Fauber:

Thanks, Scott. Good to have you on the call. So yes, we continue to see some pretty strong both demand and also utilization. That's important, right? We've talked about the utilization of our products is very important to the overall kind of value capture but around our economic data and our research and our models. I mentioned that we have just recently expanded our coverage within CreditView. And that is integrating the content from Orbis, that company database, and also our credit score. So we -- a while back, we started to provide credit scores and effectively every company that is in that giant database. And we have been integrating that into a variety of our different solutions. And we've gotten some very nice take-up from that. I would also say that, again in times where you've got economic uncertainty, there continues to be a good bit of demand for economic data and content and ability to kind of forecast and plan. And we have continued to see that. We've also seen some interest coming in from some of the government sector. So the growth there has been maybe even a little bit higher than from some of our other segments. So all in all, a number of things that are contributing to -- allowing us to keep powering along in terms of growth in that segment. And going forward, we've got the coverage expansion in Research Assistant that I think will provide future runway for growth.

Craig Huber:

Rob, what's your updated thoughts on the private credit market out there? And how significant do you think it could be for your ratings business here? And is there an area here where this could potentially be a headwind to ratings growth if it's not picked up, the stuff there is not rated? I do have a housekeeping question, if I could throw that in there. What's your incentive comp for the first 3 quarters, please?

Caroline Sullivan:

So Craig, with regards to incentive comp, our accruals align with our actual and projected financial and operating performance. And we expect incentive comp to be between $370 million and $390 million for the year with approximately $90 million for the fourth quarter. For Q1, it was $89 million. For Q2, it was approximately $100 million. And for Q3, it was approximately $100 million.

Owen Lau:

So going back to MA, I think the margin was pretty strong at 33.6%. And I know you maintained the margin guidance for MA. But going forward, given that you have been investing into GenAI, how should we think about the sustainability of your margin?

Operator:

We'll take our next question from Seth Weber with Wells Fargo.

Rob Fauber:

Yes, it's a great question. And this is probably something we're going to be talking with you more about next quarter, would be my guess. But again, if you think about what has gone on historically, that customer base, it really started really in financial institutions and mostly in banks. And then it started to evolve as all corporates had to start complying with different sanctions regimes around the world. But also, as corporates said, hey, we want to start -- this trend I talked about around better understanding who you're doing business with has driven a need from our customers to really get foundational master data and then build a set of -- leverage analytics on top of that to help them think about things like sales and marketing optimization, extending trade credit, onboarding and monitoring customers and thinking about supplier risk. Those are -- that's a set of activities that almost every one of our companies, our customers is doing. And so we're having conversations with more and more and more of our customers around, "Well, how do you think about the master data and linking then the data and the analytics that you have at your firm and that we can layer on top of that to help you get a better, more holistic view of who you're doing business with and to power those different use cases?" And so that gives us some confidence that we're really going to be able to grow in the corporate and government sector even faster than what we've done. It's a small -- you can see the customer split. But we think we have an opportunity to really get some growth there. And I think you'll hear us talk more about that in the next quarter when we start to talk about what our product pipeline looks like for 2024.

George Tong:

On Slide 10, you trimmed your issuance guidance from mid-single-digit growth to low to mid-single-digit growth. And the cuts are centered around investment grade, leveraged loans and structured finance. How much of your updated issuance outlook is locked because of refinancing needs versus discretionary in nature and more influenced by macro considerations? And then related to that, does the refinancing pipeline, particularly in high yield, what does that tell you how quickly that issuance can expand for next year?

Operator:

We'll take our next question from Ashish Sabadra with RBC Capital Markets.

Rob Fauber:

Yes, Ashish, thanks. It's a good question. Last quarter, I think we talked about hitting that high single-digit mark for ARR growth within insurance and then you see 8%. And that's, as you said, improved. And I'd say there's a few things that are going into that. And as you know, we've got, what I'll call, kind of a P&C franchise, which is really historically the RMS franchise. And then we have the life franchise or historically, the Moody's franchise. And now all of that is our insurance business. And in P&C, we have started to see an improvement in ARR growth from our core RMS customers. And some of that is just good old-fashioned blocking and tackling and great sales execution. And we have a very robust, intelligent risk platform. That's the SaaS platform. So we're having some nice success in migrating people from on-prem solutions to the SaaS platform. And we're also, as you mentioned, starting to roll out new solutions. It's giving us an opportunity to continue to not only bring in new customers but also to be able to do more for our existing customers. So that's one. I would also say that while it may not be showing up in the insurance segment, we also feel very good about the cross-selling synergies that we're seeing, where we've got insurers who may be buying solutions from other parts of Moody's Analytics. So a good example is around KYC and master data. And then on the life business, so we -- over the last couple of years, there was some growth -- one of the drivers was around some of the IFRS 17 accounting standards. Some of that is now in place. But now we're in a wave of kind of product enhancements and other things. So we still have -- actually have some very nice growth in the life business. So all in all, pretty encouraged by the -- not only the growth in the insurance business, but I think the opportunity for us to continue to see some further acceleration there.

Manav Patnaik:

Just wanted to ask real quick, any -- first off, any disclosures you can give us on revenue or growth in your ESG climate businesses there within Moody's Analytics? And is this, at this point, still mostly RMS and insurance? Or is -- it sounds like you were alluding to some cross-sell opportunities as well. So any color there would be appreciated.

Caroline Sullivan:

Sure. Maybe we'll answer the RMS question first. So we are on track to achieve $150 million of RMS-related incremental run rate revenue by 2025. And with regards to climate and ESG, for 2023, we expect about $200 million in annual revenues. They're growing at a double-digit pace. So there's really ongoing demand from our customers with regards to more information around climate that's really helping us out with that.

Operator:

And we'll take our next question from Andrew Steinerman with JPMorgan.

Rob Fauber:

So I don't think -- we don't disclose RMS growth at the -- on a quarterly basis. But I can tell you that our target of RMS revenue, including synergies, to grow in the high single-digit range for 2023, that's -- we're still on track for that. And as I mentioned, the two components is RMS growth is, what I'll call, core growth has been picking up. I think we all understand it was a fairly low-growth profile when we acquired it. That is improving. And we are starting to get more and more synergy revenue. And I guess the other thing I'd say, Andrew, is something like integrating the content into our banking solutions, we'll capture that as synergy revenue. But you won't necessarily see that in the insurance segment, which is why I think it's important for us to be able to give the color on how we're capturing synergy across the broader business. And Andrew, can I make sure I just understand that last bit of the question, it was the difference in insurance delivering in insurance and banking?

Rob Fauber:

Yes, you do. I actually, in a way -- I've said this before, in a way, I've always -- I've sometimes thought of that content is in some ways trapped in very sophisticated insurance workflow software, right? So there's really, really rich, detailed weather models, climate models and massive amounts of data that has historically been used in the RMS software for the larger global insurers and reinsurers and brokers around the world. And the reality is -- and this was a main driver of why we bought this company. We knew that there was going to be a lot of demand for that content but delivered in a different way. So for instance, we've come up with something called Climate on Demand, where we can actually do fairly simple scores and give you an average annual loss estimate. So this is the financial quantification of a weather event on a given property. And we can go down to a 10-meter resolution. So banks are saying, "Hey, I'm underwriting a commercial loan. I'm securing it by -- I'm underwriting loans, securing it by commercial real estate. And I understand the insurance policy is an annual policy, but this is a 15-year loan." And so I want to start to understand -- so we are doing exactly what you just described is how do we take that content and deliver it to customers in different ways that are consumable for them in their workflows in ways that are valuable? And that, I think, was very difficult for RMS to do as a stand-alone company. That's part of the value that we're bringing here.

Russell Quelch:

I noticed there was a small uptick in the expected restructuring charge to '23 versus what you said in Q2. I know it's very small, but wondered what's driving that. And maybe sort of broader question, is there room for further restructuring in '24 if the economic environment doesn't pan out like you laid out in response to Toni's question?

Caroline Sullivan:

Sure. So we expect our restructuring program to be substantially complete by the end of the year. We are forecasting up to $205 million for about $100 million to $110 million in MA and $90 million to $95 million in MIS. And the charges relate to both real estate rationalization and workforce optimization. And we inspect -- expect to incur restructuring charges between $20 million to $40 million in the fourth quarter, over 65% of that being related to real estate. So with regards to expanding this into 2024, we have no plans for that.

Operator:

We'll take our next question from Shlomo Rosenbaum with Stifel.

Rob Fauber:

Yes. Thanks, Shlomo. And I guess, I'll reiterate the kind of health warning of I don't want to get overly fixated on 1 quarter. Obviously, it was a good quarter from a margin perspective. But we do have some seasonal spending patterns in MA. This year, I think, is no different. And obviously, you're looking at then our full year guidance and what that implies for the fourth quarter. And obviously, that means that kind of margin will be a little bit lower in the fourth quarter than it was in the third quarter. So kind of why is that? And I would just say that as we go into the end of the year, we've got all sorts of projects that start to -- people are trying to get them done by the end of the year. And we also have a good bit of increase in selling activities, just a huge renewal and sales period for us. And the other thing I might say is that, again you've heard me talk about this reprioritization. You saw that we took some additional actions that were reflected in that updated restructuring charge. So there was -- there were some things that went on over the course of the summer. That was part of that reprioritization. And some of that went into that restructuring charge. Some of that then flowed through -- we saw that flow through. But then in the fourth quarter, as I said, we've got a plan for investments. We know we're going to have a lot of selling activity. And the other thing I'd say is if you think back to the call back in February of -- earlier this year, I mean, GenAI wasn't even a thing. And so we've had to figure out how are we going to get after GenAI? How are we going to have the right resources with the right skills and really go after that and fund that internally? And so again, that was all part of the kind of the reprioritizing and repositioning within the business. So hopefully, that gives you a bit of a sense. But I wouldn't get too caught up just in this quarter.

Jeffrey Meuler:

Want to ask a long-term question on corporate debt velocity. I hear you that it's the lowest it's been in a while. There's a lot that's impacted issuance. We should see cyclical recovery. And refi wall should be supportive. But if you look at the very long term, like a multi-decade view, I'm curious what the data shows in terms of correlation. After a period of a material interest rate increase, does corporate debt velocity tend to persist at a low level? Or is that correlation not really there?

Operator:

Our next question comes from Jeff Silber with BMO Capital Markets.

Rob Fauber:

Yes, that was a mix issue. So in investment grade, we have typically two types of issuers

Craig Huber:

Rob, I've got a follow-up question, on pricing, can you just quantify what pricing is doing this year for each of your two main segments, up about 3% to 4%? How should we think about that for '23?

Operator:

And there are no further questions at this time. I'd like to turn the call back over to Rob Fauber for any additional or closing comments.

Operator:

And this concludes Moody's Third Quarter 2023 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available immediately after the call on Moody's IR website. Thank you.

Operator:

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. As we typically do, I'm going to touch on a few key takeaways from our second quarter results and provide some insights into what's supporting our growth outlook. I also want to continue to highlight some of the exciting growth opportunities within the Decision Solutions line of business. And this quarter, I'm going to spotlight our insurance business. Then I'm going to talk about how we are positioning ourselves for what I tend to think of as a generational opportunity provided by generative AI. And as always, Mark and I will be happy to take your questions. We delivered strong performance across the firm this quarter. MIS achieved its first quarter of revenue growth in six quarters amidst a steady improvement in issuance. In fact, revenue growth – revenue grew 6%, outpacing a 3% increase in issuance. And the improvement in the issuance environment was led by a 54% increase in investment grade activity. And this, combined with the ongoing gradual recovery in high-yield bonds, has led us to raise MIS' revenue guidance for the full year to high single-digit growth, up from our prior guidance of low to mid-single-digit growth. And we continue to sustain 10% ARR growth in MA, selling into strong demand for our suite of mission-critical data analytics and workflow tools. And this quarter, we're introducing some additional top line disclosures for our banking, insurance and KYC businesses so that we can provide you with more insight into the robust performance of Decision Solutions. The stronger than expected revenue growth in MIS is driving the increase in our full year adjusted diluted EPS guidance of $9.75 to $10.25. And we continue to balance our expense control measures while furthering our investment in the business. We're capitalizing on our unique ability to integrate proprietary data sets and advanced capabilities from across our businesses into tailored cloud-based solutions. And we're innovating and investing extensively across the company to build further on this momentum with several key initiatives focused around generative AI technology turbocharged by our recent partnership with Microsoft. And over the past several months, as our businesses continue to scale, we spent considerable time talking with investors about how to think about the Moody's of today. And I want to share that with you because I think it's really useful context for understanding both our performance and our growth opportunity. And we've got several great crown jewel businesses, and anchoring those businesses, of course, is MIS, the global agency of choice for issuers and investors. But in MA, we have one of the world's premier subscription based fixed income and economics research businesses, a data business powered by what we believe is the world's largest database on companies and credit and three cloud-based SaaS businesses serving banking, insurance and KYC workflows. And at a high level, these businesses come together to help banks, insurers, corporates and public sector entities really do one of three things. First, to help them commence a relationship or an exposure so to issue, originate, select or underwrite. Second, during the life of that relationship, help them measure, monitor and manage risk. And third, on the back end, help them verify, account, comply, plan and report. And to do this, we leverage a tremendous set of proprietary data analytics and domain expertise across a range of areas

Owen Lau:

Good afternoon and thank you for taking my question. So it looks like MA has more investments into product development such as AI, Rob talked about, but it dragged down the operating margin in the second quarter and also full year guidance. So I think it will be great if you can maybe give us an update on the seasonality of your P&L by segment and how we should think about that? Thanks.

Owen Lau:

No problem. Thanks a lot. Very helpful, Mark.

George Tong:

Hi, thanks. Good morning. So 2Q debt issuance and ratings revenue performance was strong and led you to raise your full year guidance for MIS. That said, debt issuance in July so far has been relatively weak. How much of a pull forward in debt issuance into 2Q do you believe happened? And does your guidance reflect simply a flow through of 2Q outperformance, or does it assume a stronger 3Q and 4Q than you previously expected?

George Tong:

Got it. Very helpful. Thank you.

Manav Patnaik:

Thank you. If I can just ask you not around all these GenAI initiatives and stuff you’ve highlighted so far, like is that all incremental expenses or how are you thinking about in terms of spend and budget versus what I guess you’ve already doing before.

Rob Fauber:

And Manav, hey, it’s Rob. I’d also say, I think you were asking specifically also about just the extent of investment. Is it incremental? Is it significant investment? I would say that we’re able to leverage a lot of the investment that we already have. You think about we have most of our solutions are on the cloud. We’ve – it’s one reason I highlighted on the call. We’ve got a lot of expertise already across the firm around AI. I think one of the costs, and it’s too early for us to know what this looks like, we don’t yet know exactly the pricing structure of our products. But there’s going to be incremental compute cost and running these models is not cheap. So it’s still a little early for us because we’re just now Manav going into preview mode with customers, getting feedback from customers, thinking about then what the product pricing and packaging looks like, and then what the cost side will look like. So I think Manav, we’re going to have a much better sense for this in another quarter or so.

Operator:

Your next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

Rob Fauber:

Yes, Kevin, hey, it’s Rob. And look, I would be remiss, if I don't talk about both sides of the equation here, because – and I promise you I will touch on the efficiency opportunity. But this really is, we think, a compelling opportunity for us in terms of how we deliver our content. And so we are very much approaching this in terms of opportunity first and what is the opportunity to deliver unique value to our customers. And as you heard me say to Manav, we're early days here, if you want to get a sense of what it looks like, I hope you get a chance to check out the video. There's a very easy way to understand how we're thinking about deploying this and what the opportunity will be. I would also say that we have approached this from a one Moody's perspective. And that is really, really important. Because this was an opportunity for us to set up a firm-wide infrastructure, a copilot across the firm, we obviously have to think about entitlements and controls and others things, risk management, all those things. But there's an opportunity to use one infrastructure across the firm. And as we have innovations across the firm, people able to deploy those innovations into our firm-wide ecosystem. Now, you mentioned MIS specifically, the MIS teams are very engaged around this and very engaged with our AI enablement team we put together. And looking at ways that they're going to be able to process more information, to get new insights, to be able to get through these things more quickly, and I really think about it, Kevin, as essentially turbo charging our people. And we have always heard from our issuers that we have the most experienced analysts and they really value that. And now I think about – all right, now we have the most experienced analysts, who are going to be armed with the capability of this copilot and everything that it brings and being able to work together on the team's collaboration platform will really turbo charging the capabilities of our analysts. I'm sure there will be productivity gains, but there will also be some real improvements to just the insights that we're able to deliver to our customers

Operator:

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Rob Fauber:

Alex, you know what, that first question is a great question. I have to be honest. I was thinking about that coming into the call and thinking, you know what? Somebody may ask that. I don't have that answer at my fingertips. But that's something I think that we can follow up on. It's a really good question. And it's a natural question given the fact that we're spotlighting those products. Let me talk for just a moment about how we're thinking about the monetization opportunity. And again, it's in early days, so just to give you a sense of where we are? We are just in the process of going into what I would call preview mode with a handful of our customers who then can give us feedback on the product. We're thinking then about, as I said, kind of the pricing and packaging. We're starting with what we're calling a research assistant that will serve our core customer – investor customer persona, right. So this is the investor that is using our CreditView offering. We will likely make the research assistant available and integrated into the CreditView platform, we may – so in that case, you can imagine it being an add-on to your CreditView subscription. We also have the ability to call the research assistant, right. And that would allow us to deploy it through, for instance, a platform like Microsoft Teams. And we – Alex, the exciting thing there is, that's going to allow us, I think, to reach a whole new customer base of people who aren’t using CreditView today may not have the frequent need to use CreditView, but want to get access to our insights and research. So we're thinking about how do we price that. You can then imagine that we go from that core investor persona to other core personas that we serve. So in banking, it's credit officers and commercial lenders. In insurance, it might be Chief Risk Officers and underwriting staff. And so we will be creating assistants that serve those personas. And so those will be both integrated, as I said, with CreditView, likely integrated into our existing offerings. And over time, we would also expect that people would look to have additional content sets entitled with their assistants. So you could imagine that our research assistant comes preloaded with certain content sets. And then over time, if you want to add, say, a climate or ESG content set, that may be an additional entitlement and additional revenue opportunity. So, again, Alex, these are great questions. We're working through these as fast as we can. And I think towards the end of this year, we'll probably have more insight into what this looks like, what the size of the opportunity will be. That will then be incorporated into our 2024 outlook.

Operator:

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Mark Kaye:

Ashish, good afternoon. In the second quarter, our free cash flow result of $549 million was significantly higher, to your point, compared to the prior year period. And that's true primarily due to an improvement in working capital as the prior year included, and you'll recall this, a tax-related working capital headwind. And this quarter, of course, we also had stronger net income given the growth in MIS combined with solid execution in MA. That means for the second quarter, our free cash flow to GAAP net income conversion was almost 150% compared to just 66% in the prior year. And I would say we’re forecasting that conversion rate really to moderate through the rest of the year as some of those first half working capital tailwinds normalize. We’re also very pleased to increase our share repurchase guidance to $500 million. And that means we’re going to return over $1 billion to our shareholders this year, $500 million through share repo and approximately $550 million through dividends. But the most important thing here is as a management team, we continue to be committed to anchoring our financial leverage around that BBB+ rating. And that’s really because we believe that provides the appropriate balance between lowering the cost of capital and providing for ongoing financial flexibility.

Operator:

Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Rob Fauber:

Yes. Toni, hey it’s Rob. You’re – the second part was on KYC, right?

Rob Fauber:

So, as you know and this is why you’re asking the question, this has been a strong growth engine for us for some time now. And there’s a few things I think going on. We’re adding both new logos and we are adding – and upselling as well. And an interesting couple stats, the volume of what we call multi-product deals. So if you think about the components of our KYC solution, it’s really the company data that’s in Orbis. It’s the people data in what we call our GRID database. We’ve got our adverse media and AI screening, and then we wrap that in a workflow tool, right? So those are all the components. And you can buy the data separately from the workflow or you can buy the data integrated into the workflow. So where our cloud workflow platform is sold with other KYC products, that’s up 91%, so we’re seeing a lot of customers wanting to opt into the kind of full solution with workflow and data. The volume of what we call multi-product sales. So where I’m buying multiple components of this solution is up almost 50%. And where we have what we call – sales where we have something called company registration verification. So you want to go back down to the source documents themselves. It’s another important feature, actually a company we acquired several years ago. That’s – sales of that as part of our broader suite is up 53%. So, that idea of packaging the content with the workflow has really proved to be quite compelling. And, I guess, Toni, the other thing, just in terms of what’s driving overall demand in the space, you’ve got ongoing changes to regulation, perpetual KYC and you’ve also got a broadening of demand beyond just KYC into companies who want to understand more about who they’re doing business with in supply chain. So that’s – hopefully that gives you some insight into KYC. The answer is really both, new logos and upsells and this bundling of product. On insurance, so remember that this includes our insurance unit now, as I said on the call, both our legacy MA as well as RMS. And what we don’t reflect in that insurance ARR number is the cross-selling synergies that we’ve got with RMS, which are actually quite robust. And Mark you might even have a little bit of data on that.

Toni Kaplan:

Thanks so much.

Andrew Nicholas:

Hi, good afternoon. From what we can gather, it seems like the issuers, particularly within the high yield market are opting for shorter maturities in this environment. And so my question is, is a two-parter. First, is this something that you’re seeing across debt categories of late? And second, how should we think about the impact of this on MIS revenue? I’m just curious if shorter maturities ultimately results in issuers coming back to market more frequently, which I would think drives stronger transactional revenue? Or if there’s some offsetting component within your fee structure that that would offset this? Thank you.

Rob Fauber:

Yes. And in fact, I mean, Mark, you cited some of that data. We were getting the opposite questions a couple years ago as the tenors were stretching out and people worried about whether that was going to lead to less frequent issuance. So this is a happy issue to be contemplating. And to answer your question, I think it just means the issuers are coming to market more frequently. There’s nothing in our commercial constructs that I think would offset that. It’s unlikely. And most of these issuers, especially in high yield are infrequent issuers. So it’s unlikely that they’re going to be on a more of a relationship based construct. So I think net-net this is a modest positive.

Operator:

Your next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead.

Mark Kaye:

Craig, good afternoon. I’ll start with the incentive comp. So in the second quarter, the incentive comp was $99 million and that compared to a $66 million in the prior year period. And that brings up our year-to-date incentive comp accrual to $188 million, which is approximately $45 million above the first half. For the full year, we’re expecting incentive comp to be between $370 million and $390 million, which is higher, about 25% higher than the comp we accrued for last year. And that’s really driven primarily by our improved outlook for full year 2023 MIS revenue.

Craig Huber:

Great, thank you.

Faiza Alwy:

Yes. Hi. Thank you. So I wanted to follow up on that point that you just made, Rob, around structured finance. I’m curious if the competitive environment is a little bit different in structured finance? Are there areas where maybe you’re stronger in versus competition? And is that an area of investment focus for you at all?

Faiza Alwy:

Great. Thank you so much.

Seth Weber:

Hey, good afternoon everybody. Thanks for taking a question. I was wondering if you could just drill down a little bit more on the FIG revenue, 13% – up 13% versus issuance, up 5%. Just kind of give us some more details on what’s going on there. Thank you.

Seth Weber:

Makes sense. Thank you. I appreciate it.

Heather Balsky:

Hi, thanks for taking your taking my question. It’s great to see the improvement in MIS. I’m just curious, though, as you kind of look out and you think about the dynamics in the environment, where rates are, kind of where rates might go. What do you think is the biggest overhang right now? Do you think it’s the actual rate itself or do you think it’s the uncertainty? And do you think kind of incremental certainty kind of this quarter helped with what you saw with regards to issuance?

Heather Balsky:

Thank you.

Mark Kaye:

And Heather, if I just add some additional color to Rob’s comments there, few things we’re watching. We obviously feel that rates are likely approaching their peaks. We’re expecting the Fed to pause not pivot unless of course there’s a sudden increase in unemployment or a collapse in growth. The second thing we’re expecting is that the second half recession risks are likely to linger amidst tighter financial conditions. And so we’ve incorporated a dip, not a severe downturn into our outlook. And that really means that we are expecting the global default rate to rise above the long-term average, but not up to the levels of the pandemic or even remotely close to the great financial crisis. And then thirdly, we’re marching a couple of key questions on macro thematics which could include things like we are going to see more stimulus from the Chinese authorities because their post COVID reopening growth has been pretty lackluster and inflation there is low. And we’re also watching the U.S. dollar exchange rate. And then finally, we’re also watching the emerging market versus developing market to growth rates in the relatives at differential there.

Operator:

Your next question comes from the line at Andrew Steinerman with JPMorgan. Please go ahead.

Mark Kaye:

Absolutely. FX is a pretty pedestrian story this quarter. So the second quarter, MA revenue was favorably impacted by 0.3%. The impact of foreign currency translation on MCO and MIS revenue is immaterial.

Rob Fauber:

Yes. Andrew, hi. On the first time mandates, so first time mandates were down pretty meaningfully from the same period last year. I’d say we’ve seen relatively muted first time mandate activity for probably the past four quarters or so. And when you look at I’d call it 2019 and maybe the first half of 2020, so kind of a pre pandemic period. This quarter’s first time mandates were something like two thirds of that average. But this isn’t really, to me, that’s not surprising. So despite the fact that yes, we’re taking up the issuance outlook. The majority of first time mandates tend to come from leveraged loans. And so as that has been softer, we have – we just haven’t seen the same activity around first time mandates. I will say though, it’s interesting, Andrew, we’ve seen a very meaningful uptick in our private engagement. So you may have heard us talk about in the past, we have a suite of products private monitor ratings, private ratings for investors. We have a rating assessment service. Those are up pretty meaningfully. And you heard me mention a number of these issuers have not come to market. So again, we’re seeing some kind of pent-up demand on people waiting for the right time to come to market.

Rob Fauber:

Yes.

Jeff Meuler:

Yes. Thank you. Hopefully not too much of a repeat of some prior questions. But as you think about the right pace of spend on AI and GenAI and the whole generational opportunity. I guess what’s the framework for how you think about if you’re going fast enough or not fast enough? And to what extent does it tie back to just the business performance? I guess, what I’m wondering is if there’s upside or outperformance in the core just to what extent we should expect that to be reinvested and for you to go even faster on AI for the next couple of quarters? Thank you.

Jeff Meuler:

Very helpful. Thanks, Rob.

Russell Quelch:

Yes. Thanks for having me on. So first question is on MIS, please. I was wondering if the revenues grow back to the levels we saw in 2021 by 2024 or 2025 as projected by consensus, is there any reason why the adjusted operating margin for the business wouldn't move back up to the same level seen in that period two, please?

Russell Quelch:

Got you. Okay, that's comprehensive. Thanks Mark. And just as a quick follow up, in terms of research and insights obviously saw a strong step up in growth in recurring revenues there. Can I ask what drove that? How much of that was pricing? Is that new sales? Is that cross sell and upsell? Just any detail you could give to that would be appreciated? Thanks.

Russell Quelch:

Great. So thanks Rob. And also really, really welcoming this switch to adding in incremental color on products and strategy on these conference calls rather than just sort of reading back the results to us. So yeah kudos for that and thanks very much.

Operator:

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Mark Kaye:

Yes. Good afternoon. Let me take the MA margin from the perspective of a year-to-date and year-to-go onset because I think this will tie in with what you're looking for. So the year-to-date MA adjusted operating margin was 28.4%, and that was about 280 bps lower than the prior year period. And there are two primary themes underlying this decrease. And they should be consistent with what we spoke about in the April earnings call. So first we opportunistically accelerated investment in product, technology, innovation and sales deployment. And that includes the reallocation of expense dollars into our generative AI initiatives. And that really is done with the purpose of allowing us to maximize our ability to meet ongoing customer demand for our solutions. And the second piece is really an element of seasonality, and that relates to both the MA revenue and expenses. And we really try to balance our spending against a full year margin target, which for 2023 is still expanding albeit slightly. So if you take that into account, what we are thinking of for the second half of the year is really for margins to expand by on average 250 to 350 basis points versus the comparable 2022 year ago period. And then that means we're going to incrementally step up in the third quarter, and then we'll have a pretty material step up again in the fourth quarter.

Jeff Silber:

All right. That's very helpful. Thanks so much.

Simon Clinch:

Hi guys. Thanks for squeezing me in here. Rob, I wanted to ask a question about the competitive environments in MA actually. And just I'm conscious of your partnership with NASDAQ and some of the consolidation that's going on there and the number of different competitors that are sort of vying for new different niches of that kind of market that MA is playing in the various markets. I was wondering if you could talk about what you're seeing from a competitive standpoint. Who are you displacing? How fragmented the market is? And how you think that's going to really develop over the next, in your five years or so?

Simon Clinch:

That's great color. Thank you.

Operator:

Good day, everyone, and welcome to the Moody’s Corporation First Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. And good afternoon, and thanks to everybody for joining today’s call. As we typically do, I’m going to touch on a few takeaways from our first quarter results and provide some insights into what’s supporting our growth outlook. And this quarter, I’m also going to drill down a little bit on our Decision Solutions line of business in MA as that’s a very important growth area for us. And then of course Mark and I will be happy to take your questions. So, while the first quarter experienced the market turbulence from the stress in the U.S. banking sector and as is frequently the case, this heightened market uncertainty drove some strong demand for both our insights and our risk assessment offerings. And we saw some very strong upticks in usage this quarter. We are also continuing to unlock the potential of MA and its great assets and businesses. And those include one of the world’s premier credit and economics research businesses, a Data & Information business that includes one of the world’s largest databases on companies and our award-winning Decision Solutions businesses serving KYC, banking and insurance workflows. And together, MA delivered 10% ARR growth, as we continue to enhance and extend our mission-critical data analytics and workflow solutions. Now, while MIS revenue declined 11% from a pretty robust first quarter of 2022, as we talked about on prior earnings calls, the anticipated rate of revenue decline did indeed moderate from what we experienced in the third and fourth quarters of last year, as MIS really capitalized on strong investment grade issuance in the first quarter. Improvement in issuance activity combined with our decisive expense actions that we took last quarter, together enabled us to deliver more operating leverage, as reflected by the meaningful increase in MIS’s operating margin to almost 57%. And notably, the adjusted operating margin for the first quarter is up about 500 basis points over the margin for full year 2022. At the same time, we are maintaining financial flexibility, while funding strategic investments in things like product development, sales and go-to-market initiatives, modern cloud-based workflow platforms, data interoperability and accessibility and AI innovation, all to position us for the future. So now let me move on to some of the results. And there are a few key things I want to highlight amongst the performance numbers that you see on the screen. First, MA revenue grew 6%, or 9% on a constant currency basis. ARR grew 10%, and we had solid growth across the board in Data & Information, Research & Insights and Decision Solutions. I’m going to touch on that in a little bit more detail in a few minutes. And as I mentioned just a couple of minutes ago, MIS revenue was down versus a challenging Q1 2022 comparable, before issuance volumes really decelerated through the balance of last year. And corporate finance accounted for most of the decline this quarter, particularly in bank loans, and that was followed by structured finance as we saw some deals delayed amidst the market volatility in the quarter. So, despite overall revenues down 3% in the quarter, our overall adjusted operating margin was 44.6%. That was up approximately 200 basis points versus our full year 2022 margin, again, reflecting the benefit of those cost efficiency initiatives. And adjusted diluted earnings per share was $2.99, and that includes $0.75 of aggregate benefits from the resolution of several outstanding tax matters. So, I mentioned earlier the upticks and usage that we experienced across several products in the first quarter, and on the screen, I think you can get a sense for that. During the recent stress in the banking sector, traffic to our flagship website, moodys.com, was up approximately 20% from the prior year period. And that’s important for a few reasons. First, As you’ve heard me say before, we have got the most experienced analytical teams in the industry, and that is why we have been recognized as the Best Credit Rating Agency by Institutional Investor magazine 11 times in a row. And that experience allows us to be the industry’s thought leader, which is even more important in times of stress and uncertainty, like we experienced in the first quarter. And that thought leadership also drives increased demand for our insights, for our research and for access to our analysts. And together, that all supports our value proposition and our growth opportunity for both ratings and research. Now demand for our solutions during times of stress and uncertainty goes beyond ratings and research. And you can see it across a range of MA offerings. And during the peak period of banking stress last month, usage of our cloud-based asset liability management solution, which enables banks to model and manage their maturity, interest rate and liquidity risk, rose nearly 50%. And with -- as we were witnessing unprecedented deposit flows moving across banks, the use of our screening and risk monitoring KYC solutions grew by almost 30%. We’ve also more than doubled the number of in-person customer sales meetings over the last year. And that’s been supported by investments to expand the size of our sales team by almost 20% since the beginning 2022 and you have heard us talk about that on these calls. And together, the increased usage and the sales engagement give us confidence in our full year low double-digit ARR growth outlook for MA. Now, this past quarter, MA delivered 10% ARR growth, which as I mentioned was consistent and strong across all lines of business. I’ll start with Data & Information. That includes Orbis, one of the world’s largest databases on companies plus our ratings and news feeds and 300 million ESG scores, that grew ARR at around 9%. And in addition to the very strong standalone demand for private company data in Orbis, it’s the integration of this data across MA’s offerings that’s helping to drive growth in other lines of business. And this includes the integration of Orbis company data into our CreditLens lending solution for banks and the integration of our ESG scores into insurance and banking underwriting and portfolio solutions. Now moving to Research & Insights, which includes our leading credit and economic research business and a growing suite of predictive analytics also grew ARR by 9% this quarter. And we are seeing some strong and sustained demand for our economic data, research and models, particularly amidst the stress in and I guess I would say around the banking sector. And this includes our new EDF-X platform, which combines our award winning risk models with Orbis to analyze credit risk for any company in the world. And we recently completed the integration of EDF-X alongside CreditView into the moodys.com gateway, which provides direct access to a growing suite of Moody’s products, and enhances our customers’ experience and enables further cross-selling opportunities. And finally, Decision Solutions, which includes our businesses serving KYC, insurance and banking workflows, grew ARR by 11%. And given this is our fastest growing segment, I want to provide just a little bit more visibility into these offerings and what is driving growth. And these are really three great businesses, because they support mission-critical workflows across financial institutions. And the virtuous cycle of data network effects and the high switching costs, translate into industry-leading retention rates, which are typically in the low to mid-90s. And we’ve discussed our KYC business on earnings calls before. This business supports customer onboarding, perpetual KYC monitoring and sanction screening on customer suppliers, and other third parties. And strong growth in this area has been driven by our ability to cover really all aspects of KYC and anti money laundering activity, bringing together our vast datasets on companies and people, plus AI enabled risk intelligence, and cloud based workflow orchestration that’s delivered through our new PassFort Lifecycle platform. So moving on to insurance, the addition of RMS has now given us a considerable business serving underwriting risk and capital management and regulatory reporting workflows at insurers and reinsurers. And, like banks, insurance companies are moving towards greater automation and digitization, as well as the integration of more third party data and analytics to enhance their risk management processes. And the RMS intelligent risk platform is really a cutting edge cloud based platform that supports a growing range of workflow and data and modeling capabilities for insurers. And the latest product launched on this platform is our new Climate on Demand solution. That integrates RMS’ climate and physical risk models with our extensive Orbis and commercial property datasets to provide a sophisticated on-demand financial quantification of physical risk that enables a holistic view into a company’s exposure to extreme weather events and climate change through its customers, suppliers and properties. And not only will this be useful for insurance underwriting, but we’re seeing robust demand for this beyond the insurance sector, including with banks, corporates, governmental entities and professional services, as we expected when we announced the deal almost two years ago. So, third is our business serving banking workflows, which are quite similar actually to those served in insurance? They include lending, risk management, incorporating credit portfolio and asset liability management risk and financing planning, which includes things like impairment, accounting, and regulatory capital reporting. And our most significant recent product launch in the space and one that is contributing to our double-digit ARR growth in banking was CreditLens for commercial real estate, which you’ve heard me talk about on prior calls. And that integrates our market forecasts, our commercial property data with our SaaS lending solution, CreditLens. And it really significantly extends our ability to serve the commercial real estate lending market. And stepping back what sets our offerings apart from many of our competitors is that it’s not simply software, but instead we deliver integration of our proprietary data and analytics through modern cloud based architecture. And this is further enabled by the use of sophisticated machine learning and artificial intelligence across many of our solutions, including our automated financial spreading platform, and our KYC AI review, which help customers be even more effective and more efficient. And it’s that combination of data analytics, cloud based tech and innovation that powered us to the number one ranking in Chartis RiskTech100 back in November. So let me talk just briefly about how this translates to a typical customer relationship. And in this case, it’s a top 50 regional bank in the United States. And as I mentioned, our workflow solutions combining data analytics and cloud based software help banks really throughout their value chain, interconnecting what are often siloed use cases across departments from lending to risk management to finance and planning. And it’s common for us to start by serving one of those use cases and then to extend -- expand the relationship over time as the bank looks to connect its various functions leveraging our interconnected data, models and solutions. So, our customer with this particular -- excuse me, our relationship with this particular customer started back in 2019, when they began to use our models, and that includes the EDF model that I just talked about, as foundational capabilities to really create a common language of risk in the institution. And in this case, they deployed our models to support a new internal risk rating program that enabled quantitative unbiased and consistent internal practices for credit assessment across the bank. And over the next two years, we deepened that relationship by providing the bank with a workflow solution that leverage these models, and combined economic data and business analytics models with our impairment studio software to upgrade their current expected credit loss or you’ve heard us say, CECL on these calls, to upgrade those processes. And in 2022, again, leveraging some of the same data and analytics capabilities, we broadened the relationship further to support their lending needs through a combination of our AI-enabled spreading tool and our CreditLens loan origination software that includes credit score. We did the same to support their forecasting and stress testing needs, bringing together another 5 Moody’s products and drawing on some of the data and analytics the bank was using elsewhere. And this resulted in expanded licensing of several existing products but also subscriptions for new products. And in just 3 years, we’ve -- 3, 4 years, we’ve grown the ARR from this relationship fivefold. And as you can see on the far right, this ARR then shows up in different MA lines of businesses with 65% Decision Solutions and 35% in Research & Insights but really all for the same customer for a set of lending, risk and capital management and finance and planning use cases. And there’s still further potential and we’re in active discussions with this bank about supporting their KYC needs. So, this is really just one of really hundreds of instances of how we’ve expanded relationships with our banking customers in recent years and accelerated growth by offering comprehensive solutions that leverage capabilities across all three MA lines of business and really more broadly across all of Moody’s. And that is our integrated risk strategy at work. That is what makes our solutions so valuable and so sticky. So, let me move to MIS for a moment. Issuance was stronger in the first quarter of 2023 compared with the fourth quarter of 2022. And while volatility and uncertainty constrained the structured and bank loan markets, we did see robust activity in the investment-grade sector. And in the first quarter, issuance represented almost 30% of our full year outlook, which is a pretty typical historical seasonality pattern. And as you can see, growth was higher for investment grade and lower for leveraged finance. As we said on our last earnings call, we would expect markets to open up with higher-quality credits before those further down the credit rating spectrum such as high-yield and bank loan issuers, and that is, in fact, what we saw in the first quarter. If markets continue to improve, we’d expect to see leveraged finance issuance pick up. And the degree to which that happens is going to be based on a number of factors, and that includes macroeconomic risks and policy actions, market sentiment and credit spreads and economic growth and private equity activity, among other things. So staying on MIS just for a moment, over the course of the last several months, we’ve gotten a number of questions about MIS’s growth drivers, especially over the longer term. So, Mark and I thought it would be helpful to talk about how we think about the building blocks to MIS revenue growth over the long term. And while the short- to medium-term outlook can be impacted by cyclical factors, the long-term growth algorithm, as we like to think of it, for MIS revenue, we believe, remains firmly intact. And first and foremost, debt issuance growth over the longer term is driven by global GDP growth as issuers invest and grow their businesses. And we expect global GDP growth in the 2% to 3% range over the long term, and that’s in line with historical average over several decades. Second, the value proposition for ratings remains firmly intact, particularly for MIS ratings. And that supports an annual pricing opportunity consistent with the broader opportunity across all of Moody’s in the 3% to 4% range. And third, there are long-term tailwinds from the ongoing development of capital markets around the world. And this includes slow and steady levels of disintermediation in developed markets like Europe, as well as higher rates of growth in smaller capital markets in developing countries. And together, this gives a sense for what we believe is the long-term growth profile of this business. While I acknowledge over shorter time horizons, the growth rate may be above, below or within this band, depending on the nature of the headwinds and tailwinds that we’re showing at the bottom of the page. So I hope that gives you a sense of how we’re thinking about growth and how that may triangulate with our medium-term outlook. And as we look toward the rest of the year, we’re confident in the prospects for our business. That’s supported by strong demand for our solutions and our expertise and a robust product development pipeline. So, we’re reaffirming the majority of our guidance with select updates to expenses as well as our diluted and adjusted diluted EPS metrics. GAAP diluted EPS and adjusted diluted EPS are now expected to be between $8.45 and $8.95, and $9.50 and $10, respectively. So to close, I want to acknowledge that our growth and resilience as a firm rests on the shoulders of our people across the Company, and I want to thank them for their continued commitment and efforts and dedication to serving our customers, to supporting each other and to delivering for our shareholders. So, this concludes my prepared remarks, and Mark and I would be happy to take your questions. Over to you, operator.

Owen Lau:

Good afternoon. And thank you for taking my question. So last quarter, Mark, you provided the seasonality of the P&L in detail. We appreciate your help and it was very helpful. Could you please do the same and give us an update this quarter? Thank you.

Operator:

Your next question comes from the line of Andrew Nicholas with William Blair. Please go ahead.

Rob Fauber:

Andrew, it’s Rob. I’m actually going to take a crack at this. I’m going to kind of zoom out just for a moment because we were kind of thinking about what went on in March with the banking sector across kind of three dimensions. And the first, it was a very active period for our rating teams, as you’d imagine. Just to give you a sense, we rate about 800 banks globally, and that includes about 65 regional banks in the United States. So, there was a pretty intense period of credit work and market engagement as you’d expect, and you saw kind of the uptick in usage for our research. We also then thought about what could that mean in regards to MIS issuance. And January and February were stronger issuance months than March. We did see a bit of a slowdown in the markets for sure in the month of March, and we tried to think about how do we extrapolate that out for the balance of the year. Ultimately, we decided not to change the issuance outlook for the year. And then third, kind of zooming in on your question around MA. Again, just to give you a sense, we’ve got relationships with over 2,500 banks or so globally. And I would say we have not yet seen any meaningful slowdown in sales cycles. But I think we’re mindful of this, right? As you’d expect, banks are evaluating what kinds of investments they want to make and when they want to make them. We’re also keeping an eye on bank consolidation. And I’ve gotten questions before about the impact in the financial crisis. And that was one of the things that we cited was it’s consolidation of banks that can lead to some attrition events for us or some downgrades. And so that’s something we are keeping an eye on. Obviously, we had a little bit of idiosyncratic attrition here with a few of these bank failures. But I think over the -- kind of over the medium term, our view is that there’s going to be heightened demand for bank risk management. There will be new regulation that is going to stimulate further demands for our products and services. So while we’re keeping an eye on things at the moment, I would say over the medium term, we feel like this will actually be a supportive factor for growth.

Kevin McVeigh:

Great. Thanks so much. And congratulations on the results. I don’t know if this is for Mark, but just can we go back to the margins? I mean, just a ton of operating leverage and maybe -- I know some of it is restructuring, but maybe just give a sense of what’s driving the outcome on the leverage over the course of the year. Maybe just a little bit deeper on Moody’s and kind of the MA and MIS, if you could, Mark.

Operator:

Your next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Rob Fauber:

Hey Toni, it’s Rob. I’ll take that one. So two parts to it, sustainability and then how do we -- how does that also kind of translate and supported by price. Let me start with just some key secular trends that are driving growth across our business. And these are what we call kind of selling themes and how we engage with our customers. So the first of those -- and they’re really four. The first of them is digital transformation. And many, many, many of our customers are going through a digital transformation in all parts of their institution. And so we play an important role in helping institutions do that. As you’ve heard me say before, you heard me say on this call, it’s about becoming more effective and more efficient. The second is around really kind of a company 360-degree view of risk. And gosh, I’ve had a lot of these discussions with our customers recently, where they say, we’re just trying to get a better understanding of the various dimensions of any given counterparty that we’re doing business with, whether it’s a customer, a supplier, someone they’re making a loan to, someone they’re investing in. And so we’ve got a great opportunity to help them with that company 360-degree view of risk. Third is around regulation. There are -- when you serve, and we -- obviously, financial services is a big part of the customers that we serve, there’re constantly new rules and regulations that are being imposed on the industry. They’re evolving in many different ways. And our customers are looking to us to help them with regulatory compliance. And a lot of our solutions do that. And the fourth is we’re having more and more conversations around how to think about integrating climate and ESG into various different kinds of workflows. And I would say in climate in particular, where there’s a real need and desire to really understand the financial quantification of exposure to weather and climate change, and you heard me mention that on the call. So the great thing is we’re having these conversations with our customers and it’s bring -- and you heard me give that example of that bank in my opening remarks. We’re bringing together products and solutions that help our customers address a range of these kinds of challenges. So we feel good about our positioning and the medium-term growth drivers that are underpinned by this. Now, as it relates specifically to pricing, we talk about, in MA, an approach to value-based pricing. So we want our customers to drive a lot of value out of our products. We have customer success teams that support the usage and utility that our customers get out of those solutions. That, in turn, both translates into supporting ongoing pricing increases as well as upgrades across the institution. That is generally how we think about it.

Operator:

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Rob Fauber:

Hey Alex, it’s Rob. I think that’s a reasonable thesis and it’s probably too early to tell. Like I said, we haven’t adjusted the issuance outlook at this time, either up or down in regards to that. But that’s certainly one of the things that we’re considering is as banks -- the opportunity to turn to the capital markets as a funding source, particularly in the U.S. but also in Europe. And so that may -- we may actually see an uptick in issuance. We may also -- that may also drive further disintermediation, right, as -- not only as banks are turning to capital markets for funding sources but as the borrowers themselves are turning to capital markets. So that’s something I think we’re going to watch, Alex, but probably a little too early to call.

Operator:

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Mark Kaye:

This is Mark here. In terms of the overall quantification of the banking business, last year for banking-related products that we sold were around $400 million. That would have been around 14% of the MA. You could anticipate continuing to see ongoing growth of products that we sell to banks, which extend per the comments you heard from Rob this morning, not just banking-related products themselves. And the focus that we have in and especially in the banking space, really extends across those three primary segments, sort of the origination of that credit, the ability for asset liability management and then finally, to support finance and risk-related reporting. And the idea that banks themselves can use that data and analytics not just within individual departments within those disciplines but across the firm really creates very high switching costs and allows our data to be embedded ultimately into the network that the banks have.

Ashish Sabadra:

That’s great. Congrats on solid results.

George Tong:

It appears MIS outperformed your expectations in the first quarter, but your full year guide was reiterated. How much does this reflect conservatism versus a more moderate issuance outlook for the remainder of the year, perhaps to reflect aftershocks from the regional banking crisis at the end of the first quarter? Could you talk about some of the issuance trends you’re seeing real-time?

Operator:

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Rob Fauber:

Yes. Let me tackle this. So Jeff, first of all, good to have you on the call. Let me tackle this maybe two ways. One, just kind of how we’re thinking about the U.S. banking system; and then second, I think there’s a question about kind of what’s going on with bank lending and just give you maybe a little bit of insight into that. But on the first, MIS put some great research out on this and has been, so I would steer you to that. But a few things that our teams are focused on. They’re focused on ALM risks. They’re focused on stability of deposit funding, profitability pressures, and as you mentioned, Jeff, commercial real estate exposure. And when we think about what’s going on with lending standards, I think it’s fair to assume that bank lending standards are tightening. I think that was already going on to some extent before March. The banks are going to be the most cautious around property, land, development loans and commercial real estate more broadly, in particular, I think the office sector. Just to put it in perspective, today, U.S. banks hold about half of the U.S. commercial real estate debt outstanding. And I think smaller banks are more concentrated in commercial real estate as a percent of total capital than the larger banks. So I think you are going to see some caution there for sure. In terms of corporate credit, I would expect the tightening to be felt at the smaller end of businesses. You’re seeing that with some of the survey data that’s come out in March. When you think about commercial loans, credit cards, auto and personal loans, those will probably be less impacted just because a lot of that lending is done outside the banking system. And same with mortgage lending, while it’s impacted by interest rates, rising rates, I think it will be less impacted by what’s going on with bank lending standards, given that a lot of it’s been backstopped. So you got a sense of our exposure to banks overall. We have a business serving commercial real estate. And I will say there’s a lot of interest from banks to really get high-quality data and analytics and insights to help them really understand what they need to do around that asset class.

Craig Huber:

Can you please touch on your outlook for bank loans versus high yield here for the remainder of the year? What’s embedded in your outlook for debt issuance? I do want to ask you, your incentive compensation numbers for the quarter and also for all four quarters for last year, what was that, please?

Mark Kaye:

And in the first quarter of 2023, our incentive comp was $89 million compared to $76 million in the prior year period. Also just look, Craig, that we’re now including commissions as part of our incentive compensation figures that we provide as sales-based commissions have actually grown alongside revenues relative to historical levels. So put it in context, for the full year of 2023, we expect incentive compensation to be between $340 million and $360 million or approximately $85 million to $90 million per quarter for the remainder of the year. And that is 15% higher at the midpoint than the total incentive compensation we accrued for in the comparable full year period in 2022, and that’s simply a result of resetting our incentive comp baseline for the year based on annual financial targets. And just because I have the mic for a second, on the expense side, I wanted to get out the updated expense ramp of between $10 million and $30 million between the first and second quarter of this year, with expenses remaining relatively stable then through the rest of the year.

Craig Huber:

Mark, what were those incentive comp numbers for all the quarters for all of last year? Thanks guys.

Operator:

Your next question comes from the line of Andrew Steinerman with JP Morgan. Please go ahead.

Mark Kaye:

So, our long-term MIS revenue growth algorithm doesn’t have a set base here, so we’re not looking to define either the base here or the end period from which future performance could be extrapolated. Instead, the model is focused much more on historically well-established trends that we believe will be relevant in the long term and contribute ultimately to revenue growth. On the medium side, we’re really looking at that 3- to 5-year window, and we’re really reflecting the MIS revenue projection over that defined period of time. And then lastly, we are not withdrawing medium-term MIS revenue guidance.

Mark Kaye:

That is correct.

Operator:

Your next question comes from the line of Faiza Alwy with Deutsche Bank. Please go ahead.

Mark Kaye:

So, we expect the full year 2023 operating expenses to increase at the lower end of the mid-single-digit range. And you are absolutely right, that is above our prior forecast of low single-digit percent growth or the higher end of low single-digit percent growth. The primary driver for this, I’d call it, slight revision is really the expansion of our restructuring program and updates to foreign exchange rate assumptions. And given from an adjusted basis, which is what the margins are really computed off of, we would back out that restructuring piece. I also wanted to note, the operating expense segment guidance would be along the lines of a low to mid-single-digit percent decline in MIS and are very consistent with what we said in January and then a high single-digit percent growth in MA, also consistent with what we said in January.

Jeff Meuler:

On KYC, just as you think about the sustainability of the long-term growth, how do you think about TAM or market penetration? I guess, 1,700-plus existing customers that you cite on the website, that seems awfully low to me at least. And then in the near term, with PassFort Lifecycle, just help us understand how far along you are with clients upgrading to it, and if the upgrade cycle’s really significant to near-term revenue trends. Thank you.

Rob Fauber:

Yes. Sorry, indeed, we were. It was such a great answer, too. Sorry. So maybe a couple of ways to think about that. One, I think there is an opportunity for us to continue to really drive penetration of the addressable market. You talked about PassFort. And that is really the front end, the workflow for us. So now we’ve got an opportunity, like we do in banking and insurance, we’ve got a workflow platform that now allows us to integrate our data, our analytics, our models all into a holistic solution. And so, that’s a new opportunity for us, and we’re seeing a good bit of enthusiasm from our customers around us. As you think about the growth drivers within the market, I’d say there are a couple of things. One, there’s still a lot of KYC that’s being done in-house at financial institutions and companies. So there’s just, I think, a very big opportunity to automate KYC, workflow within financial institutions. That still remains a significant opportunity. But the other thing that’s going on is this is broadening from know-your-customer to know-your-counterparty. And eventually, I’m going to have to come up with a better name. One of the trends we’re seeing is around, I’d say, more broadly around third-party risk management. So this is -- I want to do some form of diligence to better understand who I’m doing business with. We’re certainly seeing that with supply chain where customers are coming to us and saying, "hey, while we don’t have all the pieces, we do give customers the ability to get a much better sense of supplier risk." And so, that’s one thing that’s, I think, kind of broadening this market and supporting growth. In fact, we just did a survey about something like 70% of firms that we surveyed were increasing their focus and spend in the space around supply chain. So, hopefully that gives you a sense.

Russell Quelch:

I wanted to start with a question on pricing and to what degree you expect that to be a driver of growth in 2023, particularly in MIS. I was wondering if that would be above the 3% to 4%, given there’s the long-term projection on slide 12.

Russell Quelch:

Okay. Thanks. Yes, this might be a silly one but let’s go for it. You spoke to ESG and climate integration as being kind of 1 of your 4 structural growth drivers for the business. And we just heard from one of your peers that growth in this area is being negatively impacted by politics in the U.S. in the near term. I appreciate your business and solutions are servicing a slightly different user base for a slightly different use case. But are you seeing a similar near-term negative impact on new sales growth here?

Operator:

Your next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

Mark Kaye:

Thanks, Kevin. So, our capital planning and allocation strategy is unchanged. We are committed as a management team to anchoring our financial leverage around a BBB+ rating. And as I’ve spoken about before, we believe that’s appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. However, given that our gross leverage as of quarter end is above that 2.5 times, we are continuing to be prudent in managing our leverage and liquidity levels and ensuring financial flexibility. So practically, that means we’re maintaining, for now, our slightly more conservative approach to share repurchase guidance in 2023. We still plan to return approximately $800 million of global free cash flow or about 53% at the midpoint of our projected free cash flow guidance range to our stockholders. That, of course, is subject to available cash, market conditions, M&A opportunities, other ongoing capital allocation. And if I broke that down into subcomponents, that would be $250 million approximately in share repo, and that’s inclusive of the $41 million we did in the first quarter as well as to distribute approximately $550 million in dividends through a quarterly dividend of $0.77 per share, which is 10% higher than the first quarter 2022 quarterly dividend. And then one final but important point I just wanted to highlight is we still have approximately $800 million in total share repurchase authorization remaining. And that gives us some flexibility to evaluate our full year 2023 share repurchase guidance while continuing to monitor the operating environment as it develops.

Manav Patnaik:

I just wanted to follow up on your earlier comments on RMS and ESG as well. But just on ESG, could you just remind us what your total ESG revenues were at the end of last year and this quarter and the growth rates? And then, something similar on RMS. I know you gave some qualitative color, but just as a total RMS, like how is that growth rate doing versus when you first acquired it?

Mark Kaye:

For the full year 2023, we’re projecting ESG and climate-related revenues to also increase in that high-single-digit percent range and that would be off of the actual 2022 full year results of $189 million.

Operator:

[Operator Instructions] Your next question will come from the line of Simon Clinch with Atlantic Equities. Please go ahead.

Mark Kaye:

In terms of the capital planning and allocation, I would also make the point that that remains unchanged from prior philosophy. First, we’re going to look for opportunities for both organic and inorganic investment in some of the high priority markets that we’ve spoken about in the call today that ultimately are going to enrich that ecosystem of data, analytical solutions and insights. After deploying any investment dollars, we’re going to look to return that capital to our stockholders through dividends and through share repurchases. Just wanted to comment here, in the first quarter itself on the free cash flow side, the result was higher compared to the prior year period, and that was really due to an improvement in working capital this quarter, despite sort of the lower net income vis-à-vis the first quarter of 2022. And that improvement in working capital was driven by higher 2021-related incentive compensation payments that came through in the first quarter of ‘22.

Operator:

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Mark Kaye:

Alex, the MA margin, as we think through to the second quarter is expected to be relatively flattish to the first quarter. And then we do expect it to progressively increase over the remainder of the year sort of in line with both revenue growth and as the benefit from our expense actions begins to take place. It is a little bit too early for us to think about 2024 just yet. On the margin for the first quarter, just two minutes on this. There were two primary impacts in terms of why the margin in Q1 was a little bit lower than last year. First was we accelerated some of the opportunistic investment in the business, and that’s going to be product development, technology, sales deployment, et cetera. But second, there is an element of timing related to both the MA revenue and expenses. On the revenue side, we had a favorable revenue recognition in the prior year period. And then on the expense side, you’ll recall, Alex, that the first quarter of 2022 had a relatively low level of investment because we had accelerated some of that work into the fourth quarter of 2021.

Mark Kaye:

Thanks for the question. And Alex, your intuition, as usual, is spot on here. So we introduced, just as a reminder, ARR, or annualized recurring revenue in the first quarter of last year. And we continue to emphasize it as a very meaningful growth metric for MA as it removes the impact of uneven revenue recognition from some of these multiyear arrangements as well as sales mix. However, since this is the first time we’ve rolled over the metric from one calendar year to another, it’s probably just worth a second to do a quick refresh of definitions, right? So ARR is a constant currency organic metric, and it utilizes a single set of FX rates for each calendar year. And our ARR table in the back of the quarter’s earnings release translates both current period, which is the Q1 ‘23, and prior period, Q1 ‘22, at the same rates, right, with the idea of expressing sort of this constant dollar growth rate. So, sequential figures within the year are comparable but those that are across years are not. And if I adjust for the FX rates, what you’ll find is that approximately $80 million in ARR in 2023 was not reported simply because of that FX movement. In other words, U.S. dollar appreciation between last year and this year. And so, if we add back that $80 million of revenue to the Q1 ARR to make it more comparable to the 2022 number, you’ll see that growth come through in our reported figures.

Rob Fauber:

Okay. So thanks, everybody. We appreciate you joining us on today’s call, and we look forward to talking with you next quarter. Take care.

Operator:

Good day, everyone, and welcome to the Moody's Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. I would now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber :

Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. I'm going to start with some key takeaways from our 2022 results, and then I'll look ahead to what we're expecting for 2023 before we take your questions. Our fourth quarter and full year 2022 financial results demonstrate the positive momentum and resilience of MA; while at the same time, reflecting the impact of challenging market conditions on MIS. And MA had a very strong finish to the year. It delivered its 60th consecutive quarter of growth and 10% ARR growth. Revenue grew 15% for the year; and for the first time, MA's full year adjusted operating margin exceeded 30%, and those are results that achieve the Rule of 40 distinction. MIS generated $2.7 billion in revenue as it weathered a challenging year for issuance, and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth. And during the fourth quarter, we executed on the expanded expense management program that we announced in October and that's expected to deliver over $200 million in annualized savings in 2023. And it really significantly strengthens our financial position and flexibility for the coming year. Now for the full year 2023, we expect Moody's revenue to grow in the mid- to high single-digit percent range. And in addition, we're maintaining our previously communicated medium-term growth targets with a reset of the base year to 2022. And in what is clearly a fast-paced and ever-evolving landscape, we're investing with intent to grow and scale and to expand our capabilities to deliver on our mission, and that is providing best-in-class integrated perspectives on risk. So turning to our full year financials. Moody's total revenue was $5.5 billion. MA contributed approximately half of our total revenue for the first time in our history. And as I mentioned, MA revenue grew by 15%. And excluding the negative impact of foreign exchange, growth would have been 20%. Organic constant dollar growth for both MA revenue and ARR was 10%. And overall, Moody's achieved a 42.6% adjusted operating margin with an adjusted diluted EPS of $8.57. Now moving on. We remain laser focused on the four strategic priorities that I outlined in February of 2021. In order to realize the potential of our global integrated risk assessment strategy, and the success of this strategy has been made possible by our incredibly talented and committed employees. They've helped us launch new products, expand into new markets and improve the experience for our customers. And it's really wonderful to see our collective work achieve a number of important industry awards. For the first time, Moody's earned the top ranking in the Chartis RiskTech100. And we placed ahead of hundreds of companies in the risk and compliance technology space that ranges from household names in our sector to earlier-stage innovators. And it's really a testament to the momentum of our risk assessment strategy and the quality of our portfolio of solutions. And in addition, for the 11th consecutive year, MIS was voted the Best Credit Rating Agency by Institutional Investor and really demonstrates that we remain the clear agency of choice with investors. In MIS, in 2022, we made several important investments to enhance our ratings presence in emerging markets. And that includes the acquisition of our majority stake in the largest domestic rating agency in Africa and the further expansion of Moody's Local in Latin America. We also met the need for greater transparency in ESG risks, specifically as they relate to credit by rolling out more than 10,000 new ESG credit impact scores across MIS. Now across MA, we enhanced a number of our workflow offerings through the integration of data and analytics, and we created new products to meet evolving customer needs. In fact, newly developed organic products contributed a significant portion of MA sales growth in 2022. I'm going to touch on several of these in a few minutes. Turning to the outlook for MIS. As I mentioned last quarter, we expect that the factors that impacted issuance in 2022 to persist really through the first half of 2023. The inflationary environment, the pace of interest rate increases are still causing volatility in equity and debt markets, and the trajectory of economic growth in major economies remains uncertain. So it's going to take some time for these issues to resolve and for debt market activity to fully resume but refunding needs and pent-up issuance demand and baseline economic growth, they all point to a recovery in issuance, which we expect to pick up in the second half of the year. And in this environment, we are proactively balancing our commitment to serve issuers and investors with the highest quality ratings and research and insights; while at the same time, prudently managing cost. And we expect that the swift and decisive expense management actions that we took in the fourth quarter will enable MIS' adjusted operating margin to return to the mid-50s percent range in 2023. So moving to MA. I want to highlight the impact of the significant investments that we've made in product development and sales and acquisitions. And over the last three years, these investments have helped us deliver $1 billion in additional recurring revenue. And on an organic constant currency basis, recurring revenue growth has been steadily improving each year from 9.2% in 2020 to 9.7% in 2021 and 11.1% in 2022. And we're well positioned for future growth as three of our businesses with revenue of more than $100 million each delivered ARR growth in excess of 10%. In fact, our KYC and compliance business, which is our fastest-growing business, had ARR growth greater than 20%. And even some of our more established products such as Orbis and CreditView, delivered high single-digit ARR growth last year. So let me give you a little bit of insight into how several of our newly-launched products are contributing to this growth. And I'm going to start with our KYC Lifecycle solution, which offers customers a user-friendly configurable portal and risk engine. And it enables fast and accurate checks that leverage our vast company, people and news data sets. And this solution integrates the capabilities that we've built and acquired over the past several years, so it's opening the door to new markets and customer segments with a powerful new workflow tool for financial crime compliance and third-party due diligence. And it is resonating with our customers. In the fourth quarter, we completed one of our largest-ever sales to a nonfinancial corporate customer in MA with a combined offering supporting both customer and supplier vetting and screening capabilities. We also recently launched an enhanced version of our Climate on Demand product, which integrates our very rich climate analytics from RMS and MA and broadens the scope of our capabilities in the banking and insurance sectors and beyond. And Climate on Demand is part of our growing suite of physical and transition risk offerings, which are gaining traction with our customers. For example, we were awarded an important sales mandate late last year as a major U.S. financial regulator selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy. And we were selected because of our ability to bring together some unique capabilities from across Moody's, and that includes our ability to quantify the financial impact of climate risk, physical risk assessment of bank operations and exposures as well as finance emissions. And in banking, we extended our CreditLens origination solution into commercial real estate, and that's one of the largest asset classes on bank's balance sheets. And this product integrates our proprietary property data, market forecast and credit analytics to meet the specific needs of commercial real estate lenders. And we're excited to partner on this product with one of the largest real estate lenders in the United States, and we're encouraged by the positive customer feedback and sales progress to date. So together, these examples, I think, demonstrate how we are integrating capabilities, we're driving product innovation and leveraging our very strong sales distribution to build a robust pipeline as a foundation for continued growth. So let me turn to the outlook for 2023, and I want to highlight just a few of our guidance metrics. We project that Moody's revenue will grow in the mid- to high single-digit percent range and adjusted operating margin to be in the range of 44% to 45%. Adjusted diluted EPS is forecast to be in the range of $9 to $9.50. And for the medium term, we're maintaining our previously communicated growth targets with a reset of the base year to 2022. And in summary, we made strong progress in the fourth quarter to position the business for success, closing out what we'd characterize as both a challenging and a productive year. And indeed, against the backdrop of macroeconomic headwinds, we've continued to unlock the growing potential of MA and reinforced the foundation for MIS to capture the immense opportunity we see once issuance levels recover. So we've entered 2023 in a position of strength, and I have tremendous confidence in the growth potential of the business as we continue to execute and invest in building Moody's as the leading provider of integrated perspectives on risk. And with that, Mark and I would be pleased to take your questions. Operator?

Manav Patnaik :

Rob, I just wanted to touch on that -- the medium-term guidance for the ratings business, which you’ve maintained at low to mid-single digits even though the base, I guess, has come down a lot. I just wanted to try and flush through a little bit more in your assumptions. And I always thought it was a GDP plus 3 to 4 type pricing business, and your competitor obviously had a more optimistic outlook there, too. So just trying to understand how you guys are thinking through that.

Mark Kaye :

Yes. And add on to just Rob's remarks, that we do recognize that some investors may now see this guidance as being slightly conservative in nature. We do remain open to the possibility of revisiting and looking at this specific target once we have better insight into the macroeconomic and the issuance environment as the year unfolds.

Mark Kaye :

Manav, thank you. So maybe let me start firstly with the expense ramp. So we anticipate operating growth, inclusive of the annual merit increases, the reset of our incentive compensation and then our incremental organic investments to contribute to an expense ramp of between $10 million and $30 million between the fourth quarter of 2022 and the first quarter of 2023 that exclude any restructuring-related items. And then from the first quarter of 2023 to the fourth quarter of 2023, we expect expenses to remain relatively stable and only ramp between $10 million and $20 million. And that's primarily as we realize the benefits of both our 2022, 2023 geolocation restructuring program and any additional cost efficiency actions. On your second sub-question, restructuring. So through year-end 2023, we still expect to incur up to $170 million in aggregate charges, and that will be split into $70 million to $90 million for MIS and $65 million to $80 million for MA, and that's related to both the real estate rationalization and the reduction of personnel as we selectively downsize and utilize alternative lower-cost locations. For the full year 2022, we were able to accelerate some of our actions. And so we accrued $114 million in total restructuring charges for the year, and that is indeed up from the $85 million we guided to back in October. And that splits into approximately $49 million for MA and $65 million for MIS. And then finally, looking forward, we estimate we'll incur up to $15 million in incremental pre-tax personnel-related charges and $20 million to $40 million in real estate charges in 2023.

Owen Lau :

I have a question related to the previous one but it's related to seasonality. Could you please give a sense of maybe the seasonality in terms of the revenue and also margin expectation on a quarterly basis in 2023?

Operator:

Your next question comes from the line of Kevin McVeigh from Credit Suisse.

Mark Kaye :

Kevin, it's Mark. So maybe I'll talk just thematically, I'll start with our base case assumptions because our medium-term guidance, as you know, refers to a time period within five years, with 2022 as the base year. And that incorporates various assumptions as of the end of January. And those include, for example, U.S. and euro area GDP to stagnate in the near term, followed by recovery, U.S. 10-year treasury yield to stabilize, fluctuating modestly around current levels, issuers continuing to refinance maturing debt. And then on the MA side, customer retention rates to remain in line with historic levels, and of course, pricing initiatives to align with prior practices and our enhancements to customer value. If I maybe pick, to your question, two specific examples, maybe two tailwinds to headwinds. On the tailwinds side, issuance activity tends to track GDP growth over the medium to long term. And our central case models GDP expansion at a level consistent with what prevailed prior to the COVID-19 pandemic. And we've used our GDP and interest rate predictions from Moody's Analytics forecast, which shows that the 2014 to 2019 average annual real GDP growth was between 2% and 3%, and that's sort of what we expect going forward. The second tailwind is something we spoke about extensively on prior calls, that's based on our maturity wall studies. U.S. corporates have $1.9 trillion in maturing debt. The majority, we expect to be refinanced. Similarly, European corporates have refunding needs around $2.1 trillion. And then on the headwinds side, the first one maybe is worth noting is we do project interest rate increases -- sorry, we do project interest rates are going to remain elevated and that may potentially impact opportunistic financing. For example, in the U.S., we model a near-term increase in the 10-year treasury yield. And then we expect that to remain roughly stable at that 4% through 2027. And then finally, in resetting our medium-term target base to 2022, we have assumed constant currency foreign exchange rates over the five-year period, specifically the euro at 1.07 and the pound at 1.20. And that shows dollar appreciation versus the original rates we gave in February last year, which were 1.14 and 1.35.

Alex Kramm :

Can you just shift gears to capital allocation for a second? Maybe I missed it, but the $250 million in share repurchases seems fairly low relative to what you've been doing in the past and obviously also the free cash flow guidance. So is there a shift of thinking on what are the uses of cash? And then obviously, does that also suggest that maybe on the M&A side, you've taken a harder look, again, maybe in a different environment from a buyer and seller perspective?

Operator:

Your next question comes from the line of Toni Kaplan from Morgan Stanley.

Mark Kaye :

Toni, thank you for your question. Let me maybe start by saying the midpoint of our cash flow guidance range implies growth of approximately 25% off of our reported 2022 free cash flow result. And that's well above the projected midpoint, which is low double-digits for our U.S. GAAP net income. And in addition, what that really means is at the midpoint, the free cash flow to U.S. GAAP net income conversion ratio is approximately 100%. And that's effectively equal to the average free cash flow conversion ratio that we've had over the last four years, meaning specifically from 2019 to 2022. So we feel pretty comfortable with that as a result. In terms of CapEx, 2022 actual result was $283 million. We're guiding to approximately $300 million, i.e., a similar level. And there are a number of factors underpinning that guidance, specifically, for example, continued M&A integration activity, for example, related to PassFort or kompany or RMS. There's ongoing enhancements to IT platform and our real estate infrastructure associated with the workplace of the future program. But one of the big drivers that will carry forward into 2023 is effectively the higher amount of capitalizable work under GAAP related to our SaaS-based solutions for our customers. And that ties in directly with the underlying business strategic shift to provide more SaaS-based, more recurring revenue solutions within MA. And so I think it's a step-up in 2023. I don't think we'll see a separate step-up in future years, but that's really what's driving the underlying numbers.

Rob Fauber :

Not really. Toni, it's Rob. Not really a change. It's pretty consistent with how we thought about it last quarter. I think one thing you're hearing from us is just the first quarter of 2022 has a relatively robust issuance here. So there is the matter of comps, but I don't think there's any fundamental change from how we were thinking about the kind of troughing and recovery in issuance.

Ashish Sabadra :

I wanted to focus on the Moody's Analytics business. We saw some pretty good robust strength there and the guidance also implies further acceleration. Mark, in your -- in response to a prior question, you talked about the seasonality but also talked about like a similar growth profile across all three units within MA. But it seems like based on that bubble chart on Slide 9 that you may have some faster growth businesses within Decision Solutions. So I just wanted to better understand how should we think about some of the growth businesses within all the three segments within MA?

Operator:

Your next question comes from the line of Jeff Silber from BMO Capital Markets.

Rob Fauber :

Yes. It's Rob. So maybe let me talk about both what I think could provide some upside as well as also what could provide some headwind to our outlook. So I'll start with the upside. We talked a lot about, on the last call, just the market's need to get more certainty around the trajectory of inflation and getting certainty that inflation was starting to peak because that then informs the Federal Reserve actions and the market wanting to understand whether we're near the end of the tightening cycle. And you can see, as we then went through the fourth quarter end of the year and into January, the market getting some confidence and you see the issuance that started. We also talked about where you're going to see that. And so I think that's interesting to understand. You're first going to see, as the markets open up, opportunistic investment-grade issuance. There's the folks with the best access to the market. Then you're going to see, and we have started to see, the higher-rated spec grid names coming to the market so the B, A names. And then eventually, you start to see the single B names coming to the market, and we have seen a few of those. In fact, we've seen our first couple of dividend recaps in months. And it's that kind of activity that starts to give you confidence that the market is opening up. Now I would say it's -- I'm going to use the word kind of a fragile recovery because there's still plenty of headline and event risk. But we are starting to see that. You saw a very robust month in January for investment grade. You saw high yield start to pick up in leverage loans, started quite slowly, but we're starting to see some leverage loan activity as well. M&A, we have a fairly muted forecast for M&A, kind of a flattish assumption built into our outlook. That could provide some upside if we see M&A activity pick up. And I would look to the sponsor-backed M&A and LBO activity as a place where the sponsors have a lot of dry powder to put to work. And so that would be something to look for. Just quickly in terms of what could the derailers or the headwinds be -- yes, sure.

Rob Fauber :

No, sorry. Just in terms of -- just very quickly, Jeff, what could provide a few headwinds? There is, as I said, a headline risk, both in terms of inflation prints and what that means for what the Fed is going to do. But -- and just in general, any unanticipated policy actions by central banks. And that's something I'd talked about even last year. The central banks have a pretty tough assignment on their hands to both deal with inflation and engineer a soft landing. So I think we're going to be keeping a close eye on all that.

George Tong :

You expect 2023 MIS revenue to increase low to mid-single digits, and that's based on an assumption of low single-digit growth in global debt issuance volumes. If you assume pricing growth of perhaps 4% to 5% given higher inflation, the guide implies to the degree of negative mix from issuance. That said, it looks like you're expecting high yield and structured issuance to be the fastest-growing categories in 2023. And these are generally favorable from a pricing mix perspective. So can you help bridge your assumptions for MIS revenue growth and global debt issuance volume growth in 2023?

Operator:

Your next question comes from the line of Jeff Meuler from Baird.

Rob Fauber :

Yes. Great question. Decision Solutions was a good story for the quarter, indeed. 15% growth on an organic constant dollar basis in the quarter. You will remember actually, last quarter, we kind of talked about Decision Solutions, a little bit lower reported growth rate print, so we're talking about the importance of kind of looking through that to ARR. That's still the case. And so if you look at kind of full year, we had about 11% growth in Decision Solutions ARR. And we've really got strength in a number of areas. And I think I used that phrase, it's not a one-trick pony. And that's true. In KYC, we're up in that kind of mid -- low to mid-20s range. But we've also got a very nice life insurance business and a very nice banking business. The KYC business, we just got lots of demand not only for the data, but now we've got this life cycle product that I mentioned, which allows us to package the data with a workflow solution, gives us the opportunity to have even bigger engagements with our customers. So that's very, very helpful. And we launched that in the second half of last year. But maybe just to focus in just a little bit more on the other two businesses. People are probably less familiar with it. We have a nice business. Obviously, RMS serves the property and casualty and reinsurance market. But we have had, for years, a business serving life insurance -- life insurers. And we've got a really powerful actuarial modeling platform and we've been able that is used by many of the world's largest insurers. And we've just been able to do what we've done with banking, frankly, which is to build a suite of solutions around risk and portfolio management and balance sheet management and capital planning and reporting. And one of the areas where we've had some really nice growth is around our risk integrity IFRS 17 solution. As you may be familiar, insurers are having to implement IFRS 17. So there's been a lot of demand to help our customers there. And then the other is banking. We've just seen some very nice growth with the kind of suite of solutions in banking across origination, risk and portfolio management and capital planning.

Andrew Steinerman :

I just wanted to jump into that MA organic revenue growth guide of about 10%. When I look at MA's ARR in the fourth quarter coming in at 10% and then the guide really is for it to accelerate to low double digit in '23, I just felt with that accelerating backlog, the bias for MA organic revenue growth would be above 10%. Are there any kind of headwinds, maybe non-subscription revenues to note to kind of just kind of keep it about 10%?

Mark Kaye :

Yes. And Andrew, just to add on to that, if you think about decomposing our guide of 10% organic constant currency growth for MA, you could think about recurring as growing in that low double-digit range when you think about transactional onetime declining in that high teens percent range.

Faiza Alwy :

I have two questions on the MIS midterm targets. First, I appreciate the conservatism on the top line. I'm curious that you left your margin target as is despite a lower sort of implied top line. So just wanted some more perspective on that. Is it related to the recent restructuring actions? And then second related question is, you mentioned a private credit market as one of the factors as you think about issuance. We've obviously seen significant expansion in that market in '22. So curious what your thoughts are around private product both for '23 and as you thought about your medium-term targets.

Rob Fauber :

Yes. One other thing I want to emphasize just around why we're talking about MIS margin expenses. And I've gotten these questions from folks over the last few months is just around making sure we've got the right resources. And I want to assure you that we approached the restructuring exercise very, very thoughtfully. We monitor over $70 trillion in rated debt and it is absolutely critical to us that we make sure that we've got the expertise and resources to not only monitor that stock of debt but also to be able to service the flow of new issuance. And so we just -- we approached that very thoughtfully, things like a typical span and layer exercise and thinking about initiatives that could be deprioritized and ways to get more efficient. And we're committed to getting more efficient in that business, and that's what you see with the medium-term target. Let me touch just briefly on the private credit space. We talked about that on the last call. The private credit market has experienced some strong growth over the last few years. And I guess the way we've stepped back and tried to really think about it is, what is the opportunity for us to address that market and the needs of that market? Because we do think that we have a role to play in helping both asset managers and investors and borrowers. And we've got some very large relationships with many of the largest private credit lenders in the world. And you think about our relationships with the asset managers. We've got ratings on the asset managers themselves as well as their portfolio companies and CLOs and BDCs. And we also support them with a range of products across MAs. And we've been in some very active discussions with a range of players in this space. And we think that we've got more that we can do to serve them around some important use cases. That includes providing independent credit assessments to help investors to understand the credit quality of these portfolios that they're invested in but also to help the asset managers themselves around credit scoring, company data, benchmarking portfolio management, ESG is another area. So we think there's an opportunity here for us to do more. And we've got a number of things in the works across the company to be able to support the use cases around us.

Shlomo Rosenbaum :

I want to ask a little bit about the MIS guidance just for 2023. When you look at the composite and the pieces of that you put in that support your outlook, how much of your guidance is dependent or focuses on kind of the refi walls that are sort of inherent support? And how much is it in terms of just assuming that market conditions tend to come -- get better over the course of the year and particularly in the second half of the year or just more dependent on things improving versus things that you can actually see? And maybe you can talk a little bit about that on vis-à-vis what you normally do this year. Is there any change?

Shlomo Rosenbaum :

Okay. And if I could sneak in one just housekeeping. The AR DSO was up a little bit sequentially. Were there any deals that closed particularly towards the very end of the quarter that kind of pushed it up?

Operator:

Your next question comes from the line of Russell Quelch from Redburn.

Mark Kaye :

This is Mark here. Russell, nice to have you on the call. One other element to add to your model is the reporting of MIS other revenues for 2023 vis-à-vis 2022. Those are down in the range of $10 million to $15 million primarily to reflect the incorporation of some of our ESG products and capabilities into our MA revenue set. That's really what's driving the difference between sort of the issuance outlook and the revenue outlook we provided this morning.

Rob Fauber :

What was that last bit of the question? I'm sorry, Russell.

Rob Fauber :

To the MA guidance?

Rob Fauber :

Let me just start with the question about Decision Solutions and pricing. And with the biggest growth engine in Decision Solutions is our KYC business. And just to give you a sense, new sales almost doubled in 2022. And we had a greater than 50% increase in the number of new customers, and we had a meaningful increase in the average sale price. That's not just pricing. What that really does is the bundling of products and capabilities that's allowing us to have a larger ticket size. So I think what you're really seeing certainly in KYC is a lot of new customers coming into the market. We're obviously doing a very nice job of bringing those into the Moody's family when you look at our growth rates relative to the overall market but also continuing to be able to provide additional capabilities to folks who are already then using the products and services. So I'd say that's actually probably a similar story to kind of a lesser extent for what we're doing around banking. We've just got a suite of cloud-based solutions that we continue to build out that allows us to bundle those solutions together and to increase the ticket sizes and the size of the relationship that we've got with our customers. So it's not just about price increases there. Of course, there's an element of that as we continue to enhance the value proposition of all of our products. But I think it's really more around cross-sell, and in the case of KYC, especially just new customer acquisition.

Rob Fauber :

I don't really see those two things tied tightly together. There'll be upside to the MIS guidance, obviously, but I don't necessarily think so from an MA standpoint.

Craig Huber :

I guess, Rob, you've talked about this, let's go a little deeper here. Your medium-term outlook, you said that's five years here, you're talking about low to mid-single-digit MIS revenue growth long term, which is the same range that you're giving for this year. We all know 2022 was obviously a very rough macro year M&A for the marketplace for most of the bloody year was quite low. Debt taken on for share buybacks was quite low last year. Refinancings last year seemed like that was low versus what it should be the next few years, that you agree on that and stuff. And when you think about pricing, historically, you've done 3% to 4% price, maybe it's a little bit higher than that, but at least 3% to 4%. How do you square all that with only up 2% to, say, 5% on average for the next five years with the base year seemingly being so low? Is it just being overly conservative here? I'm just trying to get a better sense of this. I get a lot of questions on this.

Craig Huber :

Then also just on the pricing, can you guys tell us what you're expecting pricing for MIS this year to be a similar question for MA?

Craig Huber :

And the MA side, what's the pricing there, you think, on average for this year?

Operator:

And we have a follow-up question from the line of Kevin McVeigh from Credit Suisse.

Rob Fauber :

Yes. Kevin, that's an interesting question. And I guess I might start by saying when we think about integrated risk assessment, it's not just MA. It's all of Moody's. The rating agency is a really important contributor to, but also beneficiary of, this integrated risk assessment strategy that we have. But maybe a few things, Kevin. First, I think you're seeing us develop scale in a few areas beyond our ratings business. And we obviously have a world-class fixed income research business in Digital Insights that serves investors. We've got, in Decision Solutions, I mean, you've heard me talk about a little bit meaningful businesses that are supporting both banking and insurance different really critical risk workflows, origination, underwriting, portfolio and risk management and capital planning and reporting. And then, of course, we've got a rapidly growing KYC business that we think has some really industry-leading capabilities. We're really well positioned there. I think that's where you're going to see us continue to invest and really drive growth because those are very important delivery platforms for a range of content across all of Moody's. And you heard me talk about kind of what's driving ARR. And so all this fits together. When I think about that content, I mean, think about it, $70 trillion of debt rated by MIS. It's data ownership and credit scores from 425 million companies. It's massive economic data sets and ESG and physical risk scores on hundreds of millions of companies and locations. And we think of that as kind of our risk operating system, and we are increasingly threading that content through those scaled platforms. And you've heard us talk about it but our commercial real estate lending module for banking. That takes a lot of that property and economic and climate content, and we've got KYC integrations that are on the way into our banking solutions. You've got ESG and climate integration into ratings, banking, insurance and research and so on. So I think ultimately, complementing our ratings business, we're going to have scaled platforms with a suite of cloud-based solutions that serve key customer sets. And they're differentiated by being able to draw on all this proprietary data and analytics that we've got, where and when customers need it, so that they can better identify, measure and manage risk. That's where I think we're going to be three to five years from now.

Rob Fauber :

Okay. Thanks, everybody, for joining. Appreciate the questions, and we look forward to speaking with you on the next call. Have a good day.

Operator:

Good day, everyone, and welcome to the Moody’s Corporation Third Quarter 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Rob Fauber:

Thanks, Shivani. Good afternoon. Thanks to everybody for joining today’s call. And like I did last quarter, I’m going to start with a few takeaways. And as everybody’s aware, during the third quarter, macroeconomic and geopolitical conditions continued to deteriorate. And that further suppressed the global debt issuance markets from the already subdued levels that we have seen in the first half of the year. At the same time, these conditions supported increasing customer demand for data and analytics to identify, measure and manage risk. And against this backdrop, our MA business continued to perform well, strong revenue growth of 14%, while MIS revenue declined by 36%. Overall, Moody’s generated $1.3 billion in revenue, with an adjusted operating margin of 39%. And we expect that low issuance volumes, particularly in the leveraged finance space, will persist through the remainder of the year. And as a result, we’re revising several of our 2022 outlook metrics, including our guidance for total Moody’s revenue, which is now expected to decline in the low double digit range. We’re also updating our outlook for full year adjusted diluted EPS to now be between $8.20 and $8.50. Now, in response to the expectation for continued economic headwinds, we’re also taking decisive steps to reduce our expense run rate by at least $200 million by year-end. And the cost savings will be realized across the Company and include a more than doubling in the size of our previously announced restructuring program, as well as various additional cost efficiency initiatives. And collectively, these actions put us in a position of strength as we head into 2023. And I’ll provide some additional details later in the call. Now, for the third quarter, MA recorded both, strong revenue growth of 14% and a 9% increase in annualized recurring revenue or ARR. With over half of MA’s business outside of the U.S., foreign exchange rates had an outsized impact on MA’s revenue growth, lowering it by 7 percentage points. For MIS, the 36% decrease in revenue against the record prior year period was driven by a 41% reduction in issuance. And altogether, this resulted in a 16% decline in Moody’s revenue, and the negative impact of foreign currency movements on total Moody’s revenue was 4 percentage points. Now, expenses grew just 1% in the third quarter as we continue to execute efficiency initiatives and emphasize cost discipline. And the net impact of lower revenue and controlled expenses translated to adjusted operating income of $497 million for the quarter, and adjusted diluted EPS of $1.85. Now, let me provide some additional context on the conditions impacting the issuance levels, and our revised full-year outlook for MIS. And at the beginning of the year, like others in the market, we anticipated that elevated levels of inflation would be transitory and slowly abate over the course of 2022. And instead, the conflict in Ukraine further impacted market confidence and commodity price shocks pushed inflation higher. And these factors prompted central banks to raise interest rates further and faster than expected, to levels we haven’t seen for more than a decade, and resulting in ongoing uncertainty and volatility in the capital markets. Meanwhile, corporate balance sheets remained robust following a surge in opportunistic pandemic era financing, allowing issuers to stay on the sidelines given market conditions. We expect that these macroeconomic and geopolitical conditions will continue to mute issuance levels, at least through year-end. And in light of this, we’re updating our guidance for 2022 MIS rated issuance to decline in the mid-30s percent range. Full year MIS revenue is now projected to decrease by approximately 30%. And while the outlook for next year will depend on the pace and scope of market stabilization and recovery, we’re confident that conditions will improve over time, and that the key growth drivers for issuance will resume. This year, only a little more than a quarter of the first time mandates that we signed have gone to market, meaning there’s a backlog waiting to tap the markets. And to leverage those opportunities, our teams have been engaging extensively with investors and issuers. And we haven’t been sitting still. We’ve been building our domestic rating franchises, including in Africa with the majority acquisition of GCR and across Latin America through Moody’s Local. And we’ve made significant progress in digitizing our content to both improve the customer experience but also to drive increased usage. As we look ahead, our pricing opportunity remains intact, and we know there are over $4 trillion in refunding needs that will likely be refinanced over the coming four years. In short, we’re continuing to deliver on our differentiated strategy to be the agency of choice for our customers. While current conditions for MIS are challenging, as those ease, issuance will accelerate, and we will be well positioned to capture growth and operating leverage through our extensive market presence. Now turning to MA, which despite the challenging market conditions, delivered another impressive quarter of revenue growth and margin expansion. 59 consecutive quarters of revenue growth, MA has proven to be acyclical and the third quarter was no different. MA reported 14% revenue growth, or 9% on an organic constant currency basis. And with best-in-class retention rates and growing customer demand, MA also achieved 9% ARR growth for the third quarter and that’s inclusive of RMS. We’re confirming our top line revenue guidance for 2022. MA full year revenue is expected to increase in the mid-teens percent range, and that’s despite a 5 percentage-point headwinds from foreign exchange rates. We expect ARR to accelerate to low-double-digit percent growth by year-end. We’re also raising the MA adjusted margin guidance to approximately 30%, that’s 100 basis-point increase of our prior guidance, reflecting ongoing expense efficiency. So, let me take a moment just to highlight our fastest growing business and that’s KYC and Compliance Solutions. And in recent years, we’ve invested and that’s been both, organically and inorganically, and acquiring developing and integrating data analytics and technology to create a world class set of solutions. And this combination supports new use cases around counterparty verification. That’s enabling us to grow with existing customers and add new customers in areas like the fintech, corporate and government sectors. We continue to receive industry awards and recognition, including most recently a top right quadrant positioning from Chartis. We also won the AI breakthrough award for our innovative solution for fraud prevention. And that’s one of an increasing number of places where we’re being recognized for the integration of artificial intelligence into our solutions. Also, as we pass on the one year anniversary of the RMS acquisition, let me give a quick update on that. We’re on track to achieve the financial targets announced last August, and I’m excited about the opportunities that are in front of us. We are laser-focused on maximizing our synergy opportunities by launching new products and pursuing markets that leverage our combined capabilities and strengths. So, for example, this past quarter, we launched our ESG underwriting solution for property and casualty insurers, which integrates Moody’s extensive data to help them operationalize ESG risk assessment into their insurance underwriting workflows. And I also want to recognize the great work being done by our colleagues at RMS. And in my meetings with customers over the last few months, I’ve heard firsthand about how important our solutions are in helping the industry address an increasing array of risks, including recently as we assisted our customers in rapidly quantifying the financial impact of hurricanes Fiona and Ian. Now, moving to the restructuring plan that I mentioned earlier. On our last earnings call, we said that we would take additional actions to manage expenses and improve operating leverage, if we observed further deterioration in the external environment. And given our view that the weakness in the issuance market will likely persist through at least the fourth quarter of 2022, our teams have undertaken a careful review of prioritization of ongoing initiatives and we have identified several avenues for meaningful savings. We are expanding our restructuring program to more than double, providing up to $135 million in savings in 2023 from a combination of rationalizing our real estate footprint and reducing our global workforce to reflect the reality of the current market environment. We have also undertaken a careful prioritization of ongoing initiatives in light of our current business priorities, and that has identified up to $100 million in additional savings. So collectively, these are projected to lower our 2023 expense run rate by at least $200 million. And as we take these decisive actions, we will be mindful to invest and allocate resources to maintain the rigor and quality of our ratings and processes. Look, these are challenging and uncertain times and we are prioritizing financial discipline today and making sure that we are well-positioned to capture growth opportunities tomorrow. So, that concludes my prepared remarks. And Mark and I would be pleased to take your questions. operator?

Ashish Sabadra:

Thanks for taking my question. I was just wondering, if you -- as we think into 2023, if you could provide any initial color on how we should think about issuance. There was obviously an expectation that we may see a big bounce back in issuance. Is that still an expectation as we get into 2023, or just given the higher interest rate, is it more reasonable to think about a gradual recovery? I was just wondering if you could share some initial thoughts. Thanks.

Operator:

Your next question is from the line of Manav Patnaik with Barclays. Please go ahead.

Rob Fauber:

So, we included, I think, a slide in the supplemental materials around the maturity walls. And, as you said, it’s $4 trillion -- $4 trillion to $4.1 trillion, very significant amount of debt that’s got to get refinanced over the coming four years across the United States and EMEA. And it’s interesting, we actually -- as we kind of normalized, you had about $200 billion of debt that fell out of the study due to withdrawn ratings in Russia. So, the refi walls actually did actually grow this past year, grew something like 4% on a like for like basis. But I think what’s really interesting, Manav, if you go back, just look at the slides back in 2019, those maturity walls have grown 28% from 2019. If you actually go back another year, 2018, they’re up 54%. And we’re looking at a few things. So one, just the absolute maturity walls are significant and they’ve continued to grow, despite the fact there was obviously some refinancing activity that was going on when rates were ultralow. If you look at U.S. spec grade for a moment. So, if you look at the first two years and our refunding studies, they are about 18% of the five-year total. That’s the highest percentage since we started tracking in 2010. And the other thing, I would say, Manav, just to also try to triangulate to your question. If you look at the maturity walls for 2023 and you look at what our expectation is for corporate issuance for 2022, and I understand that’s a little apples to oranges, but it represents about 50% of what we expect to be the global corporate financing activity in 2022. That’s a pretty big number. And remember, 40% of the MIS business, thereabout is recurring revenue. So now we’re talking about the support for that other 60%.

Alex Kramm:

I wanted to shift gears to the cost base, understand the restructuring program, but it will be helpful if you, I guess, Mark flush us out a little bit more. So, the $200 million achieved by the end of the year, how much of that is going to be actually impacting this year’s for your cost base? And then, I guess into 2023, how much on a net basis will be incremental as we think about the outlook there? And then, more importantly, I guess, if we expect growth to accelerate next year, hopefully, how should we be thinking about incremental margins on the ratings business? And are the low-60s target medium term still intact? So I know, it’s a three-part question, but I think it’s all important.

Operator:

Your next question is from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

Rob Fauber:

Yes. Hey Kevin. Thanks for joining us today. So, the way we kind of put together the -- some of -- the remainder of -- the guidance for the remainder of the year, we’ve essentially assumed a continuation of what we’re seeing right now into and throughout the fourth quarter. And just to give you a sense, our revised guidance for issuance implies that fourth quarter rate of issuance will be down in, call it, kind of the low-40s-percent range. And if we have another quarter of assumed unfavorable mix because of the softness in the leveraged finance markets, that would mean MIS transaction revenues would be down greater than that, right? So, they’d be down in the kind of low-50s-percent range. And then when you triangulate that back to revenue, implies that fourth quarter MIS revenue will be down in the mid-30s-percent range. And so that feels about right to us that we’re going to continue with this environment. We’ve got a pretty muted environment at the moment. And I think the rest of the year, in a way because we’re assuming that this continues, you’re kind of thinking of it as a bit of a wash because I think we’re going to be in a holding pattern until the market can get some more confidence about inflation peaking and, in turn, some certainty around the pace and trajectory of Fed rate increases.

Operator:

Your next question is from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Rob Fauber:

Yes, Toni, sure. So, we’ll kind of zoom out here. And if we need to kind of zoom back into 2023, I’m sure we’ll do that. But as you said, Toni, there’s some pretty deep cyclical issues at the moment. We’ve talked about all the macro uncertainty. You’ve obviously got the market working off some of the excess supply of issuance over the two pandemic years. But there are a few things, I think, that we’re looking at that we feel are providing some, I would say, structural support for recovery in issuance markets. I talked about the refinancing walls, and those are very significant. There’s some concern during the pandemic with ultra-low interest rates, that we were eating into those maturity walls. It turns out they’re intact and, in fact, continuing to grow and will provide support for transactional revenue. But, I also say, this is -- there’s been no change to the relative attractiveness of debt financing. And you remember on various calls over the past, we’ve been talking about potential changes to tax codes and other things. None of that is out there. We’ve also seen -- there’s been a lot of focus on cash balances. And certainly, U.S. corporates were building cash during the pandemic years. We started to see that come down. So, our cash pile report shows about a 7% decrease over the last year. Cash levels are similar to where they were in 2018. And I would also say, Toni, that I’m going to zoom in on the U.S. for a moment, but U.S. corporates are in pretty good shape from a leverage standpoint. When we look at free cash flow to debt, that’s one way to look at it across our rated U.S. corporates. It’s at about 11%. That’s the best that it’s been since 2011. So that, to me, means that corporates still have some room to take on some additional leverage. And then the last thing maybe I would say is at the moment, we’re continuing to see some stability of spreads kind of remaining around historical averages. You heard me talk about a backlog of FTMs. So despite all of this and maybe that’s not a long term, maybe that’s a shorter term. But we do have -- we are seeing a lot of interest from issuers who want to tap the markets. So, as economic growth picks up, we expect all of that to be positive for issuance. I do think this is, as I said, is mostly cyclical, cycles come and go, but we feel good about our leverage to a recovery in the markets.

Andrew Nicholas:

Just wanted to clarify a few things on the restructuring program. First, I want to make sure -- I’m looking at the slide 10. I want to make sure that that incremental savings of up to $100 million on the non-restructuring-related expense actions, I want to make sure that that’s something that’s baked in as opposed to a contingency plan. And then also, if you could give any color, and I apologize if I missed it, in terms of the split of those cost savings between corporate expenses versus MIS versus MA. I think, it would be helpful to understand that mid-50s MIS range that you alluded to, Mark, how much of that is a consequence of cost savings versus -- or cost actions versus maybe some baked-in growth next year? Thank you.

Rob Fauber:

Yes. And just to reinforce, not contingent. Those are actions that we’re taking now to make sure that we can realize those savings for full year 2023.

Jeff Silber:

I want to get back to the issuance environment. I’m just curious what you think will be the first sign that issuers are looking for to come back into the market and where in terms of which verticals we might see those green shoots.

Jeff Silber:

Right. That was really helpful. Thanks so much.

George Tong:

Sticking with the topic of debt issuance, your guidance implies 4Q issuance will be down in the low-40s range, similar to 3Q. If you look at how 3Q progressed, did it get worse progressively moving through the quarter? And the first couple of weeks of October were quite weak, much, much steeper declines than in the low-40s. So just curious, what assumptions are you baking into 4Q? Are you assuming the exit rate from 3Q and early 4Q will reverse and get better such that you land at overall average 3Q levels? And if so, what are you seeing in the markets that would prompt that?

Operator:

Your next question is from the line of Owen Lau with Oppenheimer. Please go ahead.

Rob Fauber:

Hey Owen. Thanks. So, this is an interesting topic, and we’ve been getting some questions from investors about this. So, let me share a few perspectives on this. First of all, just kind of the size of the market, about $1.2 trillion in 2021. It’s expected to continue to grow, assuming that this asset class continues to hold up. But the segment of the market that represents, I think, the potential cannibalization risk are loans, I’d say, $300 million and up. That’s kind of broadly the minimum threshold for deals that get done in the public market. And in 2021, something like $50 billion of those loans done in the private credit market versus a leveraged finance market that was, call it, $1.3 trillion. So, this year, we’ve had severe dislocation in the public leveraged finance markets. And that figure for that cohort of loans could be as high as kind of $90 billion to $100 billion. So yes, the private credit market was able to step in and provide some financing for certain transactions while the public markets were dislocated. But I think that actually brings us to an interesting question about risk and sustainability. So, private credit market clearly has more flexibility to provide higher leverage than public markets, meaningfully higher leverage. The private -- the cost of private debts is typically higher yielding, right, so more expensive than public markets. And leveraged companies with expensive debt typically have high default rates during periods of stress. So, I just -- I’d be wary of people that tell you that this time or this sector is different. So, it remains to be seen how this asset class is going to fare if we’ve got a meaningful increase in credit stress. I think it’s probably going to be hard to get a true apples-to-apples comparison on default rates, given that private lenders may be able to renegotiate agreements in times of credit stress. So, that growth and that opacity in this market is leading some people to start to call for regulation, but it’s also where I think that growth in capacity is where we can add value. So first, as I said, given the cost of private debt, I think, as corporate borrowers, as their credit profiles improve, I think we’re going to see some of these companies want to move from the private credit markets into the public credit markets. So, that growth of the private credit markets, I think, does represent some future first-time issuers into the public markets over time. Second of all, we’re actively engaged in outreach in this market to see how we may be able to provide things like private ratings or credit assessments before those companies do, in fact, tap the public markets. And the other thing I’d say is we’re starting to engage with investors in these credit funds who are looking for more transparency as to the credit quality of the funds that they’re invested in. And they’re saying, “Hey, rather than the internal risk ratings that these credit funds are using, we want to get an independent assessment of credit risk of the portfolio that we’re invested in.” So, I think we’re really well positioned to serve that particular need. We’ve got our risk calc and EDF credit models that are really considered the gold standard for portfolio and credit analysis around the world, and we’re starting to develop a sales pipeline around that. So, the last thing I’d say is -- so yes, private credit has been a meaningful source of leveraged finance funding this year as public markets were challenged, but we are seeing the market dynamics in that market starting to shift a bit as well. I mean, private credit is not immune to what we’re seeing in the market. So, you see credit funds cutting back on debt packages or increasing the equity component of deals are pulling back from big buyouts. So, while we’re engaged with private borrowers, private equity, credit funds and investors to see how we can play a more important role by bringing transparency to this market. So stay tuned.

Operator:

Your next question is from the line of Faiza Alwy with Deutsche Bank. Please go ahead.

Mark Kaye:

Faiza, good afternoon, and thank you for the questions. On MA’s margin, I’ll speak really about 2022. So, after expanding MA’s adjusted operating margin to be above 30% year-to-date, we obviously are pleased to raise our guidance to approximately 30%, which is up from approximately 29% last quarter. And that includes about 100 basis points of margin compression from unfavorable foreign exchange translation rate and approximately 30 basis points of net headwinds from recent acquisitions, primarily RMS. And what it really means is that the underlying MA margin is expected to expand by over 500 basis points off of 2021’s actual result of 26%. I will note that the 100 basis points improved full year margin outlook does reflect new and ongoing expense control initiatives, primarily supported through actions from our corporate or shared service areas, so we’re still investing back in the business. And we still expect expenses to increase in support of growth opportunities in MA in the fourth quarter as we capitalize on our existing revenue momentum. On your second question around floating rate exposure, so we seek to maintain a floating rate exposure of between 20% and 50% of our overall debt portfolio. And although we initially issue all debt at a fixed rate, we do maintain a basket of interest rate and cross-currency swaps that convert a portion of outstanding fixed rate exposure to floating rates. So, as of September 30th, our floating rate debt was approximately 32% of the portfolio. And then, now most importantly, that’s a portion as 28% euro exposure and just 4% U.S. dollar exposure. So, our stock portfolio has performed very well historically. It’s reduced annual interest expense by about $55 million in 2021 and an anticipated $40 million this year. And it also brings our average -- weighted average cost of capital down by about 20 basis points to just over -- or just under 3.1%. If I try to think forward now about the impact to our P&L from the latest forward curves and what they imply for euro and U.S. dollar moves, you could think about the swap portfolio is moving to a more neutral rather than positive impact. So, taking that into account plus the fact that we issued debt this past August, I would expect the actual interest expense in 2023 to be higher by between $40 million and $60 million.

Operator:

Your next question is from the line of Craig Huber with Huber Research Partners. Please go ahead.

Rob Fauber:

Hey Craig, it’s Rob. So on pricing, and I’ll touch -- first of all, as we always say, we’re looking for kind of a 3% to 4% annual price increase across all of our business. And I would say that if anything, the -- and you hear us talk about this all the time, the volatility and uncertainty has really reinforced the importance of what we’re doing and the value of what we’re doing. In MIS, as we do every year, we conduct a very detailed review of our pricing across sectors and regions, and based on that work in the coming year, our list prices will probably reflect a bit more of an increase than our historical average. But our actual pricing realization as -- really as it always does, is going to depend on issuance mix. Where does the mix -- where does the issuance actually come from? In MA, we always think about our focus on kind of value-based pricing. And that’s why product development and integration of our content is so important. We’re looking to integrate new analytics and data sets into our offerings because that allows us to support both price increases but also upgrades and add-ons. And that’s why we actually think about those two things together. And so, we’re continuing to see some very good usage and demand for our products. That continues to support the pricing opportunity going forward.

Operator:

Your next question is from the line of Andrew Steinerman with JP Morgan. Please go ahead.

Rob Fauber:

Yes. So, what I really meant was that the year-over-year quarterly declines in revenue in MIS, we would expect a trough in the third, fourth quarter of this year. Even though we’ve got -- so we’ve got a tough comp in the first quarter of next year from an issuance perspective. But we think that the rate of declines have probably bottomed out here in the third or fourth quarter, and we’ll start to see gradual improvement throughout the balance of next year.

Operator:

Your next question is from the line of Shlomo Rosenbaum with Stifel. Please go ahead.

Rob Fauber:

Yes. So, maybe just to try to come back and triangulate to see if this can help. If you think about the -- and it’s the first part of your question, if you just think about the -- let’s talk about in the corporate space. If you think about the maturities that are coming due in 2023, right, so we do our maturity walls. We’ve got four years of forward maturities. And then, when we look at what our expectation is for corporate -- global corporate finance issuance for this year, and I understand the 2023 maturity walls are going to get refinanced next year. But just given current levels of activity, it’s about 50%, right? So that, I think, is how you can start to size, right? And then you can say, okay, well, now as I think about the way to build to MIS revenue, well, 40% of it roughly is recurring revenue, then I’ve got 60% is transaction, how much is corporate and how much of those maturity walls there in corporate? Because that tends to be much more stable with financial institutions on kind of more regular issuance calendars and so on. So hopefully, that kind of gives you a sense of the size relative to the current activity levels in the market today.

Operator:

Your next question is from the line of Russell Quelch with Redburn. Please go ahead.

Rob Fauber:

I understand how you’ve drawn that conclusion, but I think there’s some nuance here that we need to be able to provide to you. So ARR is an organic number and it always has been for us. So we have not had RMS in our ARR number that we have been reporting. So, Decision Solutions’ ARR grew about 10% in the quarter, but that’s with RMS now included. It was not previously. So that created a 3 percentage-point drag on Decision Solutions’ ARR. That would have been 13%, if we go back to the last quarter, Decision Solutions, now on a like-for-like basis was 11%. So, we look at this as actually an acceleration of a like-for-like ARR. And I think everybody on this call knows that RMS has had a lower growth profile. We’re confident about our ability to enhance that growth profile. But the ARR growth in RMS today is lower than MA, so it has a dilutive effect now that we’re including it in the ARR metric. I would say the same thing is true if we zoom out at the MA level, and I think that’s important to understand, too. So RMS was about a 1 percentage-point drag on overall MA ARR. So again, on a like-for-like basis, MA ARR, if we had not included RMS, would have been about 10%, up from 9% last quarter. And as you know, we’re guiding to low double digit for the full year. So, you heard me mention acceleration of ARR. That’s why we feel that there’s an acceleration of ARR.

Rob Fauber:

Yes. So, we have a very active approach to corporate development. We always have. We have some very well-defined product road maps and what we call business blueprints about what are our customers looking for across our various product suites and where do we have gaps. Obviously, we’re pretty active last year and over the last several years, and we feel really good about bringing in RMS and really bulking up our capabilities around insurance and climate. So, we -- I think we feel pretty good about the portfolio that we’ve got. Sometimes it’s harder to transact in these markets than you think because there’s a bid-ask spread between what the sellers think is their valuation and what the buyers are willing to pay. And I would view us, I always have, as a disciplined buyer. We’ve got to make sure that we can achieve the synergies to make sure that we get the return hurdles that we want. So I guess, I would say, we’re always looking. We’re very disciplined in this market. And we’ve been using this time to really integrate what we’ve acquired over the last several years and really make sure that we’re getting the value out of those acquisitions that we were seeking to get. And frankly, we feel pretty good about the integration and the progress we’re making around a number of those deals that we’ve done over the last few years.

Jeff Meuler:

Maybe if you could put some additional commentary around enhancing RMS’s growth profile. So, I caught that it’s on track from a financial target perspective, but for instance, like how are the upgrades for the new platform going? Where are you in terms of integrating the heritage Moody’s capabilities and leveraging MA’s market? And I guess, related to it, I think there’s some -- I think ESG has taken a bit of a hit in 2022. Is that showing through in terms of demand for your ESG solutions from clients and prospects or not? Thank you.

Mark Kaye:

Maybe just two quick numbers around that. So we are maintaining our expectation for 2022 RMS sales growth to be in the mid-single-digit percent range. And that’s obviously up from RMS’ historical growth rate in the low-single-digit percent range. We also now expect RMS to become accretive or moderately accretive to adjusted diluted EPS in 2023. So, that’s a year earlier than what we previously projected in our deal model and as we communicated previously to the market. And then finally, our expectation for ESG and climate-related revenue is for a low-double-digit percent growth this year to approximately $190 million.

Operator:

Your next question is a follow-up from the line of Alex Kramm with UBS. Please go ahead.

Mark Kaye:

Alex, I appreciate you coming back into the queue to ask this question. I am -- we would like to intentionally not front-run our MIS revenue outlook for 2023. I think what we are comfortable committing to as a management team is what we’re able to control. And we certainly are able to control our expense base. And I think what we’re also comfortable to commit to you is that we’ll get the 2023 MIS adjusted operating margin at least in that mid-50s percentage range. In other words, as you consider modeling this out, we don’t want you to take the approximately 51% that we’re guiding to for 2022 and assume that’s a new baseline.

Alex Kramm:

No, I appreciate it very much. Thank you.

Manav Patnaik:

Yes. Sorry. Maybe I can just follow -- complete with a follow-up to that question. So the $200 million in savings, is that all in the MIS business? Is that how you get to the mid-50s? And I guess, any kind of margin connection for MA in this [Ph] regard?

Operator:

Your next question is a follow-up from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

Mark Kaye:

Kevin, thanks very much for the question. So, we remain committed to anchoring our financial leverage around a BBB plus rating, which we believe provides the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. And capital management at Moody’s really does extend beyond prudent allocation. We are thoughtful about our leverage and liquidity levels as well as maintaining a strong balance sheet. Over the last two years, we have enhanced our capital position and reduced our cost of capital, both by structuring a well-laddered debt maturity schedule and by extending our debt maturity profile to take advantage of, at the time, was a relatively flat yield curve and historically at low rates. Although our net debt to adjusted operating income, and I think this is the point that you’re getting at, was 2.3 times as of September 30th, and that’s well within the BBB plus rating range when accounting for our cash position. We have seen an uptick in our gross debt to adjusted operating income range, which was approximately 2.9 times as of September 30th. And that’s a direct result of the significantly weakened global economic conditions, again, relative to our first and second quarter outlook. And that means we are considering the possibility of perhaps executing a very smaller, very limited debt repurchase strategy in the coming months, just allowing us to opportunistically take advantage of current market conditions to marginally, marginally, marginally, delever our balance sheet and improve our gross debt position.

Mark Kaye:

Absolutely. We expect CapEx for full year 2022 to be approximately $300 million. As a reminder, there are a number of factors underpinning our CapEx guidance, including our strategic shift to developing SaaS-based solutions for our customers, continued acquisition integration activities, specifically around our recent KYC and RMS acquisition as well as ongoing enhancements to our office and IT infrastructure associated with some of our workplace of the future programs. We’re not providing guidance for 2023. However, we do currently foresee absolute dollar CapEx to remain at similar levels to 2022, especially as we continue to emphasize developing hosted solutions.