The Moody's Corporation Third Quarter 2023 Earnings Conference Call has begun, with Head of Investor Relations Shivani Kak leading the call. The company's results for the third quarter and revised outlook for full year 2023 have been released, and non-GAAP figures will be presented. Attendees are reminded of the safe harbor statement and directed to important risk factors. President and CEO Rob Fauber will provide an overview of the results, business highlights, and outlook.

In the second paragraph, Moody's CEO Rob Fauber discusses the company's strong financial results and key business highlights, including notable innovations and investments, progress on their GenAI strategy, and their fastest-growing business, the Know Your Customer (KYC) business. Fauber also mentions that Moody's has been ranked #1 in the Chartis RiskTech100 and recognizes the resilience and dedication of their employees. The company reported a 15% overall revenue growth, with strong top-line performance and improved adjusted operating margins from each of their businesses. Moody's Analytics (MA) saw a 13% revenue growth and achieved its fourth consecutive quarter of 10% ARR growth, with its KYC business leading the way. MA also had an adjusted operating margin of 33.6%. Moody's Investors Service (MIS) grew 18% in the quarter, and their revenue is expected to grow in the mid- to high single-digit percentage range for the full year.

Last week, the company published their annual refinancing wall study which showed a 21% increase in total U.S. nonfinancial corporate debt coming due over the next 5 years. This is an important component of their long-term growth algorithm. The company is also focused on integrating their data and analytic capabilities and leveraging GenAI to develop new solutions for customers and employees. The pace of innovation is accelerating across all businesses. In the third quarter, the company announced various new products, partnerships, and expansions, including the opening of VIS Rating in Vietnam to tap into the fast-growing domestic bond market in the Asia-Pacific region. They also published a groundbreaking cross-industry report on cyber risk and practices to showcase their relevance and importance in the market.

Moody's has leveraged their relationship with BitSight to highlight the high risk of cyber threats on over $20 trillion of rated debt. They are launching a new GenAI-enabled product, Research Assistant, which will be sold as an add-on to their flagship product CreditView. This will allow customers to generate credit insights in seconds and in multiple languages. They have also expanded their coverage to include 12,000 new unrated names and have integrated BitSight's cyber data into their Orbis database. They have also launched a new module in CreditLens for banking customers to integrate their own loan-level data with Moody's content.

Moody's portfolio module offers a dynamic view of a bank's loan portfolio and integrates risk models and ESG data for better decision making. The RMS acquisition has led to successful partnerships and product launches. The company is also leveraging GenAI across the organization and sharing learnings with customers. Customers have shown interest in the company's data and research and are reassured by their approach to data integrity and security.

Moody's has been demoing their Research Assistant product with customers since July and has received positive feedback. They are also expanding their partnership with Microsoft to leverage their Azure OpenAI Service and are exploring new ways to collaborate and integrate their content with Microsoft Teams and other platforms. Moody's is also working with other leading cloud and software players to develop new GenAI solutions through various forms of partnerships. They have a strategy and team in place to maximize these opportunities, as evidenced by their recent partnership announcement with Google.

Moody's and Google Cloud are partnering to create LLMs and AI applications to help financial professionals analyze financial reports and disclosures. KYC, a cloud-based SaaS business within Decision Solutions, is relevant to all customers and aims to provide a better understanding of who they are doing business with. The KYC business has seen significant growth due to the digitization and automation of compliance processes, increased online transactions, and the need for better analytics and insights amidst new regulations. Two important acquisitions, BvD and RDC, have also contributed to the success of the KYC business.

The company combines proprietary data and analytics through a cloud-based platform to deliver solutions for customers. These solutions use traditional AI and recently added ESG and credit scores. They offer access to their KYC tools and content through data feeds or APIs and also provide end-to-end workflow software. The company has been recognized as a market leader in both data and workflow. They are seeing growth outside of the financial sector and are investing in enhancing their offerings for corporate and government clients. Their recent launch of Sanctions360 helps customers comply with regulatory requirements. The company's ability to reach a broad set of customers is part of their land-and-expand strategy.

The paragraph discusses the growth of MA's new customer ARR, which is largely driven by KYC solutions. The existing customer base also presents opportunities for cross-selling. In the third quarter, MIS saw growth in leveraged finance, infrequent banking issuers, and project and public finance issuance, resulting in a favorable mix and a 31% increase in transactional revenue. However, the market sentiment remains fragile and the company has adjusted its guidance for the fourth quarter due to lower issuance volumes and macroeconomic concerns.

The forecast for investment-grade issuance in 2023 has been lowered to 25% growth due to lower asset generation and a decline of 25% in the structured finance sector. This results in an overall revision of issuance growth to be in the low to mid-single-digit range. However, the growing refunding walls and annual study on refinancing show potential for future issuance growth, particularly in the U.S. market. Overall, corporate debt velocity remains below historical averages.

The speaker discusses the potential for pent-up issuance demand in the future, and invites questions from the audience. The first question comes from Heather Balsky of Bank of America, who asks about the refinancing wall and how customers are managing in the current high-rate environment. The speaker responds by mentioning the challenges of volatility for CFOs and Treasurers, but notes that there is caution rather than a risk-off mode. They also mention that leveraged issuers are still seeing some issuance. The speaker then discusses the maturity walls, which are up about 10% in the U.S. and Europe, with investment-grade maturities up 12%. They also mention that they will share reports on this topic with interested parties.

The article discusses the increase in investment-grade maturities within the first 3 years of a 5-year study, which is up to low 60s percent from high 50s last year. This is due to companies opting for shorter financing tenors and higher rates dissuading some refinancing. The article also mentions that the current trends in issuance are below normal levels and there is pent-up demand for further issuance, as seen through the low corporate debt velocity and promising medium-term refinancing walls. M&A is also expected to be a catalyst for issuance, but it is not a Q4 story.

The speaker discusses how the company is actively engaging with issuers in the ratings business, with a focus on communicating effectively with analysts and broadening their product suite to engage with potential issuers. They also mention the development of a Private Monitored Rating to cater to those considering entering the market.

The speaker discusses the success of their company's private credit rating tool and its potential for companies to transition to a public rating. They have a large commercial team actively engaging with existing and potential issuers. The question of whether the higher interest rate environment will affect this tool is raised, but the speaker assures that there has been no change. They also mention plans for a new monetization strategy for their Research Assistant tool, but do not have specific details to share at the moment.

The company is seeking feedback from customers to improve their product and determine pricing. They expect most users to have access to basic functionality, with some opting in for full functionality. The company plans to offer customers access to different content sets, such as climate and physical risk data, and will work on entitlements to monetize these offerings. Updates on customer uptake and the impact on the company's digital insights business will be provided in the next quarter call.

On the next earnings call, the speaker will be able to provide more information on the company's traction with customers. They expect some economic deceleration in the US, Europe, and China, but a low chance of recession. Inflation has moderated, but there is still uncertainty around rates. Default rates are expected to increase in 2024, but spreads should remain stable. M&A activity may pick up in 2024 and the company has strong structural support. More details will be provided on the next earnings call.

The speaker discusses factors influencing their company's plans for 2024. They then address a question about the MA segment, highlighting strong demand and utilization in economic data, research, and models. They mention the integration of Orbis data and credit scores, as well as increased interest from the government sector. They also mention future growth potential with coverage expansion in Research Assistant. The next question is about the R&I and D&I results, which the speaker attributes to a variety of factors, including economic uncertainty and government interest. The call ends with a question about the company's plans for 2024, which the speaker addresses by discussing the MA segment's growth potential and coverage expansion.

Craig Huber asks Rob Fauber about his thoughts on the private credit market and how it could affect Moody's ratings business. Fauber acknowledges that it could be a potential headwind if companies choose to tap into the private credit market instead of the public market. However, he also sees a lot of opportunity for Moody's to serve this market due to the demand for credit assessment from both alternative asset providers and investors. Fauber has been engaging with private equity firms and alternative asset managers to discuss this market.

The speaker discusses the ways in which their company works with other firms and how it has led them to think about their product offerings. They also mention their incentive compensation and maintain their margin guidance for a specific division. The sustainability of their margin may be affected by investments in GenAI, but they prioritize resources for the best opportunities.

Moody's has invested in GenAI and is focusing on growth and investing in products and sales distribution to attract new customers. The company's retention rates are strong, indicating that customers are loyal and difficult to dislodge. The GenAI investment is still in its early stages, and expenses for compute capacity and other capabilities are expected to increase. The company will balance these investments with disciplined decision-making and strategic investments across the entire business.

The speaker is responding to a question about KYC (know your customer) and how it has evolved within their company. They mention that currently, 20% of their customers use KYC, and they plan to discuss this further in the next quarter. KYC started with financial institutions and has now expanded to all types of businesses for various purposes such as compliance and risk management.

The company is having conversations with customers about using master data and analytics to get a better understanding of their business partners. This gives them confidence in their growth potential in the corporate and government sector. They have trimmed their issuance guidance for the fourth quarter, mainly due to refinancing needs and macro considerations. They are confident in their fourth quarter performance based on their assumptions about issuance and revenue.

The speaker is discussing the sequential growth in issuance and revenues for the fourth quarter of 2023, compared to the third quarter. They expect a low to mid-single-digit decline in total issuance, with high-teens growth on a year-over-year basis. Corporate issuance is expected to grow in the mid-single digits, leading to similar revenue growth. Other ratings lines are expected to have flat revenue growth. Overall, MIS revenue is expected to have low single-digit growth compared to the third quarter, and mid-20s percent growth compared to the fourth quarter of 2022. The speaker acknowledges a wider range of uncertainty in the market.

The speaker discusses the third quarter results and how they are anchoring to it to provide a sense of how variances will affect revenues and earnings. They mention that a key assumption for the fourth quarter is corporate issuance, which they expect to have mid-single-digit growth. They also mention that insurance ARR has improved from 6% to 8% due to factors such as the ExposureIQ product, Climate Solutions, and the core business.

Moody's Analytics is seeing success in migrating customers to their SaaS platform and rolling out new solutions. They are also experiencing growth in the insurance and life businesses, with potential for further acceleration. They are on track to achieve $150 million of RMS-related incremental run rate revenue by 2025.

Moody's expects $200 million in annual revenues for climate and ESG in 2023, with double-digit growth. The demand for climate information from customers is driving this growth. Moody's is integrating RMS transition and physical risk data into banking solutions, which will further increase revenue from ESG and climate. RMS revenue is growing in the high single-digit range and is on track to meet the target for 2023. The two components of RMS growth are core growth and growth from non-P&C insurer clients.

The speaker discusses the low-growth profile of the acquired company and how it is improving. They also mention the importance of capturing synergy revenue and how integrating content into banking solutions will contribute to this. The question then asks about the difference between insurance and banking customers consuming RMS climate data, to which the speaker explains that the content is currently trapped in sophisticated insurance workflow software but can be delivered in a simpler way, such as through Climate on Demand, for banks underwriting loans secured by commercial real estate.

The speaker discusses the restructuring program and its expected completion by the end of the year. They mention the projected charges for the program and state that there are no plans to expand it into 2024. The speaker also notes that they took hard decisions and reprioritized the business.

In response to a question about the increase in operating profit in the third quarter, Rob Fauber, the speaker, cautions against focusing too much on one quarter and explains that there are seasonal spending patterns in the company's MA division. He also mentions that there will be a decrease in margin in the fourth quarter due to projects being completed and an increase in sales activities. Fauber also mentions a reprioritization within the company.

The speaker discusses the company's recent actions and restructuring charges, as well as their plans for investments and addressing the GenAI market. They also comment on the current state of corporate debt velocity and its potential correlation with interest rate increases. The speaker does not have specific data on hand, but notes that the company has looked at issuance during periods of higher interest rates.

The speaker discusses the impact of rising interest rates on issuance and how it typically leads to more challenges during a transition period. However, the correlation between higher rates and economic growth is ultimately positive for issuance in the long term. The size of the markets also plays a role in the comparison of current issuance levels to those of previous decades. In the investment-grade segment, there was a mix of frequent and opportunistic issuers, which led to a disparity between the increase in issuance volume and the decrease in revenue. The overall pricing trend has been steady and is expected to continue in the future.

The speaker, Craig, discusses the factors that go into determining pricing for issuers. They take into account regions, asset classes, and the costs associated with surveillance. The average pricing increase for the portfolio is expected to be 3-4% and this trend is expected to continue in the future. The call concludes with a thank you and a reminder to check the MIS revenue breakdown and replay on Moody's IR website.

This summary was generated with AI and may contain some inaccuracies.