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

Good morning, everybody. We are thrilled to start the last day of our session, I would say we save the best for last with Moody's. We're thrilled to have Tameka Alsop. She's the Chief Administrative Officer at Moody's. Really rich, rich history with the organization, having spent time with Rob Fauber, who is their CEO. So I think we're going to have a really unique perspective. What I'd like to do in an effort to keep this as interactive as possible, we're going to start out just with a quick question. I think we're going to get a brief overview of Moody's technology initiatives, and then we'll open a broader Q&A. So with that in mind, Tameka, I wonder if we could start just with an overview. It was like to say Moody's has gone through more of an evolution as -- revolution as opposed to evolution. So maybe you start with that -- help us frame where Moody's is today. It's gone through such a wonderful change and it's really much more balanced organization today than it's been in quite some time as you've shifted more towards the analytics, but maybe help the audience understand some of the initiatives that drove that?

Sure. So first, thank you very much, Kevin, for having me here today.

Pleasure as always.

Thank you very much. Appreciate it. I'll talk a little bit about Moody's today. Moody's is an integrated risk assessment firm that provides credit rating opinions, analytics and insights that helps our customers make better, faster decisions across a range of risk use cases, both existing and known and evolving. And the business is broken up into 2 segments. I think most of you are aware. There's Moody's Investors Service or MIS; the rating agency that has been providing credit rating opinions for over 100 years. It has developed a brand of rating agency of choice and for all the right reasons with its deep analytical expertise and it's rigorous and transparent methodologies and ratings process. And so that's the part of the business, Kevin, that most people know. I know when I was growing up, I pulled out of Moody's manual to do some research myself. But the other segment of our business is Moody's Analytics. And Moody's Analytics provides financial intelligence, analytics, tools that help our customers efficiently manage risk and growth and risk management. And again, we also like to think about it as not just risk but opportunities as well when you can bring those data sets together. So that's a little bit about Moody's, including the Rating agency and Moody's Analytics, where we have a lot of our tools and solutions. And so to the point Kevin made earlier, I thought it might be helpful if I just take a few minutes to talk about how we've been leveraging data and technology to drive our strategy forward. So not unlike most of -- the rest of the world, Moody's customers and employees are undergoing and living in an environment of significant transformation. And in order for us to meet that reality, we have to -- again, because we want to be able to compete for customers as well as employees and talent, we have to meet our customers and employees where they are. And so on this slide, you will see the 4 key principles that we use to underpin technology across the firm, focus on our customer needs. And again, most companies focus on their customer needs. But if you look at our retention rates in our ARR, there's proof that that's happening. We'll talk about that a little bit later, Kevin, I believe, investing and innovating with intention, given our role in the market and the data that we house, we have to build a secure, reliable and scalable infrastructure. And also, we want to be fostering a culture of innovation, what's coming and let's be prepared. And those 4 principles allow us to deliver value for our customers and also to increase our own operational efficiencies and security. So let's talk internal first and how we're using technology across the firm internally. We have a number of cloud solutions, web-based apps, RPA, or robotic process automation, and cybersecurity. So I'm going to talk a little bit about the cloud solutions that you see on this slide. And these 2 items have a lot to do with our rating agency business. We've moved our press release and dissemination of rating actions to the cloud that allows us to disseminate faster. We've created a new ratings and regulatory site that allows us to, again, disseminate more efficiently and meet our reporting requirements, which is critical as a regulated entity. On the web-based app, we have an issuer notification utility, allowing us to engage and notify our issuers faster. And what I would highlight here is that the importance is that by automating these processes for our analytical teams, we build and create more capacity for them to do more high-value work, which is also important to driving the strategy forward. We also have listed here our fully customizable dashboards, which is some great work that our finance team has been doing around real-time data and analytics. So not only are we producing products and solutions that allow our customers to make better, faster decisions, we're utilizing that internally as well, so that our leaders can make decisions faster. Again, RPA finance transformation, we can do -- close the books faster. We have more controls. Again, this allows us to move a little bit more quickly. And this last one is another rating related item around the rating committee cover page. This last one on the page cybersecurity. I think we can all agree is very important. We've been doing a lot of work. Our Fusion Center allows us to keep watch 24/7. We can monitor threats. We can react to those any threats that might possibly come along. And we have scanning tools, again, that reduce the e-mails that come in, which is usually the place where most attacks happen. And I would also note that by limiting the number of e-mails that come through, you're able to create more capacity for your staff as well. So moving from internally focused to externally focused. We've talked previously about our integrated risk assessment strategy and the importance of data interoperability. What we have here on the left side is a little bit about what we're doing now. Moodys.com is our entry into a number of our solutions. But today, it provides access to select capabilities. And we're working to provide access to more capabilities through a simple user-friendly entry way. And so think about it when you look at all the use cases on the right. If you can bring a customer in and they can get access to the data or the solution they use for their own use case, but they can see, wow, there's a supply chain management tool that might be useful to me. I think I want to inquire about that. And so we are looking to -- and again, we have a number of products and solutions. And so we're just trying to make it simpler and easier for our customers to be able to access this information, building more interoperability and helping them to solve more problems. And then I'll just quickly on this last slide, highlight that our strategy is working. The value proposition for our customers is recognized. You can see the number of awards that we've won. AI Review. NewsEdge, the DataHub. The NewsEdge credit scans, you can see here, news across a number of providers and can detect sentiments that might be an early warning towards some credit implication, right? So a useful tool. And our DataHub is providing data to our customers in the form that they need it, delivered at the frequency that's helpful to them, allowing them to combine it with their own data sets because we have solutions, of course, but sometimes our customers just want to be able to access our curated data sets in different ways, and the DataHub is a cloud-based platform that allows them to do that. And then over on the right, we just highlight that. We love this award, Risk Tech. We were -- received the overall #1 ranking, and we also won in 15 other categories. And so our product offerings are that our customers are asking us for are meeting their needs. It's recognized, and we're very excited about this and the opportunity in front of us. So with that, I'll pause. But thank you, Kevin, for allowing me to talk a little bit about what we're doing around data and technology.

It's been super helpful. And really, it's amazing because a cornerstone of our thesis, I think, as you know, is how much more balance the revenue streams become when you look at the traditional MIS, which is ratings business. It's about 55% of the revenue today versus the MA, the Analytics is about 45%. If you compare that with the last cycle, it was about 75%-25%. And I don't think you need a clear example of the dividends, that strategy has paid given some of the volatility we've seen in issuance over the last 24 months and the way you've really been able to deliver on revenue and earnings despite a lot of volatility. What I wanted to do is talk -- just drill down on the analytics a little bit more because I think part of our core thesis is that there's an emerging cloud story here. And I think you see that reflected in how the market is approaching its willingness to rerate the stock. A lot of that's come through organic and the inorganic initiatives. So maybe as I think about some of the cornerstone transactions, I think about BvD, I think about RMS, maybe talk about those transactions a little bit and just how they've been able to continue to enable you to enhance the core analytics within Moody's.

Absolutely. If you don't mind, Kevin, I'll just very quickly touch on the credit rating side, and then I will hit analytics. On the credit rating side, of course, you've said that we've seen a slowdown in issuance. And I would just note that in 2020 and 2021, issuance was extraordinary. We saw enormous amounts of stimulus and supportive programs that encouraged issuance. And then coming into this year, we had the crisis in Ukraine. We saw an increase in commodity prices, inflation at a 40-year high. Interest rates increasing faster than we expected and a slowing economy. And again, this led to volatility in spreads, which led some of the issuers to stand on the sideline. That said, when we look ahead, we still believe that debt is an important and key method of financing growth and innovation. And we believe the fundamentals are strong, and there hasn't been a structural shift. So we're going to talk about the Moody's Analytics side of the business, but definitely want to highlight the rating side because we have to look at it in 2022 relative to previous cycles, and we view this as an air pocket in terms of market turbulence with everything still being sound structurally.

Okay. Before [indiscernible]. Maybe just in addition, I talk about the refinancing malls because I think that's a critical part. There's a certain amount of structural issuance out there that, to your point, doesn't go away because you're in a more uncertain rate environment. Although it feels like we're getting a little bit of relief finally.

Yes, a very good point. We've talked about our maturity walls. $4 trillion to be financed over the -- to be refinanced over the next 4 years. And that creates a pretty strong base for issuance, right? And so that has been growing and we expect to see issuance from that, right? So that doesn't change to my point, right? And we have a little -- we talked a little bit about that in our prior earnings call. And so yes, strong foundation for future issuance as well. Moody's Analytics. And so I think we can really feel good about the fact that you said, Kevin, this business is acyclical with 94% recurring revenue. And what we realized is that, that business has grown 59 consecutive quarters of revenue growth, right, meaning through multiple various economic cycles, right, which really speaks to the need for the mission-critical products that Moody's Analytics provide. And actually, it's in times of uncertainty that the value of our products really stands out. And so as an example, we think about the demand for KYC and compliance tools as our customers realize they need to get a better understanding of their own customers and suppliers and counterparties. As banks are moving to digitize more of their processes, they're coming to us for our tools. You also mentioned RMS, right? There has been an interest in climate models and climate data in terms of incorporating that in some of the risk analysis. And we are well positioned to do that. And one of the other acquisitions that we like to speak to in the MA space is BvD, right, which provided us right now with over -- I think the last time it was -- count I heard was over 445 million private and public entities. That's up significantly from the acquisition 5 years ago. And it plays a key role in our integrated risk assessment strategy in terms of the data it provides with the organizational structures and it's foundational to us providing our customers with a holistic view of risk. So it's been very important for us. And to your point, MA's acyclicality is very helpful in times of market disruption.

It was marvel because I think one of the bigger challenges you have is deciding where to invest because there's so much opportunity that you almost have to stay more focused because of the growth drivers that you have. And even within the broader analytics, you talked -- you've got an amazing retention rates as well within your clients. And I think to your point, it increases the need in times of volatility, which acts as a really nice hedge against the issuance that you saw the last couple of years. I've got a lot more. What I've been doing this kind of midway through these opening it up to the audience, see if the audience has any questions. Great. We just wait for the microphone.

So when you think about the analytics side, one thing that, obviously, you're quite good at is handling that data, but how are you thinking about what separates you? Because there's a lot of whether it's some of the business services companies, how are you finding that unique data? How much does that set you apart versus how much you can handle it from a security standpoint? And the idea is thinking what's the bigger opportunity here for the collect the data sets, know how to get it to somebody, know how to get it in the right way to them in an efficient way. So what's a real big opportunity.

Sure. I mean I think I would just -- to your question on opportunity and what sets us apart. It is the unique curated proprietary data sets that we have. And that, coupled with our brand and our analytical expertise allows us to meet our customers' needs, right, those that exist today and those that are evolving. And I think, again, a classic example is when we came into this year and we had the crisis in Ukraine, and there was more interest in know your customer, understanding sanctions information, and we had that data available. And so in terms of the opportunity, it's really about making that data more interoperable. And to do that, and you mentioned earlier being on a cloud journey, Moody's Analytics has been on a cloud journey with the majority of the tools in the cloud. And so that allows us not only the fact that we have that data, and we can make it available as we talked about through the DataHub, but we can actually build connections across the various data sets in ways that perhaps others can, but I think we bring a unique skill set just given our history, our brand, our deep analytics and our ability to provide solution. So the opportunity is great in front of us because, again, we're providing new differentiated solutions, and we're providing that based on our customers, right? And to your point, we talk about BvD, that acquisition allowed us to diversify our customer base and diversify our use cases. And so these data sets allow us to continue to diversify the use cases that we can solve. And I think that's part of the opportunity, right? I don't know that we can put a sort of position to when the opportunity stops because risks continue to evolve, the need for data as we've talk about secular drivers and data and digitization, there's -- the need is going to continue to grow. And so we think that positions us well. There are others that have some of our data sets, but curated and proprietary in the way that we have and then with the tools to bring it together and make it more interoperable to solve use cases beyond probably what even we have on that page is where the opportunity lies.

I want to follow up on that question because I think it's a critical question. When you think about BvD, I think we announced that transaction in 2017. It was still pressing at the time because when you think about the complexity of the private markets and over the last 20 years in terms of capital needs, right, companies clearly are staying private longer. There's a lot more complexity around the data needs financing them before they ultimately will test the public markets, whether it's equity or debt. One of the things I think that's been so unique is as you curate the data, you have a lot of internal data that you get through the aggregation process and then you have the external component that drives the curation. That also opens you up to a much broader client mix. So I think historically, Moody's has always been perceived as service and corporation, things like that. You've got a much broader set of clients that you can service today. Maybe talk to that a little bit because it's -- whether it's insurance companies, whether it's private equity, just client base that traditionally maybe hadn't been opportunities for you folks. And I think that's another -- when we think about how much more diversified the model is. And it's not really theory. Like when you look at the volatility and the issuance relative to the revenue you've delivered, it's there today, and that's only going to continue to be more balanced. But maybe talk to the client opportunity a little bit.

Yes, sure. If you don't mind, I'll talk to the client opportunity, but I'll talk a little bit about our investments in those products and go-to-market activities to recognize those client opportunities. So our investment in product development and our investment in go-to-market activities is helping to accelerate our ARR, which is a plus. The products that we are creating and developing, and you've heard Rob talk a little bit about this, too, we have been purposeful in investing in our capabilities across our entire sales organization to allow us to more deeply penetrate our existing customer base. And so you talk about product and opportunities and the mix. It's important for us to penetrate the existing customer base that we have as well with new products, integrating existing products and more solutions. And then additionally, we also are looking for new logos, right? And so to your point, as companies evolve and in terms of their own development and are needing to manage more, we want to be able to be there to meet those needs as well. And so we've made a number of investments across our organization to really tap into those evolving industries, those private companies to help them understand the offerings that we have. And so again, I go back to the fact that we have so many curated data sets and solutions that we can help customers where they are in that journey. And so I think that allows us to, again, penetrate our existing customer base and become a little bit more stickier with the existing customers as well as new logos as they decide they need better views into managing risk as they grow -- develop.

And I agree. Maybe it might be helpful for the audience to just a little bit of a deeper dive on Bureau van Dijk in terms of, again, more private market data and when you acquired it. And then RMS a little bit because really 2 different end markets that you're able to leverage across the entire Moody's ecosystem. And again, I think the technology is what allows you to do that in a very kind of cloud efficient way.

Yes, agreed. So Bureau van Dijk, the vast number of private companies in that database allows us to integrate it with our other solutions, right? So in terms of making the data accessible via the cloud to help solve supply chain management use cases. Talking about RMS and climate data, you think about an existing commercial lending customer, right, that might be accessing some of our solutions on the cloud. And now we have RMS climate models and data and the need to incorporate the location of a particular property that they're considering lending to be nice to know about potential losses, right, and RMS allows us to do that. And because we are leveraging the cloud more, we can connect this information in order to meet these customer needs, right? So yes, Bureau van Dijk with the wealth of data on private companies, which has grown significantly. And then RMS, our recent acquisition, allows us to incorporate that with -- you think about Bureau van Dijk and our database of private companies and all the structures that can sometimes be opaque unless you have this data set and be able to bring that data set into either your existing in-house data set or just use our tools and solutions. And RMS, and again, your point about the cloud journey, it's important that this data is sitting on the cloud because by that virtue, we can integrate and solve for these problems. So RMS is we just recently shared we incorporated RMS climate data in an ESG underwriting tool. And it's just examples of how that is benefiting us and allow us to continue to grow.

And you've been way out in front of it. One other -- any other -- because I'm going to keep going if no one else. Another part to the story that we've found really, really intriguing is the margin expansion opportunity because what you've seen happen is again, over the course of time, with the MIS, it's had much higher margins in the analytics, the analytics just continue to kind of expand. There was some reinvestment at the time of RMS, but there continues to be a real clear upward trajectory on the margin side despite some of the volatility on the MAS side. And remember, within MIS, which is the issuance not to get into, but this actually might be helpful context, too. The margins vary depending upon the type of issuance you're doing. And there's been a lot of volatility yet you're still seeing very, very steady progression on the margin. And that's very, very company-specific initiatives that continue to bear fruit.

Yes. Agreed. Yes. I mean on the MIS side of the house, as you said, clearly, that business is cyclical and it's dependent on issuance patterns. I would note, though, that 39% of that revenue is recurring. It is skewed toward transaction revenue, but again, some portion of it is recurring. On the Moody's Analytics side of the house, to your point, 94% recurring revenue is and mid-90s retention rates, that -- and that retention rate is due to a couple of reasons. That is -- and I talked about that because that's all contributing to the top line growth. And you talked about margin expansion. It's the top line growth, but it's also our very disciplined expense management that is also allowing us to realize or recognize margin expansion. On the Moody's Analytics side, in particular, because of the retention rates, the stickiness of our business, the fact that our mission-critical products are needed more in times of uncertainty, that's what gave us confidence to say for Moody's Analytics. We are still confident in our ability to achieve mid-30s percent adjusted operating margin expansion from Moody's Analytics, right? And again, the stickiness of our products, the investments we've made in our capabilities to our sales teams, to penetrate existing customers and new customers, all is contributing to our ability to expand our margins even through the different cycles.

Great. And I think when you think about the caliber of your workforce, you've got tremendous skill sets that you're able to retain. I mean, through the last 18 months, you never really heard too much around attrition. And I think that underscores the optionality that sits with the Moody's itself as well that you're able to kind of retain and really power through on the margin side. I wonder...

I mean I think I would just note, too, that also speaks to the culture that we've created in the organization. I talked a little bit about -- at the beginning about the importance of competing for employees, too. And this -- as we all undergo this transformation, our data and technology is important to that, but building a culture where our employees want to come, want to stay, want to drive our strategy forward is important, and we have been able to do that.

And the other thing I mentioned, too, is Rob is relatively new to the CEO role. He took over for Ray in a much tougher environment and just he's really executed flawlessly and you see that, and that's not coincidence, right? I mean that's just an internal build that really worked itself out. So what we wanted to end was maybe you've been at Moody's a long time, help us understand what you think maybe some of the more underappreciated parts of the story are. And what you've seen the most meaningful change over your career?

Yes. So thanks for that. I have been at Moody's 20 years. I'm proud to have...

Probably it feels like right 2, right?

It feels like 2. That's right. And one of the reasons that it's great to be at Moody's is that we are -- we have evolved into an integrated risk assessment strategy. I mean, company providing solutions for our customers. I'm excited about what we can continue to offer our customers. I would say we acknowledge that we want to do more in terms of bringing together those data sets and having our customers to access them more easily, and think about that opportunity when we're able to do that, Kevin, right? That's exciting, and it's a place where I want to be in. And you talk about Rob and the flawless execution across the organization. We've taken steps to communicate our strategy to our people, have our people to understand and see themselves in the strategy, which allows us to really then hone in on our customer at the center listening to them, right, to understand them better and what they need so that we can deliver those solutions. And so that's exciting to me, Kevin. It's exciting to a number of us. Hopefully, it's exciting to some of you in terms of our ability to recognize that opportunity in front of us.

Great. And I would -- I think I'd end with because I think it's such a critical part there's such a broader set of clients that you're going to be able to service beyond just the traditional C corps, and it's very, very early stage around that, you'll be able to continue to monetize.

Exactly.

Anybody else? Perfect. I think we'll cut it there.

All right. Thank you, Kevin.

Thanks so much.