Q4 2023 Moody's Corp Earnings Call

Good day, everyone and welcome to the Moody's Corporation fourth quarter and full year 2023 earnings call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company. We will open the conference up for question and answers following the presentation.

Operator: Good morning, everyone, and welcome to the Moody's Corporation fourth quarter and full year 2023 earnings call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

Operator: At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

I'll now turn the call over to Giovanni Cox head of Investor Relations. Please go ahead.

Shivani Kak: Thank you and good morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2023, as well as its outlook for the full year 2024. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures.

Giovanni Cox: Thank you and good morning, and thank you for joining us today I'm sure Bonnie Coke head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2023 as well as our outlook for full year 2020 call. The earnings press release and the presentation to accompany this teleconference are both available on our website at IR.

Adult Moodys dot com.

Giovanni Cox: 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 a reconciliation between all adjusted measures referenced during this call and U S. GAAP.

Shivani Kak: Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call in U.S. GAAP. I call your attention to the Safe Harbor language, which can be found at 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, Discussion, and Analysis section and the Risk Factors section. We will discuss these and other factors that could cause actual results to differ materially from those contained in any such forward-looking statements in our annual report on Form 10-K for the year ended December 31, 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 Statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward- I'll now turn the call over to you.

Giovanni Cox: 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.

Giovanni Cox: 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.

Giovanni Cox: Boom 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.

Giovanni Cox: 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 would also like to point out that members of the meat maybe on the call. This morning in a listen only mode I'll now turn the call over to Rob.

Speaker: Thanks, Shivani. Good morning, and thanks to everybody for joining today's call. We're here from a snowy New York City.

Rob: Thanks Giovanni.

Rob: Good morning, and thanks to everybody for joining today's call. We're here from a Snowy New York City.

Speaker: I'm going to start with some highlights from 2023 and then discuss our expectations for 2024. And after my prepared remarks, Steve Tulenko, who's the president of Moody's Analytics, and Mike West, the president of Moody's Investor Service, will be joining me, along with Caroline Sullivan, our interim CFO, for the Q&A portion of the call. And before we get into it, I have some very exciting news. As you may have seen this morning, we announced the appointment of Noemi Ulan as our new Chief Financial Officer, and she's reporting directly to me.

I'm going to start with some highlights from 2023, and then discuss our expectations for 2024 and after my prepared remarks.

Rob: Steve to linker, who's the president of Moody's analytics, and Mike West The President of Moody's Investor Service will be joining me along with Carolina Sullivan, our interim CFO for the Q&A portion of the call.

And before we get into it I have some very exciting news as you may have seen this morning, we announced the appointment of Nuomi, along as our new Chief Financial Officer, and she is reporting directly to me and know Amy brings a wealth of knowledge to Moody's after nearly 25 years in senior roles at global public companies, including <unk>.

Speaker: And Noemi brings a wealth of knowledge to Moody's after nearly 25 years and senior roles at global public companies, including most recently as CFO of Dayforce, formerly Ceridian, and over a decade with global enterprise application software provider SAP, during which it transitioned to a global software-as-a-service business model. So as CFO, she's gonna lead the global finance organization that includes accounting and controllership, financial planning and analysis, financial systems, investor relations, strategic sourcing, and procurement, and tax and treasury. And her firsthand experience in scaling high-growth, category-leading public software companies, along with her extensive global experience, I think really makes her the ideal CFO for Moody's as we invest in and grow our subscription-based analytics businesses and continue to expand our ratings business around the world. So it's an exciting time for Moody's, and I look forward to Noemi jumping in on April 1st. And, of course, she's going to be a regular fixture on this call going forward.

Rob: Most recently as CFO of de force formally ceridian and over a decade with global enterprise application software provider S. P during which it transitioned to a global software as a service business model.

Rob: So as CFO, she's going to lead the global Finance organization that includes accounting and controller ship financial planning and analysis financial systems Investor.

Rob: Investor Relations strategic sourcing and procurement and tax and treasury and her firsthand experience in scaling high growth category, leading public software companies along with her extensive global experience I think really make her the ideal.

Rob: CFO for Moody's as we invest in and grow our subscription based analytics businesses and continue to expand our ratings business around the world.

Rob: So it is an exciting time for Moody's and I look forward to Nuomi jumping in beginning April 1st and of course, she is going to be a regular fixture on this call going forward before.

Speaker: Before we get into the results, I also want to thank Caroline Sullivan, who is here with me, for her immense contributions and support over the last few months as Moody's interim CFO. And Caroline will remain as our chief accounting officer and corporate controller. So, with that.

Before we get into the results I also want to thank Caroline Sullivan, who is here with me for her immense contributions and support over the.

Last few months as Moody's Moody's interim CFO and Caroline will remain as our chief accounting officer and corporate controller.

So with that move.

Speaker: Moving on to our results, 2023 was really a defining year for us here at Moody's. We delivered 8% revenue growth, and we grew adjusted diluted EPS by 16%. And we were an early mover in generation AI adoption and innovation, launching our first ever generation AI-enabled product in December. And I have to say that the energy and excitement across the organization really was palpable throughout the year as we launched new products.

Rob: Moving on to our results 2023 was really was a defining year for us here at Moody's we delivered 8% revenue growth. We grew adjusted diluted EPS by 16% and we were an early mover in Gen AI adoption and innovation launching our first ever gene AI enabled product in December.

Rob: And I have to say that the energy and excitement across the organization really was palpable throughout the year as we launch new products, we entered into strategic partnerships with some of the world's leading tech companies and we increased the gap in our Chartis risk Tech 100 number one ranking and as we grew we also increase.

Speaker: We entered into strategic partnerships with some of the world's leading tech companies, and we increased the gap in our Chartist RiskTech 100 number one ranking. And as we grew, we also increased our margin by over 100 basis points for the year, all while investing across the firm in technology, products, and people. And amidst what was a pretty challenging operating environment for our financial services customers, MA delivered ARR growth of 10% with retention rates in the mid-90s.

Rob: Our margin by over 100 basis points for the year.

Rob: All while investing across the firm in technology and products and in people.

Rob: And amidst was a pretty challenging operating environment for our financial services customers M. A delivered <unk> growth of 10% with retention rates in the mid nineties and looking at the three reporting lines of business and M&A.

Speaker: And looking at the three reporting lines of business in MA, that is, decision solutions, data, and information, and research and insights, it delivered ARR growth of 11%, 10%, and 7%, respectively. And as we have upped the pace of product development to meet the strong market demand for tools to better manage risk and to digitize and transform workflows. For 2024, we expect M.A.

Rob: Decision solutions.

Rob: Ada and information and research and insights and delivered a growth of 11%, 10% and 7%, respectively and as we have upped the pace of product development to meet the strong market demand.

Rob: For tools to better manage risk and to digitize and transform workflows for 2024, we expect <unk> revenue to grow at approximately 10% with growth in the low double digit percent range.

Speaker: revenue to grow at approximately 10 percent with ARR growth in the low double digit percent rate. MIS, meanwhile, delivered 19% growth in the quarter and 6% for the full year. Corporate finance, financial institutions, and public project and infrastructure finance all achieved double-digit revenue growth compared to 2022 on the basis of gradually improving market conditions. And I think I used the phrase fragile when describing the markets back in our third quarter earnings call. And this turned out to be true for the fourth quarter, where despite a very active November, December issuance was more muted than we had expected.

Rob: I asked Meanwhile, delivered 19% growth in the quarter and 6% for the full year.

Rob: Corporate finance financial institutions, and public project and infrastructure finance, all achieved double digit revenue growth compared to 2022 on gradually improving market conditions and I think I used the phrase fragile.

Rob: When describing the market's back on our third quarter earnings call and this turned out to be true for the fourth quarter, where despite a very active November December issuance was more muted than we had expected and we've seen a very constructive start to the year and consequently, our revenue expectations for 2024 are in the high single to low double.

Speaker: And we've seen a very constructive start to the year, and consequently, our revenue expectations for 2024 are in the high single-to low double-digit percent range for MIS. And I'll touch on this a bit more on the call, as well as, I'm sure, some asset-specific issuance guidance. So looking out over 2024 and beyond, we're really excited about the great momentum in the business and the tremendous growth potential that we've got in front of us. And to capitalize on these opportunities, we're accelerating and increasing the level of organic investment this year in three critical areas. Gen AI, New Product Development, and Platforming and Technology. This is a delivered investment program to fully capture the power of AI across our business, to expand the reach and connectedness of MA solutions, and accelerate the technology enablement of the ratings agency, all to deliver on our ambitious medium-term targets. For now, our capital allocation priorities remain unchanged.

Rob: Digit percent range for mis.

And I'll touch on this a bit more on the call as well as I'm sure some asset specific.

Rob: Issuance guidance.

So looking out over 2024 and beyond we're really excited about the great momentum in the business and the tremendous growth potential that we've got in front of us and to capitalize on these opportunities, we're accelerating and increasing the level of organic investment this year in three critical areas.

Rob: Jen AI new.

Rob: Development and platform and technology and this is a deliberate investment program to fully capture the power of AI across our business to expand the reach and connectedness of MH solutions and accelerate the technology enablement of the ratings agency all to deliver on our ambitious medium term targets now our capital.

Rob: Allocation priorities remain unchanged first invest in our business whenever we see great opportunities and we are in fact doing that and second return capital to stockholders and this year, we expect to nearly double the amount of capital we returned to our stockholders through dividends and share repurchases.

Speaker: First, invest in our business whenever we see great opportunities, and we are in fact doing that. And second, return capital to stockholders. And this year, we expect to nearly double the amount of capital we return to our stockholders through dividends and share repurchases. And that brings me to our EPS guidance. We're anticipating adjusted diluted EPS to be in the range of $10.25 to $11 for 2024.

Rob: That brings me to our EPS guidance, we are anticipating adjusted diluted EPS to be in the range of $10 25 to.

Rob: To $11 for 2024.

Speaker: This incorporates a little bit wider range at the beginning of the year to capture some of the uncertainty around issuance, and we would expect this to narrow during the course of the year. And of note, as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16.9%. And for 2024, we're expecting the rate to be in the range of 22 to 24%. And if you look through the 2023 benefit, at the midpoint of our 2024 range, our 2024 adjusted EPS represents a 24% growth rate since 2022, and that's in line with the low double-digit percentage growth that we've targeted over the medium term.

Rob: This incorporates a little bit wider range at the beginning of the year to capture some of the uncertainty around issuance and we would expect this to narrow during the course of the year.

Rob: And of note as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16, 9% and for 2024, we're expecting the rate to be in the range of 22% to 24%.

Rob: And if you look through the 2023 benefit at the mid point of our 2024 range.

Rob: Our 2024, adjusted EPS represents 24% growth rate since 2022, and that's in line with the low double digit percentage growth that we've targeted over the medium term.

Speaker: Now, looking at 2023, I want to take a moment to touch on a few data points that highlight what a powerful franchise we have and also put our 2023 accomplishments into some perspective amidst, as I said, what was a very challenging operating environment for many of our customers last year. And despite relatively modest MIS-rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company.

Rob: Now looking at 2023.

Rob: Take a moment to touch on a few data points that highlight what a powerful franchise, we have and also put our 2023 accomplishments into some perspective.

Rob: As I said, what was a very challenging operating environment for many of our customers last year.

Rob: And despite relatively modest mis rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company.

Speaker: And today, we have a base of recurring revenue of over $4 billion, while our more transactional-oriented revenue model across a $74 trillion universe of rated debt gives us upside as debt velocity improves. Together, this underpins our confidence in accelerating our revenue growth to the high-single-to-low-double-digit percent range in 2024. And over the years, we have really built a customer base that's almost like no other company, with 97% of the Fortune 100 and 87% of the Forbes 1000 being a Moody's customer today.

Rob: And today, we have a base of recurring revenue of over $4 billion.

Rob: While our more transactional oriented revenue model across a 74 trillion dollar universe of rated debt.

Rob: Gives us upside as that velocity improves and together this underpins our confidence in accelerating our revenue growth to the high single to low double digit percent range in 2024.

Rob: And over the years, we have.

Rob: We really built a customer base that is almost like no other company with.

Rob: 97% of the fortune, 187% of the Forbes 1000.

Rob: Being a moody's customer today, and the world's leading companies turn to us They trust our market, leading solutions and that gives us a tremendous base to sell into.

Speaker: The world's leading companies turn to us, they trust our market-leading solutions, and that gives us a tremendous base to sell into. This shows up in the many external accolades and awards that we've received. We had over 150 last year alone, and I want to give a special shout-out to our MIS team as we were awarded Best Credit Rating Agency for the 12th year in a row by Institutional Investor. That is great stuff.

Rob: This shows up in the many external accolades and awards that we've received.

Rob: We had over 150 last year alone and I want to give a special shout out to our team as we were awarded best credit rating agency for the 12th year in a row by institutional investor that has great stuff.

Rob: And I think we all understand our market leading position in ratings, but we've also built a market leading position with our MA business and for the second year in a row. We were ranked number one in the Chartis risk Tech 100, and that was supported by category wins and strategy banking and insurance and a number of solutions categories.

Speaker: I think we all understand our market-leading position in ratings, but we've also built a market-leading position in our MA business. And for the second year in a row, we were ranked number one in the Chartist Risk Tech 100, and that was supported by category wins in strategy, banking, and insurance, and a number of solutions categories ranging from climate risk to credit risk to financial crime data, and a number more. Understanding the critical importance of attracting and retaining the best talent in this environment, we continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world's great challenges. So to sustain our growth, you frequently hear about the investments that we make in our solutions to help our customers make better, more informed decisions about risk. And we achieved a number of important milestones in 2023, too many to get into on this call, but I am gonna focus on just a few of the highlights. In ratings, we continue to expand the markets we serve through Moody's Local.

Rob: Ranging from climate risk to credit risk to financial crime data.

Rob: And a number more in understanding the critical importance of attracting and retaining the best talent in this environment, we continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world's great challenges.

Rob: So to sustain our growth you frequently hear about the investments that we make in our solutions to help our customers make better more informed decisions about risk and we achieved a number of important milestones in 2023 too many to get into on this call, but I am going to focus on just a few of the highlights.

In ratings, we continue to expand the markets we serve through Moody's local we also develop dedicated teams in digital finance and private credit. So that we are at the forefront of opportunities in the global debt markets and private credit specifically, we're coordinating across our ratings franchise. So that we have the engagement methodologies and the analytical and.

Speaker: We're also developing dedicated teams in digital finance and private credit so that we're at the forefront of opportunities in the global debt market. In private credit specifically, we're coordinating across our ratings franchise so that we have the engagement, the methodologies, and the analytical and commercial resources to be the agency of choice for players in this market, ranging from BDCs to alternative asset managers, insurance companies, and debt funds. To further address the private credit opportunity, we added more than 12,000 unrated entities to our CreditView Research service in November.

Rob: Actual resources to be the agency of choice for players in this market ranging from Bdcs to alternative asset managers insurance companies and debt funds.

To further address the private credit opportunity, we added more than 12000 unrated entities to our credit view research.

Rob: Service in November that triples, the breadth of our coverage and provides a new runway for growth for our research business.

Speaker: That triples the breadth of our coverage and provides a new runway for growth for our research business. Another growth opportunity in our Research and Insights business that many of you have heard about is our Research Assistant product. That's our first GenAI-enabled product that we launched commercially on December 1st, and it's the first of a number of GenAI-enabled tools that we're developing. We're excited about the initial customer feedback and early traction with this product, and I'm sure we'll touch on this a bit more in the Q&A.

Rob: Another growth opportunity in our research and insights business that many of you have heard about is our research assistant product.

Rob: That's our first Gen AI enabled product that we launched commercially.

Rob: On December one and it's the first of a number of Gen. AI enabled tools that we're developing and we're excited about the initial customer feedback and early traction with this product and I'm sure we're going to touch on this a bit more in the Q&A.

Rob: We also continue to enhance and expand our massive company database in important ways to create valuable early warning signals for our customers and address the increasing demand for third party risk management and then there were really three elements to that in 2023 that I'll call out first was integrating our predictive analytic tools and credit scores on over 400.

Speaker: We also continue to enhance and expand our massive company database and important ways to create valuable early warning signals for our customers and address the increasing demand for third party risk management. And there were really three elements to that in 2023 that I'll call out. The first was integrating our predictive analytic tools and credit scores on over 450 million companies into Orbis. The second was expanding our coverage of over a million AI-curated and scored news stories a day that are available to companies in Orbis. And third, leveraging our investment in BitSight, over the course of 2023, we integrated over six million cyber scores into Orbis, and that number continues to grow. Across Decision Solutions, we developed new solutions and integrated more data sets to expand the utility of our offerings. And in KYC, our new Entity Verification Tool combines real-time registry content with our Orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk.

Rob: $50 million companies into Orbis.

Rob: The second was expanding our coverage of over 1 million AI curated and scored new stories a day that are available on company's in Orbis and third leveraging our investment in bid site over the course of 2023, we integrated over 6 million cyber scores into orbis in that number.

Rob: Continues to grow.

Rob: Across decision solutions, we develop new solutions and integrated more datasets to expand the utility of our offerings and in Ky see our new entity verification tool combines real time registry content with our orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk.

Rob: The launch of our most recent sanctions 360 tool. We're the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches in.

Speaker: With the launch of our most recent Sanctions 360 tool, we're the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches. In banking, we integrated climate analytics into a broad range of workflow solutions, from loan origination to portfolio management to stress testing. And in insurance, in just a year, we more than doubled the number of customers using our cloud-based intelligent risk platform. That's a versatile cloud-based risk analysis platform that enables customers to analyze hundreds of millions of commercial and residential locations. It's not just being used by insurers.

Rob: In banking, we integrated climate analytics into a broad range of workflow solutions from loan origination to portfolio portfolio management.

Rob: The stress testing and in insurance in just a year, we more than doubled the number of customers using our cloud based intelligent risk platform. That's a versatile cloud based risk analytics platform that enables customers to analyze hundreds of millions of commercial and residential locations.

Rob: It's not just being used by insurers were attracting a diverse set of customers, who have a tangible and growing need for our more sophisticated climate data and analytics.

I have to say I'm proud to report that at the end of January we signed one of the world's largest banks as a new customer of our climate and catastrophe modeling solutions to support the in depth climate analysis for required regulatory disclosures and stress testing.

Speaker: We're attracting a diverse set of customers who have a tangible and growing need for our more sophisticated climate data and analytics. I have to say, I'm proud to report that at the end of January, we signed one of the world's largest banks as a new customer of our climate and catastrophe modeling solutions to support in-depth climate analysis for required regulatory disclosures and stress tests. Underpinning all of this is our ongoing foundational investment in the business, and these investments will enhance our ability to integrate our data state across all of our customer use cases more efficiently and more effectively. So I hope you get a sense that there are a lot of exciting things that are happening here at Moody's, and as I take a step back to consider the many opportunities for growth ahead, I really am energized by all that's in front of us. And there are three things that we are doing to really drive future growth. That is, attracting new customers, expanding customer relationships, and then innovate continuously to deliver more value.

Rob: And underpinning all of this is our ongoing foundational investments in the business and these investments will enhance our ability to integrate our data state across all of our customer use cases more efficiently and more effectively.

Rob: So I hope as you get a sense there are a lot of exciting things that are happening here at Moody's and as I take a step back to consider the many opportunities for growth ahead, I really am energized.

Rob: By all that's in front of Us and there are three things that we're doing to really drive future growth.

Rob: That is land new customers expand customer relationships, and then innovate continuously to deliver more value.

Rob: I just touched on the breadth and quality of our existing customer relationships, we've got a fantastic customer base, especially in financial services, where it's been developing relationships for literally decades.

Rob: Landing, new customers expanding relationships and innovating with a proven track record of growth and in recent years. We've been successful in growing these relationships further and diversifying into new areas like <unk> and supplier risk management.

Speaker: And I just touched on the breadth and quality of our existing customer relationships. We've got a fantastic customer base, especially in financial services, where we've been developing relationships for literally decades. Landing new customers, expanding relationships, and innovating with a proven track record of growth.

Rob: In fact, our net expansion rate in the financial services sector.

Rob: <unk> at a healthy 109% and I think that's a pretty clear indication of our ability to deepen relationships and deliver value and now leveraging <unk> and our broader content sets and capabilities expanding and deepening. These relationships will continue to be a significant opportunity for us.

Speaker: And in recent years, we've been successful in growing these relationships further and diversifying into new areas like KYC and supplier risk management. In fact, our net expansion rate in the financial services sector stands at a healthy 109%, and I think that's a pretty clear indication of our ability to deepen relationships and deliver value. And now, leveraging Gen-AI and our broader content sets and capabilities, expanding and deepening these relationships will continue to be a significant opportunity for us.

Rob: Now building on these successes, we've got a great opportunity to expand in new customer segments supporting new use cases.

Rob: While financial institutions account for about 70% of our MMA.

Rob: <unk> there has been very good demand coming from newer relationships beyond the financial services segment was 14%.

Rob: New sales compound annual growth rate over the last two years.

Rob: In these sectors.

Rob: And that's the corporate and public sector and over that period, we've established significant relationships with major companies in the United States and Europe, who are leveraging our expertise for customer and supplier risk assessment.

Speaker: Now, building on these successes, we've got a great opportunity to expand into new customer segments, supporting new use cases. While financial institutions account for about 70% of ARR and MA, there's been very good demand coming from newer relationships beyond the financial services segment. 14% new sales compound annual growth rate over the last two years in these sectors. That is, the corporate and public sector.

Rob: Our ratings business also has some opportunities to serve existing and new customers I think of those as kind of the markets of tomorrow.

Rob: We've expanded our footprint in domestic and emerging debt markets, where the growth is faster than it is in more developed markets.

Speaker: And over that period, we've established significant relationships with major companies in the United States and Europe, who are leveraging our expertise for customer and supplier risk assessment. Our ratings business also has some opportunities to serve existing and new customers. I think of those as, you know, kind of the markets of tomorrow. We've expanded our footprint in domestic and emerging debt markets, where growth is faster than it is in more developed debt markets. And interesting data point, the Moody's Local Initiative in Latin America, which you've heard me talk about, it's a great example of doing that, where organic revenue grew 22% in 2023. So these land and expansion opportunities are supported by Major secular trends that are driving demand for our offerings, and I will cite a few of those.

Rob: And interesting data point, the Moody's local initiative in Latin America, which you've heard me talk about it's a great example of doing that where organic revenue grew 22% in 2023.

Rob: So these land and expand opportunities are supported by <unk>.

Rob: A major secular trends that are driving demand for our offerings.

And I would cite a few of those where we're poised to capitalize on the.

Rob: The content unlock opportunity from Gen AI enablement and innovation.

Rob: Widespread digitization and transformation programs across banks and insurers.

Rob: The growing demand for third party risk management solutions, and the ongoing growth of the private credit sector and with our wide ranging capabilities that we've put together to deliver this holistic view of risk I think we are uniquely well positioned at the intersection of these trends.

Rob: So I can assure you that we reflected a lot on these opportunities as we entered our annual operating plan cycle. This fall and not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives on the efficiency side, we expect to generate savings from resource redeployment alternatives.

Speaker: We're poised to capitalize on the content unlocking opportunity from Gen AI enablement and innovation, the widespread digitization and transformation programs across banks and insurers, the growing demand for third-party risk management solutions, and the ongoing growth of the private credit sector. And with our wide-ranging capabilities that we've put together to deliver this holistic view of risk, I think we are uniquely well-positioned at the intersection of these trends. So I can assure you that we reflected a lot on these opportunities as we entered our annual operating plan cycle this fall. And not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives.

Rob: <unk> models automation engine, AI enablement, and Geo location strategies and.

Rob: And we're prioritizing investment spending on areas that are enabling us to deliver at our current growth rates, including sah.

Rob: SaaS based product development sales deployment operational resiliency and ratings workflows.

Rob: And these initiatives are really funded within our what we think of as a regular pace of operating margin expansion, but as we exited the initial sprint around Gen AI innovation last year.

Rob: We reflected on the opportunities ahead of us we considered the deep customer relationships that I've just touched on our unique data assets that you hear us talk about the market trends that I, just mentioned together with our growth strategy.

Speaker: On the efficiency side, we expect to generate savings from resource redeployment, alternative staffing models, automation and gen AI enablement, and geolocation strategies. And we're prioritizing investment spending on areas that are enabling us to deliver at our current growth rates, including SAS-based product development, sales deployment, operational resiliency, and ratings workflow. And these initiatives are really funded within what we think of as our regular pace of operating margin expansion. But as we exited the initial sprint around Gen AI innovation last year, we reflected on the opportunities ahead of us. We considered the deep customer relationships that I've just touched on, our unique data assets that you hear us talk about, the market trends that I just mentioned, and we proactively increased the organic investments that we started in the summer of last year. And we are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas. First, and I'm sure this isn't particularly surprising, is Gen AI.

Rob: And we proactively up to the organic investments that we started in the summer of last year, and we are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas.

Rob: First and I'm sure this isn't particularly surprising is gen AI.

Rob: We're increasing product related investments across EMEA that will continue to build on our early mover momentum from 2023 and investments across the company and initiatives to accelerate our employee adoption and improve productivity on.

Rob: On the product side.

Rob: We have a few really interesting things that are moving ahead fairly quickly so credit lens, which is our flagship banking origination solution will be the next to launch a gen AI enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities that is stored nadir.

Rob: Ali in our software and we're gonna be saving loan officers and credit professionals countless hours, compiling information and generating the first draft of the documents that are produced with virtually every commercial loan. We've got our first beta customer already and we are currently in preview with a number of other customers.

Speaker: We're increasing product-related investments across MA that will continue to build on our early mover momentum from 2023 and investments across the company and initiatives to accelerate employee adoption and improve productivity. On the product side, we have a few really interesting things that are moving ahead fairly quickly. So Credit Lens, which is our flagship banking origination solution, will be the next to launch a Gen AI-enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities that is stored natively in our software.

Rob: Also.

Rob: I'm very encouraged by our new Gen AI enabled commercial real estate early warning system.

Rob: That we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors and I actually just sat through a demo of this in the last week or two.

Rob: And the early warning system integrates a wide range of our datasets. It enables the evaluation of news events in real time.

Rob: Running scenarios and calculations that linked together market forecasts listings and property data tenant data and valuation and credit models and again. The early feedback has been very positive and we're already looking to extend these capabilities beyond just commercial real estate.

Speaker: And we're going to be saving loan officers and credit professionals countless hours compiling information and generating the first draft of the documents that are produced with virtually every commercial loan. We've got our first beta customer already, and we are currently in preview with a number of other customers. I'm also very encouraged by our new Gen AI-enabled commercial real estate early warning system that we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors, and I actually just sat through a demo of this in the last week or two. And the early warning system integrates a wide range of our data sets.

Rob: From an internal perspective, we've rolled out Github copilot and some other gen AI tools to more than 500 engineering professionals across the company.

And as a result of our experienced last year.

Rob: We've specifically plan for efficiency gains in our engineering budgets in 2024.

We're also rolling out our next generation of AI enabled tools for our sales teams across the company.

Rob: Over the next several months.

Rob: That's the first area. The second area is product development and as part of our land and expand strategy in EMEA. We are building on the success and momentum of our <unk> business, which has grown to over $300 million of <unk> in just a few years.

Speaker: It enables the evaluation of news events in real time, running scenarios and calculations that link together market forecasts, listings and property data, tenant data, and valuation and credit models. Again, the early feedback has been very positive, and we're already looking to extend these capabilities beyond just commercial real estate. Now, from an internal perspective, we've rolled out GitHub Copilot and some other Gen AI tools to more than 1500 engineering professionals across the company.

Rob: And I think those of you have been in this call for a while you've heard me mentioned before that our know your customer is probably too limiting of a term for this business as it continues to expand so this year, we are increasing investments to develop solutions focused on the growing market demand.

Rob: Really for solutions to serve the customer and supplier risk needs and were especially encouraged by recent wins with a number of large government and fortune 100 customers. So this year, we're going to make investments in product technology and data and go to market capabilities to be able to scale in these customer segments.

Speaker: And as a result of our experience last year, we've specifically planned for efficiency gains in our engineering budgets for 2024. We're also rolling out our next generation of AI-enabled tools for our sales teams across the company over the next several months. That's the first area.

Rob: Rating's ecosystem also continues to evolve.

In early January we were just provided with a very first.

Speaker: The second area is product development. And as part of our land and expand strategy in MA, we are building on the success and momentum of our KYC business, which has grown to over 300 million ARR in just a few years. And I think those of you who've been on this call for a while have heard me mention before that "know your customer" is probably too limiting of a term for this business as it continues to expand. So this year, we're increasing investments to develop solutions focused on the growing market demand, really for solutions to serve the customer and supplier risk needs, and we're especially encouraged by recent wins with a number of large government and Fortune 100 customers. So this year, we're gonna make investments in product, technology, and data, and go-to-market capabilities to be able to scale in these customer segments. The ratings ecosystem also continues to evolve.

At the very first rating on a token highs bond fund and while digitized sorry digital finance is still nascent we're gonna be ready to help our customers delivering our ratings on the platforms wherever they are going to issue.

Rob: So that second and then third is around technology platforming. So we're building on the platforming work that we highlighted in our innovation open house event back in September.

Rob: And as we explained then this work is critical to strengthening strengthening the interoperability of all of our data is state and improving the synergies across our solutions by investing in our platform and engineering capabilities, we're going to accelerate our time to market enhance the customer experience better enabled cross sell and upsell.

Rob: <unk> and deliver engineering efficiencies.

Rob: Faster. This work gets done the sooner we will realize the revenue and efficiency benefits. So we have decided to hit the accelerator.

Speaker: In early January, we just had the very first rating on a tokenized bond fund. And while digital finance is still nascent, we're going to be ready to help our customers deliver our ratings on the platforms wherever they are going to issue them. So that's second.

Rob: The same is true in ratings.

Rob: More tech enabled workflow is really key to the quality speed efficiency and compliance and.

Rob: And we've been on a journey to modernize digitize and automate our systems. We've made some good headway, but there is still more work to be done optimizing our data state and moving more of our workflow into cloud based applications really has never been more important given the promise of AI and the digitization of financial markets. So here to weakness.

Speaker: And then third, around technology platforming. So we're building on the platforming work that we highlighted at our Innovation Open House event back in September. And as we explained then, this work is critical to strengthening the interoperability of all of our data estate and improving the synergies across our solution. By investing in our platforming and engineering capabilities, we're going to accelerate our time to market, enhance the customer experience, better enable cross-sell and up-sell, and deliver engineering efficiency. The faster this work gets done, the sooner we will realize the revenue and efficiency benefits, so we have decided to hit the accelerator. The same is true in ratings, where more tech-enabled workflow is really key to quality, speed, efficiency, and compliance.

Rob: Started to accelerate our efforts and this will be critical in achieving our medium term margin targets.

Speaker Change: So now let me turn to our issuance outlook very briefly.

Speaker Change: We're expecting more constructive market conditions in 2024, and I'm sure as you have all seen it was a very busy start to the year over 150 billion in investment grade issuance in January alone.

Speaker Change: Underpinning our mis revenue growth outlook of high single to low double digits is an increase in mis rated issuance in the mid to high single digit percent range for corporates, we expect that leveraged finance will grow faster than investment grade issuance, which should be favorable to revenue mix and our outlook is built on the macroeconomic assumptions that are <unk>.

Speaker: And we've been on a journey to modernize, digitize, and automate our systems. We've made some good headway, but there is still more work to be done. Optimizing our data state and moving more of our workload into cloud-based applications really has never been more important, given the promise of AI and the digitization of financial markets.

Speaker Change: On page 20 of our webcast deck.

Speaker Change: Notably incorporating a soft landing here in the U S and rate cuts starting in the second quarter of this year and I'm.

Speaker Change: Imagine will dive deeper into both our issuance in macroeconomic assumptions in the Q&A session.

Speaker Change: Before moving off of M. I asked I do want to highlight that.

Speaker: So here, too, we've decided to accelerate our efforts, and this will be critical in achieving our medium-term margin target. So now, let me turn to our issuance outlook very briefly. We're expecting more constructive market conditions in 2024. And, as you have all seen, it was a very busy start to the year, with over $150 billion in investment grade issuance in January alone.

Speaker Change: Early last year, we committed to reviewing our medium term guidance for mis revenue growth. Once we saw sustainable improvement in the debt markets and I'm happy to share that following 6% revenue growth in 2023, and the expectation of at least high single digit growth in 2024, we have updated our medium term growth target for Ms.

Speaker Change: Yes.

Speaker Change: Revenue growth target for <unk> to be in the mid to high single digit percent growth range now.

Speaker: Underpinning our MIS revenue growth outlook of high single to low double digits is an increase in MIS rated issuance in the mid to high single digit percent range. For corporates, we expect that leveraged finance will grow faster than investment-grade issuance, which should be favorable to revenue mix. And our outlook is built on the macroeconomic assumptions that are detailed on page 20 of our webcast deck and notably incorporate a soft landing here in the US and rate cuts starting in the second quarter of this year.

Speaker Change: Now moving back to our 2020 for annual guidance.

Speaker Change: Moody's revenue is expected to grow in the high single to low double digit percent range. The Moody's adjusted operating margin is projected to be in the range of 44% to 46% that's about 100 basis points of margin improvement at the midpoint.

Speaker Change: And the Moody's revenue and adjusted operating margin guidance ranges incorporate the variability of that missed transaction based revenue and then balanced against the subscription based in EMEA, where nearly 95% of our revenues are recurring in regards to M&A. We are guiding to a tighter range of approximately 10% growth revenue.

Speaker: And I imagine we'll dive deeper into both our issuance and macroeconomic assumptions in the Q&A session. But before moving off of MIS, I do want to highlight that early last year, we committed to reviewing our medium-term guidance for MIS revenue growth once we saw sustainable improvement in the debt markets. And I'm happy to share that following 6% revenue growth in 2023 and the expectation of at least high single-digit growth in 2024, we have updated our medium-term growth target for MIS, revenue growth target for MIS to be in the mid to high single-digit percent growth rate. Now, moving back to our 2024 annual guidance. Moody's revenue is expected to grow in the high single to low double-digit percent range.

Speaker Change: And.

Speaker Change: And low double digit growth in <unk> now.

Adjusted operating margin is expected to be in the range of 30% to 31%. This year, that's absorbing the impact of the incremental organic investments that I just talked about.

Speaker Change: In the medium term.

Speaker Change: We expect <unk> adjusted operating margin to be in the mid 30% range.

Speaker Change: As I have discussed with a number a number of you the path to that target is not exactly linear.

Speaker Change: For 2024, Mis's adjusted operating margin is expected to be in the range of 55, 5% to 57, 5%.

Speaker: The Moody's adjusted operating margin is projected to be in the range of 44 to 46 percent, so that's about 100 basis points of margin improvement at the midpoint. And the Moody's Revenue and Adjusted Operating Margin guidance ranges incorporate the variability of that MIS transaction-based revenue and are then balanced against the subscription base in MA, where nearly 95% of our revenues are recurring. In regards to Massachusetts, we're guiding to a tighter range of approximately 10% growth in revenue and low double-digit growth in ARR. Now MA's Adjusted Operating Margin is expected to be in the range of 30% to 31% this year.

That is a 200 basis point improvement versus 2023 at the midpoint and that is solidly on track towards the medium term target of low 60%.

Speaker Change: Our expenses overall expected to grow in the mid to high single digit percent range.

Speaker Change: A couple of factors worth, noting first we closed out our 2000.

Speaker Change: 'twenty two 'twenty three geolocation restructuring program at the end of 2023, Caroline can talk more about that.

Speaker Change: We're expecting depreciation and amortization expenses of approximately $450 million in 2024.

Caroline: That's an increase of approximately 20% as compared to 2023 and that growth is largely related to the cumulative effect of our shift towards developing exclusively SaaS based solutions starting back in 2021, and coupled with the increased capital expenditures associated with the three primary areas of incremental organic.

Speaker: That's absorbing the impact of the incremental organic investment that I just talked about in the medium term. We expect MA's adjusted operating margin to be in the mid-30s percent range, and as I have discussed with a number of you, the path to that target is not exactly linear. For 2024, MIS's adjusted operating margin is expected to be in the range of 55.5% to 57.5%.

Caroline: Ganic investment that I just talked about.

Caroline: We're expecting free cash flow of between one nine and $2 1 billion and adjusted EPS to be in the range as I said earlier of 10, 25% to $11 again at 24% increase at the midpoint versus 2022 looking through those tax benefits that I touched on.

Speaker: That is a 200 basis point improvement versus 2023 at the midpoint, and that is solidly on track towards the medium-term target of low 60s percent. Our expenses overall are expected to grow in the mid- to high-single-digit percent range. A couple factors worth noting. First, we closed out our 2022-23 geolocation restructuring program at the end of 2023.

Caroline: So I'll wrap up by just saying it was a really great year for us here in 2023, I'm expecting an even more exciting one ahead.

Caroline: I'm energized by our strategy, we've got fantastic engagement across the company and.

Caroline: And we believe that now is the time to invest in the opportunity that's in front of us to fully embrace the power of AI across our business to accelerate the build out of our technology platform and to bring together our content to build new solutions with unique value propositions that will accelerate growth.

Caroline Sullivan: Caroline can talk more about that. Second, we're expecting depreciation and amortization expenses of approximately $450 million in 2024. That's an increase of approximately 20 percent as compared to 2023. And that growth is largely related to the cumulative effect of our shift toward developing exclusively SAS-based solutions starting back in 2021, and coupled with the increased capital expenditures associated with the three primary areas of incremental organic investment that I just talked about. And we're expecting free cash flow of between $1.9 and $2.1 billion, and adjusted EPS to be in the range, as I said earlier, of $10.25 to $11. Again, a 24% increase at the midpoint versus 2022, looking through those tax benefits that I touched on. So, I'll wrap up by just saying it was a really great year for us here in 2023, and I'm expecting an even more exciting one ahead.

Speaker Change: That I welcome Caroline, Steve and Mike to join me for Q&A operator please.

Speaker Change: Open the call up to questions.

Speaker Change: If you'd 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 that your mute function is turned off so the euro signal reaches our equipment. We ask 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 one to ask a question.

Speaker Change: Our first question comes from the line of George Tong with Goldman Sachs. Please go ahead.

George K. Tong: Hi, Thanks, Good morning, I wanted to ask you about your planned incremental strategic investments in Gen. AI products in platforming can you talk a little bit more about the timing of these investments as well as benefits, you're expecting and the margin impact for 2024.

Speaker Change: Yes, George good to have you on the call I might start by maybe I'll, just give you a little more insight into kind of what's in those three main components and then.

Speaker Change: We will talk about some of the timing and margin impact.

Speaker Change: As it relates to Gen AI.

Speaker: I'm energized by our strategy. We have fantastic engagement across the company, and we believe that now is the time to invest in the opportunity that's in front of us, to fully embrace the power of AI across our business, accelerate the build-out of our technology platform, and to bring together our content to build new solutions with unique value propositions that will accelerate growth. So with that, I welcome Caroline, Steve, and Mike to join me for Q&A. And operator, please open the call to questions. Thank you. If you'd like to ask a question, please dial star 1 on your telephone keypad. If you are on a speakerphone, please pick up your handset and make sure that your mute function is turned off so that your signal reaches our equipment.

Speaker Change: <unk> got a generative intelligence team, we've stood up and MTO infrastructure, we've got some incremental engineering costs. We've got additional licenses I mentioned get up copilot, we will get the benefit of that but we had costs upfront and of course, we have incremental cloud costs and <unk> costs relating to large language models.

Speaker Change: On the product development side.

Speaker Change: Really it's about the build out of our customer and supplier risk offerings for the corporate and public sector and that's data workflow and go to market and then on technology in platforming.

As we talked about building out that MA platform, it's things like engineering around single sign on and entitlements. So that as I said, we can get those benefits faster.

Operator: We ask 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 1 to ask a question. Our first question comes from the line of George Tong with Goldman Sachs. Please go ahead. Hi, thanks. Good morning.

Speaker Change: Let me turn that over to Caroline and see if you want to just helped George around the timing of all of that.

Caroline: And so we anticipate and if you look at both Ms and SMA to deliver my assets delivered an operating margin in 2023 or 54, 5% roughly in line with our target of 55 and in 2024, we're expecting adjusted operating margin to increase by about two.

George K. Tong: I wanted to ask about your planned incremental strategic investments in Gen AI products and platforming. Can you talk a little bit more about the timing of these investments, as well as the benefits you're expecting and the margin impact for 2024? Yeah, George. Good to have you on the call.

200 basis points amaze margin is going to remain consistent with what we saw based on 2023.

Speaker: I might start by, maybe I'll just give you a little more insight into, you know, kind of what's in those three main components. And then, you know, we'll talk about some of the timing and margin impact. As it relates to Gen AI, you know, we've got a generative intelligence team, we've stood up an MCO infrastructure, we've got some incremental engineering costs, we've got additional licenses, I mentioned GitHub Copilot. We will get the benefit of that, but we have costs upfront. And, of course, we have incremental cloud costs and token costs relating to large language models.

Caroline: Without about $60 million that we talked about in Rob's comments related to the investments in MA margins would have been on track to increase and expand by 120 basis points.

Speaker Change: Great. Thank you.

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

Toni Kaplan: Thanks, so much Rob.

Toni Kaplan: Rob I wanted to take a step back for a second and not asking about 24 at all just in general where are you.

Toni Kaplan: Do you think a normalized level of issuance.

Toni Kaplan: How much upside is there from here to get back to a more normal growth environment.

Speaker: On the product development side, really, it's about the build out of our customer and supplier risk offerings for the corporate and public sectors, and that's Data, Workflow, and Go-To-Market. And then on technology and platforming, as we talk about building out that MA platform, it's things like engineering around single sign-on and entitlement so that, as I said, we can get those benefits faster. Let me turn that over to Caroline and see if you wanna just help George with the timing of all of that.

Toni Kaplan: And maybe particularly with rates at a higher level than they had been in the last couple of years. Thanks.

Rob: Hey, Tony.

Rob: <unk>.

Speaker Change: So maybe a couple of ways to kind of triangulate around this.

Speaker Change: I think as far back as 2022 as you remember we had that significant decline in issuance from the pandemic years on.

Tony: On the call I talked about how.

Tony: Total when we look at total global issuance. It was modestly below what was a I'll call kind of a 10 year average from at the time. It was I think 2012 to 22, excluding the two pandemic years.

Caroline Sullivan: So we anticipate if you look at both MIS and MA, MIS delivered an operating margin of 54.5% in 2023, roughly in line with our target of 55%, and in 2024, we're expecting adjusted operating margin to increase by about 200 basis points. MA's margin is going to remain consistent with what we saw based on 2023. Without that $60 million that we talked about in Rob's comments related to the investments, MA margins would have been on track to increase and expand by 120 basis points. Thank you. Your next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Thanks so much.

Tony: I think I I think total issuance in 2020 as it was something like 5% below that average.

Tony: It's not a big number and remember that was in the context of like a 30% decline in issuance that year, but we drilled down and and I think we made the point that corporate issuance was something like 15% below that long term average excluding the pandemic and have you actually drilled even further and got into leveraged finance even farther.

Tony: And as you know.

Tony: Corporate issuance and in particular leveraged finance issuance is quite favorable to our revenue mix. So it's interesting Tony now as you as you kind of go forward and we look at where 2023 ended relative to that average.

Toni Kaplan: Rob, I want to take a step back for a second and not ask about 24 at all, just in general, where do you think a normalized level of issuance is? How much upside is there from here to get back to more normal growth, particularly with rates at maybe a higher level than they have. Hey Toni.

Roughly inline Corp.

Tony: Corporate issuance was closer to in line I'd say modestly below that long term and with 2024.

Speaker: So maybe there are a couple ways to kind of triangulate around this. I think as far back as 2022, as you remember, we had that significant decline in issuance during the pandemic years. On the call, I talked about how, when we look at total global issuance... It was modestly below what I'll call kind of a 10-year average from at the time; it was, I think, 2012 to 22, excluding the two pandemic years.

Tony: Actually issuance will be slightly above that long term average and that holds true for corporate issuance, where obviously, we have a little bit stronger.

Tony: Growth expectation so from that aspect I think you might say well, we're getting back to something that feels more like a normalized level of issuance the caveat to that I.

Tony: Is this idea of that velocity so over that period of time, there's been an enormous amount of debt issued right. So that the stock of debt has grown significantly and we and we look at annual issuance as a percent of the total stock outstanding that's what we think of that velocity that number's still look.

Speaker: I think total issuance in 2022 was something like 5% below that average, which is not a big number. And remember that was in the context of like a 30% decline in issuance that year. But we drilled down, and I think we made the point that corporate issuance was something like 15% below that long-term average, excluding the pandemic. And if you actually drilled even further and got into leveraged finance, even farther.

Tony: A good bit lower than the you know the averages over call. It the last decade, which would imply that there is still.

Tony: A room for issuance growth in the last thing I'd say is if you look at where structured finance is at the moment that's significantly below.

Tony: That 10 year average for reasons that we may get into later in the call hopefully that gives you some insight.

That's great. Thank you.

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

Speaker: And as you know, corporate issuance, and in particular leveraged finance issuance, is quite favorable to our revenue mix. So it's interesting, Toni, now as you kind of go forward and we look at where 2023 ended relative to that average, it's roughly in line. Corporate issuance was closer to, I'd say modestly below that long-term.

Manav Patnaik: Thank you.

Manav Patnaik: Maybe I could just ask about 2020 full in terms of the cadence of.

Manav Patnaik: Issuance, you've assumed either first half or the back half and then maybe just some color on how we should think about your non transaction piece of the <unk> business how that should go.

Speaker: And with 2024, actually, issuance will be slightly above that long-term average. And that holds true for corporate issuance, where obviously we have a little bit stronger growth expectations. So from that aspect, I think you might say, well, we're getting back to something that feels more like a normalized level of issuance. The caveat to that is this idea of debt velocity.

Manav Patnaik: I guess this year.

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

Mike West: Thanks Manav.

Mike West: First of all I think we're expecting him issuance in the first half to be stronger than in the second half and that's a common pattern. If you actually look over <unk>.

Mike West: Previous years.

Speaker: So over that period of time, there's been an enormous amount of debt issued, right? So the stock of debt has grown significantly, and we look at annual issuance as a percent of the total stock outstanding.

Speaker Change: Some of that is due to the constructive conditions that we're seeing at the moment.

Speaker Change: With spreads tightening and sentiment improving in these issues of trying to lock in.

Speaker: That's what we think of debt velocity. That number still looks a good bit lower than the, you know, the averages over call it the last decade, which would imply that there's still, you know, room for issuance growth. And the last thing I'd say is, if you look at where structured finance is at the moment, that's significantly below, you know, kind of that 10 year average for reasons that we may get into later in the call. Hopefully, that gives you some insight. That's great. Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Speaker Change: The rates that they will before any potential volatility.

Speaker Change: Some of it is actually seasonality.

Speaker Change: That we see in each year given that we do expect a slowdown in the second half through some of them and sometimes it tails off when we get into and into December the other important factor when you think about issuance.

Speaker Change: Is that some of those more frequent issuers in investment grade corporate and the banks tend to come earlier in the market to secure that funding.

Speaker Change: And manage their balance sheets.

Speaker Change: And frequent issuers on the other hand.

Speaker Change: Can be opportunistic and we'll wait for those opportunities and windows that they see fit.

Manav Patnaik: Thank you. Maybe I could just ask about 2024 in terms of the cadence of, you know, issuance you've assumed, you know, either the first half or the back half, and then maybe just some color on how we should think about your non-transaction piece of the MIS business, how that should grow, I guess, this year. Hey, Manav, I think I might ask Mike to give us some color around, you know, how to think about the first half, and the second half, and then I might be able to put kind of a finer point on that. Yeah, thanks.

Speaker Change: Consistent with the comments I've just made is what we've discussed with with the market and just picking up on Rob's comment.

Speaker Change: Structured finance actually tends to be more balanced.

Speaker Change: Between the first half.

Speaker Change: On the second half so while we do expect.

Speaker Change: First half to be busier, we do expect that activity will continue into the second market. So Rob I don't know if you want to just yeah, an influence on that one yeah and I know.

Rob: People want to have a good sense for.

Rob: Informing their models so.

Rob: Last year as Mike said.

Rob: Issuance was more front end loaded we had a rising rate environment.

Mike West: So, first of all, I think we're expecting issuance in the first half to be stronger than in the second half, and that's a common pattern if you actually look at previous years. Some of that is due to the constructive conditions that we're seeing at the moment. With spreads tightening and sentiment improving, these issuers are trying to lock in the rates that they want before any potential volatility. Some of it is actually seasonality that we see each year, given that we do expect a slowdown in the second half through summer, and sometimes it tails off when we get into December.

Speaker Change: Something like I didn't call it.

Speaker Change: 56% of 2023 annual issuance was in the first half of the year.

Speaker Change: And while we do expect a rate decline in the second.

Speaker Change: Half of the year as Mike said, we still think that issuance will be front end loaded in our current assumption for issuance is pretty similar to the pattern that we saw in 2023. Now then we've got to translate it to mis revenue and the impact there is a little bit less pronounced in terms of first half second.

Speaker Change: Half.

Speaker Change: And I would say that we're expecting just a little over half maybe low 50% of mis revenue in the first half.

Mike West: The other important factor when you think about issuance is that some of those more frequent issuers in investment grade, corporate, and bank bonds tend to come earlier in the market to secure their funding and manage their balance sheets. Infrequent issuers, on the other hand, can be opportunistic and will wait for those opportunities and windows that they see fit. Consistent with the comments I've just made is what we discussed with the market and just picking up on Rob's comment, structured finance actually tends to be more balanced between the first half and the second half. So while we do expect the first half to be busier, we do expect that activity will continue into the second market. So, Rob, I don't know if you wanna just give us kind of a point on that one.

Speaker Change: And that's a little lower than the issuance mix why because banks are the ones that tend to issue would do more front end loading of their issuance and different economics for frequent bank issuers, so hopefully that.

Speaker Change: That gives you a sense one other thing Manav I might say just specifically for the first quarter I'd say, we expect.

Speaker Change: Close to 30% of annual issuance and probably closer to <unk>.

Speaker Change: Somewhere between 25% to 30% of MS annual revenue.

Speaker Change: Hi.

Speaker Change: Your next question will come from the line of Faiza <unk> with Deutsche Bank. Please go ahead.

Faiza: Yes, hi, thank you.

Faiza: Wanted to ask about the.

Faiza: Margins I think Rob you alluded to some investments, but maybe put a finer point around that because I would've thought you would have better sort of margin flow through.

Speaker: Yeah, and I know people want to have a good sense for, you know, informing their models. So, you know, last year, as Mike said, issuance was more front-end loaded. We had a rising rate environment; something like, I didn't call it, 56% of 2023 annual issuance was in the first half of the year. And while we do expect a rate decline in the second half of the year, as Mike said, we still think that issuance will be front-end loaded, and our current assumption for issuance is pretty similar to the pattern that we saw in 2023. Now, then we've got to translate it to MIS revenue, and the impact there is a little bit less pronounced in terms of first half and second half. And I would say that we're expecting just a little over half, maybe the low 50s percent, of MIS revenue in the first half. And that's a little lower than the issuance mix. Why?

Faiza: Given the revenue that you're expecting or is it all investments as there's some mix and just give us a bit more color around those investments.

Speaker Change: I can take that question and so just to follow on to Mike and Rob just said about the phasing of our revenues.

Because of this we are forecasting higher margins in the first half of the year versus the second half of the year.

So that's what we will see for Ms. But overall, we're expecting adjusted operating margins to increase by 200 basis points.

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

ashish: Thanks for taking my question.

ashish: Just wanted to better understand how we should think about the Ottawa or the strategic investments obviously the investments that you've made in the prior year has actually today made revenue growth I was wondering how should we think about the growth.

ashish: Accretion from these investments and maybe just a follow up on that one is how should we think about the journey II monetization in 'twenty four but also mcdonnell thanks.

Speaker: Because banks are the ones that tend to issue and do more front end loading of their issuance. And, and, you know, they're different economics for frequent bank issuers. So hopefully that, you know, that gives you a sense. One other thing, Manav, I might say just specifically for the first quarter, I'd say we expect probably close to 30% of annual issuance and probably closer to, somewhere between 25 to 30% of MIS annual revenue. Your next question will come from the line of Faiza Alwy with Deutsche Bank. Please go ahead. Yes, hi.

Speaker Change: Yes, maybe I'll start with that and then hand, it to Steve I would say just in general as you think about.

McDonnell: The return on these investments I would say that we're investing in the highest growth parts of our business. So.

McDonnell: Jen AI products, that's going to augment growth across our SaaS and hosted solutions.

McDonnell: Steve will touch on that in just a second.

Steve: We're investing as I talked about in enhanced solutions for corporates and the public sector around customer and supplier risk and I had that data point that we've got 14% CAGR.

Faiza Alwy: Thank you. So I wanted to ask about MIS margins. I think Rob, you alluded to some investments, but maybe put a finer point around that because I would have thought you would have a better sort of margin flow through, given the revenues that you're expecting. So is it all investments? Is there some mix?

Steve: In terms of sales growth over the last two years from those sectors and we think we can even enhance that growth at scale as we invest in product specifically for those customer segments, and then lastly platforming.

Caroline Sullivan: And just give us a bit more color around those. Thank you. I can take that question. And just to follow on from what Mike and Rob just said about the phasing of our revenues, because of that, we are forecasting higher margins in the first half of the year versus the second half of the year. And so that's what we will see for MIS, but overall, we're expecting adjusted operation margins to increase by 200 basis points. Your next question will come from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Steve: We expect revenue growth from our SaaS and hosted solutions to grow something like low teens. This year. That's in line with our medium term targets and the growth.

Steve: It has been even higher in decision solutions have been more like high teens from SaaS and hosted solutions. We're looking for this year. So I think there's a pretty strong case for investment in these high growth parts of our of our business, but Steve maybe just a couple of other comments, we're doing what we do well developing good solid.

Steve: Product development pipelines.

Steve: Creating new product life cycles too.

Ashish Sabadra: Thanks for taking my question. I just wanted to better understand how we should think about the ROI for strategic investments. Obviously, the investments that you made in the prior year have accelerated MA revenue growth. I was wondering how we should think about the growth accretion from these investments? And maybe just to follow up on that one is how we should think about GNI monetization in 24. Yeah, maybe I'll start with that and then hand it to Steve.

Steve: To generate revenue growth and support customer value propositions continuing to invest in the sales force and then what we've said today is making even more incremental investment in gen AI and especially.

Steve: In areas, where we think we can land new blue chip customers, maybe outside of financial services, we have such a tremendous franchise with the financial services sector, we see great opportunities and have demonstrated great growth trends with the with some new customers.

Steve: And corporations that maybe are non financial and the orientation of our public sector entities.

Steve: I think youll see.

Speaker: I'd say just in general, as you think about the return on these investments, I would say that we're investing in the highest-growth parts of our business. So, you know, Gen-AI products that are going to augment growth across our SaaS and hosted solutions. Steve will touch on that in just a second.

Steve: Lots of new products coming online this year in the <unk> space in particular, Rob mentioned, a couple that are coming down the pike in the next quarter or so maybe quarter second or third quarter.

Steve: We are actively engaged throughout the product development and engineering teams to build more value propositions and leverage Gen AI to support.

Speaker: We're investing, as I talked about, in enhanced solutions for corporates and the public sector around customer and supplier risk. And I had that data point that we've had 14% CAGR in terms of sales growth over the last two years from those sectors. And we think we can even enhance that growth at scale as we invest in products specifically for those customer segments. And then lastly, platforming.

To support our customers that help them not just do their business faster and save some money, but be more effective and be more productive when theyre doing it actually make better decisions develop better analyses and the research assistant, which we've launched already.

Steve: Expect you'd start to see some contributions in the research and insights line towards the end of this year because as the sales start to ramp up <unk> growth numbers will start to move as well. So we expect to see actual contributions in the numbers before we turn the page on 2024.

Speaker: We expect revenue growth from our SaaS and hosted solutions to grow something like the low teens this year. That's in line with our medium-term targets. And the growth has been even higher in decision solutions. It's been more like the high teens from SaaS and hosted solutions we're looking for this year. So, you know, I think there's a pretty strong case for investment in these high-growth parts of our business. But, Steve?

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

Alex Kramm: Yes, Hey.

Alex Kramm: This is actually a direct follow up to that to the prior question because Rob I think a couple of quarters ago.

Stephen Tulenko: Maybe just a couple other comments. We're doing what we do well, developing good, solid product development pipelines, creating new product life cycles to generate revenue growth and support customer value propositions, continuing to invest in the sales force, and then what we've said today is making even more of an incremental investment in Gen AI and especially in areas where we think we can land new blue chip customers, maybe outside of financial services. We have such a tremendous franchise with the financial services sector. We see great opportunities and have demonstrated great growth trends with some new customers in corporations that maybe are non-financial and orientation or public sector entities. I think you'll see lots of new products coming online this year in the Gen-AI space, in particular. Rob mentioned a couple that are coming down the pike in the next quarter or so, maybe the second or third quarter.

Alex Kramm: I ask you about this gen AI.

Alex Kramm: Being potentially part of your guidance already for this year in terms of revenue contribution. So it would be helpful too to give a little bit more specificity in terms of both revenue and <unk> are what are you actually budgeting.

Alex Kramm: In terms of contributions here for the for the year. Since you obviously raised some pretty high expectations and maybe just related to that I mean, you mentioned some early feedback. So just obviously very interested in your ability or signs of your ability to actually upsell people and people not just coming back to you and saying like look.

Alex Kramm: You're asking for more money all the time.

Stephen Tulenko: We are actively engaged throughout the product development and engineering teams to build more value propositions and leverage Gen-AI to support our customers and help them not just do their business faster and save some money, but be more effective and be more productive when they're doing it, actually make better decisions, develop better analyses, and the research assistant, which we've launched already. I would expect you'd start to see some contributions in the research and insights line toward the end of this year, So, we expect to see actual contributions in the numbers before we turn the page on 2020. Your next question comes from the line of Alex Kramm with UBS. Please go ahead. Yes, hey, this is actually a direct follow-up to the prior question, because Rob, I think a couple quarters ago, I asked you about this Gen AI being potentially part of your guidance for this year in terms of revenue contributions.

Alex Kramm: Of course, you'll you should enhance all products, but we're.

Speaker Change: We're not gonna be willing to pay up as much as you think you can so little flushing out there would be helpful. Thank you.

Speaker Change: Hey, Alex Thanks for the question.

Alex Kramm: So I.

Speaker Change: I think we've learned a good bit over the last few months as we've been engaging with customers.

Alex Kramm: As we have been signing customers as we've been building the pipeline and all of that is informing how we're thinking about our.

Alex Kramm: Our guidance I think Steve one leg.

Steve: And it to you just to give some insight into what we've learned and how we're how we think about that then flowing through the MA business. So just a quick short answer to your question. Alex is the research and insights lines, where youll see the biggest contribution coming from Gen. AI related problems, because thats, where we got a product in market already sales cycles take some time to develop.

Steve: You know we are we are seeing some pretty interesting patterns to rob's point.

Steve: It's interesting maybe.

Steve: Maybe investment managers and hedge funds that are <unk>.

Alex Kramm: So it would be helpful to give a little bit more specificity in terms of both revenue and ARR, what you are actually budgeting in terms of contributions here for the year since you have obviously raised some pretty high expectations. And maybe just related to that, you mentioned some early feedback, so obviously, very interested in your ability or signs of your ability to actually upsell people, and people not just coming back to you and saying like, look, you know, you're asking for more money all the time. Of course, you should improve our products, but we're not going to be willing to pay you as much as you think you can. So a little flushing out there would be helpful. Thank you.

Steve: Smaller teams, a little bit more agile and able to make a decision right now.

Steve: Are the ones that are buying this product literally right away. So our first sales that are coming in are coming in from these players where the boss is sitting at the table with the people who are the users the vast maybe your user and they're saying Wow. This is really going to make a difference let's just do it right now some are locking into multiyear agreements by the way. So they are believers in this as a productivity enhancer for them.

On the other side of the spectrum.

Steve: Where we have big customer relationships with large banks.

Steve: We're engaging.

Steve: Very differently.

Steve: The the character of the conversation is a lot more like what we've seen over the years in the software and workflow sales dynamics. So we're engaging very senior levels Theyre talking about leveraging what we're doing as a transformational tool to change the way they do business they see the opportunity to cut.

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

Steve: Cost maybe lower their cost of goods sold maybe lower there.

Steve: Increased productivity through platforming and using our capability as an element in there platforming efforts.

Stephen Tulenko: So, just a quick, short answer to your question, Alex, is, you know, the research and insights line is where you'll see the biggest contribution coming from Gen-AI-related products because that's where we have a product in the market already. The sales cycle takes some time to develop. You know, we are seeing some pretty interesting patterns, to Rob's point. It's interesting, maybe investment managers and hedge funds that are smaller teams, a little bit more agile and able to make a decision right now are the ones that are buying this product literally right away. So our first sales that are coming in are coming in from these players where the boss is sitting at the table with the people who are the users, the boss may be a user, and Some are locking into multi-year agreements, by the way. So they're believers in this as a productivity enhancer for them. On the other side of the spectrum, where we have big customer relationships with large banks. We're engaging very differently.

Steve: What we're doing in terms of leveraging journey throughout the organization.

And we're seeing project transformation.

Steve: Transformation projects, where people are looking forward to working with us evaluating us very very intentionally and we're engaging with scores of users for example to get a reading on can they really make a difference leveraging this tool and or can we make a difference leveraging us in their organization and we're seeing some really interesting conversations often at.

Steve: C level. So this isn't your run of the mill add onto the research service, which we've been doing for decades. This is a gosh this might really change the way I do investment research. Despite really changed the way I think about doing credit research at scale and that's one of the reasons. We're very excited about that dynamic. So the first couple of months.

Steve: Interesting.

Steve: Waller faster decisions are happening and people are buying the product at a rate that's above our normal rate of sales patterns with patterns or faster than normal and at the top and we're seeing really good engagement in a way that I say I think it's going to be quite profound for us.

Very good thank you.

Stephen Tulenko: The character of the conversation is a lot more like what we've seen over the years in the software and workflow sales. So we're engaging very senior levels. They're talking about leveraging what we're doing as a transformational tool to change the way they do business. They see the opportunity to cut costs, maybe lower their cost of goods sold, maybe lower their increased productivity through platforming and using our capability as an element in their platforming efforts. Well, like what we're doing in terms of leveraging Gen AI throughout the organization, and we're seeing transformation projects where people are looking forward to working with us, evaluating us very, very intentionally, and we're engaging with scores of users, for example, to get a reading on can they really make a difference leveraging this tool, or can we make a difference leveraging us in their organization, and we're seeing some really interesting conversations, often at the C-level.

Steve: Your next question will come from the line of Jeff Silber with BMO capital markets. Please go ahead.

Jeffrey Marc Silber: Thanks, So much I think earlier in the call you gave a little color on cadence for first half versus second half in terms of revenues and margins for MIF and I'm wondering if you could do the same thing for the MAA Division. Thank you.

Caroline do you want to take that sure.

And so for M&A, we see a slightly different picture.

Caroline: I guess with regards to both revenue and with regards to expenses.

So far.

Caroline: If we if we started at the fourth quarter for MAA. We recorded just under 800 million of M. <unk> revenue and were expecting just above $800 million in Q1.

Caroline: And then steadily ramping up by $20 million to $25 million through quarter, four DMA margin will kind of follow a similar path. However, Q1 will be influenced by some seasonality to our expenses.

Caroline: Associated with our annual compensation programs with arc.

Stephen Tulenko: So this isn't your run-of-the-mill add-on to the research service we've been doing for decades. This is, gosh, this might really change the way I do investment research. This might really change the way I think about doing credit research at scale.

<unk>, so, let's say higher payroll taxes associated with the vesting of employee stock grants and bonus payments, but then the margin is expected to follow a similar pattern to revenue.

Caroline: Really ramping from a couple of percentage points below our full year guide of 30% to 31% in the first clause or to a couple of points above that by the time, we get to Q4.

Stephen Tulenko: And that's one of the reasons we're very excited about that dynamic. So the first couple of months have been interesting. Smaller, faster decisions are happening, and people are buying the product at a rate that's above our normal rate of sales patterns. The patterns are faster than normal.

And while we're on the topic of now that we've covered in Mis and MA calendars Asian, maybe let me just add a little bit in terms of thinking about then you're kind of pulling this together and thinking about what it might mean for adjusted diluted EPS. So we've got the a little bit front end loaded issuance pattern that we've talked about that.

Stephen Tulenko: And at the top end, we're seeing really good engagement in a way that I think is gonna be quite profound. Very good, thank you. Your next question will come from Jeff Silber with BMO Capital Markets. Please go ahead. Thanks so much.

Caroline: The cadence that Caroline just touched on.

Jeffrey Marc Silber: I think earlier in the call, you gave a little color on the cadence for first half versus second half in terms of revenues and margins for MIS. And I'm wondering if you could do the same thing for MAD. And Caroline, do you want to take that? Sure. So for MA, we see a slightly different picture to MIS with regard to both revenue and expenses. So if we start at the fourth quarter for MA, we recorded just under $800 million in MA revenue, and we're expecting just above $800 million in Q1, and then steadily ramping up by $20 to $25 million through quarter four. The MA margin will kind of follow a similar path. However, Q1 will be influenced just by some seasonality in our expenses associated with our annual compensation programs with our employees.

Caroline: From a adjusted diluted EPS standpoint, we think that the first quarter will be our strongest quarter in terms of absolute adjusted diluted EPS, followed by the second quarter.

Caroline: And maybe the easiest way to think about it is this if you take the average.

Caroline: Quarterly EPS at the midpoint of our full year guide and I think that's somewhere between $2 60 and $2 70.

Then given the stronger front end front half issuance that we've talked about we would expect first quarter <unk>.

Caroline: Has to be something like 15 to 20.

Caroline: Higher than that average for the first quarter.

Speaker Change: Alright that is extremely helpful. Thanks, so much.

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

Great. Thank you for your time.

Craig Anthony Huber: Michael Rob I'm curious with the.

Craig Anthony Huber: Ongoing massive problems out there in the commercial real estate market out there I'm curious what your thought is on the potential impact.

Caroline Sullivan: So we'll see higher payroll taxes associated with the vesting of employee stock grants and bonuses. But then the margin is expected to follow a similar pattern to revenue, steadily ramping from a couple of percentage points below our full-year guide of 30 to 31% in the first quarter to a couple of points above it by the time we get to Q4. And, you know, while we're on the topic of, now that we've covered MIS and MA calendarization, maybe let me just add a little bit in terms of thinking about then, you know, kind of pulling this all together and thinking about what it might mean for adjusted diluted EPS. So, we've got the little bit front-end loaded issuance pattern that we talked about, the cadence that Caroline just touched on. From an adjusted diluted EPS standpoint, we think that the first quarter will be our strongest quarter in terms of absolute adjusted diluted EPS, followed by the second quarter, and maybe the easiest way to think about it is this. If you take the average, Bye.

Craig Anthony Huber: See MBS issuance for this year.

Craig Anthony Huber: Weightings, there and also more importantly on the banking client potential impact this year, the commercial real estate market out there what are you sort of expecting for issuance there as well and just my quick.

Quick housekeeping question, what was the incentive comp in the fourth quarter. Please and also for the full year last year. Thank you.

Speaker Change: Alright, we'll get we'll get Caroline teed up on that incentive comp question I think Craig you know commercial real estate actually if you think about it kind of threads through a bunch of parts of our business you know in terms of impact to the ratings business and it's not just the CRE sector, but the banking sector and then you know the.

Speaker Change: The tools needed by folks in the market and sales cycles. So let me start with Mike.

Speaker Change: Yes.

Mike West: Okay. Thanks, Craig so on.

Mike West: On the structured finance just to try and put that into context. I mean, we are anticipating overall that structured finance will grow.

Mike West: Mid single digit when you look into that there's different types of of assets.

Mike West: And.

Speaker Change: When we think about <unk>, let me just pick on CMS first for your question, we believe that we'll still be muted.

Speaker: Quarterly EPS at the midpoint of our full year guide, and I think that's somewhere between $2.60 and $2.70. Then, given the stronger front half issuance that we've talked about, we'd expect first quarter EPS to be something like 15 to 20 cents higher than that average for the first quarter. That is extremely helpful. Thanks. Your next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Great, thank you for your time. Micah, Rob, I'm curious about the...

Speaker Change: Muted given what's going on in the CRE market, particularly.

In office it is a viable phone funding alternative to bank finance, particularly as borrowers face risk.

Speaker Change: Restrictive lending standards, but I do want to emphasize that when when we look at our structured finance business.

Speaker Change: We are expecting still a active market in ABS.

Speaker Change: <unk>.

Cielo is I'm very happy that at some point on the calls talk a little bit more about <unk>.

Craig Anthony Huber: Ongoing massive problems out there in the commercial real estate market out there. I'm curious what your thoughts are. Potential Impact. CMBS issuance for this year, ratings there, and also, more importantly on your banking client's potential impact this year, the commercial real estate market out there. What are you sort of expecting for issuance there as well? And just my quick housekeeping question, what was the incentive comp in the fourth quarter, please? for your watch.

Speaker Change: Our MBS on the other hand, again muted because of the asset formation, which we expect to improve as the year goes on but with that I might just pass to Steve and talk about the Ma side.

Speaker Change: CRE.

Steve: So I.

Steve: I mean, I think we've been talking a lot.

Firm and with our customers about the impact of <unk>.

Steve: I'll call it stress in the CRE sector, particularly in the office sector and we all know many of the causes there.

Speaker: Alright, we'll get Caroline teed up on that incentive comp question. But, Craig, you know, commercial real estate, actually, if you think about it, kind of threads through a bunch of parts of our business, you know, in terms of impact on the ratings business, and it's not just the CRE sector, but the banking sector, and then, you know, the tools needed by folks in the market and sales cycle. So, let me start with Mike.

Speaker Change: Really good interest from our banking customers, especially we launched you may remember at the innovation day back in September we highlighted.

Speaker Change: Credit lens, CRE module, which was really a credit decisioning tool software application that combines all of our.

Speaker Change: Data and analytics capabilities in the commercial real estate space to help lenders do their jobs more effectively and.

Speaker Change: We've seen really good growth there in the banking segment.

Mike West: Okay, thanks, Craig. So on structured finance, just to try and put that into context, I mean, we are anticipating overall that structured finance will grow at a mid single-digit rate. And when you look into that, there are different types of assets, and, um... When we think about CMBS, let me just pick on CMBS first for your question, we believe that will still be muted, given what's going on in the CRE market, particularly in office. It is a viable funding alternative to bank finance, particularly as borrowers face restrictive lending standards.

Speaker Change: That was one of the big drivers of growth for us so.

I'd say that is exactly what you would expect as people start to be more aware of risk they start to call us a little bit more and this is one of those dynamics in EMEA were.

Speaker Change: <unk> goes up people call us more often risk goes down and they start to think about taking more chances. So maybe.

Speaker Change: Looking at looking for more alpha, perhaps so we get calls there too so the CRE segment in the CRE.

Speaker Change: I'll call. It a stress is something that.

Speaker Change: We find unattractive dynamic for the business overall, yeah, there's almost like a tipping point, where when theres too much stress in the banking system. It can ultimately become a headwind for us as Steve said.

Mike West: But I do want to emphasize that when we look at our structured finance business, we are expecting an active market in ABS and CLOs. I'd be very happy at some point during the call to talk a little bit more about CLOs. RMBS, on the other hand, is again muted because of asset formation, which we expect to improve as the year goes on. But with that, I might just pass to Steve and talk about the MA side of CRE.

Speaker Change: When there is the need for real insight and better understanding around credit that's a positive and I think what we saw in March of last year was just about going over that tipping point.

Carolyn do you want to answer the second part of Craig's question sure Gregg with regards to incentive comp for the fourth quarter we required.

Carolyn: $100 million, so that got us to about 400 million for all of fiscal 2023.

Stephen Tulenko: Yeah, so I think we've been talking a lot in the firm and with our customers about the impact of, I'll call it, stress in the CRE sector, particularly the office sector, and we all know many of the causes there. We've had really good interest from our banking customers, especially since we launched, you may remember, at Innovation Day back in September, we highlighted the Credit Lend CRE module, which was really a credit decisioning tool software application that combines all of our data and analytics capabilities in the commercial real estate space to help lenders do their jobs more effectively. And we've seen really good growth in the banking segment. That was one of the big drivers of growth for us. So I would say that it's exactly what you would expect.

Carolyn: So with regards to 2024, we expect incentive comp to be between $400 million to $420 million. So think about 100 to 105 million per quarter.

Speaker Change: Great. Thank you.

Speaker Change: Your next question comes from the line of Owen Lau with Oppenheimer. Please go ahead.

Owen Lau: Good afternoon, and thank you for taking my question, so going back to your <unk> revenue guidance, you guided to high single digit to low double digit percent GH, which is higher than your peers at mid to high single digits and I know what you have that much information about your peers, but could you. Please try and talk about some of the potential drivers.

Stephen Tulenko: As people start to be more aware of risk, they start to call us a little bit more. And this is one of those dynamics in MA where risk goes up, people call us more often, risk goes down, they start to think about taking more chances. So maybe looking for more alpha, perhaps, so we get called there too. So the CRE segment and the CRE, I'll call it stress, is something that we find an attractive dynamic for the business overall. Yeah, there's almost like a tipping point where when there's too much stress in the banking system, it can ultimately become a headwind for us. But as Steve said, when there's the need for, you know, real insight and better understanding around credit, that's a positive. And I think what we saw in March of last year was just about going over that tipping point. Caroline, do you want to answer the second part of Craig's question?

Speaker Change: For a different thank you.

Speaker Change: Yeah I think.

Speaker Change: Mike why don't I hand that to you.

Mike West: So and thank you for your question I'll start at the macro level and as Rob mentioned overall constructive.

Mike West: Outlook for 2024 and.

Mike West: And underpinning this is that first of all.

Market uncertainty that we've experienced over the last couple of years.

Mike West: Starts to subside and if you think that transmission is to a lower execution risk in the primary markets and also improved secondary trading that leaves more opportunity.

Mike West: <unk> issuance and that's what we're seeing.

Speaker Change: At the moment we are.

Speaker Change: Have an assumption around a rate decrease in the second quarter and that's unchanged. Despite some of the CPI print today.

Caroline Sullivan: Sure. Craig, with regard to incentive comp, for the fourth quarter, we recorded about 100 million. So that got us to about 400 million for all of fiscal 2023. And just with regard to 2024, we expect incentive comp to be between about 400 to 420 million. So think about 100 to 105 million per quarter. Great. Thank you. Your next question comes from the line of Owen Lau with Oppenheimer.

Speaker Change: We've already seen that spreads have come in meaningfully both in investment grade.

On the <unk>.

Speaker Change: Sub investment grade, which leaves the market open.

Speaker Change: For the rating scale from investment grade down to the lower <unk>.

<unk> credits and that's important as one of our expectations here is that leverage finance.

Speaker Change: Improves and recover during.

Speaker Change: During the year from historical lows over the last couple of years.

Owen Lau: Please go ahead. Good afternoon, and thank you for taking my question. So going back to your MIS Revenue Guidance, you guide it to a high single digit to a low double digit percentage, which is higher than your peers that lead to a high single digit. And I know you have limited information about your peers, but could you please try and talk about some of the potential drivers for the difference?

Speaker Change: In here is also the 10%.

Speaker Change: Increase in the refinancing walls, we talked about that on the on the last call and a modest recovery in M&A.

Speaker Change: Still uncertain, but there's certainly sizable dry powder and cash on the corporate balance sheet that is also a backdrop here, even though we've got moderating economic growth.

Mike West: Yeah, I think Mike, why don't I hand that to you? Yeah. Owen, thank you for your question. I'll start at the macro level.

Mike West: And as Rob mentioned, you know, an overall constructive outlook for 2024. And underpinning this is that, first of all, Mark Hitz uncertainty that we've experienced over the last couple of years starts to subside. And if you think that transmission is to a lower execution risk in the primary markets and also improved secondary trading, that leaves more opportunity for issuance. And that's what we're seeing at the moment.

Speaker Change: We are assuming an avoidance of a deep recession, and therefore economic resiliency and looking towards that growth in 2025 as people think about deploying long term.

Speaker Change: Capital.

Speaker Change: At the same time a spread comes in that is also a key assumption in our default study announced we get over that peak default period during the year as spreads come in that is amount a more favorable environment for the lower end of spec grade. So that's underpinning a lot of.

Mike West: We have an assumption around a rate decrease in the second quarter, and that's unchanged despite some of the DPI print today. We've already seen that spreads have come in meaningfully, both in investment grade and sub-investment grade, which leaves the market open for the rating scale from investment grade down to lower rated credits, and that's important as one of our expectations here is that leverage finance um improves and recovers during the year from historical lows over the last couple of years. Here is also the 10% increase in the refinancing walls. We talked about that on the last call and a modest recovery in M&A. That's still uncertain, but there's certainly sizable dry powder and cash on the corporate balance sheet. There's also a backdrop here.

Speaker Change: On a macro picture, but Rob do you want add any yeah, and we can if people want to get into the asset levels.

Guidance, we're happy to do that and another question I also I think it was manav that asked a question about <unk>.

Rob: Recurring revenue in Mis and maybe let me just come back to that.

Rob: You know that that continues to be.

Rob: Our view on that as you know continues to be in that kind of low to mid single digit range.

Rob: Our range for revenue.

Rob: This ties in part to first time mandates, obviously first time mandates or what build the stock of Av.

Rob: Of of rated issuers that we surveil, so just a little insight there.

Mike West: Even though we've got moderating economic growth, we are assuming an avoidance of a deep recession and, therefore, economic resiliency. And looking towards that growth in 2025, as people think about deploying long-term... Capital. At the same time, as spread comes in, that is also a key assumption in our default study. And as we get over that peak default period during the year, as spreads come in, that is a more favorable environment for the lower end of the spectrum. So that's underpinning a lot of our macro picture, but Rob, do you want to add anything?

Rob: We saw a pretty significant slowdown in first time mandates since I'd say third quarter of 2022.

Rob: The fourth quarter first time mandates.

Rob: Were about in line with the fourth quarter of 2022.

Rob: We are expecting that to start to pick back up and that's not surprising given what you see as our expectations for.

Rob: High yield and leverage loans, and so that will support a slight uptick I think in recurring revenue growth for us.

Speaker Change: Thanks, a lot.

Your next question comes from the line of Scott <unk> with Wolfe Research. Please go ahead.

Speaker: Yeah, and we can, you know, if people want to get into the asset level guidance, we're happy to do that. And another question, I think it was Manav that asked a question about recurring revenue and MIS, and maybe I'll come back to that. You know, that continues to be, our view on that is, continues to be in that kind of low to mid-single-digit range for revenue. I, you know, this ties in part to first-time mandates.

Scott: Hey, good afternoon. Thanks for taking my question I just wanted to go back to the research assistant.

Scott: It's only been a couple of months since you launched the product, but wondering if you could maybe share some feedback since the launch and anything you've learned about the product in the last couple of months. Thanks.

Speaker Change: Yeah. Thanks. Thanks.

Speaker Change: Scott I would say.

Speaker Change: We are happy about a couple of things one the product development.

Speaker Change: Process.

Speaker Change: The work, we did in engineering and product development to get this thing out.

Speaker: Obviously, first-time mandates are what build the stock of rated issuers that we surveil. So just a little insight there. We saw a pretty significant slowdown in first-time mandates since, I'd say, the third quarter of 2022. The fourth quarter of first-time mandates, we're about in line with the fourth quarter of 2022.

Speaker Change: Happened more quickly than than maybe some of our previous product launches. So we're really excited about some of the changes. We've made we were able to get to market faster.

Speaker Change: Because of that.

Speaker Change: We're leveraging gen AI tools and partially because we have some platform engineering elements that make it makes us able to move a little bit more quickly.

Speaker Change: So that's one good note in terms of take up among customers.

Speaker: We are expecting that to start to pick back up. And, you know, that's not surprising given what you see as our expectations for high-yield and leveraged loans. And so that'll support a slight uptick, I think, in recurring revenue growth for MIS. Thank you so much.

Speaker Change: It's early days oftentimes these us the.

Speaker Change: You'll stage of the sales cycles I would measure in months.

Speaker Change: But we have.

Speaker Change: More units in the first six weeks than we've seen among virtually any other products we've launched.

Scott Warsaw: Your next question comes from the line of Scott Warsaw with Wolf Research. Please go ahead. Hey, good afternoon. Thanks for taking my question. I just wanted to go back to the research assistant.

Speaker Change: In the past so the people are making buying decisions quickly remember we started with a December one commercial launch so they're making decisions within six weeks oftentimes you would look at our sales cycle being measured in months. So that's a really good sign and again I've mentioned earlier that we're.

Stephen Tulenko: I understand it's only been a couple of months since you launched the product, but I was wondering if you could maybe share some feedback since the launch and anything you've learned about the product in the last... Yeah, thanks. Thanks, Scott. I would say we are happy about a couple of things.

Speaker Change: We're really encouraged by the engagement at the senior levels.

Speaker Change: Ceos literally no.

Stephen Tulenko: One, the product development. The work we did in engineering and product development to get this thing out happened more quickly than maybe some of our previous product launches, so we're really excited about some of the changes we've made. We're able to get to market faster. That's partially because of the fact that we're leveraging Gen AI tools and partially because we have some platform engineering elements that make it able to make us able to move a little In terms of take-up among customers, you know, it's early days. Oftentimes, these are the initial stage of the sales cycle, which I would measure in months, but we sold more units in the first six weeks than we've seen among virtually any other product we've launched in the past. So people are making buying decisions quickly. Remember, we started with a December 1 commercial launch, so they're making decisions within six weeks. Oftentimes, you would look at a sales cycle being measured in months, so that's a really good sign.

Speaker Change: One of the largest banks in United States.

Speaker Change: We were the topic of conversation at the Ceo's table was in the last few weeks, where they literally were thinking and talking about this is one of the.

Speaker Change: Elements in their transformation program.

Speaker Change: Ceos senior levels of investment managers, and banks and insurance companies.

Speaker Change: <unk> I'm talking to people in our sales reps are talking to people at a different level than we've seen in the past. So I would say, we're very encouraged by that.

Speaker Change: Those sales cycles, I think will go faster than maybe they might have in previous product launches, but you still need to engage with the.

People and their technology groups their cyber groups their compliance groups to make sure. When you are making this big of a decision. This transformational that you've got all your bases covered.

So we're pretty encouraged by that.

Speaker Change: Hopefully that's a good a good sense for color on the demand environment.

Okay Super helpful. Thank you.

Speaker Change: Yes.

Speaker Change: Your next question comes from the line of Shlomo Rosenbaum with Stifel. Please go ahead.

Shlomo Rosenbaum: Hi, Thank you very much.

Shlomo Rosenbaum: I wanted to ask a little bit we talked a lot about gen AI, but I want to ask about general sales cycles. Like what are you seeing are things cycle is getting shorter staying the same getting any longer what do you see more on a sequential basis and then I just wanted to touch back on the last question about incentive compensation and asking if there is any change in the mix.

Stephen Tulenko: And again, I mentioned earlier that we're really encouraged by the engagement at the senior levels. You know, CEOs, I literally know, one of the largest banks in the United States, we were the topic of conversation at the CEO's table within the last few weeks where they literally were thinking and talking about this as one of the elements in their transformation program. CEOs, CEOs, the senior levels of investment managers and banks and insurance companies, where I'm talking to people, and our sales reps are talking to people at a different level than we've seen in the past.

Shlomo Rosenbaum: Of the incentive compensation between the two units just getting back to kind of the margin expansion.

Shlomo Rosenbaum: In EM.

Speaker Change: So on the sales cycle. Thanks Shlomo.

Speaker Change: In the spring last year, we got a lot of questions around are you seeing elongated sales cycles and I.

Speaker Change: I think we gave.

Pretty good sense for what we were seeing sales cycles lengthening.

Speaker Change: Maybe just a little bit nothing material.

Stephen Tulenko: So I would say we're very encouraged by that. Those sales cycles, I think, will go faster than maybe they might have in previous product launches, but you still need to engage with people in their technology groups, their cyber groups, their compliance groups to make sure when you're making this big of a decision that's this transformational, you've got all your bases covered. So, you know, we're pretty encouraged by that. Hopefully, that's a good sense for color in the on demand environment. That was super helpful. Your next question comes from the line between Shlomo Rosenbaum and Stiefel.

Speaker Change: Measured as a matter of number of days, perhaps but we were.

Speaker Change: We were also seeing higher price points and the proposal and richer.

Speaker Change: <unk> propositions composed in that in that proposal. So was consistent with what we would expect I would say that trend is actually extended through 2023. So we're running right around the same numbers we were in the spring it looked at this closely the other day.

Speaker Change: So sales cycles are.

Speaker Change: Maybe slightly longer than they were maybe a few years ago, but only because we're seeing bigger price points, a richer richer value proposition, so pretty happy about that.

Shlomo Rosenbaum: Please go ahead. Hi, Thank you very much. Um, I just want to ask a little bit, we talked a lot about generation AI, but I want to ask about general sales cycles, like what are you seeing? Are things, cycles getting shorter, staying the same, getting any longer? What do you see, you know, more on a sequential basis? And then I just want to touch back on the last question about incentive compensation and ask if there's any change in the mix of the incentive compensation between the two units, just getting back to kind of the margin expansion, you know, in MIS. So on the sales cycle, thanks, Shlomo. You know, in the spring of last year, we got a lot of questions around, are you seeing elongated sales cycles? And, you know, I think we got a pretty good sense for what we were seeing. You know, sales cycles were lengthening maybe just a little bit. Nothing material can be measured in a matter of a number of days, perhaps.

Let's see here anything else on sales cycles.

Speaker Change: Yes, that's probably that's probably a good way to to finish that.

Speaker Change: And then on the question on incentive comp and we're not seeing anything material difference between the segments compared to 24 versus 23.

Okay. Thank you.

Speaker Change: Your next question comes from the line of Seth Weber with Wells Fargo. Please go ahead.

Seth Weber: Hi, good afternoon.

Seth Weber: I guess I just wanted to follow up on the Mis margin question again, I am trying to just balance some of the investments that you're making versus.

Seth Weber: So the investment spend that you're doing versus longer term technology.

Seth Weber: Benefits cost saves there can you just remind us or update us on how we should be thinking about incremental margins for the mis business going forward. If theres been any change to just the incremental margin framework for that business. Thank you.

Seth Weber: Yes.

Speaker Change: Maybe I'll also go back a little bit to fourth quarter and missed because I think we've been getting some questions about that and.

Stephen Tulenko: But we were also seeing higher price points in the proposal and richer value propositions included in that proposal. So it was consistent with what we expected. I'd say that trend has actually extended through 2023. So we're running right around the same numbers we were in the spring. I looked at this closely the other day. So, sales cycles are maybe slightly longer than they were maybe a few years ago, but only because we're seeing bigger price points and richer value propositions. So I'm pretty happy about that.

Speaker Change: You know what I think fourth quarter to me really illustrated the tremendous operating leverage that's in the business.

If you look at to.

Speaker Change: To give you a sense of what we were saying in the fourth quarter for US and then I'll take it forward into 2024 and beyond.

Speaker Change: Revenues came in lighter than we had expected.

Speaker Change: Expenses came in almost exactly online.

Speaker Change: Of what we had budgeted I think it was something like one 5% expense growth.

Speaker Change: Over the prior year quarter, so essentially the entire revenue Miss dropped right down to adjusted operating income and again, that's what we love about this business and think about what was going on and this was in the last few weeks of the year. There's virtually nothing we can do in regards to the expense base at that point.

Stephen Tulenko: Let's see here, anything else on sales cycles? Uh, yeah, that's probably a good way to go. And then on the question on Incentive Comp, we're not seeing anything materially different between the segments compared to 24 vs. 5. Okay, thank you. Your next question comes from the line of Seth Weber with Wells Fargo. Please go ahead. Hi, good afternoon.

Speaker Change: The majority of our of our expense base in Ms. As people also we have obviously a constructive view on 2020 for issuance and you've heard us talk about in the past that we try to think about or are things cyclical or structural and we saw that as a brief air pocket.

Seth Weber: I guess I just wanted to follow up on the MIS margin question again. I'm trying to just balance, you know, some of the investments that you're making versus, The Incremental Margin Framework for that. Yeah, and I'll maybe go back a little bit to fourth quarter MIS, because I think we've been getting some questions about that.

Speaker Change: In issuance and so that then did again that dropped right to adjusted operating income and it was not an expense issue and then you see 200 basis points of margin expansion from that.

Speaker Change: Jumping off point at the end of the year and I would I would say this and Mike feel free to add.

Speaker: And, you know, what I think the fourth quarter really illustrated the tremendous operating leverage that's in the business. If you, you know, to give you a sense of what we were saying in the fourth quarter for MIS, and then I'll take it forward into 2024. And beyond, you know, revenues came in lighter than we had expected.

Mike West: So we've got our low 60% margin target, we still feel very comfortable about that we believe that this 200 basis points.

Mike West: Is solidly on track for that while we are investing back in that business.

Mike West: I talked a little bit about in my prepared remarks in particular, we've been investing in resources in some of these areas like domestic debt markets like digital finance and private credit and make sure. We've got the resources and then we've also been investing in that and the technology is so important.

Speaker: Expenses came in almost exactly online, in terms of what we had budgeted. I think it was something like one and a half percent expense growth, you know, over the prior year quarter. So essentially, the entire revenue MIS dropped right down to adjusted operating income. And again, that's what we love about this business. And think about what was going on.

Mike West: For us to get the technology enablement of the analytical teams for a variety of reasons that I touched on the call Mike anything to add to that.

Speaker: This was the last few weeks of the year. There's virtually nothing we can do in regards to the expense base at that point. The majority of our expense base in MIS is people. Also, we have, obviously, a constructive view on 2024 issuance. And you've heard us talk about in the past that we try to think about our things in a cyclical or structural way. And we saw that as a brief air pocket in issuance. And so that then did, again, that dropped right to adjusted operating income. It was not an expense issue.

Mike West: But just on the technology element, it's about driving.

Mike West: Efficiencies in the future by investing today, and having a very well controlled business. So that's the on.

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

Speaker Change: Got it thank you.

Yes.

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

Jeffrey Marc Silber: Yes, Thank you Stephen Polycom per job.

Jeffrey Marc Silber: I guess going off that last point, you talked about general Gen. AI tools that you are deploying internally.

Speaker: And then you see 200 basis points of margin expansion from that, you know, the jumping off point at the end of the year. And I would say this, and Mike, feel free to add. So we've got our low-60s percent margin target. We still feel very comfortable about that.

Jeffrey Marc Silber: Can you describe some of the ones that have gone live what efficiencies are being harnessed.

Jeffrey Marc Silber: Where do you think you can get the most benefit towards the medium term target.

Jeffrey Marc Silber: From those Gen AI tools, and then is there like an enterprise wide committee handling decision to build or.

Mike West: We believe that this 200 basis points is solidly on track for that. But we are investing back in that business. You know, I talked a little bit about in my prepared remarks, you know, in particular, we've been investing in resources in some of these areas like domestic debt markets, like digital finance and private credit, to make sure we've got the resources. And then we've also been investing in the technology. It's so important for us to get the technology enablement of the analytical teams for a variety of reasons that I touched on during the call. Mike, anything to add to that? Not really.

Jeffrey Marc Silber: Ploy.

Jeffrey Marc Silber: <unk> being handled within individual departments.

Steve: Yeah, Steve.

Steve: Steve you want to start yeah, yeah sure. So we're doing a lot of the innovation work and trying to accelerate the innovation work through.

Steve: Central team the team that is really a.

Steve: Pretty agile team, sometimes is bigger it gets bigger or smaller depending on which projects we're working on.

Speaker Change: That team is in MAA, where we're doing a lot of the experimentation and then getting developing value propositions that we can use externally and internally I will just give you a simple example.

Mike West: But just on the technology element, it's about driving efficiencies in the future by investing today and having a very well-controlled environment. Yeah, the bottom line is that as we get more technology enablement, we have surges and issuance; we'll be better able to handle that without having to add people. Thank you. Yep. Your next question comes from the line of Jeff Meuler with Baird. Please go ahead. Yeah, thank you. This is Stephen Poliakon for Jeff.

Speaker Change: Summarizing a PDF, which is something that you would expect you could do with jet AI tools.

Speaker Change: Might be able to do that with some tools that are offered.

Speaker Change: Through external folks not just through Moody's, but leveraging that so you can use it in an industrial strength way make it a part of your compliance apparatus make it a part of the way in which you build products the way in which you do your job everyday requires some engineering work as well so.

Speaker Change: We're summarizing or maybe a 300 page document.

Stephen Tulenko: I guess going off that last point, you talked about the general or the Gen AI tools that you're deploying internally. Can you describe some of the ones that have gone live? What efficiencies are being harnessed? Where do you think you can get the most? benefit towards the medium-term target from those Gen AI tools. And then, is there like an enterprise-wide committee handling decisions to build or not? Is this a toy, or is this one of these things being handled?

Speaker Change: Developing summaries across multiple documents at once we're incorporating a document that you are reading today into our other jet AI tools in order to generate.

Speaker Change: Influence across not just what you might get from the open AI models, we're working with Microsoft on but also through the content that you're introducing to your analysis right now and you're right here. So an experiment that you could see being very helpful for the folks in M. I S might be.

Stephen Tulenko: Individual. Yeah. Steve, you want to start? Yeah. Yeah, sure. So we're doing a lot of innovation work and trying to accelerate the innovation work through... A central team, a team that is really a pretty agile team, sometimes it's bigger, it gets bigger and smaller, you know, depending on which project we're working on. That team is in MA where we're doing a lot of the experimentation and then getting, and developing value propositions that we can use externally and internally. I'll just give you a simple example.

Speaker Change: I am doing work on this particular industry. There is three or four documents that might be interested in reviewing and maybe I can incorporate them into understanding really them more quickly taking in gathering data from that much more quickly. So.

Speaker Change: The central team is there to create critical mass in terms of engineering and then rollout tools.

Speaker Change: In a compliant way in a way thats been tested from an industrial strength perspective, and is consistent with all of the normal processes that we would want to adopt as a reading agency, where it's appropriate.

Stephen Tulenko: Summarizing a PDF, which is something that you would expect you could do with Gen AI tools, you might be able to do that with some tools that are offered, you know, through external folks, not just through Moody's, but leveraging that so you can use it in an industrial-strength way, make it a part of your compliance apparatus, make it a part of the way in which you build products, the way in which you So, we're just summarizing maybe a 300 page document. We're developing summaries across multiple documents at once. We're incorporating the document that you're reading today into our other Gen AI tools in order to generate inference across not just what you might get from the open AI models we're working on with Microsoft on, but also through the content that you're introducing to your analysis right now and right here.

Speaker Change: Yes, just maybe a couple of points for me.

Speaker Change: Ms, but pretty excited about the potential of Gen II.

Speaker Change: In the ratings business and internally with office leveraging the Moody's co pilot.

Speaker Change: But we also do envisage that using gen AI across the workflow and doing that to actually enhance our compliance as well as improving the overall efficiency in the business and seeing that Gen. II that Steve just referenced as an enabler to human judgment in the ratings process. So.

Speaker Change: Again exciting opportunities for mis to navigate with this technology, yeah, and the only thing I would add and I've said this.

Stephen Tulenko: So, an experiment that you could see being very helpful for the folks in MIS might be, I am doing work on this particular industry; there are three or four documents I might be interested in reviewing, and maybe I could incorporate them into understanding, reading them more quickly, taking in, gathering data from them much better. So the central team is there to create critical mass in terms of engineering and then roll out tools in a compliant way, in a way that's been tested from an industrial strength perspective, and it's consistent with all of the normal processes that we would want to adopt as a rating agency where it's appropriate. Yeah, just maybe a couple of points for MIS.

When this comes up is that.

Speaker Change: We're going to be deliberate and transparent in the rating agency in terms of how we leverage generative AI, we're in dialogue with our regulators to make sure that they understand how we're going to do that.

Speaker Change: Hey, good color. Thank you.

Speaker Change: Your next.

Speaker Change: Question comes from the line of Heather <unk> with Bank of America. Please go ahead.

Heather: Hi, your line might be.

Heather: Yes, sorry.

Heather: Thank you for taking my question.

Heather: Just with regard to your mid term margin.

Heather: You talked earlier about that.

Heather: But you didn't.

Heather: Wasn't necessarily going to be linear he got that but can.

Mike West: I mean, we're pretty excited about the potential of GenAI in the ratings business. And internally, we're obviously leveraging Moody's Copilot. But we also do envisage using GenAI across the workflow and doing that to actually enhance our compliance as well as improve the overall efficiency in the business. And seeing that GenAI that Steve just referenced as an enabler to human judgment in the ratings process.

Can you help us bridge kind of as we think out over the next couple of years.

Heather: How it could lock, especially given some of these areas.

Heather: <unk>.

Heather: And how comfortable are you kind of.

Heather: If the opportunity presents itself would you.

Heather: <unk> been more now for topline growth.

Heather: Or I guess, just the commitment to that.

Heather: Again, given what you're seeing on the environment.

Speaker Change: Hey, Heather Thanks for the question. So I think that's what you're seeing us do right and we.

Mike West: So again, exciting opportunities for MIS to navigate with this technology. Yeah, and the only thing I would add, and I've said this before when this comes up, is that we're going to be deliberate and transparent in the rating agency in terms of how we leverage generative AI. We're in dialogue with our regulators to make sure that, you know, they understand how we're going to do that. Your next question comes from the line of Heather Belsky with Bank of America. Please go ahead. Out of your line, Mike. I, yeah, sorry.

Speaker Change: We've got to make the investment has got to come before the sales and ultimately the revenue growth comes in.

Heather: I feel like we have some ambitious medium term targets that mean that we're going to continue to accelerate.

Heather: Revenue growth in the MA business and so we're making the investments that we talked about today to be able to support Gen. AI product development in platforming, which we think are going to support that acceleration for the reasons. We've talked about we continue to feel comfortable with those medium term targets, particularly the.

Heather Belsky: Thank you for taking my question. With regard to your midterm margins, you talked earlier about that you didn't, The path wasn't necessarily going to be linear to get there, help us bridge kind of out. You know, how it could look, especially given some of these areas that you're investing in, and how comfortable are you, kind of, if the opportunity presents itself, would you, and more now for top-line growth or I guess just the commitment to those margins given what you're seeing in the environment. Hey, Heather, thanks for the question. So I think that's what you're seeing us do, right?

Heather: You mentioned that the.

Heather: The margin, it's just that in this case the investment is coming before the the the.

Heather: Our growth.

Heather: Okay.

Speaker Change: Thank you.

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

Andrew Steinman: Hi, Jessica Caroline could you just talk more about the 20% increase in DNA is there any change of accounting assumptions or methods and well DNA kind of stay in this general vicinity as a percentage of revenues.

Speaker: And we've got to make the investment. It has to come before the sales and, ultimately, the revenue growth come. And, you know, I feel like we have some ambitious medium-term targets that mean that we're going to continue to accelerate revenue growth in the MA business. And so we're making, you know, the investments that we talked about today, to be able to support Gen AI product development and platform management, which we think are going to support that acceleration for the reasons we talked about. We continue to feel comfortable with those medium-term targets, particularly the, I mean, you mentioned the margin. It's just that, in this case, the investment is coming before the ARR. Thank you. Your next question comes from the line of Andrew Steinerman with J.P. Morgan. Please go ahead. Hi, this is Matthew from Kalkine.

Jessica Caroline: Yeah, Let me, let me just I'll start with that and then I'll turn it over to.

Caroline: To Caroline.

Caroline: I think in general what Youre, saying with DNA represents the we've been talking about the investments that we've been making in our SaaS products you've seen some increased capital expenditures over the last few years, that's now starting to come through in the form of capitalized software and I also talked about the higher growth rates there.

Caroline: We are seeing with those SaaS products and I think that's you.

Caroline: You want to be able to look at those two things together across all of MAA, we're expecting our hosted and SaaS solutions to be growing in kind of a call it low double digits to two.

Matthew: Could you just talk more about the 20% increase in DNA? Is there a change in accounting assumptions or methods? And will DNA, you know, kind of stay in this general vicinity as a percentage of revenue? Yeah, let me just start with that, and I'll turn it over to Caroline.

Caroline: Parts of the MA portfolio like decision solutions, we expect to be growing more like.

Speaker: I think, in general, what you're seeing with DNA represents the, you know, we've been talking about the investments that we've been making in our SAS products. You've seen some increased capital expenditures over the last few years. That is now starting to come through in the form of capitalized software. And I also talked about the higher growth rates that we are seeing with those SAS products. And I think that's, you know, you want to be able to look at those two things together.

Caroline: High teens and that's that.

Caroline: That's where that investment in software development is going Caroline do you want to talk a little bit about it from a accounting perspective, so certain development costs linked to the SaaS based solutions are capitalized and then they are depreciated over the useful life of those underlying assets and that's usually.

Around four to five years and that's all in accordance with U S. GAAP.

Speaker: Across all of MA, we're expecting our hosted and SAS solutions to be growing in kind of the, call it, you know, low double digits. Parts of the MA portfolio, like decision solutions, we expect to be growing more like the high teens. And, you know, that's where that investment in software development is going. Caroline, do you want to talk a little bit about that from an accounting perspective?

Caroline: Yeah.

Caroline: Okay and should it stay in this <unk> as a percentage of revenues going forward.

Caroline: Yes, I think if you look at it as a percent of revenues I mean, obviously, we're we're bumping up the capex here, a little bit, but I think as.

Caroline: As we get to the increase in revenue growth.

Corresponding increase in capitalization that should stay relatively in line from a percent I think a percent of revenue basis.

Caroline Sullivan: So, certain development costs linked to the SAS-based solutions are capitalized, and then they're depreciated over the useful life of those underlying assets. And that's usually around four to five years, and that's all in accordance with U.S. accounting standards. And should it stay in this vicinity, D.A., as a percentage of revenues going forward? Yeah, I think if you look at it as a percent of revenues, I mean, obviously, we're bumping up the capex here a little bit. But I think, you know, as we get the increase in revenue growth and, you know, corresponding increase in capitalization, it should stay relatively in line from a percent, I think, of the revenue base. Okay, thank you very much. Again, that is star number one to ask a question, and your next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead.

Speaker Change: Okay. Thank you very much.

Speaker Change: Again that is star one to ask a question and your next question comes from the line of Craig Huber with Huber Research partners. Please go ahead.

Craig Anthony Huber: My follow up here.

Craig Anthony Huber: 2024 can you just talk a little bit further about your outlook specifically for investment grade high yield bank loans to finance institutions in terms of the debt issuance outlook for this year that's embedded in your overall.

Craig Anthony Huber: The company outlook and then also can you maybe just throw in there what the what is your cost ramp assumption over each of the four quarters for the rest of the year. Thank you.

Speaker Change: Greg I'll take the first part of your question for hunting off.

Speaker Change: By segment.

The <unk>.

Speaker Change: Investment grade issuance growing up.

Speaker Change: 5% that comes off of 20%.

Speaker Change: Growth last year.

Speaker Change: Underpinning this steady uptake with regards to upcoming maturities.

Speaker Change: <unk> is supporting in certain key sectors, but I would see that as a variable to the.

Craig Anthony Huber: Yeah, hi, my follow-up here. For 2024, can you just talk a little bit further about your outlook specifically for investment grade, high yield, maybe bank loans, and finance institutions in terms of the debt issuance outlook for this year that's been better than your overall outlook? And also, can you maybe just throw in there? What is your cost ramp assumption over each of the four quarters? Thank you. Craig, I'll take the first part of your question before handing off.

Speaker Change: Up side as I mentioned earlier.

Speaker Change: The spreads at the moment are creating favorable conditions at the higher end of the rating scale on down into the <unk>.

Speaker Change: So that's really an investment grade corporates high yield.

Speaker Change: Again back to this market uncertainty that subsiding spreads have come in.

Speaker Change: Materially over the last.

Mike West: If I go by segment, the... Investment-grade issuance is growing at 5%. That comes off a 20% growth last year, underpinning this steady uptick with regard to upcoming maturities. M&A is supporting in certain key sectors, but I would see that as a variable to the upside. As I mentioned earlier, the spreads at the moment are creating favorable conditions at the higher end of the rating scale and down into the BAA.

<unk> months Theres been some delayed refinancing that's now coming due and these tend to be higher quality spec grade issuers.

Speaker Change: <unk>.

Speaker Change: We will get that opportunity to come into the market should those spreads.

Speaker Change: <unk> remain favorable and again still coming off a low base as Rob.

Speaker Change: Highlighted earlier leverage loan.

Speaker Change: Driven primarily by refinancing, including the amend and.

Mike West: So that's really on investment grade for corporates, high yield. And again, back to this market uncertainty that's subsiding, spreads have come in materially over the last 12 months.

Speaker Change: <unk>.

Speaker Change: There is also a.

Mike West: There's been some delayed refinancing that's now coming due, and these tend to be higher quality spec-grade issuers that will get that opportunity to come into the market should those spreads remain favorable. And again, still coming off a low base, as Rob highlighted earlier.

Our refinancing in the public market of Sutton.

Speaker Change: Deals that got done in the private market, which.

Speaker Change: Which is nice to see and again these tend to be more.

Speaker Change: Sensitive at the lower end, so as spreads again come in at lower end market access to those around the single BS.

Mike West: Leverage loan driven primarily by refinancing, including amending and extending. There is also a refinancing in the public market of certain deals that got done in the private market, which is nice to see. And again, these tend to be more sensitive at the lower end, so as spreads again come in at the lower end, market access to those around the single Bs is there. So again, 20% for the leverage loan. FIG, on the other hand, as we mentioned, a heavy proportion of FIG is frequent issuers. We've kept that relatively flat. There are some different variables here.

Speaker Change: So again, 20% for the leverage loan thing on the other hand.

Speaker Change: As we mentioned a heavy proportion of Ah.

Speaker Change: Fig is frequent issuers, we've kept that relatively flat there are some.

Speaker Change: Different variables there to some some different.

Central Bank support facilities.

Speaker Change: We will start to shrink in <unk>.

Mike West: There are some different central bank support facilities that will start to shrink in 24, therefore leading banks to come to the capital markets. And that will also be a focus on their buffers and broader capital needs, but stable year-over-year. PPIF, mid-single-digit, largely made up of infrastructure financing and access by some of the larger US PFG issuers.

Speaker Change: 24, therefore, leading banks to come to the.

Speaker Change: Capital markets and that will also be a focus on the buffers.

Speaker Change: Broader capital needs, but stable year over year.

Speaker Change: Yes.

Speaker Change: Mid single digit largely made up of infrastructure financing and access by some of the larger U S. PFG issue is when we think about the transition of monetary policy.

Mike West: When we think about the transition of monetary policy and the tightening... that has occurred, we will probably see an increase in infrastructure projects that are really long-dated as they want to lock into some lower rates. I touched on structured finance earlier at that mid-single-digit percentage, and you've got to look inside structured finance to look at the different asset classes, but really ABS is leading in that particular area.

Speaker Change: The tightening.

That has occurred that we will probably see a increasing infrastructure projects that are really long dated us they want to lock into some lower rates.

Speaker Change: Going forward I touched on structured finance Lia.

Speaker Change: Mid single digit percentage and you've got to look inside structured finance.

Speaker Change: Look at the different asset classes, but really ABS, leading in that particular area. So hopefully that helps.

Speaker: So hopefully, that helped. I'll now turn the call back to Rob for any closing remarks. Okay, one public service announcement for those of you in Europe.

Speaker Change: Yes.

Speaker Change: I'll now turn the call back to Rob for any closing remarks.

Rob: Okay, one public service announcement for those of you in Europe.

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

We're looking forward to seeing you at our London event in our offices on February 29th I know that Steve and Siobhan in some of our other senior leaders from Moody's analytics will be there to provide a spotlight on our MA business like we did.

Rob: In New York.

Rob: September of last year, so with that I'm going to bring the call to a close thanks, everybody for joining and we'll talk to you next quarter.

Rob: This concludes Moody's Corporation fourth quarter and full year 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 after the call on the Moody's IR website.

This concludes Moody's Corporation's fourth quarter and full year 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 after the call on the Moody's IR website. Thank you.

Speaker Change: Thank you.

Speaker Change: Please wait the conference will begin shortly.

Speaker Change: Okay.

Speaker Change: Okay.

Yes.

Speaker Change: [music].

Okay.

Speaker Change: [music].

Speaker Change: Okay.