Q4 2024 Moody's Corp Earnings Call
Thank you. Thank you.
Speaker Change: Good day, everyone, and welcome to the Moody Corporation fourth quarter and full year 2024 earnings call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.
Speaker Change: Thank you. Good morning and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year 2024, as well as our outlook for full year 2025 and updates to our medium term guidance.
Speaker Change: During this call, we will also be presenting non-GAP or adjusted figures.
Speaker Change: Please refer to the tables at the end of our earnings press release filed this morning for reconciliations 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 towards the end of our earnings release.
Speaker Change: In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2023 and in other SEC filings made by the company, which are available on our website and on the SEC's website.
Speaker Change: These, together with the Safe Harbour Statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Rob.
Speaker Change: Thanks, Shivani, and thanks very much, everybody, for joining today's call. After our prepared remarks, Steve Tolenko, the president of Moody's Analytics, and Mike West, president of Moody's Investor Service, are going to join Noemie and me for the Q&A portion of the call, and that's something that we've done for a few years now.
Speaker Change: Before I get into our results, I just want to acknowledge that it's been a difficult few weeks for many members of our team.
Speaker Change: Following the tragic loss of our dear friends and Moody's colleagues
Speaker Change: Chris Collins and Melissa Nakandri in the Washington, D.C. plane crash. They really were cherished members of our team, and their loss leaves an immeasurable void, and our thoughts are with their families during this incredibly difficult time.
Now, on to our results.
Speaker Change: Moody's delivered a record year in 2024. We grew revenue by 20% to over $7 billion.
Speaker Change: with strong growth across both businesses and through disciplined cost management.
Speaker Change: We expanded our adjusted operating margin by over 400 basis points. And that translated into a 26% adjusted diluted EPS growth. All while executing on strategic investments across both of our businesses.
Speaker Change: in the fourth quarter, and our ratings teams were really active, and it wasn't just in the fourth quarter, but throughout the year.
Speaker Change: Delivering 33% revenue growth for ratings and over 500 basis points of adjusted operating margin expansion.
for the full year.
Speaker Change: Moody's Analytics also had a strong finish to the year with 10% recurring revenue growth in the fourth quarter and 9% ARR growth. Decision solutions continued to lead the way with $1.4 billion in ARR growing at 12%.
Speaker Change: Thinking about the future, as we enter the third year since we introduced our medium-term targets, today Noemie and I are going to provide an update on our key metrics and what underpins our higher adjusted diluted EPS growth range.
Speaker Change: So, as we set out this time last year on last year's fourth quarter call, 2024 was a year in which we really doubled down on our investments in order to help us capitalize on some big opportunities that are in front of us.
Speaker Change: And we executed on those foundational investments that we called out on that earnings call at the start of last year. And those included.
Speaker Change: platforming and modernizing. It included new products and also Gen AI. And we focused on the accessibility of our data estate and also enhancements to our risk and resilience posture.
Speaker Change: And we continue to invest in the rating agency and our positioning as the agency of choice for investors and issuers. And I have to say, I'm really proud that we were named Best Rating Agency for an impressive 13th year in a row by Extel, formerly Institutional Investor.
Speaker Change: It's our experienced analysts, insightful research, and active market engagement that really reinforce our leadership position in the market, and that allows us in turn to capitalize on robust periods of issuance like this past year.
Speaker Change: We've also made investments to address the big shifts that are going on in the capital markets.
Speaker Change: The first of those is private credit, and I'm not just talking about direct leverage lending, which is a roughly $1.5 trillion market and growing, but also fund finance, infrastructure debt, and asset-backed finance, to name a few.
Speaker Change: And with dedicated analytical and commercial focus on private credit, we made some really good progress in this space this past year, rating nearly 400 private credit-related transactions in 2024.
Speaker Change: Similarly, we have a product suite to serve transition finance, and we issued over 150 second-party opinions and more than 20 net zero assessments in 2024, and we have a very strong pipeline there as well.
Speaker Change: We also have a coordinated commercial and analytical initiative focused on digital infrastructure and data centers to ensure that we are the agency of choice in this space for the years to come.
Speaker Change: And these investments are driving improvements in operational efficiency and are allowing us to be increasingly volume agnostic within a range of issuance. And you can see this come through in our 60% margins in 2024 and our guidance for 2025.
Speaker Change: And Mike West has given me an interesting statistic that throughout last year, our ratings teams issued a press release related to a credit opinion on average every 20 minutes.
Speaker Change: And that's without needing to meaningfully increase our analytical staffing levels. And very importantly, we did this while maintaining the robust controls that the market and our regulators expect from us.
Speaker Change: And as you've heard me say, we're always looking for ways to invest inorganically in ratings because it's a great business.
Speaker Change: And if you recall, in mid-2024, we invested further in GCR, that's the leading domestic credit rating agency in Africa, taking our ownership up to almost 100%.
And in November...
Speaker Change: We expanded Moody's Local again, this time into six more countries.
across Central America.
Speaker Change: And we're really pleased with the growth that we're seeing in Moody's local revenues, up 16% in 2024. And we signed several hundred first-time mandates. So that's a great expansion of the rated portfolio across the region and really bodes well for the future.
Speaker Change: So let me turn to Moody's analytics for a few moments.
Speaker Change: We've invested there to enhance our product platforms and go-to-market strategy as we continue to deepen our relationships with our traditional customer base.
banks and insurers.
Speaker Change: We've also expanded our data coverage and workflow solutions to serve large corporate customers in in-demand third-party risk domains. That includes things like KYC, supplier risk, trade credit, transfer pricing, and master data management.
Speaker Change: And those include Numerated, which extends our loan origination system for banks.
Speaker Change: PrediCat which adds to our capabilities and casualty underwriting and analytics and most recently in January Cape Analytics which enriches our insights on properties and will integrate with our cat risk models
Thank you.
Just a little bit more on Numerated for a moment.
Speaker Change: We've been collaborating with their team on joint offerings for some time.
And that really highlighted the great fit between our respective
Speaker Change: in the fourth quarter with our enhanced end-to-end commercial lending offering and it's really resonating with our customers.
Speaker Change: Switching over to insurance, over the last several years we've talked about the foundational investments that we've made in our cloud-based intelligent risk platform, we call that IRP.
Speaker Change: And these investments are now delivering meaningful ARR growth for our insurance business. In fact, in 2024, we grew the number of customers on the IRP by almost 20 percent. And migrating to the IRP then enables insurers to reduce sometimes by as much as half.
Speaker Change: The time that they need to model complex scenarios across billions of property locations.
Speaker Change: And as our platform hosts the most modern, sophisticated, high-definition models, our customers are able to better measure and quantify their financial exposure, as well as monitor the evolving risks in their portfolios at scale.
Speaker Change: And this is helping to deepen our relationships with our customer base and expanding our strategic relationships with the largest global insurers, reinsurers, and brokers in the world.
Speaker Change: And I'd be remiss if I didn't mention that for the third consecutive year, Moody's was ranked number one in the Chartist RiskTech 100, providing market validation of our best-in-class solutions serving nearly 15,000 analytics customers.
So, a lot to be proud of in 2024.
And while we had a strong 2024...
Speaker Change: I'm very excited about 2025 and beyond due to a set of deep currents that are changing the way that businesses and markets operate
Speaker Change: And given the investments that we've made over the last several years, we really are well positioned to ride those deep currents. And there are five that we are particularly focused on.
Speaker Change: First, the ongoing expansion and evolution of the debt capital markets that I just touched on. Second, the increasing pace of digital transformation and automation across banks and insurers.
Speaker Change: Third, the imperative for businesses to know more about who they're doing business with.
Speaker Change: Fourth, the growing needs across industries to understand the financial impact of extreme weather events and a changing climate. And fifth, the transformative power of generative AI and the potential unlock for owners of proprietary data and insights.
Speaker Change: So, let me just double click on the impact of extreme weather for a moment because this has been so much in the headlines lately. And on past calls, we've talked about the need to better understand the physical risk relating to extreme weather events and climate change.
Speaker Change: And when we announced the acquisition of RMS a few years ago, some folks asked us, why did we think it was important to have these capabilities?
Speaker Change: In fact, the issue of insurability of assets, both whether insurance is available and what the cost will be over time, has become a very important issue in property and financial markets.
Speaker Change: and the demand to better understand these risks not just by insurers but by banks, investors, companies, governments is only going up.
And that's why we acquired Cape Analytics.
Speaker Change: Their AI-powered technology delivers address-level risk insights, which are a natural complement to our catastrophe models. And these sophisticated models, combined with our really rich and deep data and insights on credit and economics and properties,
Speaker Change: means that we are uniquely positioned to be the authoritative voice on quantifying the financial impacts of physical risk and we see this need continuing for years into the future.
Speaker Change: Noemie is going to walk you through our full year 25 guidance assumptions in a moment. And as we look forward after delivering a remarkable performance in 2024, we're going to provide an update on the progress against our medium-term targets. But let me give you the bottom line.
Speaker Change: We have fundamentally strengthened the earnings power of this business. And that should support Moody's as a serial compounder in the years ahead. So with that, Noemie, over to you. Thank you, Robin. And hello everyone, and thank you for joining us today.
Noemie: Starting with our Q4 results, we delivered a very strong finish, tapping a year of remarkable financial performance in 2024.
Noemie: You can see the highlights from our four-year results on slide 9. The Q4 MCO revenues were nearly $1.7 billion, up 13% year-on-year, and our adjusted yielded EPS was $2.62, up 20% year-over-year.
Noemie: MIS delivered its second highest Q4 revenue on record, with growth across all business lines.
Noemie: The anticipated volatility around the U.S. elections didn't materialize, and with spreads at their tightest levels in over a decade, particularly in spec-grade,
Noemie: The robust demand environment continued throughout the quarter until the last days of December.
MIS revenue in Q4 were $809 million, up 18% year-on-year.
The growth was driven primarily by three key factors.
Noemie: First, Healthy Leveraged Loan Issuance Activity, which was up 134 in Q4.
Noemie: However, with the mix weighted towards refinancing and repricing, transactional revenue for that asset class was up 27%.
Noemie: Second, the continued strengths from infrequent issuers in the banking and insurance sectors. And third, strong performance from structured finance in particularly in US CLOs and CMBS, reflecting strong demand in a very favorable spread environment.
Noemie: MIS's fourth quarter performance and corresponding higher incentive compensation translated into a 51.3 adjusted operating margin which exceeded our implied guidance.
Noemie: Turning to MA, we also had a strong Q4, with revenue of $863 million, up 8% year-on-year.
Noemie: Recurring Revenue, which accounts for 95% of total revenue in MA, grew 10% year-on-year, broadly in line with the 9.4% growth in AR.
Noemie: As Rob said, Decision Solutions drove the performance with 12% growth year-on-year.
Noemie: We delivered strong growth across lines of businesses in decision solutions with banking, insurance, and KYC, achieving AR growth of 9%, 12%, and 17% respectively.
Noemie: More specifically, KYC AR grew 17% with strong demand from customer and supplier risk data usage and sales from new customers.
Noemie: Insurance AR grew 12% driven by improved customer retention and strong demand for a cat model tool as extreme weather events are becoming more pervasive and impactful across industries.
Noemie: This is generating demand for best-in-class risk modeling solutions with the IRP.
Noemie: And our Q1 2025 Acquisition of Keap Analytics only builds on this, as Rob highlighted.
Noemie: Banking AR grew 9% reflecting strong customer retention and expansion of relationships with subscription-based offerings that are enabling customers lending, risk management and finance workflows.
Noemie: The other two lines of businesses in MA include our more established data and research franchises.
Noemie: Data and information grew AR by 8%, driven by demand from ARBIS within the corporate sector.
Noemie: With the attrition events from the asset manager space we discussed earlier in the year affecting the growth rate. That said, sales, meaning cross-sale, up-sale or upgrades, grew meaningfully above AR trends in Foyer 24.
Noemie: And some of this was from upselling research assistance to our CreditView customers, which accounted for 25% of our overall research and insights AR growth.
Noemie: We are encouraged by the Customer Engagement for Research Assistance, one of our GNI offerings, and that's building a healthy pipeline for 2025 and has already reached more than 100 customers in Q4.
Noemie: MA adjusted operating margin of 33.8%, increased 240 basis points versus Q4 last year, leading to a full year margin of 30.7%, which is towards the high end of our annual guide.
Noemie: Now, turning to Fiscal Year 2025 guidance, we expect MCO revenue growth in the high single-digit range, with an adjusted operating margin expanding by about 200 basis points to approximately 50%.
Noemie: And this is on the back of a fiscal year 2024, where we increased adjusted operating margin by 420 basis points.
Noemie: Our adjusted yielded EPF guidance range is a range of $14 to $14.50.
Noemie: Now, for MIS, we expect market conditions will remain constructive this year with tight spreads, declining high-yield default rates, and an uptick in M&A activity.
Noemie: You'll see our issuance outlook for individual asset class on this slide. But all in all, we're projecting MIS-rated issuance growth to be in the low single-digit range for 2025, with 700 to 800 first-time mandates.
Noemie: For MIS revenue, we expect growth in the mid to high single-digit percent range for the year, benefiting from a positive issuance mix.
Noemie: We expect the revenue performance to translate into an adjusted operating margin of 62 to 63 percent, which at the midpoint represents about 250 basis points of margin expansion year over year.
Noemie: For MA, we expect revenue growth in the high single-digit range, with AR growth in the high single-digit to low double-digit range.
Noemie: We expect MA Adjusted Operating Margin to be between 32 and 33%, which at the midpoint represents 180 basis points of margin expansion year over year.
Noemie: Turning to what underpins MA and the expected MCO margin expansion.
Noemie: In our analytics business, we are, for the most part, through the integration of the businesses we've acquired over the recent years.
Noemie: We are also gradually reorienting our go-to-market from selling individual products to selling end-to-end solutions to our customers in the banking, insurance, and corporate segments.
Noemie: And also, more broadly across the organization, we're starting to reap the benefit of the investments we made in automating our workflows, which translates into expected improvements in operating leverage.
Noemie: So, in connection with this, today we are announcing an efficiency program to simplify the organization, allowing us to accelerate profitability expansion and redirect some investment capacity to strategic growth areas.
Noemie: We plan to incur between $200 and $250 million in restructuring charges over the two-year duration of the plan.
Noemie: primarily in personnel related costs for an expected total annualized cost savings in the range of 250 to 300 million dollars upon completion of the plan.
Noemie: We accrued approximately $45 million already in the fourth quarter, and expect to record an additional charge in the range of $80 million to $100 million in FY25, primarily in Moody's Analytics, and to a lesser extent within our corporate functions.
Noemie: I note that we have included the FOIA 24 to FOIA 25 operating expense bridge in the appendix of this presentation to assist with modeling questions.
Noemie: And here's some color on how to think about the calendarization of top line and margin.
Noemie: We expect MIS revenue in FY25 to follow a similar quarterly pattern to FY24, with first quarter revenue up in the mid-single-digit range from the first quarter of FY24, ramping up in the second quarter, before declining sequentially in our third and fourth quarter.
Noemie: For MA, we expect our year-over-year total revenue growth to be consistent in the high single-digit percent range throughout the year, with Q1 revenue being sequentially flat versus Q4-24, a pattern that's consistent with the prior year.
Noemie: For operating expenses and excluding the impact from restructuring and asset abandonment charges, we expect expenses to follow a normal seasonal pattern.
Noemie: Sequentially, we anticipate expenses to increase by about $10 million from Q4 to Q1.
Noemie: In terms of margin, we expect MIS to be in the mid-60s in the first half before declining in the second half in line with revenue.
Noemie: For MA, we expect approximately 30% in the first quarter, sequentially improving in the second half to achieve a four-year guidance of 32-33% as revenue ramps and as we start to see the savings from our efficiency plan in the second half.
Noemie: In terms of how these different dynamics translate into adjusted diluted EPS, we expect this to follow the MIS revenue cadence, and more specifically for Q1, we expect adjusted diluted EPS to be at the high end of the implied quarterly adjusted diluted EPS range of $3.50 to $3.60.
Noemie: So finally, looking beyond 2025, I'd like to talk about how we're tracking against our medium-term targets.
Speaker Change: It's been three years since we published those, and with almost a year in the CFO seat, I'm using this as an opportunity to take stock on how our performance has stacked up.
Speaker Change: The headline is this, 2024 adjusted diluted EPS is up 46% from two years ago.
Speaker Change: Now a lot of this outperformance has been driven by very good execution during a robust issuance environment with MIS revenue up 40.5% in the last two years and MIS adjusted margin already exceeding 60% in 2024.
Speaker Change: We also have delivered strong organic growth in MA, reporting AR growth consistently in the range of nine to ten percent over the last two years.
Speaker Change: As we look forward, we expect our retention rate to remain in the low to mid-90s percent range and to continue to grow our new business at low to mid-teens percent pace, enabling us to sustain ARR growth in this 9 to 10 percent range in the coming years.
Speaker Change: Of note, what's most notably different now from what we envisioned when we initially published our medium-term guidance is that our recent M&A has been at a smaller scale and focused on enriching our offerings to fuel durable growth in our strategic growth areas, including lending and casualty underwriting.
Speaker Change: On profitability, we've invested in GenAI and process automation more broadly for internal efficiencies. We've invested in the build-out of the MA platform and our data interoperability, all of which are expected to generate increased operating leverage in the coming years.
Speaker Change: We expect that this, coupled with our program to simplify our organizational structure, will translate into a margin expansion in the mid-to-high 30% range by 2027.
Speaker Change: Now, bringing this all together, for MTO, we are increasing the range for our adjusted diluted EPS growth from the low double-digit percent growth to low to mid-teens percent growth range, reflecting our ongoing efforts to improve the earnings power of our business.
Speaker Change: To wrap up, we believe that demand drivers and the execution of our strategy will deliver attractive and sustainable growth and profitability expansion across market cycles.
Speaker Change: We remain committed to executing on our capital allocation strategy and anticipate consistent strong free cash flow returns to continue as we work to deliver on both our customers and shareholders.
Speaker Change: I'd like to thank all of our colleagues around the world for their remarkable contributions to another great year for Moody's. And with that, Rob, Mike, and Steve and I will be happy to take your questions. Operator.
Speaker Change: Thank you. If you would like to ask a question, please dial star 1 on your telephone keypad.
Speaker Change: 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. We ask that you please limit yourself to one question.
Speaker Change: The option to rejoin the queue will be unavailable. Again, that is star 1 to ask a question. We'll take our first question from the line of Monifatnayak with Barclays. Please go ahead.
Monifatnayak: Thank you. I just wanted to ask you about the medium term guide. I just wanted to confirm if those were organic numbers, particularly on the MA side, and just maybe just some of the moving pieces in there. It sounds like, Noemie, from your last comment, maybe there's less M&A than what you initially thought. Is that correct?
Monifatnayak: As I said, we're tracking ahead on MCO revenue and adjusted diluted EPS metrics, and MIS operating margin is already at 60%. So we've delivered strong organic growth in MA. We had reported growth consistently in the 9% to 10% range over the last two years, and I think that's what you should expect us to deliver over the medium term.
Monifatnayak: To your point, what's to note, we had a bit lower contribution from M&A than what we initially envisioned when we published those medium-term target initially.
Monifatnayak: We had a different rates environment back then. So, again, we're committed to deliver a 9 to 10 AR growth, as I said, over the medium term. And that's mostly organic. We may do a bit of tucking, but that's really what's driving the main change here.
Speaker Change: Our next question comes from the line of Ashish Sabhadra with RBC Cableton Markets. Please go ahead.
Ashish Sabhadra: Yeah I just wanted to follow up on that midterm questions particularly on margins. So the MIS margins are already at low 60% so just wanted to better understand is there not much room for margin expansion on with issuance just given the high incremental margins there but also what does it imply for earnings growth in the midterm?
Ashish Sabhadra: Are we implying a much more modest earnings growth profile? Any color that will be helpful. Thanks.
So on MIS margin for 2025 just to
Ashish Sabhadra: Kind of give you a little bit more color on what's on our guidance. We've got to remember
for 2025, and then in terms of...
Ashish Sabhadra: And we're continuing to invest in our risk and resiliency program, as you know, we are regulated, and so we continue to improve and enhance our internal controls with automation there.
Speaker Change: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.
Toni Kaplan: Thanks so much. I wanted to ask about MA Margins, really great corridor and higher than expected guide. You talked about the efficiency plan, which was very helpful.
Toni Kaplan: Are you pulling back on investment at all, and just any additional color on...
Speaker Change: Yeah, thanks. I'll start and I'll have Steve provide some color as well.
Speaker Change: to go after the corporate segment. We're making some investments there. We're continuing to invest in our platform and our data estate as well. Now, the efficiency is really coming from – that's the – we're at the point where we've –
Integrated, for the most part, the acquired entities.
That gives us some opportunity to simplify the organization.
Speaker Change: and Steve can talk about some of the things he's doing. We've also, to your point, invested in GenAI. That's delivered some very nice efficiency gains in engineering, as well as in our customer success group. So obviously we're starting to reap the benefits of that as well.
Everything you said there makes good sense.
Speaker Change: I would say the simplification dynamic is a rich one and I think a very valuable way to think about this. Maybe most importantly, we're concentrating on those use cases and those areas where we perceive the demand to be the richest among our customers. Rob talked about.
Speaker Change: Big drivers of growth in the future and we're making investments in those Concentrating on those and redeploying toward those sometimes redeploying out of some areas that aren't going to be as fast growing
Speaker Change: So that's probably the other big change there. But just to reinforce, Gen AI really is making a difference internally. We're pretty excited about the productivity gains we're seeing in engineering especially, and starting to see some on the sales side as well. Already seeing some in customer service, so pretty excited about that.
Speaker Change: Our next question comes from the line of Alex Cram with UBS. Please go ahead.
Speaker Change: Yes, hey, good morning everyone. I guess a good afternoon now, but very quickly on the rating side Obviously laid out kind of some of your expectations But maybe you can dig a little bit deeper for 2025 the puts and takes on the range Where do you think some upside can come from for example M&A and and and what you see as the biggest risk?
for the outlook here. Thanks.
Hey Alex, it's Rob. Thanks for the question.
Speaker Change: So let me give you a little insight into maybe a few of the, you know, some of the key assumptions here in the outlook. I mean, first of all,
Speaker Change: You know, economic growth, we think, is going to support broader market activity. Spreads are tight. They may widen a little bit during the balance of the year, but we'll still be well below historical levels we expect.
Speaker Change: and we think we're going to see continued strong investor demand.
Speaker Change: Refinancing and improved M&A activity are going to be key drivers in regards to refi.
Speaker Change: There's a fairly wide range of assumptions about refi volumes for leveraged loans in particular for 2025 when you look across all the banks.
Speaker Change: And it ranges from, you know, leverage loan issuance being substantially down to being up. And you can see in our webcast deck, we're kind of somewhere in between, you know, down mid-single digits. So that's...
Speaker Change: That's one, and the second key variable is M&A activity. And we've assumed there's something like a 50% increase in M&A for 2025, meaning that M&A will be an increasing percent of the use of proceeds.
Speaker Change: And that is favorable to revenue mix. And just to give you a sense of the sensitivity there, if it was something like 20 to 25 percent increase, that might be, you know, 2 to 3 percentage points.
Speaker Change: of revenue growth. We also haven't assumed any, you know, any risk-off periods, you know, when you've got a forecast that calls for more than six trillion of issuance.
Speaker Change: to issuance. It's not just one assumption, but taken together, Alex.
Speaker Change: That explains our guidance range for revenues that spans mid to high single digits on low single digit issuance growth.
Speaker Change: So maybe I'll take that. Thanks Scott for the question. So I think first of all the length of sales cycle has not changed materially over the last 18 to 24 months. I would say that's been a
Speaker Change: The patterns we've seen in the last couple of years, I'd say we're very encouraged by the pipeline. Our new business production has actually been very good in 2024 across the board and across segments.
Speaker Change: and I would say pipeline going to 25 is very strong as well, so very encouraging.
If I just add...
Speaker Change: So we're just going to add on the new business growth. That was really an encouraging sign that we saw in research and insights.
Across all the businesses, actually, where we had...
Speaker Change: New business growth going faster than AR, and we had some very interesting use cases on research assistant, and that gives us confidence on the outlook.
Speaker Change: Our next question comes from the line of Owen Lau with Oppenheimer. Please go ahead.
Hi, good afternoon and thank you for taking my question.
Speaker Change: So, again, I'm sorry for multiple questions here, but you expect your revenue to grow high single digit, even though your ARR is expected to grow high.
Speaker Change: single to low double-digit. Should we expect this dynamic that is still like, I don't know, maybe 2-3% gap between the two, like this dynamic to continue in the near to medium term? When and what does it take for revenue to actually accelerate to low double-digit? And also, how much have you baked in some of the new initiatives such as AI, MSCI partnership, and other new product launch in your guidance? Thanks a lot.
So, um...
Speaker Change: Just a couple of things on revenue, first of all, that can include some M&A effects. And so AR is an organic constant currency growth number. So that's just one clarification.
Speaker Change: In terms of the best way to look at it, AR and recurring revenue over a trailing 12-month period should be pretty consistent. If you look at 2024, for example, our recurring revenue was 9%, and that's very consistent with AR. What's really driving the difference is this transactional revenue.
Speaker Change: is going down and provides a bit of a headwind. We'll continue to see that in the foreseeable future as we have still customers remaining on our more on-premise platforms outside of the U.S. in banking and insurance. But we expect that to continue to narrow as we migrate those customers over on the platform.
I think that's the best way to look at it.
Speaker Change: So how about guidance? Have you baked in any AI and MSCI, all this into your guidance?
Speaker Change: That we incorporate those into our plans. I would say the sales pipeline is big enough that they are, you know, contributors to the pipeline, but they're not major contributors or material contributors across the whole business.
Speaker Change: Yeah, I would say though that, so it's all baked in, but...
Speaker Change: Research assistant has been very helpful to sales in research and insights and 25% of the growth
in Research and Insight ARRs from customers who subscribed.
Speaker Change: to Research Assistant, and the weighted sales pipeline for Research Assistant is double the total sales for Fiscal 24.
Speaker Change: So, we've got larger opportunities around workflow automation and we're seeing, you know, good momentum. So, it's an important contributor to growth even though it's modest in terms of the overall base of revenues.
Got it. Thanks a lot.
Speaker Change: Our next question comes from the line of Jeffrey Silber with BMO Capital Markets. Please go ahead.
Jeffrey Silber: Thank you so much. With all the discussion coming out of Washington, D.C., I was wondering if you could talk a little bit about first your exposure to federal government as a customer and then more broadly in terms of some of the expected policy changes what the impact on your business might be. Thanks.
Jeffrey Silber: So in terms of the overall impact, it's pretty small. We have an overall MCO level. It's less than 1% of our consolidated revenue. And maybe I'll let Rob talk a little bit about some of the policy changes and how we're looking at that.
Speaker Change: Yeah, so I think it's important to kind of zoom out for a moment and just think about what the world's been through over the last five years. We've had a pandemic. We had a huge negative shock to GDP and employment. Then we had a huge monetary and fiscal stimulus in response.
Speaker Change: Then that led to record inflation and an interest rate shock, and as the pandemic subsided, we had two military conflicts in key energy producing regions.
Speaker Change: and has been able to adapt. So, I think it's important just to keep that, you know, that backdrop because, you know, obviously there's a large volume of.
Speaker Change: Executive Orders and Policy Directives that span a number of different issues, but the headlines don't, you know, tell all the all the story.
You know, I think we'll see some impact.
Speaker Change: in certain sectors based on what happens with tariffs. And you can imagine, you know, sectors like autos and retail and steel and aluminum, immigration, sectors like agriculture and hospitality and construction.
Speaker Change: You could see on fossil fuel producers. So there are going to be, you know, I think some, again, some puts and takes here. We may see, you know, more broadly, a stronger economic environment that's going to be good for issuance in general.
Speaker Change: So I think, you know, also from a rating agency perspective, we're really going to anchor on the credit impacts of all this and, you know, we're putting out a lot of research about, you know, what those impacts could be.
Speaker Change: Our next question comes from the line of David Motomadden with Evercore ISI. Please go ahead.
David Motomadden: Good morning. I had a question just on the higher medium-term outlook for
MIS revenue, the high single to low double-digit growth now.
Speaker Change: versus mid-to-high growth when you guys last updated these medium-term targets. Could you help me think through what's driving that uptick? Were there any big movements in the long-term building blocks that you've given in the past?
Speaker Change: or is it just M&A coming back that's driving that and and maybe also if you could just talk about how we should think about the third-party private credit rating assessments contributing to that as well would be helpful.
Speaker Change: So, we're now a couple of years into that, we've got guidance out for the third year, and we're kind of looking out to now, where do we think we're going to be?
Speaker Change: Five years out in 2027. So we've got two years in the books We've got a year of guidance and two years of unknown And so what you're seeing is us now just updating and an important part of that is the performance that we've already achieved
Speaker Change: So, you know that hopefully that gives you a sense, but Mike maybe just talk a little bit about some of the you know the the demand drivers for issuance because I think that also gives some insight into the the durability of growth and ratings
Yeah, thanks. Thanks, Rob. As Rob mentioned earlier...
Speaker Change: What you've got is a lower rate of MNA over the last
Speaker Change: that we do anticipate to come back because there's large pent-up demand, but if I move away from some of those traditional M&A refunding studies and think a little bit more broadly about growth of private credit, whether that is in the U.S. or in the U.K.
Speaker Change: Direct lending, whether that's in securitization, whether that's in fund finance.
Speaker Change: Then on top of that got to think about some of the drivers in that sustainable and transition finance area
Speaker Change: There are clean energy commitments around 93% of global GDP which is expected to translate in investment needs of about two and a half times.
by 2030, and Rob.
Thank you.
Speaker Change: long-term financing for long-term assets and that could be project finance it could be corporate finance or it could be
Speaker Change: of the Debt Capital Market, these are some of the things that we're investing in, we are engaging in with market participants, and feel very good as part of that medium term story.
Speaker Change: Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead.
George Tong: Hi, thanks. Good afternoon. With respect to the MA segment and your median term target of high single, low double-digit growth, how are you thinking about growth by subsegments? So, decision solutions, research and insights, and data and information, and what do you see as driving the differences in growth?
between those segments.
George Tong: maybe I'll take a I'll talk to that George thanks for the question it's Steve so first of all if you just think about the
George Tong: core franchises. These franchises have been around literally for decades. The data information business, the research and insights business.
George Tong: These businesses have demonstrated a good track record of solid growth, maybe above average for the industry or above average for a peer group.
George Tong: with AR numbers in the high single digits. We think that's going to continue very reliably into the future. You've got continued investments in terms of data quality, data coverage.
George Tong: Some of the higher-growing businesses, most notably the KYC and third-party risk management work that we do to help people understand who they do business with.
George Tong: That's put up some really nice numbers in terms of AR numbers in the recent past and continues to do so we think in the future. So you should see higher growth in the decision solution segment, maybe high single-digit growth in these core franchises that have been around for a long time.
I think you'll see a differentiation that way.
Very helpful.
Speaker Change: Our next question comes from the line of Peter Christensen with Citigroup. Please go ahead.
Peter Christensen: Thank you. Good afternoon. Great to be a part of the call.
Peter Christensen: Really nice execution here. I want to get back on the M&A side.
Speaker Change: You know, you've had some really good speed to market on some new products, some enhancements. I was just talking, just like to hear any color on your ability to pass on value-based pricing across a number of your products and subsegments there. And then lastly, just...
Peter Christensen: Curious how you're thinking about headcount for MIS and growth there potentially. Thanks.
Maybe I'll start with the...
Speaker Change: Questions about MA? Welcome to the call there. Nice to have you on board, by the way. You know, the value-based philosophy is I think one that we have long talked about and long maintained. We think it's really important to the process. You know, inflation is not as important as the value we create for customers, for example.
Speaker Change: In MA, we actually provide some statistics. I'm sure Shivani will have this in our investor deck
and you'll see those are...
Speaker Change: contributions that are very stable and continue over the course of the last couple of years, and we expect it to continue in the future. I think that number was around 7% in 2024, just to give you a benchmark. So, the contributions from pricing, I think, are stable and we expect them to continue going forward.
Thank you.
Speaker Change: Let's see, do you want to talk about the staffing question? For MIS, we've talked about earlier, and that actually drove part of our performance in the fourth quarter. In the fall year, we invested significantly in automation and rating workflow to make our analysis more efficient, and you can expect us to continue to do that.
Speaker Change: We'll obviously continue to invest in our skill set. We have the best analysts and we'll continue to invest and grow, but probably less than the pace of revenue growth given the investments we've made in automation.
Speaker Change: Yeah, the one other thing I'd add, you know, double-clicking on Steve's point about...
You know the the value prop
Speaker Change: It's really interesting. You have so many customers who are focusing on efficiency and digitization and automation and all of these things, and I think we've talked a little bit about the example of what's going on with our CreditView offering with Research Assistant, where the value prop itself
Speaker Change: is changing. So CreditView with no Gen AI enablement is a research subscription product.
Credit View with...
Speaker Change: Gen AI enablement, research assistant, custom AI workflows, those kinds of things.
Speaker Change: is actually something where people can start to say, how do I change the...
Speaker Change: in my, you know, whether it's my my investment team or my research team or whatever it may be. That's a very different conversation and a very different value proposition. Now,
Speaker Change: The cycle time to have those conversations is different, but that's a pretty exciting evolution of that particular product.
Thank you. Compelling narrative.
Speaker Change: Our next question comes from the line of Craig Huber with Huber Research. Please go ahead.
Speaker Change: Thank you. Rob or Mike, can you just talk further about private credit?
Speaker Change: I'm curious what, if you're willing to give this, what percent of your ratings revenue came from private credit last year?
Speaker Change: And then, Naomi, if you could just throw in there, what was the incentive comp number in the fourth quarter and for the full year, and how did that change year over year? Thank you.
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Speaker Change: Craig yeah let me give you um so we don't you know we don't break out exactly like you're you're asking but we can give you some data points to give you an insight give you some insight into
You know the
the traction that private credit is getting.
Speaker Change: You know, things like ratings on, you know, BDCs, sublines, closed-end funds, you know, the suite of fund finance, but also, you know, asset-backed finance and middle-market CLOs, private ratings for investors.
Speaker Change: You know, and that has grown very significantly in the course of one year. And also, just to give you a sense, because fund finance...
Speaker Change: is certainly a growing area, and I think it's going to continue to grow for a number of years. And fund finance is in our FIG. We address that through our FIG rating franchise. In 2024, 30% of our first-time mandates in FIG were private credit related.
Speaker Change: So again this goes back to the when you look at it in the total base it's still modest but when you look at it as a percent of growth you can see that this is starting to make a difference. Mike do you have anything you want to add just in terms of how we're addressing private credit?
Mike West: It's very important when you think about the originator, the transparency around the credit quality there, they're looking to...
Mike West: move on to the buyer. And then many of the buyers, again, want to know their credit quality and an independent view of their credit quality because many of these buyers.
Mike West: are sensitive with regard to regulation and their own capital allocation. So, again, there's many trends that support why independent opinion is very important in a growing asset class.
Mike West: We need to work as a team, we need to work on the highest level, we have to organize around leadership so we can engage with all these players that may be touching in these different franchises. And therefore we have dedicated commercial people, dedicated analytical teams, but a very good thing is that we have depth.
Mike West: individual areas of asset class, we are able and available to discuss at a very early stage. And that's what's very important when you have an evolving market like this. So I feel very good about going into 25 and over the medium term.
Speaker Change: Our next question comes from the line of Jeff Moeller with Baird. Please go ahead.
Jeff Moeller: Yeah, thank you. The medium-term growth guidance is obviously really good, but as Rob said, a lot's updating for performance already achieved. I think mathematically it implies lower growth and
Jeff Moeller: 26 and 27 relative to what I'd consider your longer-term structural growth especially in MIS.
Speaker Change: Are there any specific call-outs there, or should we just not read?
Speaker Change: Too much into that. I think Rob said there's kind of blue sky assumptions for issuance in 25
But 25 MIS doesn't look overly inflated.
Speaker Change: by any means relative to the long-term trend. And Mike sounded positive on structural growth. So if you could just help us reconcile what's implied for 26, 27, thank you. Maybe the fundamental takeaway for me is, you know, we're not downgrading our, you know, growth assumption for ratings. And hopefully what you're hearing is...
Speaker Change: some real confidence about the, you know, the medium term drivers of
Speaker Change: of issuance. So I, you know, that may be the math. Remember, we've got ranges and other things in here that we're expressing it in ranges, but I don't want you to take away that we think somehow...
Speaker Change: growth outlook has been dampened for the ratings business. Yeah, one other thing I would add is if you look at the overall picture, we're really reflecting the MA growth rates that we've observed across our different businesses. And Steve talked about the nuances between our mature franchises and data and information research and insights.
Speaker Change: and the other piece that I really want to point out is we are focusing on increased profitability especially in MA and that's something that's driving increased profitability going forward and that's what's behind partially the increase in the adjusted diluted EPS range.
Hear you loud and clear. Thank you.
Speaker Change: Our next question comes from the line of Andrew Steinerman with JP Morgan. Please go ahead.
Andrew Steinerman: Hi Naomi, I just wanted to talk about the contribution of M&A in in the quarter for both MA and MIS and also Going forward is the CAPE acquisition in the guide. I'm not sure if that closed
Andrew Steinerman: Yeah, so it was really small for the fiscal year 2024, Andrew. We had maybe 25 bips of revenue growth for MA. And then for the full year 2025, what's embedded in our guide, you have a little bit of tailwind from M&A, but you also have some FX headwinds. So the net up to is really not material to our fiscal year 2025 guidance.
and Kate Bissett. Kate Bissett, yes. Okay.
Speaker Change: Our next question comes from the line of Russell Quelch with Redburn Atlantic. Please go ahead.
Russell Quelch: Hi, thanks for having me on. In respect of AR growth...
with in KYC, sorry.
Russell Quelch: There had been some expectations that that would mature after the booms post the pandemic and the Ukraine and Gaza conflicts. Can you talk about what's driving a re-acceleration of growth in that area and how sustainable it is in the high teens range? And then separately MSCI said on its conference call it was having further conversations with you about expanding your partnership which is currently in ESG into perhaps other areas including private credit. Can you provide an update perhaps on that from your perspective?
Yeah, so we are
Speaker Change: Believers that we have a better mousetrap when it comes to KYC and third-party risk management and whether you're talking about knowing who you're doing business with as a customer or supplier.
Speaker Change: and we've made investments across the board really in terms of data, in terms of models that would help you make decisions on whether or not you should do business with this customer.
Speaker Change: as well as software to organize and coordinate your thoughts and remember what you...
Why you decided to work with that customer.
Speaker Change: So, we're releasing those features and those products literally all the time as investments we think are going to be very worthwhile and they contribute to this growth rate. So this has been a good grower for us and we can expect it to continue.
associated with doing this work. So not just the databases.
Speaker Change: but helping and maybe coordinating and helping make things more efficient in that respect.
Speaker Change: but once they identify someone they want to investigate and learn more about.
Speaker Change: We're helping them do that much more quickly. So the number of people required to do this work...
Speaker Change: can go down when they become a customer of ours. And to be clear, it's not by us providing bodies to do that. It's providing software, data, and analytics, and AI enablement. Just a couple of things I'd add to what Steve said.
Speaker Change: You know, we had some nice growth in the quarter. We had some very large...
expansions of our relationships with
Speaker Change: several of the largest banks in the world. And I think that really is validation of the value of the Orbis data set and the other analytics that go along with it. The other thing is, and we talked about this on last year's call, that we were developing a platform to address
a variety of use cases for corporates.
Speaker Change: Customer Onboarding and Monitoring, Supplier Risk, and so on. Well, we've now launched that. And so, we're excited about that because we think that's going to give us a good entree into the large corporate market and provide support for the growth in our KYC segment.
Speaker Change: Hey, before we go to the next question, I just want to go back to Craig's question of incentive comp. I realize we passed that. So, for 2024, incentive comp total was $507 million, Craig, with $133 million in Q4. And we're projecting around $420 to $440 for 2025.
Thank you for watching. See you next time.
Speaker Change: Our next question comes from the line of Slomo Rosenbaum with Staple. Please go ahead.
Speaker Change: early slowness that we saw in adoption in Research Assistant has turned around and it looks like things are really starting to pick up well there. I was wondering if you could update us on some of the other capabilities that you added like the, you know, the automated credit memo, the early warning system. What are you seeing over there in terms of traction and do you expect a similar type of adoption path as what you're seeing for Research Assistant? Or do you think that those things are going to take a little bit longer because the customers might need
Speaker Change: to do a little bit more on their side in terms of process.
Speaker Change: Yeah, maybe a couple things and I'm also going to ask Steve to add on here. First,
primary solutions.
Speaker Change: There are early days, and anything that, again, is selling into the banks, so there's lots of really good conversation, particularly about early warning. But like Research Assistant,
Speaker Change: This takes these sales cycles take time with the bank Steve anything you want to add to that well number one we have people meeting with some of Your colleagues not you Shlomo, but some of the people on this call literally today talking about these things I would say the big institutions
are increasingly talking about this as a transformational moment.
And we're starting to hear quotes like...
Speaker Change: Steve, can you help us save one million hours of work?
Speaker Change: by leveraging your tools, right? Is there a way for us to, and we literally have a proposal that is literally intended to displace a knowledge-based
Outsourcer
Speaker Change: by using some of these more refined workflows and persona-based Gen-AI tools. So, the prompt engineering that we're able to do now is...
Speaker Change: Progressing to the level where we're able to help people literally do their job and replace some of the labor and we're starting to see that in the pipeline, starting to see the adoptions, the adoption curve a change in tenor.
Speaker Change: from I need to meet regulations to I'm starting to get confidence that we can and let's see if we can develop a business case To do that. So I think there's there's some pretty exciting green shoots in that respect
Thank you.
Jason Haas: Our final question will come from the line of Jason Haas with Wells Fargo. Please go ahead.
Jason Haas: Hey, good afternoon. Thanks for taking my question. I wanted to follow up on the MIS.
Jason Haas: revenue growth in 4Q. It looked like I was looking specifically at the MIS transaction revenue growth. It was up 29% in 4Q, but the issuance growth was up 42%. So I was curious what drove that delta. Looks like it was maybe on the corporate finance side, but yeah, maybe it could help explain a little bit better why the revenue is weaker relative to issuance. Thank you.
Jason Haas: bank loans. So there was very robust bank loan issuance by our definition. We include repricings as issuance volume. And so in the fourth quarter something like 55% of bank loan volume was repricings.
Jason Haas: out of transaction revenues, you know, we would have had, you know, by our definition issuance of, you know, something like mid-teens percent growth, but we would have had, you know, call it, you know, 30%, you know, transaction revenue growth. So, I think that's primarily what was going on there.
Jason Haas: But one other thing I'd add is we do see a lot of repricing activity in January, so strong loan volume, but repricing activity, so keep that in mind.
Rob: And I will now turn the call back to Rob for any closing remarks.
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Rob: Okay, well thanks everybody for your time and your questions and we look forward to talking to you in the first quarter.
Goodbye.
Speaker Change: This concludes Moody's Corporation fourth quarter 2024 earnings call. As a reminder, immediately following this call the company will post the MIS revenue breakdown under the investor resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you.
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