Moody's Corporation (MCO) Earnings Call Transcript & Summary

All right, everyone. We're back for the last session of the day. We have a few more tomorrow. Hello again. For everyone who hasn't seen me today, I'm Alex Kramm, senior research analyst at UBS, covering the U.S. exchanges, the rating agencies, information services and the commercial real estate brokers here at UBS. Excited to have next up Moody's. And given the timing of last week's acquisition, even more delighted to have Steve Tulenko here, who is the President of Moody's Analytics. Before we get started, a quick housekeeping reminder. If you're on the webcast, there should be a way for you to ask question. So I'm going to have a hopefully nice relaxed early or -- early evening, late afternoon, discussion with Steve here. But if you have any burning questions you want me to work into the conversation, I am happy to do that.

So with that, why don't we get started? And Steve, why don't we -- since there is no presentation, why don't we start really big picture here? I think last year -- or maybe it was at the beginning of this year, in your investor presentation, you started presenting Moody's a little bit different as this integrated risk assessment business. So I guess my question is, to start us off, what does this really supposed to mean? And then, of course, how does Moody's Analytics fit into the equation of being a risk assessment company?

Yes, sure. So thanks, Alex. Nice to talk to everybody. I think the -- there's 2 things that are happening here that are important to note. And one is that customers have spent a lot of time trying to figure out what to do about resiliency. And I would say that this was a trend that was increasingly important and becoming more important as we moved into the COVID era and then during COVID became amazingly top of mind for almost everybody. And when I say customers, I mean, the investor community that we work with as well as the issuer community that we work with, the corporations that we work with in terms of providing data, the banks we work with in terms of delivering analytic tools. This concept of resiliency was something that I think was pretty important. And we, as a rating agency, as a standards provider, are often -- we're one of the places where people look to for help whenever they're trying to understand uncertainty and maybe even look for help when it comes to dimensioning uncertainty. So we've got a lot of capabilities at Moody's. Credit is, of course, one of those capabilities that everybody is very familiar with. There's many other things that we offer help with. And this -- I would say this concept of resiliency has taken on a bit of a holistic sense to it. And customers are asking us for help in terms of monitoring early warning around different risk domains. And I often tell a story about how you can look at a company, for example, and consider them from a credit perspective, but you might also want to consider them from maybe a supplier perspective in addition to maybe you're lending them money or you're selling them goods. So the different perspectives generate different orientations. They generate different questions. And people often come to Moody's to ask those questions. So we've got a lot of tools to assess risk. And if we can integrate those to help people create that holistic understanding, we can really add a lot of value. And with that holistic understanding, you can really, I think, differentiate your ability to understand who it is you do business with. And that's ultimately what's behind integrated risk assessment as a construct. It's asking yourself a question, when I do business with this company, this counter-party, when I make this loan, when I buy this bond, when I sell this, whatever it is, this set of goods, what kinds of questions should I be asking and can I get a good perspective -- or can I get multiple perspectives to the table to help me answer that question. So that's really the meat behind integrated risk assessment. And as a company that develops standards and creates standards for people to rely on, we think we can extend and support people through multiple risk domains by integrating those risk assessments. So that's the basic idea.

Fantastic. Good start. Let me stay big picture here for a second. So getting now really into the growth algorithm for Moody's Analytics, your business. Can you just -- yes, can you help us think about how we should think about the business longer term? How fast of a growth business should this be? And importantly, what are the components of that growth? What's the growth algorithm?

Yes. So I mean, Moody's Analytics, in a lot of ways, provides ballast to the revenue stream you see at the rating agency, right? There, you've got a little bit more transactional revenue. Moody's Analytics, much more recurring revenue. So just to pin that, I think our number at the end of the second quarter was 92% of the revenue base was considered recurring revenue. That's up from 88% about a year ago. So just to give you a sense, it's actually increasing. You have a very solid recurring revenue base with really good retention rates, retention rates that are in the 90s, sometimes the mid-90s, sometimes the low 90s. But you have high recurring -- a proportion of recurring revenue with really good retention rates and then a very healthy understanding of customers, a healthy interaction with customers to develop new ideas. And those new ideas can either take the form of enhancements to an existing product to maybe support those renewal rates or new modules we might add to expand through upgrades or maybe through price. So you see those. And then, of course, you have new business activity that we generate as well. We have about 1,000 sales reps, actually a little bit more. They run around -- well, they are now virtually running around the world, checking in with customers and helping them work with us. So you combine those factors, and that's the basics of it. The other thing I'd mention is that a big push for us in the last couple of years has been to drive that recurring base through subscription products and through SaaS delivery. So virtually every product we've released -- in fact, every product we've released since probably 2015 or '16 has been a SaaS-oriented product. And that enables us to drive a different level of operating leverage. And I think that's what really contributes to that margin story that you see on the screen there where you have a track record of growth on the top line, continued investment in the product line. And then you also see simultaneously expanded, ratcheting up the margins over the course of time as well.

Well, we'll definitely get to the margins at a later point because that's definitely part of the thesis some people have around the business. But last one bigger picture before we dive into the details of the segment, and this is more of a holistic Moody's question again. And really, the question comes down to, do you think Moody's Analytics is positioned to sustainably grow faster than MIS, the rating agency over the long term? Because really, from my perspective, I think MIS has this very long-established moat that we think will be around for many decades to come. And with Moody's Analytics, you just saw it last week, it seems like you always have to reinvent yourself, something -- sometimes organically, sometimes inorganically, to keep the growth really where it's been. It's been faster growth and even maybe more competition over time. So the question really is, is MA a better and faster-growing business over time that it really makes sense to allocate more capital to relative to MIS? And I know who I'm talking to, so maybe it's an unfit question, but I think it's something that some investors definitely grapple with.

Yes. Well, I mean we could start with -- let's acknowledge, first of all, that you're right, the rating agency is a pretty impressive business, right? The moat is impressive. Growth over the years is impressive. The investment thesis of shall I buy in on the idea of the fixed income market growing over time and credit expanding over time, I think that's something that everyone should be comfortable with and consider a very good idea. Now Moody's Analytics. Let's just start with just some facts, right? The simple truth is since we created this entity, we've grown at a 12% CAGR. That's north -- how many years are we into now? At least on this screen, you've got 12 years' worth of that. We've grown at rates that are about the same over the last couple of years as well. 7 or 8 of those 12 points, roughly 60%, 65% of that growth is coming from organic product development, organic sales and marketing activities. So we've built a machine to deliver, especially now with a high recurring base, a very predictable growth rate. And we believe that our product development capabilities and the experience and, I would say, track record suggests that we can keep up with these kinds of rates. And after you do some math, you could start to see that we would be the size of the rating agency maybe in a few years. The current expectation for all of the markets that we're in, if you think about the total addressable market for Moody's, a portion of that would be the addressable market for the rating agency, and maybe even more than half of it would be associated with the activities we undertake in Moody's Analytics. So there's just more irons in the fire. And we have a track record of doing a good job in terms of execution. So I think you've got a decent thesis there as well.

Okay. Very helpful. So as promised, why don't we, for the benefit of the audience, actually dive into some of the various businesses within Moody's Analytics a little bit here, starting with RD&A. So can you talk about the latest trends in the legacy credit data and research business? I always view this as a byproduct of the rating agency with probably the strongest moat and pricing power of all your RD&A business. But yes, maybe you could just give us an update on how those products are doing, what the customers are, what the pricing environment is like.

Yes. I mean I think that's fair to say there's -- a big chunk of the RD&A business is related to the content created by the rating agency. And that research, for example, and rating feeds and some other services we provide, those are growing at, I think, the rates that you've seen historically, high single kind of growth rates and very, very profitable growth for us. They're -- it's an attractive way for us to leverage the content and support the investor community especially but also other people interested in credit. And so we add a lot of value, and we explain the ratings business in a lot of ways through that commercial venture. So the trends here are very similar to what you've seen before. Thank you, Shivani, for putting this one up on the screen. Your retained basis is very similar to what you've seen before. Your net growth number on the right-hand side, very similar years. You've seen it in the past as well. So doing very well. COVID has had a little bit of an impact but not much and, I think, in reasonable shape there. The growth stars for us are really that KYC business that we've talked about before. So leveraging the investment we made in BvD a few years ago, taking the content we have in the Orbis product, which is primarily information on private companies, combining it with the acquisition we made with RDC. I guess it was the beginning of 2020, just before COVID hit. You take the information on individuals in the GRID product from the RDC company, the Orbis product, combining those, and you have a fantastic solution for people to perform Know Your Customer activities. And the basic idea here is before I do business with this customer, who am I getting involved with and is there anything out there I should be careful with, especially as it relates to financial crime and maybe some new sentiment as well. So we've done a lot of work there with AI to try and bring those things together and help people speed their decision process. And this is one of those places where we can show a real improvement on people's efficiencies in people's organizations. So this has gone very well for us. The growth rates here have been tremendous. It's our fastest-selling product, at least in terms of renewable products that we've got right now. I think you can see that growth rate year-on-year, about 27%. So I'm very happy with the way that's performing.

So you just jumped a little bit from the core credit into the BvD and KYC, which is great. And clearly, that's the area you're probably most excited about. I guess anything else outside of KYC or maybe the core BvD business trends that you would point out? And then maybe more holistically, as you think about that private market data business, KYC, but also other use cases. I mean what's really the goal over time? I mean are you trying to become maybe a nimbler and better version of your larger U.S. competitor? I mean D&B, everybody knows who they are. And obviously, Moody's knows them from their own past very well. Is that kind of how you think about the BvD, RDC and other assets combination? And if so, like how are you trying to catch up to them? And how competitive is this market?

Yes. Okay. A lot of questions.

A lot of questions, yes.

Let's see if I can tackle them. Let me just, first of all, point out just organic growth for RD&A, which is this combination of the research that you explained before, the KYC work we're doing, some of the work we're doing in real estate. Organic growth in the second quarter, I think, was 16%. So we're talking about a very healthy growth number here, not like other -- not too many other companies are running that kind of growth number. I think the business overall, RD&A was something around $1.5 billion, $1.6 billion in size, just to give you a sense. So why -- what are we thinking about this? And how does it fit in strategically? And I think there are a lot of connections between RD&A and the ERS segment that we often talk about. But I would say that the private company asset is one that we really are planning on being -- generating a lot of value for us and for our customers. You think about it. Everything that you might want to do with respect to company analysis starts with, one, does this company exist? Two, roughly how big is it? Three, can you associate that company to maybe a location, to maybe some data you might have around ESG? You could potentially think about that company in a holistic -- or a series of companies in a holistic way and maybe look at a portfolio as well. So we're making big investments in connecting that private company information to ESG filters, ESG scores, ESG analytics as an example. And it's a good example of a place where if we didn't have that private company asset, we wouldn't be able to do some of the work we're doing. And one of the things we've released recently, and we actually talked about it, I think, on the earnings call, was a Score Predictor tool so that you can -- we've now prepopulated 140 million companies with a series of ESG analytics so that you can score those names according to these various ESG factors. And that's a good example of how we're leveraging that private company data asset to do something more for people so that we can roll things out and really do some work to help them do their jobs. That's, I think, a good example of that private company asset being leveraged in another way, a way that maybe nobody else can do. So same kind of thing could be at play with respect to commercial real estate, which is another area we see transformation happening. And we think we can do a lot of work here to support that sector. If you think about tenant analysis with respect to commercial real estate or if you think about, gosh, what are the properties associated with this particular company and how many of them might be exposed to some climate risks or some -- maybe some C-level change or some other catastrophic change. So these connections between that private company asset and these other risk domains, again, integrated risk assessment as a construct is where we see the growth because not everybody can do these things. Bringing all these capabilities together is the thing that Moody's can bring to the table, not everybody else can. So I think that's a big growth driver for us in the future as those domains become more important to people and the monitoring of those domains become important to people. The private company asset in the middle is central and core.

Okay. Helpful. I mean you didn't -- maybe you did, but in terms of the competitive dynamics, I mean...

Yes. I mean I think I would say I certainly have a lot of respect for Dun & Bradstreet and the franchise. It's only been around for 100-something, 50, 60 years, right? So very impressive. I would say we compete with them from time to time. But most of the time, we're concentrating on this Know Your Customer work right now. We're doing a lot of work with the ESG space, a lot of work with the commercial real estate space. So I'd rather go to a place where our customers need our help and maybe they aren't talking to too many other competitors right now. So that's where we're concentrating. It's in those kind of applied analytics and especially leveraging the skill sets that we bring to the table that not everybody else has. So there are certainly times when we do compete, but I would say our growth engine is an area where we don't always see them. We don't always see them.

Yes. So it's more about growing the TAM than competing for the TAM, right?

Yes. I mean -- yes, exactly.

Anyways, just to round out real quick and finish on RD&A. Since you mentioned real estate in passing just now, any -- it's been quiet on that front. And again, it sounds like you're integrating a lot of this. But maybe be a similar question. Everybody, when they hear real estate, they think about CoStar. Again, is it kind of like thinking about being bigger and grabbing some share? Or is it more about other use cases? And then maybe just to round it out on the post real estate, you've done a few other acquisitions. Maybe you can just remind us around Acquire Media, Catylist, Cortera, how this all fits in just so we round out RD&A before we move to...

Sure. Okay. So well, first of all, just the competitive dynamics, I think, is similar. CoStar, similar dynamic. I'm much more interested in doing something that's new and maybe something that we think is a trend that commercial real estate professionals will adopt or demonstrate over time. And there's a lot of transformation here to be done. I think anybody on the phone who is sort of familiar with the commercial real estate sector, whether it's the investment sector, the lending sector, the property management sector, there's some digitization work to do. There's some efficiencies to be gained. And I think we can make a pretty big difference there. In a lot of ways, applying the same recipe that we've done for commercial lending for banks and for commercial credit, for investment managers, I think we can offer some assistance in the commercial real estate space. So we're doing a lot of product development right now. No doubt about that. We are developing larger data sets, but they tend to be very applied and very specific to those kinds of applications that we think are going to drive transformation in the long run -- or actually, let's call it transformation in the intermediate term. So we're excited about those growth prospects. And it's really -- again, like you said before, it's really expanding TAM rather than going head-to-head to compete over a particular existing customer. Rounding out, so Catylist is an acquisition we made in the commercial real estate space. This was -- it's a listing service there in smaller markets and expanding into new markets every day. We're investing there to try and drive more and more coverage. So they provide commercial real estate listing capabilities to the real estate professionals on the ground there. We gather information along the way. That's a nice source of data gathering for us and very good accurate data as well. They have some good technologies that we're using in some other places as well. Acquire Media. I think of Acquire Media as really the core of our early alert or early warning franchise. There's lots of other things that Acquire Media can do, but their technology is really quite good and lends itself to artificial intelligence and machine learning techniques around natural language processing and enabling us to read news stories and gather sentiment, not just facts or not just collect data items, but gather sentiment from those new stories and then apply that in a lot of different ways. So we're trying to create a -- and we've started to commercialize an early warning suite, especially around credit today. But it could also be applied to other concerns like social concerns or ESG concerns or, gosh, climate concerns and then see what they might -- how they might relate to existing companies. So again, news -- capturing sentiment around the news, integrating that with the private company information. You can start to say things like maybe I can give you a sentiment score on credit for that name even if that name is not rated or a sentiment score around climate for that name or transition risk for that name even though that name might not be rated. So we're pretty excited about that connection. Cortera, you mentioned that one. I think of Cortera as really a big injection of high-quality information on private companies in the U.S. They have a lot of experience in the trade credit space as well, which is interesting. But primarily, we're just trying to get our data linkages together and leveraging some of their expertise with some of the smaller -- with all the private companies in the United States. We already had a relationship with Cortera, and we had a relationship with Acquire Media. They were big suppliers for us prior to the acquisition. So we have some solid work that's already underway, and we have some good experience with them and consider them to be high-quality providers. So we're very happy that they're part of the family.

Great. I think we covered it all within RD&A, but did I miss anything? Anything else that you would point out that me or investors should be thinking about?

Yes. I mean we'll just talk about that organic growth number. It's a good number to keep in mind there. I think I said it was 16% in the second quarter. Good perform -- I'm very proud of our colleagues and very happy that we're doing something good for customers here. So...

No. That's great. Thanks for the reminder. That was impressive growth rate. Then let's shift to ERS and fourth thing -- for a minute. Unfortunately, I guess, I think the investor perception of that business right now is a little bit poor. And I think it's primarily because some of that growth that you're seeing has actually been masked by some of the business moving from onetime sales to more recurring SaaS. You mentioned earlier that every new sale is really a SaaS sale now, and I don't know if that applies to ERS as well. But can you update us where that -- where we are in that transition and maybe why those underlying trends are actually stronger than they may be appearing to a lot of people?

Yes. So Alex, we should probably acknowledge that I ran ERS for 6 years at Moody's. So the fact that people are thinking of it as poor, I'd like to talk to some more people to make sure we understand how good this business can be. The big story is what you said there, Alex. 2015 -- this chart is a great way to tell the story. 2015, roughly, I forget, something in the -- it looks like it was $250 million there. But 61% of the business at that point in time was recurring. So a big chunk of the work we were doing, we had to repeat, start over, start fresh, year in and year out. So roughly 40% of the business was considered -- was really project work. We had gotten ourselves into that -- we had done it that way in order to develop more exposure and experience to what our customers were doing. So we did a lot of work to expand the code base with the software and expand our experience with some of the analytic questions that they were asking, and we did it through projects. So once we got to the point we felt we had critical mass around those, we kind of changed the channel and started to really concentrate on converting that to a subscription business. And today, we're at 83%. You can see on the chart here. The recurring revenue number in ERS land is a 14% CAGR over that period of time, right? When you think about it that way, that's an impressive number. If you start to take away some of this project work, which is low margin work because you have to pay people to do it and just look at the -- what's the core of the business today, which is a very nice recurring SaaS and subscription business, I think you'll look at it much more positively. That shift has been a little tricky because we wanted to try and keep the plane in the air while you're making some adjustments to the engine. And that's -- this is what it looks like 5 years later, 6 years later, right? And I think in 2015, when we declared we were going to make that shift, we've certainly, I think, accomplished the shift in the -- for the most part. I don't think we're done completely doing project work. There are customers today asking us for help on certain projects that we like because strategically speaking, I learn something when I do them, and I might develop a new feature from a product by doing something with the customer. So we'll still have that. And I think ERS is where you'll see most of that kind of, I'll call it, codevelopment work, and we'll do that from time to time. The other thing is in the ERS space where we do a lot of software projects for people in Asia and the Middle East, where the SaaS computing concepts are not as well adopted. This is still a part of our life. So I'm not going to turn away a customer in the Middle East because they will only do it on an installed basis. We'll still keep the customer, and then we'll work with them over time as they're more able to handle -- or more able to work with the SaaS technology.

Great. And I'm sorry, did you -- maybe I just missed it, but do you think in a few years, we're approaching 100%? I mean is that really where you want to go?

Yes. I would say, again, I don't know if it's 100%. But I would expect this recurring proportion to continue to ratchet up as the -- it's really the Asian market and the Middle Eastern market where we have lots of customers and they just tend not to be ready for SaaS. Often, there's some regulatory reasons that prevent that. And I could tell you a story. I was in Bahrain once and we were talking about let's move to a SaaS product. And the CEO of the bank told me, "I'd love to do that, but we have to build a power plant first before we can get AWS here, right?" It's that kind of problem. We're maybe not used to that in the U.S. context, but there's still some development work there just to be ready for SaaS.