MCO - NYSE

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2024 Earnings 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 question and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. 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 second quarter 2024 as well as our revised outlook for select metrics for full year 2024. 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 in 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 & Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2023, 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'd also like to point out that, members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Rob.

Thanks, Shivani. Good afternoon, and thanks everybody for joining today's call. I'm looking forward to talking about this quarter, 22% revenue growth and adjusted operating margin of almost 50% and 43% adjusted diluted EPS growth. That's great stuff. As I have said before, and I'm very proud to say it again, MIS is one of the world's great businesses and when issuance activity ramps up, like it did in the first half of this year and you maintain such a strong position with investors and issuers like we do, as well as our ongoing disciplined approach to costs, we generate a tremendous amount of operating leverage. For the second quarter, MIS delivered 36% revenue growth and a 63.2% adjusted operating margin, up 730 basis points from the second quarter of last year. Following another consecutive quarter of robust performance, we're again raising our guidance for both revenue growth and margin. On the MA side, we delivered a seventh consecutive quarter of 10% ARR growth with a 94% retention rate. ARR growth continues to be led by Decision Solutions, which grew by 13% this quarter. That said, and while we see a strong pipeline for the second half of the year, we are widening our ARR guidance to account for the potential for a bit more uncertainty in the buying environment in the second half. And Noemie will expand more on our thinking around this later and I'm sure we'll discuss it in Q&A. In addition to the MIS guidance raise, we're also increasing several of our Moody's corporation metrics, including upping our expectation for share repurchases for the year from $1 billion to $1.3 billion and raising and narrowing our adjusted diluted EPS guidance to a range of $11 to $11.40. We continue to innovate and invest, launching new products, expanding coverage, extending our partnerships, all to spur growth and position Moody's for long-term sustainable success. Now speaking of growth, MIS has truly established itself as the agency of choice and that allows us to really capitalize on a market environment like we experienced this past quarter. For the first half of the year, we grew transaction revenue by 56%. That outpaced issuance growth of 43%. That was particularly evident in our corporate finance and financial institutions rating groups, which both delivered transactional revenue growth rates north of 65%. When considering recurring revenue, overall total revenue grew by 35%. The investments we're making to streamline and automate our workflows, enabled us to meet the surge in issuance and that's double-digits growth across all asset types, while maintaining discipline around expenses. Even considering these investments, we're delivering adjusted operating margin up 760 basis points through the first half of the year. Now moving to MA, we had a strong first half generating 8% revenue growth and as I mentioned earlier, the seventh consecutive quarter of double-digits ARR growth. We continue to focus on high growth SaaS and subscription products, which are delivering mid-90s retention rates and now represent 95% of total revenue. Taking a deeper dive into MA, the businesses within Decision Solutions continue to deliver very good growth and that includes KYC, which is delivering new and innovative features and functionality and remains the fastest growing business with ARR growth at 18% as of the end of the quarter. Insurance ARR growth was 6% at this time last year to now 14%. Banking delivered 9% ARR growth and for it’s purely SaaS offerings, a mid-teens ARR growth rate. Meanwhile, data and information delivered its fourth consecutive quarter of double-digits ARR growth. Research & Insights ARR growth remains at 6%, but we continue to expect the growth rate will improve in the second half of the year, with the expectation of high single-digits percent growth range by year end and that's benefiting from the momentum with Research Assistant and our unrated company's coverage expansion in CreditView. How are we achieving all this? I mean, pretty simply, we're delivering mission-critical solutions, tapping into our risk operating system with massive data sets and analytic engines, all helping our customers navigate an increasingly complex and interconnected environment. Last quarter, I gave you a glimpse into our GenAI product roadmap, and I'm excited to share that we launched two new skills this past quarter and the first of those is an automated credit memo, which saves bankers hours of work by assembling a credit memo leveraging the bank's in-house content, Moody's content, and third-party content. Second is our Early Warning System, which is a cutting-edge, GenAI-powered solution that's initially focused on commercial real estate that we launched last week. This solution monitors breaking news, it alerts our customers and that includes lenders, insurers and asset managers to risks that could affect their portfolio and allowing them to query a broad range of Moody's data and models to quickly understand the potential impact of a given event. We've got a number of institutions using both of these solutions in private preview mode, and we're receiving some very encouraging feedback. They're both great examples of more ways that we are unlocking the power of our data, our analytics, our insights, leveraging GenAI. In KYC, regulation continues to drive demand for new and targeted solutions. This past quarter, we launched our sanctioned security screening tool, which allows asset managers to look through the ownership hierarchies of their holdings to the ultimate parent and flag those that are sanctioned. We also launched the European sanctions product. That was something that we actually launched in under a month and it will help our banking customers manage new European, reporting requirements on certain types of money transfers. Both of these solutions provide critical, timely and trusted data to our customers, helping them avoid potential reputational or regulatory issues. They're great examples of how we're broadening the use cases we serve leveraging our massive company, people, and news data sets. Now these products wouldn't be possible without the investments we've been making in our Orbis database, which we believe is the world's best curated database of public and private companies. We've more than doubled the number of entities we cover, since we first acquired Bureau van Dijk. We added more than 20 million companies this year alone. In this past quarter, we have reached a pretty incredible milestone with over 0.5 billion companies in our Orbis database. This massive coverage is a great source of competitive advantage for us. Now, turning to our ratings business. I always say that, if there's an opportunity to invest in one of the world's great businesses, we're going to do it. That's why I'm thrilled to announce that, in early July, we completed our acquisition of GCR. That's the leading African domestic credit rating agency covering 25 countries across the region. GCR really is a fantastic franchise. They've got a very impressive management team and this investment continues to reinforce our leadership in domestic rating markets around the world. We've got a 30% stake in the leading rating agency in China. We've got very strong positions across Asia, in India, in Korea, Malaysia, and most recently Vietnam. We've been enjoying great success with our Moody's local strategy across Latin America and now we've established a leadership position across the African continent. We've also achieved an important milestone in our sustainable finance franchise in ratings this quarter. When we delivered our 200th second-party opinion in MIS. We've got a healthy pipeline for the rest of the year. With the more recent launch of our net-zero assessment, we now have, I think, a very compelling set of offerings to support sustainable and transition finance and those are clear growth areas for the foreseeable future. You may recall back on the third quarter call last year, I talked about how we'd established a framework for third-party partnerships really to drive the ubiquity of our content in more and more platforms, where people are making decisions about risk, investment, and opportunity. This past quarter, we had some exciting announcements on that front. First is our strategic collaboration with MSCI around ESG and private credit. We really are excited to offer our customers MSCI's market-leading ESG scores and data through a range of our solutions and MSCI will leverage Moody's Orbis database to extend its private company ESG coverage. Together we're going to explore solutions that will leverage our company data and credit scoring models and MSCI's distribution and expertise with the global investment community to provide greater insight into the private credit markets. Just to be clear, our collaboration does not impact our ESG work and ratings nor does it affect our very extensive climate and transition capabilities across the firm. Second, in June, we announced a new collaboration with

Thank you, Rob, and good afternoon, everyone. Building on the momentum from the first quarter, I'm very pleased to share that, we delivered a very strong performance in Q2. Our revenue was $1.8 billion, up 22% year-on-year and our adjusted operating margin of nearly 50% improved by 590 basis points illustrating our strong operating leverage. Turning to segment performance. Moody's Analytics revenue grew 7% or 8% on a constant-currency basis. Recurring revenue, which represents 95% of our revenue in this segment, was up 9% year-on-year. The adjusted operating margin was 28.5%, up 50 basis points from the second quarter last year. Annualized recurring revenue or ARR was $3.1 billion, up $292 million or 10% year-on-year. Our largest line of business, Decision Solutions, grew ARR by 13% with 150 bps sequential growth acceleration from Q1. Growth in this line of business was enabled by mid-and-high teens growth from insurance and KYC, where we continue to see strong customer demand for our best-in-class workflow solution. Data & Information ARR grew 10% with low-teens growth in our corporate and government sectors, while our Research & Insight business grew ARR at 6%, a similar trend to what we've seen in recent quarters, when we observed some modest uptick in CreditView attrition from banks and asset managers, as we previously called out. Our overall retention rate remains high around 94%, which is the evidence of the stickiness of our solutions. I do want to note that, while this quarter marked the seventh quarter of double-digits ARR growth, we expect some moderation in our growth rates for this metric in certain areas of our business in the second half, which I will address when I talk about guidance. Switching to MIS. Revenue was the second highest on record, growing 36% and topping $1 billion. Transactional revenue grew 56%, outpacing issuance growth of 47% and represented close to 70% of the total revenue for the quarter in MIS. We saw a positive mix from our investment grade sub-segment with transaction revenue increasing 28% versus a 10% rise in issuance, partially due to a combination of refinancing activity and several large M&A related deals. Our Financial Institutions Ratings Group saw a record level of revenue from insurance customers, primarily due to a favorable mix in infrequent issuers, resulting in 58% overall increase in transaction revenue against the 17% increase in insurance. Now tight expense controls and our increased focus on automation, coupled with the strong levels of issuance activity enabled us to deliver an adjusted operating margin of 63.2%. As Rob mentioned upfront, we are updating our guidance for a number of metrics. I'll start with the biggest change, which is the improved rated issuance outlook. Given the very strong start of the year and a slightly improved expectation for the second half, albeit with a notable slowdown from the first half, we're now forecasting issuance growth to be in the 20% to 25% range and revenue growth to be in the high-teens percentage range. Looking out at the rest of the year, we now expect second half issuance to be roughly in line with the second half of '23 and we continue to expect Q4 issuance to be down in the mid-teens range versus prior year Q4, very consistent with our prior guide. What's changed here really is, we've taken the second quarter beat into our issuance numbers and our outlook for Q3 is now a bit higher than it was previously. We've provided some additional color on this slide for the various asset classes and we'd be happy to talk about more of this in the Q&A. Given this level of growth, we're raising guidance across revenue and profitability metrics in our ratings business. I'd like to take a moment to provide some high-level context behind our thinking. As we've consistently stated, we expect the first half of the year to be busier than the second half and this view remains unchanged. From a macroeconomic standpoint, we have a positive outlook for the remainder of the year and expect global GDP to be between 2% and 3% for the full year. Our June default report, which was just published last week, is signaling that global default rates peaked in April and will continue to decline gradually in the coming 12-months. And we are also relatively agnostic to the timing and number of rate cuts expected later this year. Now with that context in mind, we are raising our guidance for MIS revenue growth to be in the high-teens percentage range. And we now expect full year MIS adjusted operating margin to be in the range of 58% to 59%. For MA, we're maintaining our guidance of high single-digit growth for revenue and a 30% to 31% margin. However, we're adjusting our expectations for year-end ARR to a wider range of high single-digit to low double-digit percent growth. Our current midpoint estimate for ARR growth is at the upper end of the high single-digits range. But taking into account a couple of strategic changes and more uncertainties that we usually have at midyear, we decided to make this update and provide you with some additional color on the factors that are notable. First, the partnership we announced with MSCI represents a commitment to our customers as well as a strategic shift in our offering. This change may impact our year-end renewals and reduce the sales pipeline for this line of business. Second, while we were optimistic that tight purchasing patterns, particularly in banks and asset managers, would have improved over the course of this year, we continue to see very tight conditions in those customer sectors. This trend is most impactful on our banking, KYC, and Research & Insights line of businesses. And third, as we look toward the U.S. elections in the fall, we'd be remiss if we didn't note that the timing of certain upcoming renewals with U.S. government agencies could be impacted. On a positive note, we also have several newly launched products: Research Assistant, which continues to be enhanced and has been gaining traction at higher price points; along with the new products Rob highlighted earlier, and these are all expected to be able to build pipeline and close deals as we head into the back half of the year. So all in all, our pipeline is strong, we're continuing to invest and innovate to drive durable double-digit growth in the years to come. Now bringing all this together, we now expect Moody's revenue to grow in the low-teens percent range, expenses to grow in the high single-digit range, and an adjusted operating margin in the range of 46% to 47%. This expense guidance update of a high single-digit percent increase primarily reflects increases to incentive comp and the additional charge related to asset development, which we will take over the second half of the year related to the shift in our strategy to source ESG data and scores from MSCI. That's a non-cash charge. From a capital allocation perspective, I'm happy to share that we are increasing our free cash flow guidance to a range of $2 billion to $2.2 billion and are also raising our guidance for share repurchases by $300 million to approximately $1.3 billion. In doing so, we plan to return around 90% of our free cash flow to our stockholders in the form of buybacks and dividends for the full year 2024. And finally, as Rob mentioned earlier, we are increasing our adjusted diluted EPS guidance range to $11 to $11.40, a $0.50 increase at the midpoint, and that represents about 13% growth versus last year. So I'll just wrap up by congratulating my colleagues on a very strong first half, and I'm very excited for what looks to be a very strong year. And that concludes our prepared remarks. Operator, can we open the call up for questions, please?

[Operator Instructions] And our first question will come from the line of Owen Lau with Oppenheimer & Co.

So I do want to go back to issuance. You have provided a lot of good information already. But again, like issuance continued to be strong in the second quarter. You raised the guidance for MIS. But could you please give us an updated view on your pull-forward expectation? And do you now expect like less impact on pull forward than you had expected maybe a few months ago? Can you maybe elaborate a little bit more on that?

Great question. I'd say there's 2 kinds of pull forward. The first is pull forward of planned financing within a given calendar year, and the second is the pull forward from forward maturities. And I would say that we have seen both this year as I think Noemie was touching on a bit in terms of what we think in the second half. We think that the fourth quarter, in particular, I think it's going to be November and December is going to be much more muted in terms of issuance. And that's due in part because a lot of the issuers have been guided by the banks to issue earlier in the year while the market conditions are favorable and to avoid any kind of election-related turbulence in the fourth quarter. Second, we've seen some pull forward from future years from the forward maturities. That's mostly 2025 and mostly spec-grade. And I'll give you maybe just a little bit of context around that. If you go back something like a decade, Owen, it's pretty common actually to see pull forward from spec-grade maturities in the immediate year prior to maturity. And if you think about it, it makes sense because spec-grade issuers don't want to wait until the last month or 2 and risk not having market access due to a risk-off period in the market. That's much less true with investment-grade issuers who generally always have market access. So we've certainly seen some pull forward from 2025, I'd say, a meaningful amount of pull forward. But it's also within the ranges that we have seen in prior years for pull forward from the year -- immediate year prior for spec-grade. 2026 pull forward is actually a bit lower than some of the ranges that we have typically seen. And I think that's probably because issuers want to see rates come down before they pull forward those maturities, right? I would also just note that 2025 spec-grade maturities at the time of issuance were the highest on record. So there's just a lot of spec-grade debt that's got to get refinanced, that's contributing to the refi volume. So I think, Owen, I think my takeaway is that, yes, there's pull forward. The pull forward from future years appears to be in these historical ranges that we've seen. And I don't think at this point, it changes how we would feel about next year.

Our next question comes from the line of Andrew Nicholas with William Blair.

I want to kind of follow-up on that pull forward question a little bit more. And you hit on a little bit, Rob, at the end, but it sounds like you're expecting a little bit more muted issuance around kind of geopolitical and maybe macro uncertainty and factors of that sort. But it doesn't sound like you're quite yet baking in any benefit from rate cuts. Just kind of wondering how you think about the interplay of those 2 dynamics, both at the end of this year and maybe even to start next.

Yes. So I think that's probably right. I mean if you think about how we're thinking about the balance of the year, I'd say how we're thinking about it, not particularly dependent on what's going to happen with interest rates. Noemie talked a bit about, now I'm just focusing on the balance of the year here for a moment. We basically took the very strong first half of issuance into our outlook. We believe based on the strength of conditions through the first half of the year, we actually then upped our issuance outlook for the third quarter. And we remained pretty cautious, as I said, about the fourth quarter. So I would expect if there are rate cuts, given what I think has gone in the fourth quarter, and I think largely, there's been this in-year pull forward, if we see rate cuts, that's probably going to be a catalyst for 2025 issuance would be my guess.

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

This is Greg Parrish on for Toni. Maybe just to move to MA for a moment. So you reiterated your expectations for Research & Insights to accelerate in the second half towards high single digits. Maybe just update us on the drivers there because, I mean, you lowered ARR partially because of R&I but you still expect that to accelerate. So maybe just help us reconcile that. And it sounds like the environment is not improving as fast as you thought, so just kind of wanted to better understand. And then maybe kind of update us again this quarter on why you expect it to accelerate.

Yes. So in Research & Insights, ARR growth of 6%, that's in line with what we saw in the first quarter. I think on the last call, we talked about some modest retention pressures with our CreditView offering, some of which came from some of the banking consolidation that was expected. We had anticipated that. I think Noemie mentioned that both the banking and asset management sectors are experiencing, as she said, tight conditions, cost pressures. That puts some pressure on upsell, pricing retention, those kinds of things. But it's also why we've really been focused on innovating and investing in that -- in our offerings, in particular, Research Assistant. And we talked about last quarter and I think this continues to be true. Part of what is going to drive the pickup in ARR growth in Research & Insights is Research Assistant and our coverage expansion. And maybe just to double-click on Research Assistant for a moment because that's a part of this. We've got some good, very encouraging data points. We've got a very strong pipeline for Research Assistant. We have some good sales momentum in the past couple of months. Specifically, since the first quarter, we've doubled the number of customers for Research Assistant. We've seen average deal sizes increase by 2x. We've experienced some shorter sales cycles, and usage is up and customer satisfaction is up with Research Assistant users. So all that is encouraging and leading me to believe that we're moving in the right direction, and that's going to continue to support the pickup of growth in that line.

Yes. The other thing I would add, Rob, is on the retention rate for MA in general and Research & Insights is remaining very solid around 94%.

Our next question will come from the line of Manav Patnaik with Barclays.

Rob, I just wanted to double click, I guess, on the MSCI partnership. Just on the time line, I think the ESG piece is self-explanatory. Just time line and sample of what you envision on the private credit side. And if I could just follow-up, Noemie on the ESG side, just the size of that ESG business you currently have? And if you could just help us appreciate like if MSCI sells $10 million, let's say, how much does that impact you? I think you referred to maybe seeing some negative upticks from that.

Yes. Manav, I'll start and then hand it to Noemie. I have to say, we are really excited about this MSCI partnership because I do think it's a win-win for our customers because the MSCI ESG scores and data really are considered a market standard. And we're going to be able to provide that content through to our banking, insurance, and corporate customers. And the -- as I think you know, they're going to be leveraging Orbis to expand their coverage. So it's a great partnership, a real spirit of partnership with MSCI. In terms of timing, there's a good bit of work to do to transition, to integrate the content and transition it into our solutions. I'd say that work has begun, in earnest, Manav, but it's probably going to take through the end of the year to be able to do that. Meanwhile, I think we've already got some very good ideas around what we can do in terms of private credit. And if you think about our credit scoring capabilities as well as their expertise and distribution around the global investment community, and there's a clear need and desire to have a third-party assessment of credit risk in the private credit space. So we've got some good ideas there. And I think the initial focus right now is going to be around the ESG integration into our solutions. I would say when we come back from the summer, probably sometime in September, we're going to roll up our sleeves around the private credit and start to get to work there. I don't have a time line on when we might actually get something to market, Manav. But I would say the ESG stuff came together pretty quickly. And given the market need, I think we'll work quickly here as well.

Yes. And on the relative side of the ESG in our MA business, it's pretty small. It's a small part of our overall ESG and climate business. It's going to affect a little bit the pipeline for the remainder of the year, which is factored into our revised guidance for ARR. But it's not a material swing to our overall business for MA.

Our next question comes from the line of Scott Wurtzel with Wolfe Research.

Just wanted to go back to the strategic investments that we've talked about over the course of this year. And can you just update us on sort of where we are in that investment cycle? I mean it seems like you are making progress on sort of the gen AI-related product side, but would love to kind of hear where we are in this investment cycle. And specifically on maybe some of the other new products around private credit, digital finance, transition finance, just kind of where we are now?

Yes. Maybe I'll take that and I'll let Rob expand as well. But we remain on track with what we've communicated initially earlier in the year. Let me give you a bit of color on where we've deployed investments so far. So let me start with GenAI. You heard last quarter, we've established a framework around our GenAI development. We have a set of GenAI tools that will be rolled out across our product suite this year. In banking, we've made a small acquisition earlier this year to accelerate the build of our banking assistant and the enablement of end-to-end lending workflow. It was a company called Able AI that really helped automate the commercial loan documentation process and filling some gaps for us in jobs to be done across the lending value chain. So that's an example of where we've invested. Internally, we're expanding our use of Copilot and other GenAI capabilities. We've completed our CSA framework in Ratings and we're rolling out a ratings copilot environment. Obviously, we've talked with our regulators, and we have very tight controls around that, and Rob can expand on that as well. We've rolled out a lot of Copilot and GenAI tools internally across the business. Everybody is using it. We have very strong uptick in usage and a lot of exciting things when we look at our internal hackathons for example that we just conducted. So that's for gen AI. On the product development area, we're bringing together our data and analytics here into a workflow platform. That's for corporate to support the use of different use cases around sales and marketing optimization, customer onboarding, and monitoring trade credit supplier risk. Those are areas that are really important for our customers, and we hear a lot of strong feedback, and we are on track to launch additional products later in the year on that platform. And last, on the technology platforming, which was the third area of investments, in MA, we have a platform engineering and architecture road map to build on single sign-on, entitlements, other functionalities to drive a better user experience, which helps retention but also helps drive further growth in our business. That gives us more insight into customer behavior across our platform, which help us build use cases that resonate and address the needs of those customers and that also reaps some efficiencies across our engineering teams as well. For MIS, we continue to deploy applications on our platform. We have the first team on our full ratings life cycle automation, and we're scaling that to a number of other teams throughout the year. And that's going to be really helpful in enhancing regulatory compliance. That will also allow us to process more efficiently issuance volumes. And you saw that already in our ability to deliver increased margin in MIS. So in general, we're doing well. We are tracking very well against the investment plan we communicated to you earlier this year.

I think you nailed it. I don't have anything to add, Noemie.

Our next question will come from the line of Alex Kramm with UBS.

I think I'm going to take the other side of that question just now and stay on the AI topic. It sounds like you continue to do a lot, a couple of new products you mentioned today, which sounds very sensible and it seems like there's decent demand. So can you give us an update on revenues that you're seeing so far, the trajectory and how change you expect to really have a material contribution here?

Yes, Alex, it's Rob. So I think I gave you some data points around Research Assistant. This is one of, if not, the fastest-growing products that we've ever launched. But starting from scratch and we've got a huge revenue base. So it's not material in the grand scheme of Moody's Analytics, but there's some really encouraging things about it. Like I said, we've doubled the number of customers, deal sizes are going up. But I think very importantly is usage and customer satisfaction is up, and that gives us a lot of confidence that we're going to be able to monetize that over time and not just in Research Assistant. So it's no longer a one-trick pony. It's not just Research Assistant, right? We've now launched several other solutions, and that's going to go on through the back half of the year and into next year. So there's going to be more and more products that will be leveraging AI coming into our solution suite. Like I said, we've already got a number of customers on private preview mode for both automated credit memo and early warning. I would also say, Alex, that we're also working on extending our partnerships with folks like Microsoft and Google in particular. And that's important because I think those are going to open up some new monetization pathways for us with our content embedded into their solutions, their Copilot solutions, their AI solutions. So that is in process. So it's still not material but we definitely see some things that are quite encouraging.

Our next question comes from the line of Jeffrey Silber with BMO Capital Markets.

You talked a little bit about, I guess, the tighter purchasing pattern that you've been seeing. You gave a little color. I was just wondering if you can drill down a little bit more. Maybe you can give some examples of what we're talking about.

Yes. I mean I guess I would say, in general, and Noemie talked about this, we see some cost pressures coming from the banking and asset management sector. And just to put a finer -- kind of a finer point on it, I ran the sales team at one point in the rating agency. You have real conversations with your customers, with procurement departments. You've got to make sure you're really able to articulate the value proposition of your solutions. That might mean that customers, you might see that again in terms of pressure, in terms of what we think of as upsells or perhaps around annual price increases. I talked about -- we've mentioned we've seen a little bit of pressure on the retention rates in CreditView. So that gives you -- hopefully gives you a little bit of a flavor. I guess maybe the other thing I might just touch on though is also the -- maybe the sales pipeline. So that gives you a little bit of the sales environment in certain customer segments. But we've got a very healthy sales pipeline. There is very strong demand for our products. You're seeing that from the ARR growth that we put up through the second quarter. And in some cases, some of our gen AI offerings, we're actually seeing shorter sales cycles with some of the early adopters. The other thing I'd say is one of the drivers of pipeline growth is sales meeting activity. The more meetings you do with customers, the more likely you are to build pipeline and that's been true for a long time. This quarter, we saw the highest volume of sales meetings post pandemic, and face-to-face engagements were something like 40% of that activity. So that gives me a lot of confidence that customers want to engage around our solutions. So hopefully, that gives you a little bit of a flavor for what we're dealing with out there.

Yes. And the other thing I would add is we're also having -- we've elevated the discussion with the C-suite at our banks and traditional customer base, and we're like a lot more plugged in into their overall digital transformation initiatives now. Now the flip side of it is, as I'm sure you know, we have also working with them to help them build their framework around GenAI adoption, and that's going to take some time because they also have to abide by regulations. They have a lot of risk considerations to take into account, and that also plays a role in the dynamic that you see with our GenAI products.

And I just was curious, is the line any worse over the last 3 months better, stay the same?

Is the what?

The environment, has it gotten any worse, better, or stayed the same over the last 3 months?

I think it's probably pretty consistent with what we've seen for the balance of the year.

Our question comes from the line of Andrew Steinerman with JPMorgan.

This is Andrew of JPMorgan. I wanted to understand better the organic constant currency revenue growth of the Data & Information subsegment, which decelerated to 8% in the second quarter year-over-year. It had been double digit in the first quarter year-over-year. It just strikes me as odd because as you know, the ARR of this subsegment has consistently been double-digit. And I just don't understand why there's variation between the organic revenue growth and organic ARR of Data & Information because I thought it was essentially fixed subscription.

Andrew, this is a very good question. And you're right, on a sequential basis, the growth was down from, I think 12% to 8% this quarter. There is, in fact, a little bit of impact from mix of product, nature of the contracts. That does create a little bit of variability in the quarter-to-quarter revenue numbers. 12% in the first quarter is probably a little higher than typical. 8% is probably a little lower than typical. You look at the first half growth of roughly 10%, I think that's pretty reflective of the business performance. And I also think, Andrew, that's what you can expect for the full year as well as ARR growth. And so it's a good question but I think that -- hopefully, that gives you a sense.

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.

So as we -- you've mentioned a few headwinds to the ARR as we get into the back half of the year. How should we think about those headwinds for revenues? And just given the MA revenue growth has been like relatively muted and comps get harder in the back half of the year, as we think about that high single-digit revenue growth guidance, is it fair to assume towards the lower end versus the higher end of that high single-digit growth?

Yes, let me take that. So as I said in my prepared remarks, the second quarter revenue growth was 7% and 8% at constant currency. It was similar to what we saw in the first quarter. But if you take recurring revenue, which is 95% of our revenue in MA, it grew by 9% for the second quarter, similar to what it was in Q1. We expect similar growth rates for recurring revenue throughout the year. Transactional revenue was down in the second quarter as we continue to trend -- and will continue to trend downwards in the second half of the year. We're shifting our focus to renewable sales, as you know. So what that means, the best way to think about the guide in the second half of the year, we expect MA to grow in the third quarter, to be more or less aligned with the growth that we saw in the second quarter before ticking back up in the higher end of high single-digit growth in the fourth quarter. So that's what's behind our guidance.

Our next question comes from the line of George Tong from Goldman Sachs.

Within MIS, you mentioned you saw a pull forward from both within the year and also from 2025. You also mentioned that your outlook for 2025 issuance hasn't really changed. And just wanted to reconcile those statements. Has your outlook for issuance come down in any future period because of the pull-forward effect?

George, no, I don't think so because the way I tend to think about this is we went back and looked, for instance, I mentioned we looked at spec-grade forward maturities and what kind of pull forward we see on a year-to-year basis. And what we're seeing this year is pretty consistent with a kind of a historical range over the last decade. So that tells me that -- I don't think that given what's going on this year would then have a material impact to the way I might think about the growth profile and issuance profile on a go-forward basis because I don't see this as anomalous pull forward. What's going on in the in-calendar, obviously, we talked about that with our outlook. I do think there's in-calendar pull forward. There is 2025 pull forward but I don't think that is unusual pull forward at this point.

Our next question comes from the line of Craig Huber with Huber Research Partners.

Rob, could you just touch on the commercial real estate market in the U.S.? With all the problems in recent years here that might be compounding here, what it may mean to the banking sector. How concerned are you and your analysts about that? And then my housekeeping question for Noemie is what's the incentive comp in the quarter versus a year ago?

Yes. So Craig, commercial real estate is obviously an area that we've got a keen focus on with our analytical teams. And we've got a lot of touch points into the commercial real estate space across Ratings. We've also got a lot of data and analytic tools across the entire company around commercial real estate. I think generally, the concerns around commercial real estate are probably most focused on office. And it's a certain type of office, too. Type A, Class A office has held up pretty well, and so I do think the type of property does matter. We see this both with CMBS. You've seen some articles in the paper looking at single asset, single borrower CMBS, which -- and then we also think about this from a banking perspective. And our teams actually put out some really interesting research. I'm happy to share it with you after the call. Really making sure we understand the commercial real estate exposure of our rated banks and how to think about stress scenarios around that. So I would say there's a lot of focus on it. Interestingly, Craig, the CMBS issuance market this quarter actually showed some signs of life. We're actually -- it's on a small base, but just given the fact that we've got it at this point, what looks like a soft landing, there is some new investor interest in the CMBS space, which I actually think is quite interesting and tells you something about investor sentiment.

Yes. And on your question about incentive comp, we've made an adjustment in the second quarter to reflect the accrual in relation to the top line performance that we saw. We recorded about $117 million in the second quarter. And for the remainder of the year, we expect the quarterly expense to be about $110 million per quarter.

One other thing I might add, too, Craig, I mean I talked about it in my remarks, this early warning system, but it is -- the initial offering is focused specifically on commercial real estate. And this really synthesizes a broad range of our content and our models to allow you to understand, an event happens in the market and you want to start to sensitize and understand the potential impact of that event, call our models, call our data, and be able to get a sense of the impact in a fraction of the time that you might otherwise. And so you can imagine, based on that, there's some very good interest from folks in the market who want to use tools like that to be able to figure out where do they need to actually focus scarce resources in our portfolio.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

I just want to probe a little bit more in the ARR widening of the range because of this MSCI deal. Can you explain again the -- there's a change in strategy, so therefore, some of the sales in the pipeline may not materialize this year as you're thinking of switching over to some of the MSCI products? Is that correct? And then how should we think about it on the flip side in terms of you selling stuff through Orbis? And trying to understand, is there -- is this a little bit of a slowdown but then things should pop more in 2025 when the links are kind of set up technologically between the 2 companies? Or is this something just kind of a slowdown and then we get back to what it was before? Just if you can give a little more color on this.

Yes. So maybe I'll first start by just kind of reiterating what Noemie said. The scores and data are actually a pretty small part of our overall, what we call, the ESG and climate business. I know we defined that a couple of years ago so it's really kind of a fraction of that. But you're exactly right. I think that's what's going to happen is as we transition -- you can imagine, we have a sales pipeline of our own content threaded through our solutions. And so now we're going to be integrating in the MSCI content. We've got to be able to go out and talk to our customers. We're going to be able to integrate that. That is going to impact our sales pipeline in the near-term. And it could also impact some of the retention in the near-term. But I think in the medium-term, having the opportunity to offer what is clearly best-in-class ESG content through to our customers, through our solutions, I think, is going to be a positive for us. And we'll be able to kind of start to build the pipeline back. I would expect that will be a 2025 event. But again, remember, ESG scoring and data, purely scoring and data, that's a pretty small business for us.

And then going the other way, the Orbis going back to them?

Yes. So it's going to start with MSCI using Orbis for ESG scores, and that's a place where there's good demand from our customers. And I think like sometimes like many partnerships, you start with 1 thing and you continue to build into other opportunities. And I think there will be other opportunities for MSCI to be able to leverage our Orbis database beyond simply ESG and climate. And so again, I think that's something we'll see in probably a 2025 event and private credit is going to be one of those places.

Our next question comes from the line of Faiza Alwy with Deutsche Bank.

So I had a similar question but on the government side because I think you mentioned that one consideration in terms of thinking about ARR is some of these government contracts that may be up for renewal later in the year. So just curious if you can remind us how big the government business might be. Is all of it up for renewal? And is it really, again, sort of a timing factor? Or how should we think about the risk in a different administration? And I assume that this is mostly the KYC business. But any further color is appreciated.

Yes. So we don't disclose around revenues by customer segment but it's our smallest customer segment. But that said, it's been growing quite nicely over the last year or two. There's a lot of demand for -- I mean, as you said, the Orbis data supporting governments really want to understand more about entities that they're engaging with, obviously. I think we were just -- I don't want to over-rotate on this. I think we were just trying to be prudent. And we've got a few of these bigger contracts. These are one year contracts. And we've -- you hear us talking about a little bit -- the potential for a little bit bumpier environment in the fourth quarter. And so we just wanted to acknowledge that there might be some risk that some of that could slip into the following year.

Yes. And if you take each of those different factors individually, they're not significant in and of themselves. It's just a combination of all those things that made us want to widen the range of it. But as I said, the midpoint of our current guidance range is in the upper end of that high single-digit percent range. So I just want to put that into perspective. Again, we're talking a narrow range around that ballpark.

Yes. And the renewals, it's probably mostly in our Data & Information business, I would say.

Our next question comes from the line of Jeffrey Meuler with Baird.

Beyond the GenAI product launches and scaling that revenue, what are the other callouts that go into the assumed acceleration in MA in the medium-term framework? And I ask because KYC is doing really well, insurance already accelerated to a great growth rate, and R&I is assumed to have good growth in this year. So just with how diverse the business is, it seems hard to bank on all of the end markets doing well but one. So what are the other self-help factors?

Yes. I would say in a nutshell, it's probably our land and expand strategy. So we believe there remains a fairly significant cross-sell opportunity into banks and insurance companies. We've been focused on that for some time but we actually think there is more upside to that. There are some things that we're doing. Some of the things that Noemie talked about, some of the investments we're making are designed to help us with that expand cross-sell opportunity with banks and insurance companies. She talked about some of the platform engineering and being able to better understand customer usage across all of your product suite and so on. So that's one. And then second is an expand opportunity with corporates. And you heard us talk a little bit about on this call going after a set of interconnected use cases around sales and marketing optimization, customer onboarding and monitoring, supplier risk, trade credit, all of that. And so there's a -- we've had some really nice sales wins with big multinational companies around some or all of those use cases, which has given us confidence to further invest in product development around all of that to really industrialize our offering and go after that opportunity at some scale. So it's expanding the revenue that we're generating from banking and insurance customers, and it's landing with these kind of big corporates around the collection of use cases. And that gives us confidence around the ability to continue to drive and accelerate growth.

Our next question comes from the line of Russell Quelch with Redburn Atlantic.

You touched on the benefits of migrating to the SaaS platform in RMS. You talked about that a lot. The 14% ARR growth in insurance is a great number. Given the forecast for the upcoming very active weather season in the U.S., do you anticipate that's going to be a tailwind for RMS in the back end of the year? Have you baked that into guidance? And in fact, are you now in a better position to monetize these periods of increased usage of data, given you've migrated to the SaaS platform?

This is an interesting question, Russell. I'm processing it at the moment here. I think I would say that, so while we may have a very active extreme weather season coming up, particularly with North American hurricanes, I don't think that's going to translate into an immediate revenue or ARR bump. But I would say that thematically, the increased severity and frequency of extreme weather events and an increasing focus on understanding the impact of a change in climate and what kind of financial consequences that has, that is a theme that is driving more and more interest in our solutions. And it's going beyond simply the insurance market. I mean in some cases, extreme weather -- actually, extreme weather events can put pressure on our insurance customers. You've seen that in Florida. But in general, I would say there's -- with insurers, there's an understanding that you need better and better data and models. And by the way, that's why there's interest in our cloud-based SaaS offering because you're able to leverage a lot more compute capacity, which can run these high-definition models that are actually better than the current generation of models. But then you're seeing banks and other organizations who are also wanting to be able to understand all of this because, for instance, banks have clearly realized that they can actually have weather and climate risk. So as they're underwriting a commercial loan, wanting to understand the risk of the collateral they're taking, that's now become something banks are quite focused on. So I would say it's driving more and more interest in our climate and weather and catastrophe modeling capabilities, but I wouldn't tie it to a seasonal set of events.

Yes. Just to make a final point on the platform, I think one of the competitive differentiator for us with the risk insurance platform is it's open to third-party models as well that can enrich the algorithm that gives it a more -- that makes it even more powerful for customers, and that's really where we differentiate ourselves.

Yes. And look, back to when we bought RMS, I remember, I still very clearly remember that call. And I remember saying we got into the -- we made that acquisition for 2 reasons: one, to get into the insurance segment at scale and I feel great about that; but second, because we wanted to take those really world-class capabilities that RMS had and thread those through our solutions to a broader set of customers. And that is very much playing out. And I'm very glad that we own one of the world's premier climate and weather modeling platforms because I think there's only going to be more and more demand for that in the years ahead.

Our next question comes from the line of Heather Balsky with Bank of America.

I want to ask about MA. I know you've gotten a lot of questions today about ARR and your guidance. But taking, I guess, zooming out and you think about the growth algorithm you laid out at -- back in your Investor Day, there's been a little bit more time. We're in probably a tougher environment than expected. Have you rethought the targets that you laid out? Do you think the algorithm maybe looks a little bit different than you originally thought in any way?

Look, first of all, I have to kind of remind all of us, this quarter, we did achieve our highest ARR growth rate that we've had, a little bit over 10%. Decision Solutions is now growing at a pace consistent with these medium-term targets, ARR growth of 13%. So actually, there's some -- there's a lot to feel good about. There isn't a change to our medium-term outlook. We continue to view the medium-term targets as a North Star that really drives innovation and investments. And I would expect that we'll talk about the medium-term targets annually, absent some sort of material catalyst to revisit them within the year. And there just hasn't been. There's been nothing that would lead me to believe I need to have a call and talk about this in the middle of the year. So like I said, we've got very strong growth in our SaaS businesses. We talked about the pressure on banks and asset managers. And Heather, you're right. That's a little bit different than the environment when we put those medium-term targets in place. But we're continuing to invest. We feel good about the innovations, the product development, the sales engagement, the partnership strategies all designed to accelerate growth. So we'll revisit this topic in February.

I will now hand the call back to Rob for any closing remarks.

Okay. Thanks, everybody, for the questions. I hope everyone has a wonderful summer, and we look forward to talking with you again in October. Take care.