The Moody's Corporation First Quarter 2024 Earnings Call began with an introduction from the operator, followed by Shivani Kak, Head of Investor Relations, providing an overview of the company's first quarter results and revised outlook for 2024. Non-GAAP figures were also referenced, with a reconciliation provided in the earnings press release. Attention was drawn to the safe harbor language and forward-looking statements, and the presence of media on the call was acknowledged. The call was then turned over to Rob for further discussion.

Moody's first quarter results were strong, with 21% revenue growth and impressive performance in both their MIS and MA businesses. The addition of Noemie Heuland as Chief Financial Officer is expected to bring valuable experience in technology and Software as a Service. MIS saw a 35% increase in revenue and a 64.6% adjusted operating margin, while MA reported a 10% growth in ARR across all lines of business. The company also made investments in platforming, product innovation, and GenAI enablement during the quarter.

The third paragraph of the article discusses the strength of the company's business model and its ability to simultaneously invest in future growth, return value to shareholders, and achieve its EPS target. The focus is on the financial performance of the company's MIS business, which saw significant growth in the first quarter, particularly in the leveraged finance markets. This growth is attributed to the company's strong global coverage and its dedicated team for private credit. The company is confident in its ability to maintain its leadership position and capitalize on market opportunities.

Moody's is encouraged by the interest in their transition finance offerings, including second-party opinions and a new net-zero assessment. They have seen strong operating leverage in their business and are remaining cautious about changes to their full year outlook due to uncertainties such as upcoming elections, tensions in the Middle East, and inflation concerns. However, they are seeing resilience in the global economy and a decline in high-yield default rates, as well as an increase in M&A activity. Moody's Analytics will continue to monitor these factors closely.

In the past year, Moody's Analytics has shown consistent growth, with 65 consecutive quarters of revenue growth and six consecutive quarters of double-digit ARR growth. The retention rate has remained steady at 94% for the past two years, demonstrating the stickiness of their solutions. The company's land-and-expand strategy is evident in their reported lines of business, with new customer acquisitions driving 1/4 of the 18% ARR growth in the first quarter, while cross-selling to existing customers contributes to 90% of the 10% insurance ARR growth. The acquisition of RMS has also been successful, with expected low double-digit ARR growth including synergies in 2024. Moody's Analytics has also made significant progress in their GenAI initiatives, with a framework for their suite of solutions being rolled out in 2024.

Moody's is expanding its capabilities beyond just Research Assistant and has categorized them into three buckets: navigators, skills, and assistance. Navigators use AI to help customers get the most out of products, skills provide automation and insight, and assistance is tailored to specific customer personas. This framework will address the needs of customers as they adopt AI and is expected to drive value, retention rates, and new user opportunities. Noemie will provide more details on the results.

The speaker, who is the CFO of Moody's, is excited to be a part of the company because of its strong reputation and valuable assets, including proprietary data dating back 100 years. They believe Moody's is well-positioned to leverage GenAI capabilities and has a strong track record of providing valuable financial insights. The speaker also mentions their previous experience interacting with Moody's analysts and their belief in the potential for Moody's Analytics solutions. They have studied Moody's financial profile and are passionate about the company's prospects.

The CFO of Moody's discusses the profitability and strong fundamentals of the business, including a high return on assets and a disciplined capital allocation plan. He also praises the company's focus on risk management and its strong culture. The first quarter results showed a 21% increase in revenue and a 13% increase in adjusted EPS compared to the same period last year.

Moody's Corporation experienced strong growth and increased operating leverage in the first quarter, resulting in a 610 basis point expansion of adjusted operating margin and a free cash flow conversion to GAAP net income of over 120%. The MIS segment saw its second highest quarter on record due to increased issuance in all lines of business. Moody's Analytics also saw growth, with revenue increasing by 8%, driven by strong demand for Data & Information and KYC and compliance solutions. However, the timing of revenue recognition and a slight increase in CreditView attrition affected the growth rate in the Research & Insights segment. Overall, revenue from hosted software solutions is trending closer to ARR growth.

In the first quarter, Moody's Analytics saw a 10% increase in annualized recurring revenue, with growth accelerating in two of its three lines of business. The company also maintained a 94% retention rate, demonstrating the effectiveness of its solutions. Moody's is balancing investments in its cloud platform and product roadmap with operating efficiency initiatives. The company expects mid- to high-single digit growth in issuance for the full fiscal year, with strong first quarter issuance driven by Corporate Finance and financial institutions. Moody's will make modest revisions to certain asset classes to account for first quarter activity.

The company expects a low single-digit increase in big issuance and a high single-digit increase in SFG, driven by jumbo transactions and CLO refinancing. They are maintaining their MIS revenue guidance of high single-digit to low double-digit growth for the full year, taking into account specific macroeconomic assumptions and adjusting for the appreciation of the U.S. dollar. Moody's Analytics revenue is expected to increase in the high single-digit range, while ARR growth remains unchanged. The company is maintaining its full year operating margin outlook for Moody's Analytics and its revenue outlook for MIS.

In the first quarter, the company saw 8% revenue growth and 10% ARR growth, with strong demand for data solutions and KYC. While Research & Insight had lower revenue growth due to a shift towards SaaS subscriptions, the ARR growth outlook for the full year remains unchanged. The company has adjusted its revenue outlook to account for currency fluctuations.

The company's sales have a bit of seasonality, with the back half of the year driving revenue updates. The retention rate remains strong at 94%, and the ARR is also strong. The sales pipeline is healthy, with no elongation of sales cycles. The company is seeing some pressure from banks and asset managers in the MA portfolio, but there is strong underlying demand for their products. The company is also facing cost pressures, but they are focused on being disciplined with expenses.

The speaker discusses the drivers of demand for GenAI technologies, particularly in the financial institutions sector. These institutions are focused on digitization and automation, and are looking to GenAI as a way to accelerate and de-risk their transformation journeys. The value proposition of GenAI solutions, including labor substitution and efficiency gains, make them an important tool for addressing cost pressures. Additionally, there is a strong desire for a 360-degree view of customers and suppliers, driven by both business optimization and regulatory requirements. With their data and analytics, GenAI can help institutions in a cost-effective way.

The speaker, Rob Fauber, is responding to a question from Toni Kaplan about the company's strong first quarter performance and why they did not fully raise their MIS guide. Fauber explains that while there are some factors that could lead to increased issuance, such as pull-forward from banks and refinancing, there are also uncertainties and caution for the rest of the year, including the upcoming election and potential rate changes.

The speaker discusses potential upside and downside risks for the leveraged finance market, including stronger economic growth without inflation, potential new money transactions for M&A, and geopolitical tensions. They also mention upcoming elections and the possibility of a widening regional conflict in the Middle East. Overall, they are being cautious but see potential for growth in the market.

Ashish Sabadra from RBC Capital Markets is asking about the pull-forward of maturities and the potential impact on the refi wall in 2025-2026. He also asks about the trend in M&A as a percentage of overall issuance and how it compares to previous years. CEO Rob Fauber responds by saying that they will have more insight on maturities later in the year, but there has been some pull-forward from 2024 and it's possible that there may be more in the second half of the year. He also notes that there was a large amount of pandemic-era issuance in leveraged loans, with a majority maturing in 2027 and beyond, making them less likely to be pulled forward. However, there was also a significant amount of issuance in 2022 and 2023 that may be more susceptible to pull-forward.

The speaker discusses the various AI frameworks and their potential for monetization, with different strategies for each one. They also mention a recent pickup in their rating assessment service, which gives them confidence in the M&A market for the rest of the year. The speaker also mentions a wildcard in the M&A market and the importance of sponsor-backed deals.

The company is focused on bringing innovation to the market for their customers and will be deploying it in a variety of ways. This includes providing GenAI-enabled software, navigators to assist customers in getting the most out of their offerings, and allowing customers to integrate their APIs into their own workflows. They are also building partnerships to expand their ecosystem. The navigators will be a key part of their value proposition and will support both pricing and retention. Other companies are also using chatbots and similar tools to make their solutions easier to use.

The company is focusing on developing skills that will deliver proprietary content to customers in various industries. They are still considering how to price these skills, but it may involve increasing subscription fees or implementing a consumption-based model. Customers are looking for trustworthy partners with a strong reputation for data integrity and analytics. The company is holding its operating margins for the year despite outperforming in the first quarter, but there may be some reinvestment of the first quarter's upside.

Noemie Heuland, from the company, is discussing the increase in MIS adjusted operating margin and the unchanged MA adjusted operating margin despite a slight revenue headwind. The company is investing strategically and building efficiencies into the system. The outlook at the consolidated level has not changed, and the company remains within the previously communicated range. The change in MA revenue outlook is primarily driven by FX and a little bit of sales linearity, but the pipeline and sales meetings are going well. There is no change in the low double-digit range per ARR.

The ARR for Research & Insights has seen some deceleration in growth over the past year, but this is expected due to the mature market for fixed income research. Moody's has introduced new enhancements to CreditView, including Research Assistant and unrated coverage expansion, which are expected to drive ARR growth in the second half of the year. The company has a good sales pipeline for these new offerings and expects to see an acceleration in ARR towards high single digits.

The company has seen an increase in adoption of Research Assistant among smaller companies, but larger institutions are taking longer to adopt. The company is encouraged by the strong usage and engagement from users, which indicates market interest. There was a significant amount of refinancing activity in the quarter, with some new money transactions also being pulled forward. The company expects a majority of refinancing activity in the back half of the year, but there may be some new money transactions as well.

The speaker, Noemie Heuland, is the new CFO of the company and is confident about the company's future. She believes that the mix of refi to new money needs to increase to show that the first quarter was not just a one-time success. She also mentions that private equity firms have a lot of money that needs to be deployed, which could lead to more sponsor-backed transactions in the public markets. When asked about her plans to improve the company, she states that her priorities align with the company's goals and targets for the future.

The speaker discusses the company's focus on capital allocation, transitioning to a SaaS recurring model, and driving efficiencies for both customers and internally. They also mention the addition of Noemie to bring a new perspective and communicate the value of the business. The revenue acceleration is expected to come from both platform upgrades and follow-on sales, and the synergies are mostly two-way cross-sell between heritage RMS and Moody's products. There is also potential for net new product synergies.

The core RMS ARR is now growing in line with MA ARR, which is a significant improvement from the low single-digit growth when the business was acquired. The acceleration of customer migration to the Intelligent Risk Platform and improved sales strategies are driving this growth. Additionally, there are synergies between RMS and other Moody's customers, such as a recent partnership with a large bank to use the Cat model for stress testing and portfolio analysis.

The speaker discusses the demand for risk assessment related to climate and extreme weather from banks, asset managers, and corporates in the supply chain. They also mention a positive trend in inbound cross-selling and leveraging master data for KYC purposes. The speaker then addresses questions about the current guide for credit issuance, stating that they expect a mid-single-digit decline for the rest of the year, with a larger decline in the fourth quarter due to uncertainties such as elections. They mention that their forecast reflects a change in the calendarization of issuance and they will be monitoring various drivers.

The speaker believes that we are in the midst of a multiyear issuance recovery, despite potential volatility in the near future. This is supported by the debt velocity and the fact that corporate issuance is still below pre-financial crisis levels. The speaker also sees private credit as a tailwind for the recovery, as private players are deferring to public markets for cheaper financing. This leads the speaker to believe that private credit is not cannibalizing public markets, but rather deferring issuance.

The operator introduces a question from Russell Quelch about the company's balance sheet and capital allocation. Noemie Heuland responds by stating that they are maintaining their approach and will catch up on their planned share buyback. She also mentions that they focused on deleveraging last year. The operator then introduces a question from Owen Lau about margin seasonality and the impact of cloud migration on revenue growth. Rob Fauber responds by stating that there will not be a big valley in revenue growth as they move customers from on-prem to SaaS.

Noemie Heuland discusses the company's expectations for MIS margins and revenue growth in the remainder of the year. They anticipate a slight decline in expenses for the second quarter and a margin of 53-56% for the rest of the year. The MA margin is expected to follow a similar pattern. In terms of overall costs, the company expects a ramp up in the remaining three quarters. Incentive compensation for the first quarter was $105 million and is expected to average $100 million in the second and third quarters, and slightly increase in the fourth quarter.

In the second quarter, expenses are expected to remain flat compared to the first quarter, gradually increasing in the third and fourth quarters due to strategic investments, merit increases, and other variable costs. The company serves both public and private alternative asset managers, and has significant relationships with players in both markets. They have a dedicated private credit team and offer various services for private credit, with a strong pipeline.

Rob Fauber, CEO of Dun & Bradstreet, discusses the company's relationship with the alternative asset management community and the growth of their KYC (Know Your Customer) solution. The demand for KYC is driven by the need for businesses to know who they are doing business with and to connect the dots between entities. The company is leveraging their Orbis database and AI-curated news to expand their solution set beyond traditional KYC. The growth of KYC is accelerating on a larger revenue base, but the ARR (Annual Recurring Revenue) remains around 17-18%.

The demand for KYC solutions is expanding beyond financial institutions to include large corporations, driving strong growth for the foreseeable future. Moody's has invested in product innovation and has seen positive momentum in their ARR, indicating strong underlying trends in the business.

Rob Fauber thanks everyone for joining the call and says they will talk again next quarter. The operator then concludes the call and mentions that the MIS revenue breakdown will be posted on the Moody's IR website and a replay will be available.

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