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

Hello, everyone. I'm Andrew Steinerman, your business information service analyst here at JPMorgan. This is Ultimate Services Investor Conference. This is the Moody's fireside chat. And -- excuse me, this is the Moody's fireside chat. I'm here to interview Noémie, the CFO. It's going to be 30 minutes in total. I'm going to ask about 20 minutes of questions, and I want to inspire you to have the last 10 minutes of questions.

So Noémie, you're in the seat now about 7 months. We probably sat down long format when you were really early in the seat. But now it's a nice period of time. And obviously, you have a big history at -- what do we call Ceridian now?

Dayforce.

Dayforce, sorry. I covered Ceridian in the mid-90s, so it's a little hard for me. But what I wanted you to do is just tell us, what have you learned?

Yes. No. So it's a pleasure to be here. It's been an incredibly busy year so far and very exciting times. As you would expect, I've spent some time with Mike and Steve and their business leaders. I've traveled to a lot of our offices. I was in London a couple of weeks ago. I'm going to India, where we have 2,000 more employees. And it's been a great learning to see the different parts of our businesses. Obviously, it's been a strong year for our Ratings business. We would have rated at the end of the year over $6 trillion of debt, our rating actions going out every 20 minutes. So it's been a great year for me to join and really spend some time with our Ratings colleagues. And then we just had our conference 2 days ago, our leadership conference in the MetLife Stadium, where we talked about not only the great achievements we've accomplished in 2024, but also what's to come for 2025 and beyond. And the theme was bending the curve. So a lot of excitement in the room around the new brand and the change on the opportunity ahead for both businesses, Ratings and Analytics. And so yes, it's been a great year. Exciting time to join and a lot of great prospects for both sides of our businesses.

Okay, great. Obviously, you come from a very successful SaaS subscription company. And when we talk about MA, we talk about it as heavily subscription for good reason. But there's still transformation going on in MA. And it's not a singular scaled SaaS company from where you came from. So now that you have your experience and you've come to MA, and you've really [ diligence ] it, how far along are we in that transformation? And what will be the results when we're sort of further?

Yes. So as you pointed out, with Moody's Analytics, maybe helpful to kind of unpack a little bit the different components of our businesses there. We have a largest fixed income research business. That's about $800 million in ARR. That's been growing at high single digits, mostly subscription based, and that's obviously not going to change. Then we have our data, the feed and data business, that builds on that research, but also other third-party data components. That's also under subscription, and that's another 1/3 roughly of our ARR today. Those 2 components fuel our Decision Solution workflows, which is where we still have some components of customers and solution sets that are on-premise. So we're working to build a platform not only in our banking, but also insurance sectors to really drive customer adoption and more cross-selling opportunities. So we still have -- if you think about insurance business, when we acquired RMS, we had maybe 50 customers on the insurance platform. We now have over 250, so we've been really focused on building that platform. That then enables us to cross-sell some of the catastrophic models of RMS to existing life insurance customers to provide other opportunities to leverage gen AI capabilities and so on. And then in the banking sector, that's the same. We still have, as I said -- as you said, some customers on-premise that are -- and the goal is to migrate gradually those customers over to the platform, so that they can benefit from the depth and breadth of our solution, including the innovative components around gen AI.

So looking at MA, specifically the organic ARR, and I do like the definition of ARR, it dipped to 9% in the third quarter. But you're still guiding for a robust year on MA organic ARR. In other words, acceleration into the fourth quarter to get the year inside the guide. What needs to go right?

Yes. As you said, we grew our ARR about 10% in the first half, even 10.4% in the second half. We've had a little bit of headwinds from the attrition in banks and overall financial institutions earlier in 2023 and 2024. That has a bit weighed in on our growth rate for -- this is the reason we've widened our guidance amongst a couple of other factors. Having said that, if you step back, we're still expecting to grow a $3 billion business at high single digit, which is pretty remarkable. We have a strong sales pipeline. We are in the midst of our strong -- of our busiest quarter. Q4 is obviously a...

Selling season quarter.

Selling season quarter. We have strong pipeline coming into December. It's actually 50% higher than it was last year. Part of it -- a lot of it comes from activities that we've undertook in the summer to really build additional pipeline, having in-person sales meeting, demos, et cetera, a lot more engagement with our customers. So obviously, we'll have to see how the year plays out. But we have a significant pipeline of renewals, large transaction businesses but also volume businesses that we aim to close, and a lot of great opportunities in KYC and insurance, amongst others.

Can I just make sure I understand that 50% sales pipeline is growing? I mean at first, it just sounds like this amazing figure. But my thought maybe is that things aren't closed, so they're just sort of staying in the pipeline longer. Like is this 50% figure super duper encouraging like it sounds? Or maybe it's really describing a slower-moving decision?

So we -- as you would imagine, expect from us, we have a pretty religious approach when it comes to pipeline monitoring analytics. And we look at things like stalled opportunities, how long they stay in the pipeline without making any movement. We'll look at new pipeline generation from not only the volume business, but also large transactions, what are the probability of closing, a lot of different metrics that you would expect us to follow. And that pipeline expansion that you're referring to that we talked about in the earnings call is really stemming from increased focus. And that's something I really was really heavy and focused on when I joined is really working with our salespeople to not only build our pipeline maybe in the upcoming first or second quarter, but look also longer term because those certain sales cycles take a lot more time to materialize, and you need to anticipate those things. So to answer your question, we feel really good about the quality of our pipeline. We've spent a lot of time over the summer, again, doing a lot of demo, in-person meetings. And those metrics around meeting activity has really picked up a lot.

So last year, Rob was in the seat here. And I asked him how does he think about the medium-term MA guide of low to mid-teens. That's annual growth. And he used the word punchy, just so you know. I know you weren't hired yet, but that is what he used. What word would you use for those ambitions and the achievability of them? The medium term.

Yes, we've talked about and we've been pretty open about the fact that those are aspirational targets to really help drive behavior. And we spent a lot of time over the past couple of days with our -- in our leadership conference to really articulate the different components that will get us there, not only in terms of top line expansion, but also margin expansion and scale. So there's a lot of excitement. At the same time, understanding that we're not there yet, and we have certain things that we need to continue to evolve. So our focus is really around -- a few things I would point out. One is really continuing to build our platform such that we can move away from those on-premise or other less faster-growing components of our product portfolio, focusing on cloud-based insurance and banking workflows as well as KYC. So that's one thing. And by doing that, we also expand our ability, especially in KYC, leveraging our database and Orbis to cross-sell and land -- even land customers outside of our traditional financial services customer segment. So we have evolved our go-to-market to be able to address the needs of customers in bank, in corporate and government sectors. Because if you think about catastrophic models that we sell in RMS, they are also very relevant to assess your supply chain risk if you're a customer in the corporate sector or in the government as an example or to assess the effect of those climate events in your real estate portfolio, in your footprint for factories and plants and things around those lines. So we're evolving our go-to-market to be able to serve the needs of those 2 customers and at the same time, moving away and build more workflows capabilities in our SaaS platform.

Right. So you're holding these targets for your broader team.

I think what we've said is when absent a major catalyst that would make us revise those, we're holding -- we will talk more about this in February, as you said. But I would tell you, in the last couple of days, we spent a lot of time looking at how we're going to bend the curve. That was the theme of the 2 days, and that's something that people are very excited about.

Okay. So what should we know about bending the curve?

So bending -- there's 2 different components. I've talked about the initiatives that we were developing for -- on the MA to fuel the top line growth. But we also have, obviously, margin expansions target. We published our medium-term target of mid-30s. So there's a lot of actions and efficiency that we're -- efficiency initiatives we're implementing around the use of gen AI but also through the platforming of our insurance workflows business -- sorry, insurance and banking businesses to really leverage -- build it once and sell it many times, which I think is a recipe for scale in the long term. In our Ratings business...

Wait, before we move on. And that mid-30s margins, you would have called that aspirational. You would say, that's our target, right?

Yes. We've published them some time ago where we've seen us -- you've seen us making some pretty steady progress. We purposely invested this year, and we've talked about this earlier in February, to fuel our product development capabilities. We embedded gen AI again in our workflows. So we've made some investments to really fuel the long-term growth. But yes, that's what we're committed to in expanding the MA margin. If you think about the business, 95% of it is recurring. We're building platform elements to be able to cross-sell more, and we're landing new customers in a white -- in a complete white space for us. I think there's no reason we can't get there.

Okay. Great. It's obvious that RMS has been a huge success, maybe as big of a success as BvD was when acquired or since acquired in 2017. RMS goes back to 2021. Like is it time for a scaled acquisition for Moody's? And is it necessary?

So just want to thank you for acknowledging our track record with BvD and RMS. And if you think about RMS, when we acquired it, I wasn't there but...

I was a little nervous.

I heard there were some eyebrows.

I was nervous.

And it was probably growing at 1% and then margin in high teens. And now it's...

And the company was a challenger in that.

Yes, it was just in the second attempt to their building their cloud platform. Now we've leveraged that cloud platform in our insurance business. We now have over 250 customers. We had what -- like 50 when we acquired RMS. That's lower than that. So that's been a really great success, and that's a proof point that we can really build a platform that allows us to cross-sell.

It was as envisioned. It really was.

And for Orbis, I think we cover a lot of private companies that we see -- continue to see the benefit of even 7 years after. We continue to invest to extend the solutions that we deliver for the insurance sector and beyond. You've seen us making a recent acquisition with Praedicat, where we now have expanded our ability to serve the casualty market, which we think is as big as the property market. We've acquired earlier this year Able AI, which gave us some pretty good talent to build workflows in the banking space, leveraging, again, gen AI in more automated tools. So you would expect us to continue to do that and do like acquisitions to enhance our offering and then see if an opportunity materializes and makes sense for us, we reserve the rights to look at it. But as you would expect, I won't comment on whether there's something bigger that we're considering because we're really focused on, again, landing new customers, expanding in our existing footprint and building the solution set and complementing it. And sometimes, it comes by acquiring existing capabilities as opposed to spending the capital to build it yourself.

Okay. So I'm just going to mention, D&B is up for sale.

You know I won't comment on anything, right?

I don't know. Others have commented on it, actually, but no problem. No problem. Is commercial credit an area that you want to increase? Like to me, when you did BvD, all I can tell you is that the big success of BvD was like leveraging everything else but commercial credit.

Well, we have -- if you think about landing customers in corporate and government sectors, we have a lot of use cases that are very compelling today for those customers in that segment if you think about supply chain risk management. That's an area where we can already leverage the existing assets to build workflows and solution sets for risk -- for supply chain risk management, partnering with some players also in the space to feed our data into their existing workflow. So that's an example of additional use cases that we're building.

So I don't know if you know it, but there was an election last week. I know it's like half of the conversation, and we haven't even mentioned the election. So my question is...

Refreshing, actually.

It is. It is. I'm just like, we have to get there. So really, I'm talking about the MIS side of the business. Is this a clear positive or is it more mixed in terms of a Trump administration, a Republican sweep?

So we've -- I'd start by saying we've been around for 115 years, and we've seen -- we've been through different election cycles. We've worked with both administrations. So I don't think election in itself has a significant bearing on our -- the way we're looking at our business. We're really -- if you step back, our growth algorithm is really predicated on GDP growth. And then you add a bit of pricing power, value selling and then other expansion in other markets like private credit, domestic market, sustainable finance. That gets you to high single-digit growth in the -- mid- to high single-digit growth in the long term. And that's what -- regardless of any election outcome, that's what we've delivered. Now I would say we've talked a little bit about short-term or 2025 issuance environment. And I'd say we're probably more -- there's more -- the balance of tailwind and headwind is probably more oriented towards tailwinds. We have spreads at historical low levels. We have obviously M&A. We'll have to see when that starts to pick up again. The M&A activity has been muted for the past couple of years. We have a lot of dry powder at private equity funds. Companies are sitting on a lot of cash. We have our interesting leading indicator with our rating assessment services business. That's performing quite well. Now the timing between we do those rating assessments and the timing that transaction actually happen can be elongated, but that's a good indicator that M&A might probably come back at some point. So in balance, I think we're more constructive on 2025, but we'll have to see.

Post election? Or -- this was an election question.

Yes. It's just in general. If you look at the environment, again, the spreads have remained tight throughout the year.

That's true.

They're actually tight right now.

Yes. That's always [ possible ].

We continue to see, again, the maturity wall. We just published our study. We have -- maturity walls have gone up significantly, especially in spec grade. So those are all indicators of a constructive issuance environment.

Right. But when I think about particularly refi and the refi walls, I think of 2 things. I don't just think about tight spreads, which is positive. I think about the level of rates as well. And it just seems like with the current vows of the Trump incoming administration is that it's very possible what they'll do is inflationary. And even though interest rates are dropping, they might drop more slowly now. Isn't that a factor?

But you look at the overall cost of debt and with spreads remaining tight, I think there's still...

You think that's more important? Okay. Great. Why don't we open up for questions? So you said more positive after election, right?

No, I said in general, if I look at the way -- listen, I don't -- I think election -- the only other thing I would say about the election that we've seen some pull forward of activity in 2024 because people actually were advised and rightly so to come out before potential volatility. But that's something we had anticipated. That's something that's in our guidance. This is nothing that we didn't know coming into the year. And then if you look at the long-term driver of our business, we have not only the existing maturity walls, but we also are working to enhance our franchise in private credit. We have sustainable finance. We have domestic market. You've seen us do an acquisition with the leading franchise in Africa this year. So I would look at it in a more macro level than just the impact of the election because as I said, we've been through a lot of different cycles over the years.

Okay. Great. Go ahead.

I was just hoping you could elaborate a little bit on the company's efforts and priorities with respect to private credit.

Private credit.

Yes, sure. So we've -- I'm sure you know this, but we've established a dedicated private credit team earlier this year that's building on existing talents we had within the organization. And so we have now the co-head of the FIG franchise is now also leading our private credit effort throughout the firm. We've had very encouraging dialogue with the large players in the space. And you've heard, I'm sure, Apollo in their Investor Day calling out the significant role that credit agencies will have to play in that market to provide comparability, transparency amongst the different actors in that space. And so we're pretty encouraged about that. Rob spends a lot of time with the players in private credit, too. And we have -- I think this -- we have different -- we have the direct lending, obviously, piece. But we also have a fund finance business that is like feeder funds, a lot of different products there to serve the needs. And the only thing I would say, it's just there's ratings of specific companies and instruments. But there are also different flavors of risk assessments for those different companies. If you think about BDCs or portfolios within those BDCs, we can also provide different types of rating assessments for those portfolio companies. And that's something that we're pretty excited about.

Could you say at this point that it's a net positive for Moody's?

I think we were probably more defensive 18 months ago than we are right now. We're pretty encouraged by all the dialogue and discussions with the big players. And again, the fact that Apollo is calling out the role that credit agencies will have to play is pretty encouraging.

I'll tell you, the piece that I still find hard to research is just knowing the amount of debt that gets issued in private credit that, let's say, if it was in the capital markets, it would have got rated but now it didn't get rated. It's just hard to track that. You can obviously track everything that you've gotten rated.

That's true. But I think to your question earlier, I think we're -- probably view it as a -- at the end of the day, well, investors will need to get comparable assessment of the profile of the companies they invest in. And I think that's where we have a big role to play.

Sure. Okay. Other questions?

Anyone else?

Questions? Go ahead, Ram.

Ram from TD Asset Management. How are you thinking about what's happened over the last 10, 15 years? You've obviously seen a de-leveraging cycle. Companies are more free cash flow positive where we are today. How do you think about how ratings are going to increase over the medium term?

So the thing that I would encourage you to look at, if you haven't done so yet, is our refi wall study. We publish that every October, and you look at the maturity walls over the upcoming 4 years. And you have the different breakdowns between U.S., EMEA and different regions. The maturity walls over the next 4 years have increased significantly. And if you look at spec grade, specifically, it's up 19% from the last study that we've published. And if you look at the U.S., it's even up to 27%. So that's one indicator of how we're looking at the long-term profile of our business. We also look at debt velocity, so how much the stock of debt has grown over time and how much issuance has been growing. And we are not yet to the historical mature debt velocity levels. We think there's still upside to that. So those are indicators that we look at as we're building not only upcoming year guidance, but longer-term growth expectations for the business.

And maybe can you comment on the partnership with MSCI and what is -- what sort of strategic fit you're seeing? And what sort of upside is there?

Yes. So we've announced the partnership, I believe it was in the second quarter. What we've done here is we're providing -- the goal was to really look at customers' needs in terms of ESG scoring content. And we came to the conclusion that those needs were better served with leveraging MSCI data points than building our -- continuing to build on our existing assets. So we've actually partnered with MSCI to feed their ESG scoring and ESG content into our own products so that customers can consume that. And then on the flip side of it is we are working with MSCI to see how we leverage our Orbis database to serve the needs of the private market. They have the largest distribution network in private market with their LPs and GP networks. So we're working on that. It's still early days, but we're pretty excited about the partnership.

So I'm going to be a little annoying. I hope that's okay. Sorry, I'm a research analyst. On the conference call, I asked about organic revenue growth. The company does not consistently disclose revenue growth when it's small acquisitions. And I find it helpful to ask on the call. Rob answered with the answer that the ARR is organic. And that's true, and I do like the definition of ARR here. But I'm going to give you like another opportunity, and Rob is not here. Would you be willing to tell us how much GCR contributed to MIS revenues in the third quarter?

So I would say like maybe just -- and I'll get to your specific question around GCR. But just on Praedicat, there was no -- we were very clear. There's no revenue contribution in the third quarter. We primarily acquired a very solid customer base with a very good platform that we can then cross-sell to our existing customers. It's not so much a revenue play. It's more like a customer acquisition, a technology asset that we're buying instead of creating our own solution sets for the casualty market. And so if you look at those 2 combined, there's probably like less than 0.4% of our total revenue. So really, the reason we're not spending more time disclosing those is really in terms of actual dollar of contribution in revenue, those are all the reasons we're doing those deals.

I haven't said it, but I would say that 0.4% revenue growth, if it was compounded, has a meaningful effect on shareholder value.

Yes. Well, here, I think it becomes -- then how do you -- I think what we're looking to do with the things like Praedicat is really enhance our ability to cross-sell our existing product suite to those customers and vice versa. So it then becomes very, very hard to kind of continuing to track separately. It's really one portfolio that we want to build to serve the needs of an expanded customer base. But we take your point, and I think always welcome to look at enhancements to our disclosures and take any feedback into consideration.

Which is similar to all the other companies in the space. Other questions? Why don't I just turn it back to you? What am I not asking you? Obviously, I know I'm very like diligent about asking certain questions, but I'm sure there are subjects that you want to talk about that I haven't brought up.

No, I think we've touched on all the themes that were very prominent over the past couple of days. If I think about what we talk about with Rob and the management team and the extended management team like we did in the past couple of days, we talked about areas of growth for our great analytics business that -- and how we're going to really continue to expand the TAM, continue to expand our margin on that business. So we touched on that. And then on the Ratings side, it's really how do we build not only to sustain the volume of this year or next year, but also be relevant and the agency of choice in the next 120 years. So we're making investments in that business as well and on our workflow around being -- making sure that our analysts are equipped with the best tools and capabilities to continue to provide the best-in-class ratings. And that's -- those are things that get me really excited and that we spend a lot of time talking about.

Right. How's morale and company culture?

I found the company -- and that's something I've said quite a bit in the different investors discussions I've held over the past few months. I found that to be one of the most surprising -- not that I was expecting anything different. But I'm very, very amazed by the culture at Moody's, the intellectual strengths and robustness, which is not surprising considering what we do. But everybody I've spoken to is really sharp, really smart, very generous with their time. It's just a pleasure to be working around the Moody's crew, and I'm really looking forward to continue to travel to different offices.

Yes. And you moved to New York for this job.

I did.

It's a big deal. Last question. Obviously, we'll be sitting together a year from now. And what do you think will be important a year from now, if you could try to look in the crystal ball, that we were not really yet talking about here today as it pertains to Moody's book of business?

I think we've touched on the major components that we're really focused on. We're really focused on execution, I think, focused on things we control. And I think we have great opportunities in both businesses to bend the curve, and we've talked about the components of that. So I think I would say, I hope that we will be able to talk about how well executed we would have driven the business over the next year.

Sounds good. Thank you very much.

Yes. Thanks for your time.