Q1 2023 Moody's Corp Earnings Call

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 Giovanni Clark head of Investor Relations. Please go ahead.

Thank you good afternoon, and thank you for joining us today I'm <unk> head of Investor Relations. This morning, Moody's released its results for the first quarter of 2023 as well as our revised outlook for select metrics for full year 2023.

Earnings press release, and a presentation to accompany this teleconference are both available on our website at IR don't ladies don't come.

During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end up 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 of 1995 in accordance with the Act I also direct your attention to the management's discussion and analysis section and the <unk>.

Risk factors discussed in our annual report on Form 10-K for the year ended December 31st 2022, 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 statements set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.

I'd also like to point out the members of the media maybe on the call. This morning in a listen only mode.

Saba, Moody's President and Chief Executive Officer will provide an overview of our results key business highlights and outlook after which we'll be joined by Mark Kaye Moody's Chief Financial Officer to answer your questions I will now turn the call over to Rob.

Thanks, Giovanni 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.

And provide some insights into what's supporting our growth outlook and this quarter I I'm also going to drill down a little bit on our decision solutions line of business in EMEA.

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 some 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're also continuing to unlock the potential of M. A and it's great assets and businesses and those include one of the world's Premier credit and economics research businesses.

A data and information business that includes one of the world's largest databases on companies.

And our award winning decision solution businesses, serving Ky see banking and insurance workflows and together.

They delivered 10% <unk> growth as we continue to enhance and extend our mission critical data analytics and workflow solutions.

Now, while <unk> 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 M. I asked really capitalized on strong.

Investment grade issuance in the first quarter improve.

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 <unk> 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.

And at the same time, we're 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 at MA revenue grew.

6% or 9% on a constant currency basis.

<unk> grew 10% and we had solid growth across the board and data and information research and insights and decision solutions.

Are you 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 are down.

Down 3% in the quarter. Our overall adjusted operating margin was 44, 6% and that was up approximately 200 basis points versus our full year 2022 margin again, reflecting the benefit of those cost efficiency initiatives and.

And adjusted diluted earnings per share was $2 99, and that includes 75 cents of aggregate benefits from the resolution of several outstanding tax matters.

So I mentioned earlier the upticks in usage that we experienced across several products in the first quarter and are 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 Dot com was up approximately 20% from the prior year period in that.

That's important for a few reasons first as you've heard me say before we've 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.

Laos 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 opportunities.

<unk> 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 MAA offerings and.

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 <unk> solutions grew by almost 30%.

We are 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 of 2022 and you've 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 IRR growth outlook for EM Act.

Now this past quarter, EMEA delivered 10% <unk> growth, which as I mentioned was consistent and strong across all lines of business.

I'll start with data and information that includes Orbis, one of the world's largest databases on companies plus.

Plus our ratings and news feeds and 300 million ESG scores that grew <unk> at almost not at around 9% and in addition to the very strong stand alone demand for private company data in Orbis. It's the integration of this data across MH offerings, that's helping to drive growth.

In other lines of business and this includes the integration of Orbis company data into our credit lens lending solution for banks and the integration of our ESG scores into insurance and banking underwriting and portfolio of solutions now.

Now moving to research and insights, which includes our leading credit and economic research business and a growing suite of predictive analytics.

Also grew <unk> by 9% this quarter and we're seeing some strong and sustained demand for our economic data research and models, particularly amidst distress in and I guess I would say around the banking sector and this includes our new EDI FX platform, which combines our oh.

Ward winning.

Our risk models with Orbis to analyze credit risk for any company in the world and we recently completed the integration of of EDI FX alongside credit view into the Moodys Dot Com Gateway, which provides direct access to a growing suite of Moody's products and enhances our customers experience and enables further cross selling.

<unk>.

And finally decision solutions.

Which includes our businesses, serving <unk> insurance and banking where flows grew <unk> 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 workflow.

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 <unk>.

<unk> and we've discussed our <unk> business on earnings calls before.

This business supports customer Onboarding perpetual Ky monitoring and sanction screening on customers suppliers and other third parties and we're in.

Strong growth in this area has been driven by our ability to cover really all aspects of <unk> and anti money laundering activity, bringing together, our vast datasets on companies and people plus.

Plus AI enabled risk intelligence and cloud based workflow orchestration, that's delivered through our new passport lifecycle platform.

So moving on to insurance. The addition of RMS has now given us a considerable business, serving underwriting 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 launch.

This platform is our new climate on demand solution that integrates RMS as climate and physical risk models with our extensive orbis and commercial commercial property datasets to provide a sophisticated on demand financial quantification of physical risk that enables a holistic view into our company's <unk>.

Closure 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 finance and planning, which includes things like impairment accounting and regulatory capital reporting.

And our most significant recent product launch in this space and one that is contributing to our double digit growth in banking.

What's credit lens for commercial real estate, which you've heard me talk about on prior calls and that integrates our market forecasts are commercial property data with our SaaS lending solution credit lens 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.

Of our solutions, including our automated financial spreading our platform and our <unk> AI review, which help customers be even more effective and more efficient and.

And it's that combination of data analytics cloud based tech and innovation that powered us to the number one ranking in charters risk Tech 100 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 based.

Serving one of those use cases, and then to extend and 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 and 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 deepen 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 Cecil on these calls to <unk>.

Upgrade those processes.

And in 2022.

<unk> leveraging some of the same data and analytics capabilities, we broadened our relationship further to support their lending needs through a combination of our AI enabled spreading tool and our credit lines.

Loan origination software that includes credit score.

So we did the same to support their forecasting and stress testing needs, bringing together another five 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 three years, we've three or four years, we've grown the air or from this relationship fivefold and as you can see on the far right. This AAR are then shows up in different MAA lines of businesses with <unk>.

65% decision solutions and 35% in research and 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 is still further potential and we're in active discussions with this bank about supporting their Ky see 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 law.

Average capabilities across all three lines of business and really more broadly across all of Moody's and.

And that is our integrated risk strategy at work that is what makes our solution so valuable and so sticky.

So let me move to mix for a moment issuance was stronger in the first quarter of 2023 compared with the fourth quarter of 2022.

And while volatility and uncertainty constrain 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 would 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 in credit spreads and.

Growth in private equity activity among other things.

So staying on <unk> 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 that.

2% to 3% range over the long term and that's in line with historical average over several decades.

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 Moodys in the 3% to 4% range and third there are long term tailwind from the ongoing development of capital.

Markets around the World and this includes <unk>.

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 us 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 tailwind 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.

Our remarks, and Mark and I would be happy to take your questions over to you operator.

Thank you if you would like to ask a question. Please dial star one on your telephone keypad. If you are on speakerphone. Please pick up your handset and make sure. Your mute function is turned off so that your signal reaches our equipment. They will ask you that you. Please limit yourself to one question you will have a chance to rejoin the queue for a follow up again that is star.

Wanted to ask a question. Our first question comes from the line of Owen Lau with Oppenheimer. Please go ahead.

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 he was very helpful. Could you. Please do the same and give us an update this quarter. Thank you.

Oh, good afternoon, I'm very happy to do that.

Central case assumption is that the near term capital market activity is going to continue to be impacted by some of the recent straight as we've seen in the banking sector as well as sort of those ongoing inflationary in recessionary concerns before improving as we progress into the latter half of the year.

While we have to acknowledge that there's been strong sequential improvement in issuance volumes from the fourth quarter to the first quarter, we remain cautiously optimistic and that's maintaining our full year revenue guidance of low to mid single digit percent growth base.

Based on the strong first quarter investment grade and infrequent financial institution issue activity.

A slightly derisked our year to go forecast, we now expect first half and minus revenue to decline in the mid to high single digit percent range.

In second half <unk> revenue growth in the mid to high teens percent range and that's again based on our expectation for market volatility due partially abate in the latter half of 2023.

It's also worth noting that this outlook is now more in line with the historical seasonality, where the proportion of transaction revenue tends to be greater in the first half versus the second half of the year.

We're also pleased to reaffirm our expectation for full year 2023, MA revenue to.

<unk> increased by approximately 10% and it's too early to assess if there are any near term.

Headwinds related to the disruption, resulting from in the banking sector.

And as you heard from Rob we are experiencing increased product utilization customer engagement.

All of our risk solutions. During this period of that financial market uncertainty and given that MA revenue is highly recurring approximately 94%, we still expect absolute dollar MA revenue to progressively increase over the course of the year with second half revenue growth anticipated to be slightly <unk>.

<unk> vis vis the first half and that means we're forecasting EMEA second quarter adjusted operating margin to be flattish.

Q1 results before improving in the second half of the year and as we fully realize the benefits of our restructuring program and additional cost saving initiatives.

Our net total Moody's operating expenses. The guide here is for an increase in the lower end of the mid single digit percent range. Its revised just slightly upwards on the expanded debt restructuring related charges.

As well as our expectation for sort of a modest FX headwind.

And then finally, we don't anticipate the future resolution.

Of uncertain tax positions to sort of reoccur to the same extent in future quarters.

Got it. Thank you very much we really helpful. Thanks.

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

Hi, Good morning, I guess good afternoon. Thanks for taking my question I wanted to ask a little bit more specifically on the impact from.

From FCB and kind of the broader banking sector turmoil on the sales pipeline in M&A.

Mark you just said that.

It was a little bit too early to tell but if there any color you could provide on.

Anything outside of usage increases it seems like that would bring in additional sales opportunities, but also understanding that some of these end markets are these clients would have other things that they're focused on spending money on in the near term any any additional color on how youre thinking about that would be great.

Hey, Andrew its 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 you know kind of three three.

Three dimensions in the first.

You know it was a very active period for our rating teams as you'd imagine just to give you a sense. We are right 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 would expect and you saw the kind of the uptick in usage.

<unk>.

For our research. We also then thought about what could that mean in regards to mis mis issuance and.

January and February were stronger issuance months, then 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.

The issuance outlook for the year.

And then third you know kind of zooming in on your question around M&A.

Again, just to give you a sense, we've got relationships with over.

2500 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 would expect.

<unk> 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.

I've gotten questions before about the impact in the financial crisis 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 a video synchronic attrition here with a few of these.

Bank failures.

But I think over the kind of over the medium term. Our view is that theres going 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 are 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.

Okay.

Your next question will come from the line of Kevin Mcveigh with Credit Suisse. Please go ahead.

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 maybe I know some of this restructuring, but maybe just give a sense of what's driving the outcome on our leverage over the course of the year, maybe just a little bit deeper on Moody's and kind of the M. A N M.

Miss if he could mark.

Kevin get opportunity to I'll talk.

Moody's level full margin and I'll give some insight into how the full year is progressing and certainly happy to take other questions on MA margin at later on in the call. So is it management team where can.

Emitted team proving.

Moody's margin and accelerating the topline growth here.

<unk> for the full year is point adjusted operating margin in the range of that 44% to 45% and that implies around 200 basis points of margin expansion at the midpoint that reflects our view that the cyclical market disruption.

Experienced last year as well as some of the concerns in the banking.

Likely to abate over the coming months and in addition, you know over the past several months to the point you made we have taken prudent yet aggressive actions firm wide to streamline our expense base.

And we've done that while concurrently ensuring sufficient investment and resources to maintain the high ratings quality within mis as well as to support innovation and organic investment in a M E. As we execute on our strategic Roadmaps. So if I translate that into numbers used.

Our actual Q1 results as a baseline for the full year 2023, you can expect approximately 100 to 150 basis points related to increased operating leverage from both <unk> and Mrs.

Nate of ongoing hiring activities and strategic investments.

Approximately 350 to 400 basis points related to the expense benefits.

From some of those actions, we've taken to lower and control costs associated with either real estate rationalization.

Reduction in staff or other efficiency initiatives.

And then with a partial offset there of approximately 300 basis points from incremental costs associated with the annual salary and promotional increases as well as a reset of our incentive compensation.

Thank you.

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

Hey, thanks, so much.

Wanted to ask the MAA.

Right.

A question a little bit differently.

Wanted to understand.

Sort of sustainability of double digit.

Our growth how do you see that playing out.

Great usage numbers that you gave that was really helpful is there a component of price that is linked to usage or is it more that in your negotiations on price you sort of point to you said Jan and try to drive price that way.

And then also just.

How you see the sustainability of the growth continuing just if you do see budget tightening or cutting back.

How is that sort of been in the past during challenging times for your customers.

Hey, Tony it's Rob I'll take that one.

So two parts to its 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 with our customers. So the first of those and they are really for the first of them is digital transformation and many many many of our customers are going through a digital transformation.

And 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 or supplier. So when they're making a loan to someone theyre investing in and so we've got a great opportunity to help them with that company 360.

Degree degree view of risk third is around regulation there are.

When you serve.

Obviously financial serves a big part of.

The customers that we serve.

They are constantly new rules and regulations that are being imposed on the industry, they're evolving in many different ways our.

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 theres, a theres a theres a real need and desire to really understand the.

The financial quantification.

Of exposure to weather and climate change and you heard me mentioned that on the call. So.

Right thing as we're having these conversations with our customers and it's bringing in you heard me give that example of that bank.

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 in the medium term growth drivers that are underpinned by this now as it as it relates specifically to pricing we talk about an MAA unapproached of value based pricing. So we want our customers to drive.

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 generally how we think about it.

Tony This may be an implicit in the question you were asking but part of the reason we introduced <unk> in the first quarter of last year is that it's a fabulous leading indicator of performance.

Because by design. It provides that 12 month forward looking view Intel growth trajectory and Thats also progress towards achieving our medium term targets.

Yes.

Thank you.

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

Yeah, Hey, Hello, everyone just wanted to come back to.

The regional bank discussion from earlier I heard your comments on M&A, probably agree that could be an opportunity in the future but would also.

Ask that same question on MFS, maybe it's not as simple of an answer but.

With regional banks are having more stress more regulations to them are coming to them. Just wondering if you think that could be an opportunity actually that some of that bank lending actually.

Most of the capital markets like we've seen over many decades and decided it for Europe , but but maybe even in the U S. Now I understand they are lending is a little bit more.

Smaller smaller ticket sizes right.

Market, but wondering if there could be some opportunities there and then also maybe maybe even some opportunities in structured as some of these banks I'm trying to figure out how is the deal with <unk>.

These new regulations coming down the pipe potentially so any early looks will be great.

Hey, Alex it's Rob I think that's.

A reasonable thesis and it's probably too early to tell.

We haven't adjusted the issuance outlook at this time, either up or down.

In regards to that but that's certainly one.

One of the things that we're considering as you know as banks.

No.

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 is 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 gonna watch, Alex, but probably a little too.

Early to call.

Fair enough, we will watch it.

Your next question comes from the line of Ashish <unk> with RBC capital markets. Please go ahead.

Thanks for taking my question I, just wanted to focus more on the banking vertical and in M&A I was wondering if it's possible to quantify how big that your exposure is and particularly on the regional banking side and then obviously you talked about the increased focus on risk management being positive and or the midterm, but I was just wondering how how do your.

<unk> sales conversations trending that those banks.

Seeing increased focus.

All three risk management, even in the near term. Thanks.

Ashish Good day. Good afternoon. 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've been around 14% to the MA you could anticipate continuing to see ongoing growth of products that we sell to banks, which extend the commentary here.

Rob This morning, not just banking related debt products themselves and the focus that we had as an initial 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.

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 and ultimately into the network and that the banks have yeah, maybe I'll just add to that you know kind of in the immediate term.

You know obviously, we highlighted the increased usage that we saw in our products but.

We were we were literally doing kind of daily stand ups, where we were in touch with our banking customers and prospective customers around a few different themes and one as you can imagine our banking customers. We're in a period and still are of enhanced kind of credit and counterparty monitoring and there. We've got obviously a number of tools that can help.

We have.

Set of asset liability management solutions, and I noted the significant increase in usage by our existing customers, but that also gave us an opportunity to engage in a number of new discussions and then third is around <unk> and wallets hard for banks to deploy a new cable IC solution, you know kind of in the span of a week.

Just given what was going on we've seen an ability to have an increased conversation.

Around <unk> see it at a broader set of financial institution. So in general.

You know there are some there are some immediate term opportunities and we see some medium term opportunities.

That's great congrats on solid results.

Thanks.

Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Alright, thanks, good afternoon.

It appears that 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 reflect aftershocks from the regional banking prices at the end of the first quarter could you talk about somebody shouldn't trends youre seeing real time.

Yeah.

Yes, George it's Rob I'll start.

You know I mentioned and we showed in our webcast deck that.

First quarter issuance through March was roughly 29% of our <unk>.

Full year outlook and I mentioned also that that's pretty consistent with the average that we've seen over roughly a 10 year period, excluding the pandemic than last year.

Our expectations are.

Going into this year, we're probably somewhere closer to 25% so by not taking up our issuance outlook I think George you could.

Think of that as Derisking, our issuance outlook for the rest of the year a bit but that feels reasonable given just the seasonality patterns that I just talked about and I would also say George.

There are a couple pretty straightforward reasons that we didn't.

Take up or adjust lets say the issuance guidance one.

Yes, there were some green shoots.

But you know I think we just decided it just too early for us to change our full year issuance outlook January and February were good months March was was choppy and second we've got plenty of headline risk with three quarters to go we saw that in March.

With the banking sector, we still got the debt ceiling to navigate.

So we just thought it was too early to make to make a change.

And I guess, just kind of thinking about what are we seeing at the moment.

Markets are pretty constructive.

You know, we're going to see how corporate earnings all shake out and what the appetite is going to be for M&A.

The market feels more optimistic and in late April than it did in March.

You know M&A has been a has been sporadic you've seen it more in defensive sectors.

But it does feel like there is some pent up demand, we're hearing bankers talking about pipelines building for the second half of the year into 2024.

And and look issuance investment grade issuance.

While it started off quite strong.

It did slow down in mid March given what was going on with the banks and so we will see in early May we've got I think a fair bit of economic data, that's going to come out and.

If that goes well, we may see a pickup in issuance from corporates and the last thing I would say Georges.

The banks have there have been windows that have allowed the banks to start clearing some of the.

The big LBO backlog that they had sitting on their balance sheets and so that's important to kinda on sticking those markets. So.

Again constructive tone.

But we'll.

We will see.

Got it very helpful. Thank you.

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

Thanks, So much wanted to focus a little bit more about some of the uncertainty going on in the banking sector, but maybe take it to the next level I know theres a lot of concern about the impact on the commercial commercial real estate sector.

No you've got exposure there in both lines of your businesses can we just talk about what's going on there.

Yeah, let me.

Let me tackle this so Jeff first of all good to having the call.

Let me tackle this may be two ways.

One just kind of how we're thinking about the U S banking system and then second you know.

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 mif's 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 a L. M risks. They are focused on stability of deposit funding profitability pressures and and as you mentioned Jeff commercial.

Commercial real estate exposure.

You know when we think about what's going on with 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.

Just to put it in perspective.

<unk> U S banks hold about half of the U S commercial real estate 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.

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.

<unk> 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 whats going on with bank lending standards, giving us a lot of it's been backstop. 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 a high quality data and analytics and insights to help them really understand what they need to do around that asset class.

Okay. Thanks, so much for the color.

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

Great. Thank you 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.

Want to ask you what your incentive compensation numbers.

For the quarter and also for all four quarters for last year, what was that please thank you.

Hey, Greg.

Yeah. So.

Yeah, we haven't changed any of the outlook so.

For leveraged finance.

You know, we're looking at high yields.

25% and.

And leveraged loans.

Still remaining roughly flat and I gave you a little bit of color on it.

What we're seeing in the market.

Hopefully that gives you some sense.

In the first quarter of 2023 out incentive comp was at $89 million compared to $76 million in the prior year period. I'll also just note 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 putting the context for the full year 2023, we expect incentive compensation to be between 340 and $360 million.

Or approximately $85 million to $90 million per quarter for the remainder of the year.

That is 15% higher at the midpoint and then the total incentive compensation, we accrued for in the comparable full year period in 2022, and Thats simply a result of resetting our incentive comp baseline for the year based on annual financial targets and just because there's a 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.

Yes, Craig the one other thing I, maybe I'll I'll I'll add just and thinking about.

Our outlook, which is unchanged.

Maybe how could you think about puts and takes just around around leverage finance.

I think in general the leveraged finance probably represents the potential for the most upside.

So our outlook just if we if these markets start functioning robustly again.

My sense is there's lots of dry powder and pent up demand, we might see an uptick in <unk>.

Sponsor driven M&A activity.

We don't have a particularly we don't have an aggressive forecast for M&A built into our outlook. So if we see that pick up.

So we could see some upside to how we're thinking about it.

Mark what was incentive comp numbers.

For all of last year, thanks, guys.

Sure no problem and incentive compensation for 2020, yet she was as follows.

Approximately <unk> <unk>.

$76 million in the first quarter 66, 81 third 82 in the fourth quarter.

Great. Thank you.

Your next question comes from the line of Andrew Steinman with J P. Morgan. Please go ahead hi.

Hi, It's Andrew I went to today's slide 12, and I added up the three growth drivers and this is for kind of aggregate M. I as long term revenue growth and I got in 6% to 9% I was hoping that that was the right thing to do to add the three together I was wondering for the 6% to 9% long term growth when you say long term what's your.

Timeframe for long term at that kind of lastly, I want to make sure that the medium term numbers that you gave us in January if that is kind of five year revenue growth of <unk>.

Low singles to mid singles is still in place.

Good afternoon, Andrew So long term.

Revenue growth algorithm doesn't have a set base here. So we're not looking to the findings of the base year or the end period.

From which future performance could be extrapolated instead, the models 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 three to five year window and greater reflecting the mis revenue projection over that defined period of time and then lastly, we are not withdrawing <unk>.

Medium term mis revenue guidance and that's true of all of the medium term numbers that were given in January right that is that is correct. Okay. Thank you very much.

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

Yes, hi, thank you.

And just I wanted to follow up on the <unk>.

<unk> ramp up work and apologies if I missed this but I noticed that you increased your.

<unk> guided to up mid single digits from low single digits.

You give us a sense of like what what's driving that and which particular segment is that coming from.

You haven't changed the margin outlook for any of the segments.

Good afternoon, and thank you for the question. So we expect the full year 2023 operating expenses to increase at the lower end of the mid single digit range.

You're absolutely right that is above our prior forecast of low single digit percent growth will be higher end of low single digit percent growth.

<unk> driver for this I 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 look computed off of and we would back out that restructuring piece.

I also wanted to note.

Operating expense segment guidance.

It would be along the lines of a low to mid single digit percent decline in Ms 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 .

Okay.

Your next question comes from the line of Jeff <unk> with Baird. Please go ahead.

Yes. Thank you.

<unk> Ky see just as you think about the sustainability of the long term growth. How do you think about Tam or market penetration I guess 1700, plus existing customers that you cited on the website that seems awfully low to me at least and then in the near term.

With passport lifecycle.

Just help us understand how far along you are with clients upgrading to it.

If the upgrade cycles.

Really significant to near term revenue trends. Thank you.

Okay.

Speakers you may be on mute.

Oh, yes, sorry, and indeed, we were it was such a great answer too.

I'm 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 passport.

And that is really the front end the workflow for US 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 or analytics or models.

All into a holistic solution and so that is that's a new opportunity for us.

And we're seeing it.

Good bit of enthusiasm from our customers around us as you think about the the growth drivers within the market I would say there are a couple of things one.

There's still a lot of <unk>, that's being done in house.

At financial institutions and companies. So theres, just a I think a very big opportunity to automate.

K y C.

Workflow within financial institutions, Thats still there still remains a significant opportunity, but the other thing thats going on is this is broadening from know your customer to know your.

Yes, counterparty and eventually I'm going to have to come up with a better name.

One of the.

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 were certainly seeing that with supply chain, where customers are coming to us and say hey, well, 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 that's that's I think kind of broadening this market and supporting.

Supporting growth in fact, we just did a survey about.

It's something like 70% of firms that we surveyed were increasing their focus and spend.

In this space are around <unk>.

Supply chain so.

Thank you for that gives you a sense yet.

Your next question comes from the line of Russell <unk> with Redburn. Please go ahead.

Yes, hi, thanks for thanks for having me on.

Wanted to start with a question on pricing.

<unk> you expect that.

To be a driver of growth in 2023, particularly in EMEA. So I was wondering if that would be above the 3%, 4%, giving us the long term protection on slide 12.

Okay.

Yep.

So Russell it's Rob.

There is really kind of no change to I think either the pricing opportunity or our approach to pricing either in Ms or <unk>.

And let me just kind of recap for just a second on some of our previous calls I did mentioned in Ms.

You know as we do every year.

Last year, we conducted a detailed review of our pricing across sectors and regions.

Again, Thats, what we always do based on that work.

We anticipated that the rate of increase in list prices for 2023 would reflect a bit more of an increase.

That said, our actual pricing realization it really as it always does then depends on issuance mix because we do not just apply a an increase kind of ratably across the entire customer base.

So I can't really get into more detail than that I'm sure. You can appreciate that but I am comfortable with our pricing opportunity for 2023.

Within that broader 3% to 4% opportunity across the firm.

Okay. Okay. Thanks.

Yes.

B the city, one, but let's go for it you spoke to ESG and climate integration as being kind of one of your four structural growth drivers for the business and we just heard from one of your peers that growth in this area is being negatively impact by politics in the U S. In the near term I. Appreciate your business and solutions are servicing a slightly different user base for slight different.

Use case, but are you seeing a similar niche a net negative impact on new sales growth yeah.

Yeah Russell I think this is why we're trying to be really clear about.

What do our ESG and climate solutions really measure.

And I almost feel like Theres, a little bit of and ESG 2.0 moment going on across the industry. Because that's what customers are asking what are your scores actually measure. So let me start with with what we're doing in the rating agency you've heard me talk about we've rolled out over 10000 and the name is.

Credit impact scores. So we have met with all of our issuers and had a dialogue with them about how E S and G factors impact their credit profile, we've been very clear because that's something that investors wanted to understand so there's a very clear linkage between those score.

<unk> and how we think about credit ratings and are not new we have always considered ESG factors in credit ratings. It's just we haven't made it as transparent as we are now doing the second thing is.

There is a there is a desire.

Really.

Integrate ESG and climate considerations into a broad range.

Range of processes, all around the firm and one thing that we've heard from our customers is hey.

I need to get a sense of my supply chain, but I've got.

30000 entities that.

Our customers.

Tens and tens and tens of thousands of entities. So it's not just scores on public companies, but it's how do I get a better sense of quick and dirty of the ESG profile of who I'm doing business with whom I suppliers are and the third thing I would say Russell is.

And this is this is in part why we made that.

The significant investment in RMS is because I think there is a lot of immediacy around understanding the impact of extreme weather and climate change on physical risks. So theres two things our customers we hear a lot about please help us understand and quantify.

Physical risk relating to weather and climate and please help us understand the financial implications of carbon transition and so again that is the positioning that we're taking is really focusing on the financial quantification of those factors for our customers and then integrating that.

Into a broad range of the workflows that we support for our customers.

Yeah.

Thank you.

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

Great Hey, just one quick follow up.

I Wonder if you could just refresh your thoughts on buyback, particularly given it seems like there's some incremental cash flow from some of the tax benefit you saw in the quarter, but just any thoughts around the buyback.

Thanks, Kevin.

Capital planning and allocation strategy is unchanged and we are committed as a management team to anchoring our financial leverage around a triple B plus rating and as I've spoken about before we believe that's the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital power.

Given that our gross leverage as of quarter end is above that two and a half 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 and.

We still plan to return approximately $800 million.

Global free cash flow or about 53% at the midpoint.

Of our projected free cash flow guidance range to our stockholders and that of course is subject to available cash market conditions M&A opportunities other ongoing capital allocation and if I broke that down.

Sub components that would be $250 million approximately and share repo.

Inclusive of the $41 million, we did in the first quarter as well as to distribute approximately $550 million of dividends.

Through a quarterly dividend of 77 cents per share, which is 10% higher.

And then the first quarter 2022 quarterly dividend and then one final but important point that I 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 at while continuing to monitor.

Operating environment and as it develops.

Okay.

Crystal clear thank you.

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

Thank you I just wanted to follow up on your earlier comments on RMS and ESG as well.

On ESG can you just remind us what you are totally issue revenues.

At the end of last year in this quarter and the growth rates and then something similar in RMS I know you gave some qualitative color, but just.

As a as a total iron man.

Is that a growth rate doing listen when you first acquired it.

And Manav, let me, let me start with with RMS and I'll, just kind of recap.

2022, and how we're thinking about 2023, but in general I would say, we feel very good about our ongoing synergy and integration efforts.

And we are very excited about the value of the.

The data the analytics and the expertise of the team.

So last year, we achieved mid single digit sales growth that was what we were targeting this year inclusive of synergies and those are important.

To get that sales growth to high single digit for the year.

Also while we're on the topic of RMS.

We've also invested to accelerate the build out of that intelligent risk cloud based platform that I mentioned in.

The reason one of the reasons. That's so important is when we're rolling out something like climate on demand, where theres a lot of.

Near term customer demand for something like that by having that clause.

<unk> based platform it was very easy for us to to.

You know to roll that out and get that launched we've also been able to launch our ESG for underwriting offering.

And we're just in the process now we just had our first customer win for a new net zero underwriting module. So you heard me talk about understanding physical risk integrating ESG understanding the impact of carbon transition all three of those things are things that are supporting.

You know that we're doing in terms of product development and supporting sales growth at Rms.

Full year 2023, and we're projecting ESG and climate related revenues to also increase in that high single digit percent range and that would be also the actual 2022 full year results of $189 million and Manav one other thing I'll steer everybody too.

In a couple of weeks, we've got our annual conference called Exceedance I think it's the second week of May.

And so if you want to learn a little bit more about what RMS is doing we're going to have several important product launches and partnerships that we're going to announce that week. So.

That's a good opportunity for people to dial in and learn more.

Got it thank you.

Again to ask a question press Star One your next question will come from the line of Simon <unk> with Atlantic Equities. Please go ahead.

Hi, everyone. Thanks for taking my question.

Questions will be.

Okay.

Opex because.

Obviously issuance issuance.

With upsides.

So I don't expect I guess.

And the high incremental cash flow coming from that and I was wondering if you could talk a little bit more about.

The priorities of that deployment of that incremental cash flow shouldnt, what should happen in maybe the pipeline of M&A opportunities you see right now and how that's developing given the market environment, we see.

In terms of capital planning and allocation.

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.

Some of the high priority markets that we've spoken about on the call today that ultimately are going to enrich that ecosystem.

Data analytical solutions and insights.

After deploying any investment dollars, we're going to look to return that capital to our stockholders through through dividends and through share repurchases just wanted to come 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 ad.

Despite sort of the lower net income vis vis the first quarter of 2022 and that improvement in working capital was driven by higher 2021 related incentive compensation incentive compensation payments that came through in the first quarter of 'twenty two.

Yes, Simon it's Rob also.

Just I think your question was in regards to Moody's M&A right.

Yeah.

So.

Yeah I thought so.

Just on that topic.

As I've always said you know we have a we have a great team.

We have a well defined growth roadmaps.

We are informed by customer.

Customer needs market trends.

And it's interesting because when you have a.

A meaningful kind of dislocation like we had in the markets last year.

Oftentimes, you'll see kind of a disconnect between buyer and seller expectations and it takes some time.

To kind of be able to bridge that gap unless you've got sellers who have.

You know our capital structure or some other trigger that is forcing them to sell oftentimes what you'll see in our spaces.

Folks will sit on the sidelines until valuations improve and it's interesting because we have seen kind of a bifurcation in valuations between.

High growth companies that are profitable, which are still commanding a premium.

High growth companies that are unprofitable less so and lower growth companies and <unk>.

So.

I think that kind of informs you know.

It starts to inform buyer and seller expectations.

Okay.

Alright. Thanks.

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

Yeah, Hey, guys I know, it's late in the call, but just a quick follow up on the EMEA margin.

I think you said something about flat in the second quarter and sorry, if I missed this and I assume looking at your guidance that we should get some nice inflection in the back half, maybe maybe ended like 33% or so.

And the <unk> is that a is that a good run rate then to think about next year I know, it's early but maybe just talk a little bit more about the MA margin. If if you haven't addressed it. Thanks.

Alex the Emmy margin as we think through to the second quarter is expected to be relatively flattish.

To the first quarter and let me do you expected to progressively increase.

Over the remainder of the year sort of in line with both revenue growth and <unk>.

And as the benefit from our expense actions and it begins to take place. It is a little bit too early for us to think about 2024 and just yet.

On the margin for the first quarter just two minutes on this and there were two primary impacts in terms of why the margin in Q1 was a little bit lower than last year.

First we accelerated some of the opportunistic investments.

In the business and that it could be product development technology sales deployments et cetera.

Secondly, there is an element of timing related to both the revenue and expenses on the revenue side, we had a favorable revenue recognition in the prior year period, and then on the expense side Youll recall, Alex that the first quarter of 2022 at a relatively low level of investment and because we had accelerated some of that work into the fourth quarter of 2021.

Okay. Thanks, and then just maybe while I'm on here.

On the <unk> side.

I think.

Again, maybe this is just the currency et cetera, but like I think the dollar amount of our actually dropped quarter over quarter not sure. If you addressed it but maybe just flesh that out as well.

Thanks for the question Alex your intuition.

As usual was spot on here. So we introduced it just as a reminder.

Our annualized recurring revenue in the first quarter of last year, and we continue to emphasize it is a very meaningful growth metric for MAA 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.

Probably just worth a second to do a quick refresh of definitions right. So <unk> a constant currency organic metric and utilizes a single set of FX rates for each calendar year.

And our IRR table in the back of the.

The quarter's earnings release translates both current period, which is the Q1 'twenty three and prior period Q1 'twenty two at the same rates rights with the idea of expressing sort of this constant dollar growth rates. So.

Sequential figures within the euro comparable but those that are across yours or not and if I adjust for the FX rates, what youll find is that approximately $80 million in.

<unk> in 2023 and was not reported simply because of that FX movements 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 <unk> to make it more comparable to the 2022 number you'll see that net growth comes through in our reported figures.

Alright fantastic thanks for the clarification.

And we have no further questions at this time.

Okay. So.

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

This concludes Moody's first 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 the Moody's IR website.

You may now disconnect.

Please wait the conference will begin shortly.

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