Q4 2022 Moody's Corp Earnings Call
Okay.
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 question and answers following the presentation.
I would now turn the call over to Giovanni Cox head of Investor Relations. Please go ahead.
Thank you and good afternoon, and thank you for joining us today I'm sure Bonnie.
Of Investor Relations.
This morning, Moody's released its results for the fourth quarter and full year of 2022, our outlook for full year 2023, and an update on our medium term targets. The earnings press release and a presentation to accompany this teleconference are both available on our website at IR Moodys Dot Com <unk>.
During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliation between all adjusted measures referenced during this call and U S. GAAP.
I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
In accordance with the Act I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2021 and in other SEC filings made by the company, which are available on our website and on the SEC's website.
These together with the Safe Harbor statement set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.
I would also like to point out that members of the media may be on the call. This morning in a listen only mode.
Rob Fauber, Moody's President and Chief Executive Officer will provide an overview of our results key business highlights and outlook after which he will be joined by Mark Kaye Moody's Chief Financial Officer to answer your questions I'll now turn the call over to Rob.
Thanks, Giovanni 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 MAA, while at the same time, reflecting the impact of challenging market conditions on mis.
In EMEA had a very strong finish to the year delivered its 16th consecutive quarter of growth and 10% IRR growth.
Revenue grew 15% for the year and for the first time.
Full year adjusted operating margin exceeded 30% and those are results that achieved the rule of 40 distinction.
<unk> generated $2 $7 billion in revenue as it weathered a.
The challenging year for issuance and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth.
During the fourth quarter, we executed on the expanded expense management program that we announced in October that is expected to deliver over $200 million in annualized savings in 2023, and it really significantly strengthened our financial position.
Position and flexibility for the coming year.
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 the reset of the base year to 2022.
And then 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.
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.
M&A 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.
<unk> would have been 20% organic constant dollar growth for both MA revenue and <unk> 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 our 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 and they've helped us launch new products expand into new markets and improve the experience for our customer <unk>.
Customers and it's 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 risk Tech 100.
And we placed ahead of hundreds of companies and the risk and compliance technology space that ranges from household names in our sector or two 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.
Miss was voted the best credit rating agency by institutional Investor It really demonstrates that we remain the clear agency of choice with investors and.
And MFS in 2022, we made several important investments to enhance our ratings presence in emerging markets and that includes the acquisition of a majority stake in the largest domestic rating agency in Africa and a further expansion of Moody's local in Latin America we.
We also met the need for greater transparency and ESG risks.
Specifically as they relate to credit.
By Rolling out more than 10000, new ESG credit impacts scores across MFS.
Now across EMEA, we enhanced a number of our workflow offerings through the integration of data and analytics and we created new products to meet.
<unk> customer needs in fact.
Newly developed organic products contributed a significant portion of MH 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.
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.
Research and insights while at the same time prudently managing costs and we expect that the the <unk>.
Swift and decisive expense management actions that we took in the fourth quarter.
Will enable Mrs. Adjusted operating margin to return to the mid 50% range in 2023.
So moving to MAA 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 and additional recurring revenue.
And on an organic constant currency basis recurring revenue growth has been steadily improving each year from nine 2% in 2020 to nine 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 growth in excess of 10% in fact.
Our <unk> compliance business, which is our fastest growing business had a growth.
Greater than 20% and even some of our more established products such as Orbis and credit view delivered high single digit 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 am going to start with our <unk> lifecycle solution.
Which offers customers a.
A user friendly configurable portal and risk engine.
And it enables.
Fast and accurate shacks that leverage our vast company people and news datasets.
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 our nonfinancial corporate customer an MAA with.
With our combined offerings 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 MAA and broadens the scope of our capabilities in the banking and insurance sectors and beyond and climate on demand as part of our growing suite of physical and <unk>.
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 regulators, so selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy and.
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 financed emissions.
And in banking, we extended our credit lens origination solution into commercial real estate and Thats one of the largest asset classes on bank balance sheets.
And this product integrates our proprietary property data market forecasting 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 bill.
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.
Project at 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% adjusts.
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 have continued to unlock the growing potential of EMEA and reinforced the foundation.
Ms to capture the immense opportunity, we see once issuance levels recover so we've.
We entered 2023 and 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 is the leading provider of integrated perspectives on risk.
With that Mark and I would be pleased to take your questions operator.
Thank you I would like to if you would like to ask a question. Please dial star one on your telephone keypad, if you're on a speakerphone. Please pick up your handset and make sure. Your mute function is turned off so that your signal reaches our equipment. We will ask that you. Please limit yourself to one question.
We'll have a chance to rejoin the queue for follow ups again that is star one to ask a question.
And your first question comes from the line of Manav Patnaik from Barclays. Your line is open.
Thank you very much.
Rob I just wanted to touch on that in the medium term guidance towards the ratings business, which you've maintained at low to mid single digits and have no debate.
That's come down a lot I, just wanted to try and flash chat a little bit more on your assumptions and I always thought it was a GDP plus 2% to four type pricing business and your competitor. Obviously you had a more optimistic outlook there too. So just trying to understand how you guys are thinking through that.
Yes manav.
We've we've gotten some questions around <unk>.
How quickly things are effectively going to snap back to 2020 and 21.
And.
Just to kind of put that in perspective.
2021 total issuance was.
More than 35% higher than the average from one nine to 2022, if you exclude the 2020 and 21 years. So.
The pen those two pandemic years were in fact extraordinary and unusual.
Years and so on.
Obviously, we are rebase lining off of what we believe are in fact kind of more normalized levels of issuance.
In fact, if you look at 2022.
Total issuance it was down something like 5% from that that average that I was talking about that historical average.
But.
Another way to kind of look at this manav and Youre kind of I think getting at.
Is there also some upside to the to the way we're thinking about the medium term. So while overall issuance in 2022. It was about 5% below that historical average ex those two extraordinary years.
If you look at corporate issuance was down something like 15%.
And if you look at the mix of corporate issuance as a percent of total issuance were actually down a good bit in 2022 and as we as we kind of look forward. So.
Yes, I think.
In a way there's been a mix shift against us here and so if you think that there is more opportunity for corporate issuance as a percent of the total there might be some upside to.
The way, we think about the medium term.
Add on to that disrupts remarks that you 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 the specific target.
Once we have better insight into the macroeconomics and the issuance environment.
Year unfolds.
Okay got it makes sense and then mark just.
Perhaps maybe even an open ended question to talk about the expense ramp and stuff that you typically do but what I was looking for as you know the expense savings that you've talked about like how does that split between the two segments.
Thank you so maybe let me start.
Firstly with da expense ramp so we anticipate operating net growth.
<unk> of the annual Merit increases the REIT.
To allow incentive compensation and then our incremental organic investments to contribute to an expense ramp of between 10 and $30 million between the fourth quarter of 2022, and the first quarter of 2023 and that excludes any restructuring related items and.
And then from the first quarter of 2023 to the fourth quarter of 2023, we expect expenses to remain relatively stable and oney ramp between 10 and $20 million and Thats, primarily as we realize the benefits of both our 2020 to 2033 geolocation restructuring program and any additional.
Cost efficiency actions.
On your second sub question.
Structuring.
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 to $80 million for MMA and thats related to both the real estate rationalization and the reduction of personnel as we selectively.
Downsized and utilized lowest alternative lower cost locations.
For the full year 2022.
We're 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 at for Mis and then finally looking forward we are.
Estimate, we will incur up to $15 million in incremental pre tax personnel related charges and $20 million to $40 million in real estate charges.
In 2023.
Alright, great. Thanks, a lot Mike.
Your next question comes from the line of Owen Lau from Oppenheimer. Your line is open.
Thank you for taking my question. So my 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 quantity basis in 2023. Thank you.
Good afternoon.
The central case assumption is for the cyclical market disruption that we experienced during the majority of 2020 to really persist through the first half of 2023.
And as a result for <unk>, we expect in transaction revenue to be significantly weaker in the first half.
This will be the second half of the year.
Prior period, Comparables, the capital market conditions and spreads become more constructive.
Specifically the midpoint of our full year 2023, Mis revenue guidance implies first half revenue to decline in the low teens percent range and second half revenue to grow in the mid 20% range and that also underscores our expectation then for higher Ma's margin.
In the second half of the year versus the first half of the year.
If I look at EMEA, we forecast full year 2023, total revenue will increase by approximately 10%.
And that's underpinned by broad based strength across all lines of business.
And given that May recur revenue is highly recurring we expect absolute dollar revenue.
To progressively increase over the course of 2023 and as such we expect first quarter adjusted operating margin to be similar to our actual fourth quarter 2022 margin.
And before improving through the remainder of the year, obviously as revenue increases and as we realize the benefits from our cost savings.
In addition.
As we expand our product capability suite as we continue to grow the size of our sales force to meet customer demand, we anticipate <unk>.
<unk> also steadily increased throughout the year and it's going to be similar to what we saw in 2022.
Smithy, achieving low double digit percent growth by the end of 2023.
On Moody's total operating expenses.
<unk> series for an increase in the low single digit percent range.
We don't typically provide expense growth forecast by statement given we anticipate the majority of our 2023 strategic investments to support EMEA revenue growth opportunities to full year statement operating expense guidance would be along the lines of low to mid single digit percent decline in mix.
And a high single digit percent growth in MA and then find that for EPS modeling purposes, I'd, just like to remind you our first quarter effective tax rate tends to be lower compared to the full year results and thats simply due to the excess tax benefits around employee stock based compensation.
Got it. Thank you Marc I'll go back to the queue. Thanks a lot.
Your next question comes from the line of Kevin Mcveigh from Credit Suisse. Your line is open.
Great. Thanks, so much and really nice results.
If we went back you were able to reaffirm the medium term targets, obviously, you reset the base year, but pretty.
<unk> shifted in 'twenty, two relative to initial expectations.
Yeah.
D for <unk>, but just any thoughts on puts and takes.
Kevin It's mark can get good afternoon, so maybe I'll start.
Domestically I'll start with Allied base case assumptions, because our medium term guidance as you know refers to a time period within five years with the 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.
Fluctuated modestly around current levels.
At issue is 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 <unk>.
Our enhancements to customer value.
Maybe to your question two specific examples maybe to tailwind to headwinds on the tailwind 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 two and 3% and that sort of what we expect going forward.
Second tailwind something we spoke about extensively on prior calls that's based on a maturity wall studies U S. Corporates have one nine trillion of maturing debt. The majority we expect to be refinanced a similarity European corporates.
Refunding needs around $2 one trillion.
And then on the headwind side.
First one maybe it's worth noting as we do predict interest rate increases sorry would you predict 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.
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 107, and the pound at $1 20, and Thats shows dollar appreciation versus the original rates. We gave in February last year, which were $1 14 and $1 35.
Very helpful and then get back in the queue. Thank you.
Your next question comes from the line of Alex Kramm from UBS. Your line is open.
Yeah, Hey, Hello, everyone 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 to thinking.
Other uses of cash and then obviously it does it also suggest that maybe on the M&A side Youre, taking a harder look again, maybe in a in a in a dip.
Current environment from a from a buyer and seller perspective. Thanks.
Alex Best place for me to start is too.
We reaffirm that our capital planning and allocation strategy is unchanged.
We remain committed to anchoring our financial leverage around a triple B plus rating.
Which provides in our view the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital.
Given however that our gross leverage as of year end was above two five times.
And then as we know is driven by the cyclical market conditions, we just experienced.
As we head into 2023, we want to retain the financial flexibility to marginally deliver our balance sheet.
And improve our gross outstanding debt position.
Needed.
And that's similar to the actions that we took in the fourth quarter.
Through our tender offer and what that means for 2023 is our plan is to return approximately $800 million of our global free cash flow, it's about 53% at the midpoint.
To our stockholders as subject of course to available cash market conditions, M&A opportunities et cetera, and that includes to your question.
Share repurchase guidance of $250 million and approximately $560 million in dividends.
Through a quarterly dividend of 77 cents per share which is.
10% up.
From our prior quarterly dividend and it's all about creating that flexibility to evaluate opportunities as the year goes on.
Fair enough. Thanks.
Your next question comes from the line of Toni Kaplan from Morgan Stanley . Your line is open.
Perfect. Thank you Manav.
To ask about the free cash flow guide.
Part of the reason why it was maybe a little bit lower than what I saw was that.
Capex sort of staying at the $300 million range, roughly let's call it like 5% of revenue.
Should we expect that level to continue are you at sort of a different capex.
Just Chris.
<unk> wise because of the change in.
In model or I guess, what's driving it is 5% the right number to be thinking about for future years as well.
Tony. Thank you for your question, let me maybe start by saying the midpoint of our cash flow guidance range implies growth of approximately 25%.
Our reported 2022 free cash flow result, and thats 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.
Commit to a 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 similar level.
And there are a number of factors underpinning that guidance as specifically for example are continued M&A integration activity.
For example related to possible to accompany or RMS, there's ongoing huntsman to <unk> and our real estate infrastructure associated with the workplace of the future program.
The big drivers that will carry forward into 2023 is effectively the higher amount of <unk> work under GAAP related to our SaaS based solutions for our customers and that ties in directly with the underlying business strategic shifts to provide more SaaS based more recurring revenue.
Solutions within Ma.
I think it's a step up in 2023, I don't think we'll see a separate step up in future years, but thats really whats driving.
The underlying numbers.
Okay terrific and just as a really quick follow up.
I know last quarter, you were sort of saying that you thought third quarter on fourth quarter would be the trough for the issuance declines and that it should improve throughout 2023 and in particular second half I feel like there is some consistency.
And the messaging that second half can be better than first half, but like I guess have you delayed your expectation for issuance recovery or is it still similar to where you were thinking it was going to be last quarter.
Not really there Tony it's Rob not.
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 is a relatively robust.
Issuance year. So there is the matter of comps, but I don't think there is any fundamental change from how we were thinking about the kind of trough ing and recovery in issuance.
Thank you.
Okay.
Our next question comes from the line of Ashish Sabedra from RBC capital markets. Your line is open.
Thanks for taking my question I wanted to focus on the Moody's analytics business, we saw some pretty good <unk>.
This to us strength, there and the guidance on same place further explanation.
Mark in Euro in response to a prior question you talked about the.
The seasonality, but also talked about like a similar growth profile across all three units within EMEA, but it seems like based on that bubble chart on slide nine that you may have some faster growth businesses within decision.
Solution. So I just wanted to better understand how should we think about.
Some of the businesses within all the <unk> segments within EMEA.
Yeah, Hey, Ashish, it's Rob let me.
Maybe let me start since the question is really about about EMEA growth, maybe let me just start with kind of the <unk>.
And then I can zero in a little bit on kind of what's what's contributing to that.
But.
We talked about on the last call that we've got RMS now in the MAA.
Our our figure.
And I think we've also talked about the fact that RMS is not quite yet growing at the same rate as EMEA overall were still.
Executing on our synergy opportunities in order to accelerate that growth. We believe we're on track, but there's still work to do.
So the reported figure of 10% had about a one 5% drag from from from RMS. So excluding that we would have been.
There are about 11, 4%.
And you might remember that.
Back in the third quarter, we were talking about 10%. So we're seeing some very nice acceleration of IRR on a like for like basis, and I think that goes to the expanded capabilities that we've got now.
To attract both new customers and to better serve and expand our relationships with existing customers frac.
Frankly, we had some great execution by our sales teams in the fourth quarter.
And.
That was a real area of investment for us as you've heard us talk about but it's not a one trick pony either I think thats. The other interesting thing we're trying to get that.
Message across with that bubble chart, we frequently talk about <unk> as kind of our high flyer in it as it continues to have very strong momentum.
But you can also see our life insurance business.
You can see our banking business.
And you also see I think interestingly, we wanted to show two of our what I think of as kind of more mature product lines, which are there.
There are credit view research and our orbis offering so.
There is there is data that's in the <unk>. So this this result, you see there for Orbis is kind of everything excluding <unk> use cases for the data and both of those are growing at at.
Hi.
High single digit <unk> growth rates, so we feel very good about.
Kind of the portfolio and again, if you think about the strategy it's been about <unk>.
Identifying.
Risk assessment use cases, and then threading through these kinds of capabilities.
Two two.
To help our customers.
With a range of.
Kind of risk and decision, making so.
Some very good momentum in the portfolio.
Thanks, very helpful I'll get back into queue.
Your next question comes from the line of Jeff Silber from BMO capital markets. Your line is open.
Thank you so much in euro.
Prepared remarks, you talked a little bit about some of the indicators you are seeing to give you confidence about our global debt issuance rebounded in the second half of the year can we get some examples of what Youre looking for what we should be looking for.
Yeah.
Hey, there its rob.
So maybe let me maybe let me talk about both.
I think could provide some upside as well as also what what could provide some some headwind to our outlook.
So I'll start with the upside.
We talked a lot about on the last call just the markets need to get more certainty around.
The trajectory of inflation and getting certainty that inflation was starting to peak.
Does that is that 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 as we then went through the fourth quarter ended the year and into January the market getting some confidence and you see the issuance. So it started we also talked about where youre going to see that and so I think thats.
That's interesting.
Understand.
First going to see as the markets open up opportunistic investment grade issuance theres the folks with the best access to the market then youre going to see and we have started to see the higher rated spec grade names coming to the market. So the the names and then eventually you start to see the single B names come into 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.
<unk>.
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 is still plenty of <unk>.
Headline an event risk, but we are starting to see see that you saw a very robust month in January for investment grade you saw high yields start to pick up in leveraged 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 if we see M&A activity pickup.
I would look to the sponsor backed M&A and LBO activity is 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 derail or is are the headwinds.
Yes sure.
Alright. Thank you broke up sorry about that sorry, just in terms of just very quickly Jeff.
What could provide a few headwinds.
There is as I said, the headline risk both in terms of inflation prints and what that means for what the fed's going to do.
In general.
Any unanticipated.
Policy actions by by Central banks, and Thats, something I had talked about even last year.
The central banks have a pretty tough assignment on their hands to both deal with inflation and engineered a soft landing. So I think we're going to be keeping a close eye on all of that.
Okay.
Okay. Appreciate the color. Thank you.
Your next question comes from the line of George Tong from Goldman Sachs. Your line is open.
Hi, Thanks, good afternoon.
Do you expect 2023, <unk> revenue to increase low to mid single digits and Thats 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 that guide implies a degree of negative mix.
From issuance that said it looks like Youre expecting high yield and <unk>.
Structured issuance to be the fastest growing categories in 2023, and these are generally favorable from a pricing perspective. So can you help bridge your assumptions for revenue growth in global debt issuance volume growth in 2023.
And George.
I think you've got it about right.
And that's why we've got a range that we've included there for our.
For our outlook.
And maybe let me just it might be helpful. George just to touch on for a moment.
How we're thinking about 2023 issuance outlook.
And.
There are a wide range I think of views probably a wider range than I can remember in recent memory.
Around what's going to happen with outlook and as you start to zero in on what's accounting for the difference.
It really I think is largely around folks' expectation around leveraged finance issuance.
<unk>.
Leveraged finance.
We look at high yield were expecting growth of 25%.
Last year as one of the slowest years on record.
I would acknowledge that we've got a little bit more cautious view than some folks in the market I have seen some much more bullish forecast for high yield issuance.
But in general I think what is informing kind of our view is we've got an environment with higher funding costs, we've got the potential for recession.
And we've got a flattish M&A outlook and so that's what's contributing to our view I would acknowledge George that.
We've got a pretty healthy backlog of first time mandates that did not go to market last year.
Almost all of those are in the leveraged finance space, where there is some definite pent up demand and then leverage loans.
We think it is going to be flattish and again back to kind of March commentary kind of.
<unk> of two halves.
Loans had a very strong start to 2023.
But.
So we expect that that will pick up in the back half of the year.
2022, excuse me okay.
Got it thank you.
Your next question comes from the line of Jeff Mueller from Baird. Your line is open.
Yes, thanks for taking the question Rob you hit on some of this when talking about M&A.
Broadly, but I want to focus on decision solutions in Q4, specifically it pretty significantly accelerated.
Correct me, if I'm wrong, but I thought RMS was in there.
That's currently growing more slowly organically than I guess your heritage solutions. So just anything further you can say on what drove the organic acceleration in decision solutions in Q4, specifically and as it underlying or is there anything unusual like one timers like Rev. Rec true ups for full year use.
Or anything like that thank you.
Okay.
Yes.
Great question.
The 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 the <unk>.
Decision solutions.
A little bit lower reported growth rate print. So we're talking about the importance of kind of looking through that to IRR. That's still the case and so if you look at kind of full year.
At about 11% growth in decision solutions.
And we've really got strength in a number of areas.
I think I use that phrase you know, it's not a one trick pony.
And that's true in <unk>.
Oh I see.
We're up in that kind of mid low to mid twenties range, but we've also got a very nice life insurance business and a very nice banking business.
The <unk> business.
Just got lots of demand not only for the data, but now we've got this lifecycle 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 on 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 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.
Our risk and portfolio management in our balance sheet management and capital planning and reporting.
And one of the areas, where we've had some really nice growth is around our risks.
Brisk integrity <unk> solution as <unk> as you may be familiar.
Insurers are having to implement <unk> 17, so theres 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 kind of a suite of solutions in banking across origination risk and portfolio management and capital planning.
Okay. Thank you.
Your next question comes from the line of Andrew Steinman from Jpmorgan. Your line is open hi.
I just wanted to jump into that M&A organic revenue growth.
Guide of about 10%.
I look at <unk>.
In the fourth quarter coming out at 10% and then the guide really is for it to accelerate to low double digit in 'twenty three.
With that accelerated backlog.
The bias for MAA organic profit growth would be above 10% are there any kind of headwinds maybe non subscription revenues to note kind of.
Just kind of keep it about 10%.
Yes.
One headwind as you know.
Andrew we've transitioned most of the portfolio to recurring revenue I think it's something like 94%.
But in the banking business is where we we do have some still some kind of one time and you've heard us talk about moving away. We've moved almost entirely away from onetime license revenue. We also have some services work.
We've been deemphasizing that and really focusing on the SaaS solutions. So that's that's one place where you might see.
A small delta between kind of IRR and then translating to overall revenue Andrew just to add on to that if you think about decomposing our guide of 10% organic constant currency growth for Ma.
Think about recurring is growing in that low double digit range. When you think about transactional one time declining in that high teens percent range area that makes sense. Thank you.
Your next question comes from the line of Phase all the way from Deutsche Bank. Your line is open.
Yes, hi, thank you.
Two questions on the <unk>.
Midterm target.
First I appreciate the conservatism on the top line I'm curious.
Your margin target is that despite a lower sort of implied top world. So just wanted some more perspective on that is it is it related to the recent restructuring actions and then second related question is you mentioned private credit markets is one of the factors.
As you think about issuance, we've obviously seen significant expansion in that market in 'twenty. Two so curious what your thoughts are around private cloud that both for 'twenty three and as you thought about your medium term targets. Thanks.
Okay.
Good afternoon.
On your question around the Mis adjusted operating margin, we are maintaining our expectation.
Mrs medium term margin to be in the low 60% range.
And certainly acknowledged that that's a meaningful step up.
<unk> the base year of 2022 results and full year 2023 guidance.
This target is reflective of performance within five years.
The key and I think this is the point that you were flushing out.
The key to achieving it will naturally be influenced by the issuance recovery pattern, we experienced in 2023 and beyond that.
That said <unk> medium to long term business fundamentals remain firmly intact and we continue to believe that the disruption in the debt capital markets that we experienced in 2002 was really cyclical it wasn't structural in.
In nature and that view is informed by several data points and observations for example, the stock of date.
<unk> grown over the last several decades the price to value is compelling for our customers. There are strong we're financing needs that can help doctors the future transactional revenue base.
Credit spreads remain around that historical average and overall I'd say that the interest burden is still relatively low for corporates and these factors in addition to the proactive and decisive.
Expense management actions, we took last quarter should help to stabilize the 'twenty three margin in that mid 50% range and that will help us obviously set a good base before expanding to that low <unk>.
<unk>.
Medium term, yes, one other thing I want to emphasize just around while we're talking about Ms margin expenses and I've gotten these questions.
From folks over the last few months.
It is just around <unk>.
Making sure we've got the right resources and.
Want to assure you that we approached the restructuring exercise.
Very very thoughtfully, we monitor over 70 trillion dollars and rate of 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.
Sure.
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 can be de prioritized 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 private credit market has experienced some strong growth over the last.
A 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.
Our role to play in helping both asset managers and investors in <unk> 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 of companies and close in Bdcs.
And we also support them with a range of products across <unk> 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 <unk>.
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.
To support the use cases around us.
Great. Thank you Bob.
Your next question comes from the line of Shlomo Rosenbaum from Stifel. Your line is open.
Hi, good afternoon, and thank you for taking my questions I wanted to ask a little bit about the mis guidance just for 2023.
When you.
Look at the composites and the.
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.
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 John things improving versus things that you can actually see and maybe you can talk a little bit about dead on.
Vis vis what you normally do this year was there any change.
Hi, Shlomo it's Rob.
Maybe what I'll do refi, let me just kind of.
Talk to you a little bit about.
There's several different things that kind of go into.
How we think about it.
The issuance drivers and also kind of what our visibility and confidence level around those refi is one of them.
And the first thing I would say is just around mix and we've talked about that a little bit.
There's obviously a wide range of what's going to happen with leveraged finance.
And.
I think we've got a little bit less certainty around that again, just the fact that there is a wide range of use across wall Street.
It means we have a little less confidence about what's going to happen and that's also contributes to while we have a range.
And our overall guide when you think about the issuance in the coming from the financial institution space.
There, we've got much more confidence as it translates to revenue right because of the kind.
Kind of commercial relationships that we have with with banks around refi, obviously, we've got great visibility into their refi walls themselves.
There is a question about the extent of pull forward that's always a question.
And I would say look we've looked at this before is a really really rough number but.
We kind of tend to think about kind of a little over a third of.
Transaction revenue being supported in any given year bye bye.
Bye bye.
There is refi walls and then you have to look at kind of what do we think is going to happen with market conditions and that gets into.
Rates and spreads spread.
Spreads are.
Very well correlated to default rates, we have great visibility around default rates.
But obviously there's volatility in the market.
I can.
Make spreads move around in any given time I talked about some of the headline risk that exists in 2023.
And.
That's not something that we're able to.
Capture in our forecast, it's those kinds of events are binary they either happen or they don't.
And are great examples.
The kind.
The debt ceiling issue that create some event risk for the market. So.
Can't predict the future, but there are some things that we feel fairly comfortable about that gives us insight into that.
Help us kind of build to that outlook. So hopefully that gives you a feel for it.
Okay. Thank you, Ken if I could sneak in one just housekeeping.
Our DSO was up a little bit sequentially or is any deals that closed, particularly towards the very end of the quarter.
Pushed it up.
Some of this is mark here.
It might be a record for a equation on an earnings call around dsos.
Im participate you are looking at externally reported account.
Accounts receivable over I think three months revenue annualized in Im guessing youre seeing a number.
Of around 115 in the fourth quarter around let's call. It 110 for full year and internally, we're able to do a little bit more of a precise calculation because we can use sales and so if I think about ending sort of sale ending accounts receivable offer divided by three months sales.
<unk>, we get a much lower number of around 71 for the full year.
That 71 days is a little bit up from what I saw in the last year and the driver here is just around the integration of acquisitions into our corporate processes as we bring sort of that same discipline and rigor to the DSO processes of the companies we've acquired.
Okay. Thank you.
Your next question comes from the line of Russell calls from Redburn. Your line is open.
Yes, Hi, Jen <unk>.
Just wanted to go back to this point around the guidance if I may to stall.
And if I pose it this way we've got.
Data that we've been presented historically and that shows that to be at.
It's a 5% refi boom in 'twenty three 'twenty two.
Bye bye.
Defaults, which I think it would be conservative.
The starting point, therefore is 3% growth.
And as George pointed out historical pricing, it's four to five with the potential for positive pricing mix, which would get me to sort of 8% to 10% as the baseline growth for next year that's.
Without assuming any new issuance recovery and you said new issuance recoveries in the low single digit. So I'm just trying to square that with this sort of low to mid single digit guidance because it lets see mob business.
A big gap there between the buyer and what Youll get.
Guidance suggests.
Hey, good afternoon. This is mark here and a restaurant nice to have you on the call.
One other element to it to add to your AD model is the reporting of Mis other revenues for 2023 visiting 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 EMEA revenue set that's really what's driving the difference between sort of the issuance outlook and the revenue outlook. We provided this morning.
Okay.
Okay.
With you on that one.
And then just another question maybe flipping over to decision solutions I. Appreciate it's been a feeling this now but.
While did how much of the growth in Q4 as it relates to pricing.
And how much might be related to you increasing cross sales between the products, where <unk> been investing in.
In that growth.
And if you will.
If you would argue there was upside risk to the guidance if coker M&A activity recovers.
And sorry about the 10% guidance for EMEA.
What was that last bit of the question Im sorry, Russell Yeah, apologies wondering whether there is upside risk to the 10% NII growth guidance, if we see it.
<unk> corporate M&A activity next year.
Oh, sorry this year.
So the M&A guidance.
Yes, 10% EMEA guidance. Thanks.
Let me, let me just start with.
The question about decision solutions and pricing.
And.
<unk>.
The biggest growth engine in decision solutions is our <unk>.
<unk> business and just to give you a sense.
New sales.
Almost doubled in 2022.
And.
We had.
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 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 <unk> is a lot of new customers coming into the market. We're obviously doing a very nice job of bringing those into the Moodys family. When you look at our growth rates relative to the overall market.
But also continuing to be able to provide additional.
Yeah.
Capabilities to folks who are already then using the products and services.
So I'd say, that's actually probably a similar story to a.
Kind of a lesser extent for what we're doing around banking.
We've just got to.
Our suite of cloud based solutions that we continue to build out that allows us to two two.
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 is 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 <unk>, especially just new.
Customer acquisition.
Yeah.
Okay, and then the second point.
In terms of the.
Revenue growth guidance of 10% is there upside risk to that if we see a.
Recovery corporate M&A activity.
I don't I don't really see those two things tied tightly together.
There would be upside.
Upside to the Miss.
Guidance, obviously, but I don't know I don't necessarily think so from a M&A standpoint.
Okay. Thanks very much.
Yep.
Your next question comes from the line of Craig Huber from Huber Research Partners. Your line is open.
Yes, hi, Thank you I guess.
Robert.
You've talked about this let's go a little deeper here.
Your medium term outlook. So that's five years here you are talking about low to mid single digit mris revenue growth long term, which is the same.
The range that you've given 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 would agree on that and stuff and then you think about pricing historically, you've done 3% to 4% pricing, maybe it's a little bit higher than that.
At least 3% to 4% how do you square all of that.
With only up 2%, let's say, 5% on average for the next five years with the base year seemingly being so low is it just being you're being overly conservative here Im just trying to get a better sense of this I get a lot of questions on this thank you.
Yes, I understand that some will view us as conservative and obviously time will tell.
I Hope that's correct Craig.
I guess it just comes back to kind of what I talked about earlier, when we look at kind of a longer term average in terms of overall issuance and where we ended up 2022, and what we see at least in front of us for 2023.
<unk>.
We think implies.
I think in line with our medium term targets.
So I think that's what it comes back to.
But as I said.
The one thing that maybe to think about in terms of are we being conservative I touched on this a little bit earlier in the call is.
While on one hand, we're at.
Relatively similar levels of issuance from pre pandemic.
A little bit lower but not significantly lower.
The mix is different so last year, we had much more issuance coming from financial institutions as a percent of the total then corporates and so as that if that mix shift changes back to what we've seen over the last call. It six seven years.
Pre pandemic then yes, I think in that case, we would see faster corporate growth that might provide some upside to the way we think about the medium term targets.
And then also just on.
The pricing can you guys tell us what you're expecting pricing for mras. This year to be similar question for M&A. Thank you.
Yes, so Craig.
I always kind of target across the company kind of a 3% to 4%.
Kind of annual price increase.
And.
I think we talked about a little bit on the last call but.
What we do in MS, where every year, we do a very detailed.
A review of pricing across sectors and regions.
Based on that we.
Come out with our list prices for the following year.
<unk>.
I think you can expect our list prices for 2023, you're going to be a little bit higher than.
The rate of increase a little bit higher than maybe it has been.
Historically.
The realization of that will depend on mix right, where the issuance actually.
Actually comes from.
Okay.
And a side what was the pricing that you think kind of average for this year.
I'd say it's.
Within that range.
Okay, great. Thank you.
Okay.
And we have a follow up question from the line of Kevin Mcveigh from Credit Suisse. Your line is open.
Great. Thanks.
Rob you've done a really nice job remixing the business in EMEA.
<unk>.
Cross the 50% threshold.
Look at three to five years, how should we think about what the business looks like.
If there's a way to maybe frame that.
Organically versus Inorganically, it's hard to to kind of course deals and things but.
Maybe give us an organic view kind of where the business. It's three to five years from now.
Yes.
Kevin that's an interesting interesting question.
And I guess I might start by saying when we think about integrated risk assessment.
And it's not just M&A.
It's all a moody's.
The rating agency is a really important contributor to but also a beneficiary of that.
This integrated risk assessment strategy that we have.
But maybe a few things Kevin first I think youre seeing us develop scale.
In a few areas beyond our ratings business and we obviously have a world class fixed income research business.
And digital insights that serves investors.
Got in decision solutions I mean, you've heard me talk about a little bit.
Meaningful businesses that are supporting both banking and insurance across.
A set of 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 <unk> business.
That we think has some really industry, leading capabilities, we're really well positioned there I.
I think thats, where youre 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 IRR and so all of this fits together.
Think about that content I mean think about it 70 trillion of debt rated by Mrs.
Data ownership and credit scores on $425 million companies, it's massive economic datasets in ESG and physical risk scores on hundreds of millions of companies and locations.
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 <unk> 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.
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 are 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.
Thank you.
And there are no further questions at this time, Mr. Rob Palmer I turn the call back over to you for some closing remarks.
Okay. Thanks, everybody for joining appreciate the questions and we look forward to speaking with you on the next call.
Good day.
This concludes Moody's fourth quarter and full year 2022 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 the Moody's IR web.
Site. Thank you.
Please wait the conference will begin shortly.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Sure.
Okay.
Okay.
No.
Sure.
Yes.
Okay.
Okay.
Thanks.
Sure.
Okay.
Okay.
Yes.