The Moody's Corporation Fourth Quarter and Full Year 2023 Earnings Call has begun, and the conference is being recorded. Shivani Kak, Head of Investor Relations, welcomes everyone and provides information on where to access the earnings press release and presentation. Non-GAAP or adjusted figures will be presented and a reconciliation with US GAAP figures can be found in the press release. The safe harbor language and forward-looking statements are also mentioned. The call is open to questions following the presentation.

Moody's CEO Rob Fauber starts the call by announcing the appointment of Noemie Heuland as the new Chief Financial Officer. He highlights her extensive experience in scaling high growth public software companies and her global experience as key factors in her selection. He also mentions that she will be leading the global finance organization and will begin her role on April 1st. Fauber expresses his excitement for Noemie to join the team and mentions that she will be a regular presence on future calls.

In 2023, Moody's had a successful year with 8% revenue growth, 16% growth in adjusted diluted EPS, and early adoption of GenAI technology. The company also entered into strategic partnerships and maintained its number one ranking in the Chartis RiskTech100. Despite a challenging operating environment for financial services customers, Moody's MA division saw ARR growth of 10%. The company expects MA revenue to continue to grow at approximately 10% in 2024. MIS also had a strong quarter with 19% growth and 6% growth for the full year, driven by double digit growth in corporate finance, financial institutions, and public project and infrastructure finance.

In the fourth paragraph of the article, the speaker discusses their previous description of the markets as fragile, which proved to be accurate in the fourth quarter with less issuance than expected. However, they are optimistic about the start of the year and have high revenue expectations for 2024. To capitalize on opportunities, they are increasing investment in GenAI, new product development, and technology. Their capital allocation priorities remain the same, with a focus on investing in the business and returning capital to stockholders. They expect to nearly double the amount of capital returned to stockholders this year and have provided a range for their adjusted diluted EPS guidance for 2024.

In 2024, the company is expecting a tax rate of 22-24%, which will result in a 24% growth rate since 2022. Despite a challenging operating environment, the company was able to generate $450 million in incremental revenue growth and has a base of recurring revenue of over $4 billion. The company's customer base includes 97% of the Fortune 100 and 87% of the Forbes 1000, and they have received numerous external accolades and awards. The MIS team was awarded best credit rating agency for the 12th year in a row by Institutional Investor.

Moody's has a market leading position in both ratings and MA business, as recognized by being ranked number one in the Chartis RiskTech100 for the second year in a row. They value attracting and retaining top talent and have made investments in solutions to help customers make informed decisions about risk. In 2023, they expanded their markets through Moody's Local and developed teams in digital finance and private credit. They are also coordinating across their ratings franchise to be the agency of choice for players in the private credit market. To further address this opportunity, they added 12,000 unrated entities to their CreditView research service in November, providing a new runway for growth.

The company has launched a new product, Research Assistant, which is the first of many Gen AI enabled tools. They have also expanded their company database and integrated predictive analytic tools and credit scores. They have also invested in BitSight and integrated over 6 million cyberscores into their database. In addition, they have developed new solutions and integrated more datasets in their decision solutions. In KYC, they have launched a new entity verification tool and in banking, they have integrated climate analytics into their workflow solutions.

In the insurance sector, Moody's has seen significant growth in the number of customers using their cloud-based risk platform. They have attracted a diverse range of customers, including one of the world's largest banks, who use their climate and catastrophe modeling solutions for regulatory disclosures and stress testing. Moody's ongoing investments in the business have enhanced their ability to integrate data for all customer use cases. The company is focused on three key strategies for future growth: landing new customers, expanding relationships with existing customers, and continuous innovation. Moody's has a strong customer base in financial services and has successfully diversified into new areas such as KYC and supplier risk management.

The company's net expansion rate in the financial services sector is at a healthy 109%, indicating their ability to deepen relationships and deliver value. Leveraging GenAI and their content sets and capabilities, they plan to continue expanding and deepening relationships. There is a significant opportunity to expand in new customer segments, such as the corporate and public sector, with a 14% new sales compound annual growth rate in these sectors. The company is also expanding their footprint in domestic and emerging debt markets, taking advantage of major secular trends such as digitization and transformation programs, demand for third party risk management solutions, and the growth of the private credit sector.

The company has a wide range of capabilities that uniquely position them at the intersection of current market trends. They have prioritized both organic investments and operational efficiency in their annual operating plan. They are generating savings through resource redeployment, alternative staffing models, automation, and GenAI enablement. They have also increased their budgeted operating expenses for 2024 by $60 million in three primary investment areas: GenAI, product development, and sales deployment. They have some interesting developments in the works on the product side.

The company is launching a new GenAI enabled capability for their banking origination solution, which will save loan officers and credit professionals time by automating the generation of credit memos. They have a beta customer and are receiving positive feedback for their new GenAI enabled commercial real estate early warning system. The company is also implementing GenAI tools for their engineering and sales teams and is focusing on product development, specifically in their KYC business which has seen significant growth.

The company is expanding its solutions to meet the growing demand for customer and supplier risk services and has seen success with large government and Fortune 100 clients. They are also investing in technology and data to be able to rate digital finance platforms and are accelerating their platforming work to improve data interoperability and customer experience. Additionally, they are modernizing and automating their systems to improve efficiency and compliance.

Moody's is focusing on optimizing their data estate and transitioning to cloud-based applications to prepare for the promise of AI and the digitization of financial markets. This is crucial for achieving their medium-term margin targets. They expect more favorable market conditions in 2024 and anticipate an increase in MIS rated issuance for corporates. They have updated their medium-term revenue growth target for MIS to be in the mid to high single digit percent range. Moody's overall revenue is expected to grow in the high single to low double digit percent range, with an adjusted operating margin of 44% to 46%.

The Moody's revenue and adjusted operating margin guidance ranges take into account the variability of MIS transaction-based revenue and the strong recurring revenue base in MA. M&A is expected to contribute to a tighter range of revenue growth and ARR, with MA's adjusted operating margin expected to be in the mid-30s percent range in the medium term. For 2024, MIS' adjusted operating margin is projected to improve by 200 basis points towards the medium-term target of low 60s percent. Expenses are expected to grow in the mid to high single digit percent range, with a significant increase in depreciation and amortization expenses due to the shift towards SaaS solutions and increased capital expenditures. Free cash flow is expected to be between $1.9 billion and $2.1 billion, and adjusted EPS is projected to increase by 24% at the midpoint compared to 2022, without considering tax benefits.

The speaker concludes by expressing excitement for the future and announces planned investments in AI products and platforming. They provide more details on the components of these investments, including generative intelligence, product development, and technology and platforming. These investments will require some upfront costs but are expected to bring benefits and accelerate growth. The speaker then invites questions from the audience.

Caroline Sullivan is discussing the expected operating margins for MIS and MA in 2023 and 2024. MA's margin is expected to remain consistent with 2023, while MIS is expected to increase by 200 basis points. The question then shifts to the normalized level of issuance and the potential for growth in the future, with Rob Fauber mentioning a decline in issuance in 2022 due to the pandemic but noting that it was only 5% below the long-term average. Corporate issuance was 15% below the average and leverage finance was even lower.

The speaker discusses the favorable mix of corporate issuance and leveraged finance issuance for the company's revenue. They mention that corporate issuance was slightly below the long-term average in 2023, but is expected to be slightly above in 2024. However, the total stock of debt has grown significantly, implying potential for further issuance growth. The speaker also notes that structured finance is currently below the 10-year average. The questioner asks about the cadence of issuance for 2024 and the expected growth of the company's nontransaction business. The speaker defers to another speaker for more specific information on the first half and second half of the year, but mentions they may be able to provide more details.

Mike West and Rob Fauber discuss expectations for issuance in the first half of the year, which they believe will be stronger than in the second half due to constructive conditions and seasonality. They also mention that frequent issuers tend to come earlier in the market while infrequent issuers are more opportunistic. Structured finance is expected to be more balanced throughout the year. Last year, issuance was more front-end loaded due to a rising rate environment, and they expect a similar pattern for this year.

The company expects to see a decrease in MIS revenue in the first half of the year, with around 30% of annual issuance and 25-30% of annual MIS revenue in the first quarter. This is due to banks front-loading their issuance and different economics for frequent bank issuers. The company also anticipates higher margins in the first half of the year, with overall adjusted operating margins expected to increase by 200 basis points. Strategic investments made in the prior year have accelerated MA revenue growth, and the company expects to see further growth accretion from these investments.

The company is investing in high growth areas such as GenAI products, enhanced solutions for corporates and the public sector, and platforming. They expect revenue growth from SaaS and hosted solutions to be in the low to high teens, and are making incremental investments in GenAI to attract new customers outside of financial services.

The speaker discusses the potential growth opportunities in the financial services sector and the company's plans to leverage GenAI to support customers and increase productivity. They also mention the launch of Research Assistant and expect to see contributions in the numbers before the end of the year. The speaker is asked for more specificity on the expected revenue and ARR contributions from GenAI and the potential for upselling customers.

The company has learned a lot from engaging with customers and building their pipeline, which has influenced their guidance. They expect the biggest contribution from GenAI products in the research and insights line. Smaller investment managers and hedge funds are more likely to make quick decisions and sign multiyear agreements, while larger banks are engaging in a more traditional sales process. The company sees their products as transformational tools for businesses.

The company is seeing opportunities to cut costs and increase productivity through platforming and leveraging their capabilities. They have engaged with many users and are having conversations at the C level. Sales patterns for their new product have been faster than normal and they are expecting good engagement in the future. For the MA division, they see a different picture in terms of revenue and expenses compared to the MIS division.

In the fourth quarter, the company recorded just under $800 million in revenue for MA and expects to see a steady increase of $20 to $25 million each quarter throughout the year. The MA margin will also follow a similar pattern, starting a few percentage points below the full year guide and gradually increasing to a couple points above it by the fourth quarter. The first quarter will be influenced by seasonality and higher expenses related to employee compensation programs, but the margin is expected to steadily increase. Adjusted diluted EPS will be strongest in the first quarter and second quarter, with the first quarter expected to be $0.15 to $0.20 higher than the average for the year.

Craig Huber asks about the potential impact of ongoing problems in the commercial real estate market on CMBS issuance and ratings, as well as the impact on banking clients. Rob Fauber and Mike West discuss their expectations for structured finance growth and the potential for a muted CMBS market. Steve is mentioned as potentially being able to provide more information on the impact of CRE on the MA side.

The company has seen an increase in interest from banking customers in their CreditLens CRE module, which helps lenders effectively manage risk in the commercial real estate sector. This has been a major driver of growth for the company. The increase in stress in the banking system has also led to more calls for their services. However, there is a tipping point where too much stress can become a headwind for the company. In the fourth quarter, the company recorded $100 million in incentive compensation and expects a similar amount for 2024.

The operator introduces a question from Owen Lau regarding the company's MIS revenue guidance. Lau asks about the potential drivers for the higher guidance compared to their peers. Rob Fauber hands the question to Mike West, who explains that the company has a constructive outlook for 2024 due to a decrease in market uncertainty, improved secondary trading, a rate decrease, and other factors. West also mentions the company's expectations for an increase in leverage finance and a modest recovery in M&A. He also notes that the company assumes economic resiliency and growth in 2025.

The speaker discusses the recent launch of a product called Research Assistant and shares some positive feedback they have received in the last couple of months. They also mention that the product development process was quicker than expected.

The company is pleased with the changes they have made and credits their use of GenAI tools and platform engineering for their ability to bring products to market quickly. They have seen a strong uptake among customers, with more units sold in the first six weeks than any other product launch. Senior level executives, including CEOs, COOs, and investment managers, are showing interest in the product and discussing it as part of their transformation programs. The sales cycles are expected to be faster than previous launches, but it is still important to engage with various departments within potential customers to ensure all aspects are covered. Overall, the demand environment is positive.

Shlomo Rosenbaum asks about general sales cycles and whether they have gotten shorter, stayed the same, or gotten longer. Rob Fauber responds that sales cycles have lengthened slightly due to higher price points and richer value propositions, but this trend has extended through 2023. Caroline Sullivan adds that there is no material difference in incentive compensation between segments compared to the previous year. Seth Weber follows up on the MIS margin question, asking about the balance between investments and technology benefits and cost savings.

The paragraph discusses the incremental margins for the MIS business and how they were affected in the fourth quarter. It highlights the strong operating leverage of the business and how expenses remained in line despite a revenue miss. The company also has a positive outlook for 2024 issuance and maintains a target margin of low 60s percent. However, they are also investing back into the business.

The speaker discusses the company's investments in resources and technology in areas such as domestic debt markets, digital finance, and private credit. They mention the importance of technology enablement for their analytical teams and how it will help handle surges in issuance without adding more people. They also mention the deployment of GenAI tools and the benefits they will bring, with a central team handling innovation work and developing value propositions for internal and external use.

GenAI tools can be used to summarize PDF documents, but incorporating them into an industrial strength compliance apparatus and using them in daily tasks requires engineering work. The central team is working to create critical mass and roll out tools in a compliant and tested manner, while also leveraging GenAI across the workflow to enhance efficiency and support human judgment in the ratings process.

MIS is excited about the opportunities to use generative AI technology and is being transparent with regulators about its use. The company is making investments in areas like GenAI product development and platforming to support acceleration of revenue growth. There has been a 20% increase in D&A, but there have been no changes in accounting assumptions or methods.

The company expects D&A to remain around the same percentage of revenues as it has in recent years. This is due to increased investments in SaaS products and higher growth rates in certain parts of the portfolio. From an accounting perspective, development costs for SaaS solutions are capitalized and depreciated over four to five years. The company expects this trend to continue as revenue grows.

Mike West discusses the outlook for debt issuance in various segments for 2024. Investment grade is expected to grow at 5%, driven by upcoming maturities and M&A activity. High yield is also expected to see growth due to lower spreads and delayed refinancing. Leverage loan issuance is primarily driven by refinancing, and FIG is expected to remain relatively flat due to a high proportion of frequent issuers.

The central bank support facilities will start to shrink in 2024, leading banks to turn to the capital markets for funding. This will also prompt them to focus on their buffers and capital needs, but overall stability is expected. Infrastructure financing and access by larger US PFG issuers will make up the majority of the PPIF, with an increase in long-dated infrastructure projects anticipated due to the transition of monetary policy and tightening. Structured finance is also expected to see growth, with ABS leading in this area. The company also announced an upcoming event in London to showcase its Moody's Analytics business.

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