Moody’s Corporation (NYSE:MCO) Q4 2022 Earnings Call Transcript

Moody's Corporation (NYSE:MCO) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good day, everyone, and welcome to the Moody's Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. I would now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Shivani Kak: Thank you, and good afternoon, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2022, our outlook for full year 2023 and an update on our medium-term targets. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call and U.S. GAAP. I call your attention to the Safe Harbor language which can be found towards the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2021, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results, key business highlights and outlook; after which, he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. I'll now turn the call over to Rob.

Rob Fauber : Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. I'm going to start with some key takeaways from our 2022 results, and then I'll look ahead to what we're expecting for 2023 before we take your questions. Our fourth quarter and full year 2022 financial results demonstrate the positive momentum and resilience of MA; while at the same time, reflecting the impact of challenging market conditions on MIS. And MA had a very strong finish to the year. It delivered its 60th consecutive quarter of growth and 10% ARR growth. Revenue grew 15% for the year; and for the first time, MA's full year adjusted operating margin exceeded 30%, and those are results that achieve the Rule of 40 distinction.

MIS generated $2.7 billion in revenue as it weathered a challenging year for issuance, and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth. And during the fourth quarter, we executed on the expanded expense management program that we announced in October and that's expected to deliver over $200 million in annualized savings in 2023. And it really significantly strengthens our financial position and flexibility for the coming year. Now for the full year 2023, we expect Moody's revenue to grow in the mid- to high single-digit percent range. And in addition, we're maintaining our previously communicated medium-term growth targets with a reset of the base year to 2022. And in what is clearly a fast-paced and ever-evolving landscape, we're investing with intent to grow and scale and to expand our capabilities to deliver on our mission, and that is providing best-in-class integrated perspectives on risk.

So turning to our full year financials. Moody's total revenue was $5.5 billion. MA contributed approximately half of our total revenue for the first time in our history. And as I mentioned, MA revenue grew by 15%. And excluding the negative impact of foreign exchange, growth would have been 20%. Organic constant dollar growth for both MA revenue and ARR was 10%. And overall, Moody's achieved a 42.6% adjusted operating margin with an adjusted diluted EPS of $8.57. Now moving on. We remain laser focused on the four strategic priorities that I outlined in February of 2021. In order to realize the potential of our global integrated risk assessment strategy, and the success of this strategy has been made possible by our incredibly talented and committed employees.

They've helped us launch new products, expand into new markets and improve the experience for our customers. And it's really wonderful to see our collective work achieve a number of important industry awards. For the first time, Moody's earned the top ranking in the Chartis RiskTech100. And we placed ahead of hundreds of companies in the risk and compliance technology space that ranges from household names in our sector to earlier-stage innovators. And it's really a testament to the momentum of our risk assessment strategy and the quality of our portfolio of solutions. And in addition, for the 11th consecutive year, MIS was voted the Best Credit Rating Agency by Institutional Investor and really demonstrates that we remain the clear agency of choice with investors.

In MIS, in 2022, we made several important investments to enhance our ratings presence in emerging markets. And that includes the acquisition of our majority stake in the largest domestic rating agency in Africa and the further expansion of Moody's Local in Latin America. We also met the need for greater transparency in ESG risks, specifically as they relate to credit by rolling out more than 10,000 new ESG credit impact scores across MIS. Now across MA, we enhanced a number of our workflow offerings through the integration of data and analytics, and we created new products to meet evolving customer needs. In fact, newly developed organic products contributed a significant portion of MA sales growth in 2022. I'm going to touch on several of these in a few minutes.

Turning to the outlook for MIS. As I mentioned last quarter, we expect that the factors that impacted issuance in 2022 to persist really through the first half of 2023. The inflationary environment, the pace of interest rate increases are still causing volatility in equity and debt markets, and the trajectory of economic growth in major economies remains uncertain. So it's going to take some time for these issues to resolve and for debt market activity to fully resume but refunding needs and pent-up issuance demand and baseline economic growth, they all point to a recovery in issuance, which we expect to pick up in the second half of the year. And in this environment, we are proactively balancing our commitment to serve issuers and investors with the highest quality ratings and research and insights; while at the same time, prudently managing cost.

one photo/Shutterstock.com

And we expect that the swift and decisive expense management actions that we took in the fourth quarter will enable MIS' adjusted operating margin to return to the mid-50s percent range in 2023. So moving to MA. I want to highlight the impact of the significant investments that we've made in product development and sales and acquisitions. And over the last three years, these investments have helped us deliver $1 billion in additional recurring revenue. And on an organic constant currency basis, recurring revenue growth has been steadily improving each year from 9.2% in 2020 to 9.7% in 2021 and 11.1% in 2022. And we're well positioned for future growth as three of our businesses with revenue of more than $100 million each delivered ARR growth in excess of 10%.

In fact, our KYC and compliance business, which is our fastest-growing business, had ARR growth greater than 20%. And even some of our more established products such as Orbis and CreditView, delivered high single-digit ARR growth last year. So let me give you a little bit of insight into how several of our newly-launched products are contributing to this growth. And I'm going to start with our KYC Lifecycle solution, which offers customers a user-friendly configurable portal and risk engine. And it enables fast and accurate checks that leverage our vast company, people and news data sets. And this solution integrates the capabilities that we've built and acquired over the past several years, so it's opening the door to new markets and customer segments with a powerful new workflow tool for financial crime compliance and third-party due diligence.

And it is resonating with our customers. In the fourth quarter, we completed one of our largest-ever sales to a nonfinancial corporate customer in MA with a combined offering supporting both customer and supplier vetting and screening capabilities. We also recently launched an enhanced version of our Climate on Demand product, which integrates our very rich climate analytics from RMS and MA and broadens the scope of our capabilities in the banking and insurance sectors and beyond. And Climate on Demand is part of our growing suite of physical and transition risk offerings, which are gaining traction with our customers. For example, we were awarded an important sales mandate late last year as a major U.S. financial regulator selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy.

And we were selected because of our ability to bring together some unique capabilities from across Moody's, and that includes our ability to quantify the financial impact of climate risk, physical risk assessment of bank operations and exposures as well as finance emissions. And in banking, we extended our CreditLens origination solution into commercial real estate, and that's one of the largest asset classes on bank's balance sheets. And this product integrates our proprietary property data, market forecast and credit analytics to meet the specific needs of commercial real estate lenders. And we're excited to partner on this product with one of the largest real estate lenders in the United States, and we're encouraged by the positive customer feedback and sales progress to date.

So together, these examples, I think, demonstrate how we are integrating capabilities, we're driving product innovation and leveraging our very strong sales distribution to build a robust pipeline as a foundation for continued growth. So let me turn to the outlook for 2023, and I want to highlight just a few of our guidance metrics. We project that Moody's revenue will grow in the mid- to high single-digit percent range and adjusted operating margin to be in the range of 44% to 45%. Adjusted diluted EPS is forecast to be in the range of $9 to $9.50. And for the medium term, we're maintaining our previously communicated growth targets with a reset of the base year to 2022. And in summary, we made strong progress in the fourth quarter to position the business for success, closing out what we'd characterize as both a challenging and a productive year.

And indeed, against the backdrop of macroeconomic headwinds, we've continued to unlock the growing potential of MA and reinforced the foundation for MIS to capture the immense opportunity we see once issuance levels recover. So we've entered 2023 in a position of strength, and I have tremendous confidence in the growth potential of the business as we continue to execute and invest in building Moody's as the leading provider of integrated perspectives on risk. And with that, Mark and I would be pleased to take your questions. Operator?

See also 21 Largest Italian Companies by Market Cap and Top 20 Oil Importing Countries in 2023.

To continue reading the Q&A session, please click here.