The Moody's Corporation held a conference call to discuss their second quarter 2024 earnings. The call was recorded and participants were in a listen-only mode. After the presentation, there was a question and answer session. Shivani Kak, Head of Investor Relations, presented the results and revised outlook for select metrics. Non-GAAP or adjusted figures were also discussed and a reconciliation with U.S. GAAP was provided. The safe harbor language was mentioned and forward-looking statements were made in accordance with the Private Securities Litigation Reform Act of 1995. The Management's Discussion & Analysis section and risk factors were also referenced. The call was open to members of the media in a listen-only mode. The call was then turned over to Rob.

Rob Fauber, CEO of Moody's Corporation, is pleased with the company's 22% revenue growth, 50% adjusted operating margin, and 43% adjusted diluted EPS growth in the second quarter. He credits this success to the strong position of MIS with investors and issuers, as well as their disciplined approach to costs. MIS delivered 36% revenue growth and a 63.2% adjusted operating margin, leading to a raise in guidance for both metrics. On the MA side, they saw a seventh consecutive quarter of 10% ARR growth and a 94% retention rate. Moody's is also increasing their share repurchase and adjusted diluted EPS guidance for the year. They continue to innovate and invest in order to drive long-term sustainable success.

MIS has established itself as the top agency, leading to strong growth in transaction revenue and overall total revenue. The company's investments in streamlining and automating workflows have allowed for double-digit growth across all asset types while maintaining expense discipline. In MA, the company saw 8% revenue growth and double-digit ARR growth for the seventh consecutive quarter. High-growth SaaS and subscription products make up 95% of total revenue and businesses within Decision Solutions, such as KYC and insurance, have also shown strong growth.

Moody's ARR growth is at 6%, but expected to improve in the second half of the year due to the success of Research Assistant and CreditView. This is achieved through delivering mission-critical solutions and utilizing their risk operating system, massive data sets, and analytic engines. They have also launched two new skills through their GenAI product roadmap, an automated credit memo and an Early Warning System. These solutions have received positive feedback and demonstrate the power of their data and analytics. In the KYC space, they have launched a sanctioned security screening tool to help asset managers comply with regulations.

Moody's has launched two new products, the European sanctions product and the Orbis database, which have helped their banking customers manage reporting requirements and avoid potential issues. They have also made significant investments in their Orbis database, which now covers over 0.5 billion companies. In addition, they have acquired GCR, a leading African domestic credit rating agency, to further strengthen their position in domestic rating markets around the world. They also have a strong presence in China, Asia, and Latin America.

Moody's has achieved a milestone in their sustainable finance franchise by delivering their 200th second-party opinion. They have a strong pipeline for the future and have launched a net-zero assessment. They have also announced strategic collaborations with MSCI and Zillow to provide customers with ESG scores and data, as well as insights into the private credit and real estate markets. They are also deepening their relationship with Google to provide more comprehensive data and analysis for customers. These partnerships do not affect Moody's ESG work or their climate and transition capabilities.

In the last month, Moody's has made significant announcements, including partnering with Moody's to expand their audience and collaborating with Diligent to offer a risk management dashboard. These partnerships are helping to expand the reach and influence of Moody's data and analytics. In Q2, Moody's delivered a strong performance with revenue of $1.8 billion, a 22% increase from the previous year. Moody's Analytics also saw growth in recurring revenue and an improved operating margin. Their largest line of business, Decision Solutions, saw a 13% increase in annualized recurring revenue.

The company experienced strong growth in its insurance and KYC businesses, as well as in its Data & Information and Research & Insight sectors. However, there may be some moderation in growth rates in the second half of the year. In the MIS division, revenue grew by 36%, with transactional revenue outpacing issuance growth. The Financial Institutions Ratings Group also saw record revenue from insurance customers. The company was able to maintain a high retention rate and a strong adjusted operating margin through expense controls and automation. The company has updated its guidance, with the biggest change being an improved rated issuance outlook.

The company is forecasting a 20-25% growth in issuance and high-teens percentage growth in revenue for the year. They expect the second half of the year to be slower than the first half, with a decline in Q4 issuance. The company is raising guidance for revenue and profitability metrics in their ratings business due to a positive outlook for the global economy and a decline in default rates. They expect MIS revenue growth in the high-teens percentage range and a 58-59% adjusted operating margin, while MA revenue will see high single-digit growth and a 30-31% margin.

Moody's is adjusting their expectations for year-end ARR growth to a wider range of high single-digit to low double-digit percent. This is due to a partnership with MSCI, tight purchasing patterns in the banking and asset management sectors, and potential impact from the upcoming U.S. elections. However, they have also launched new products that are expected to help drive growth in the back half of the year. Overall, they expect revenue to grow in the low-teens percent range, expenses to grow in the high single-digit range, and an adjusted operating margin of 46% to 47%.

The company has announced a high single-digit increase in expenses, primarily due to increases in incentive compensation and a non-cash charge related to asset development. They have also increased their free cash flow and share repurchases guidance, and raised their adjusted diluted EPS guidance range. The company has seen strong issuance in the second quarter and has raised their guidance for MIS. They do not expect a significant impact from pull forward, both in planned financing and from forward maturities.

The speaker discusses the current state of the bond market and predicts a decrease in issuance in the fourth quarter due to guidance from banks and pull forward from future years. They also mention that this pull forward is within historical ranges and is mostly seen in spec-grade maturities.

The speaker believes that the current geopolitical and macro uncertainties will not have a significant impact on their outlook for the rest of the year. They have already factored in the strong first half of the year and have adjusted their outlook for the third quarter accordingly. They remain cautious about the fourth quarter and believe that any potential rate cuts will have a bigger impact on issuance in 2025. They also expect Research & Insights to accelerate in the second half of the year, but have lowered their ARR due to this division.

The speaker is asking for clarification on the slower growth in the company's Research & Insights division. The CEO explains that there have been some retention pressures due to consolidation and cost pressures in the banking and asset management sectors. However, they are investing in new offerings, such as Research Assistant, which has shown promising results with a strong pipeline, increased sales, and positive customer feedback. The retention rate for the division remains solid at 94%.

The operator introduces a question from Manav Patnaik about the MSCI partnership. Manav asks about the timeline and impact of the partnership on the private credit side and the current size of their ESG business. Rob Fauber responds by expressing excitement about the partnership and the potential benefits for customers. He mentions that the integration of MSCI's content into their solutions will take time and that they have ideas for expanding into the private credit space. The initial focus will be on integrating ESG into their solutions.

The company is planning to focus on private credit and ESG initiatives in September, with no specific timeline for implementation. The ESG business is relatively small and will not have a significant impact on the overall business. The company is on track with its strategic investments, including the development of GenAI tools and the acquisition of a company to accelerate the build of a banking assistant. There is progress on the gen AI-related product side, but no specific updates on other new products such as private credit, digital finance, and transition finance.

The company has invested in Able AI to automate the commercial loan documentation process and expand their use of Copilot and GenAI capabilities. They have completed their CSA framework in Ratings and are rolling out a ratings copilot environment with tight controls in place. Internally, they have seen strong uptick in usage of Copilot and GenAI tools and have conducted successful hackathons. They are also bringing together data and analytics into a workflow platform for corporate use and plan to launch additional products later in the year. Lastly, they are investing in technology platforming for better user experience and to gain more insight into customer behavior.

The company is successfully implementing AI technology, with the first team already on board and plans to scale to other teams. This will improve regulatory compliance and increase efficiency. The company is tracking well against its investment plan and has seen strong growth in its Research Assistant product. The company is confident in its ability to monetize AI technology and plans to launch more products utilizing it in the future.

The speaker discusses how they have customers on private preview mode for automated credit memo and early warning, and are working on partnerships with companies like Microsoft and Google. They also mention cost pressures from the banking and asset management sector, and the need to articulate the value proposition of their solutions. There is also strong demand for their products and a healthy sales pipeline.

The company has seen strong growth in ARR and shorter sales cycles for their gen AI offerings. The increase in sales meetings, including face-to-face engagements, gives the company confidence that customers are interested in their solutions. They have also been having elevated discussions with the C-suite at their traditional customer base and are working with them to adopt GenAI, which may take some time due to regulations and risk considerations. The environment has remained consistent over the past 3 months.

The speaker asks about the deceleration of organic constant currency revenue growth in the Data & Information subsegment and the variation between this and the subsegment's ARR. The CEO explains that there may be some impact from product mix and contract nature, but overall, the first half growth of 10% is reflective of business performance. The speaker then asks about headwinds to ARR and revenue growth in the back half of the year, to which the CFO responds that the second quarter revenue growth was 7% and 8% at constant currency, similar to the first quarter.

The company's recurring revenue grew by 9% in the second quarter, and they expect similar growth throughout the year. Transactional revenue was down due to a shift in focus towards renewable sales. The company expects MA to grow in the third quarter and tick up in the fourth quarter. The outlook for 2025 issuance has not changed despite a pull forward effect seen in both the current year and 2025. The company does not believe this pull forward will have a significant impact on future growth.

Craig Huber, from Huber Research Partners, asks Rob Fauber about the state of the commercial real estate market in the U.S. and its potential impact on the banking sector. Fauber explains that they have a keen focus on this area and have a lot of data and analytic tools to monitor it. He notes that there are concerns about Class A office properties, but overall the market is holding up well. Fauber also mentions that there has been some new investor interest in the CMBS space, indicating positive investor sentiment. Noemie Heuland answers a housekeeping question about incentive compensation.

In the second quarter, an adjustment was made to reflect the accrual in relation to top line performance, resulting in a $117 million expense. For the rest of the year, the expense is expected to be around $110 million per quarter. The company has also introduced an early warning system for commercial real estate, generating interest from potential clients. The widening of the ARR range is due to a change in strategy and potential delay in sales as the company switches to MSCI products. However, there may be an increase in sales through Orbis once technological links are set up between the two companies. It is unclear if this is a temporary slowdown or a long-term change.

Rob Fauber, CEO of MSCI, and Noemie Bisserbe, CFO of MSCI, discuss the impact of integrating MSCI's ESG content into their solutions. While this may initially affect their sales pipeline and retention, they believe it will ultimately be a positive for the company. MSCI will also use Orbis for ESG scores, and there may be potential for further collaboration in other areas such as private credit. This is expected to take place in 2025.

Faiza Alwy asks about the potential impact of government contracts on ARR, specifically in regards to the upcoming renewals and the potential risk involved with a change in administration. Rob Fauber and Noemie Heuland respond by stating that the government segment is their smallest customer segment, but has been growing. They also mention the possibility of contracts slipping into the following year due to a potentially bumpier environment in the fourth quarter. They clarify that the renewals are mostly in their Data & Information business and that the current guidance range is in the upper end of the high single-digit percent range.

The assumed acceleration in MA in the medium-term framework is not solely dependent on the success of the GenAI product launches and scaling revenue. The company also has a land and expand strategy in place, which involves cross-selling to banks and insurance companies, as well as expanding to corporates. The company has seen success in these areas and is further investing in product development to target these opportunities at scale. This gives the company confidence in their ability to continue driving and accelerating growth.

During a conference call, Russell Quelch from Redburn Atlantic asked about the potential impact of the upcoming active weather season in the U.S. on RMS and if it would result in increased revenue. CEO Rob Fauber responded by stating that while extreme weather events are driving more interest in their solutions, it may not immediately translate into a revenue bump. However, there is a growing understanding among insurers and other organizations about the need for better data and models to understand the impact of climate change. This is why there is interest in their cloud-based SaaS offering.

The speaker discusses how banks are increasingly interested in climate and weather modeling as they underwrite commercial loans and assess the risk of collateral. This has driven more interest in the company's modeling capabilities, but it is not tied to seasonal events. The company's open platform, which allows for third-party models, is a competitive differentiator. The speaker also mentions the importance of their acquisition of RMS, a premier climate and weather modeling platform, in providing solutions to a broader set of customers. The questioner then asks about the company's growth algorithm and if it has changed given the current environment.

Rob Fauber, CEO of Moody's Corporation, reminds investors that the company achieved its highest ARR growth rate in the second quarter and that Decision Solutions is now growing at a pace consistent with their medium-term targets. He also states that there is no change to their outlook and they will revisit the medium-term targets annually unless there is a material catalyst. He acknowledges the pressure on banks and asset managers but says they are continuing to invest in innovations, product development, sales engagement, and partnership strategies to accelerate growth. He concludes by thanking everyone for their questions and looking forward to talking again in October.

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