MCO - NYSE

Good day, everyone, and welcome to the Moody's Corporation First Quarter 2025 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 questions 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 morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter 2025 as well as our revised outlook for select metrics for full year 2025. 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 reconciliations between all adjusted measures referenced during this call in US 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 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, 2024, 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. Over to you, Rob.

Our first question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

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

Maybe just a question on the issuance guidance. I just wanted to better understand when you reduced that guidance, just given some of the uncertainty, what were the key assumptions that were made in terms of M&A volume? I believe original guidance was expecting M&A volumes to be up 50%. So, what were the new assumptions? And have you also made any changes in any terms of assumptions for the refinancing volume? Maybe just a follow-up there would be just how much visibility do you have for the issuance guidance for the rest of the year?

Maybe just to zoom out when we're thinking about how we're thinking about issuance and the outlook. Obviously, tariffs have been impacting how companies are thinking about spending in investment decision. So it's created some uncertainty and we've seen some of that already in April in terms of just a delay in issuance. Spreads have widened out a bit. We've had some risk off days. You might recall last year it was basically blue sky days the entire year. But as I mentioned, we're in a much more of a headline driven environment at the moment, so we have had some no issuance days. And now there are questions about the kind of pace and trajectory of rate cuts through the balance of the year. So there's just a number of things that are going in to create some uncertainty for issuers. In regards to M&A, we've gotten off to a more modest start. We had thought that it was going to be primarily second half loaded, but I'd say it was more muted than we had thought. And so we've adjusted our own M&A assumptions down. I think we had 50%. We still believe there'll be growth in M&A off of a low volume, lower levels last year, something like 15%. And again, I think we would think that that will be generally back end loaded. Really no change to how we're thinking about the maturity walls. So those continue to be I think very supportive of future issuance. Hopefully that gives you a sense.

Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

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

Just wanted to ask around the guidance for MIS again. Could you square the guidance for a decrease in issuance versus flat to increased revenue growth for 2025? Is there a positive mix effect here coming from somewhere?

So you think about kind of the building blocks to go from issuance to revenue and we do have our annual pricing initiatives and we always talk about that being kind of 3% to 4% on average across the firm and that continues to be intact. There's actually a positive mix shift from what we believe will be a decrease in bank loan repricing activity as a percent of total, just given we really have minimal economics on repricing. As I said, we do still expect a modest improvement in M&A in the back half of the year and that typically is mix positive. And then if we think about recurring revenue that we think that will be up mid -single digits. And so that will also be supportive in terms of going from issuance volume to total rating revenue.

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

Our next question comes from the line of David Motemaden with Evercore ISI. Please go ahead.

Just another question just on the MIS outlook. Wondering if you could talk about some of the sensitivities, if we got more Fed rate cuts, how you think about that potentially impacting your issuance outlook as well as on the M&A side if we had flat M&A this year versus the up 15%, how we should think about that impacting your outlook?

David, thanks for the question. I guess I would say the rate cuts are kind of a mixed bag. You heard us talk a lot on this call about one of the fundamental drivers of issuance is economic growth, right? This is companies that are investing. And if we have decelerating economic growth, which is we have shaped our growth forecasts, we thought that tariffs are going to take about 1% off of global GDP growth. If we've got decelerating economic growth that's leading to Fed rate cuts, again, I'd say it's kind of a mixed bag. The negative impact of decelerating fundamental growth versus the benefit of lower rates. Now that may impact things like pull forward from the maturity walls and things like that, but I would say it will be mixed. For M&A, I think we had talked about on the last call that kind of every 10% of M&A we thought would be about call it $35 million in rating revenue. So that gives you a sense of the sensitivity to that assumption. But I guess what I'd say is M&A is one assumption among many at this point that you have to look at in terms of thinking about what's going go on with issuance.

Our next question comes from the line of Manav Patnaik with Barclays. Please go ahead. Thank you.

Rob, just on Private credit, just hoping maybe it's a little bit of a broader question, but obviously you said a lot of the growth showed up in structured finance. I was just curious where which other lines within your Moody's reporting segments do you think you have initiatives where you think that could pop up? And obviously, that's all good news. I was hoping you could just help us balance that with all the headlines in the near term, I guess, around how the banks are obviously frozen and private credit is in the headlines taking deals here and there. Just balance with some of the negatives out there too if you could?

Yeah. All right. So let me kind of work my way through that Manav. Great question. So first of all, I'd say it's in times where you've got some volatility in the public markets that we've seen that private credit can step in. We've seen that with - we started with post financial crisis, but we really saw it with COVID. And then in 2023 when we saw some stress in the US Banking system, we saw private credit again step in there as a funding source. I think you got to balance that with there are going to be increasing issues around asset quality across the private credit portfolios, right? These are highly leveraged typically the direct lending or highly leveraged loans. And we're seeing it in a few places, right? We talked about structured finance. So you're seeing a lot of asset-backed finance from private credit sponsors rolling through. We also see it in fund finance. That may not be issuance per se at times. We've got ratings on different alternative asset managers and fund entities and other things. So it's not always showing up in the issuance numbers, but you see it in the first time mandates. So the growth of our FIG first time mandates is importantly - there's important contribution from private credit related entities. And within FIG when we talk about fund finance, it's everything from ratings on alternative asset managers and BDCs. But you've also got and I think of some of that as what you might call related to direct lending, right? Those are direct lenders. And then you've got true fund finance where you've got things like subscription lines and NAV loans and rated feeders and all of that. So those are the two places where we're seeing the most of this flow through. The last thing I would say Manav is, and I imagine most of you saw our announcement with MSCI that I mentioned in my remarks, but there's more and more investor desire to understand and have a third party view of credit risk of the investments that they're invested in through these private credit funds. And it's interesting because when we made this announcement, we've gotten some very good inbound from people saying, this is interesting, tell me more, I'm interested in understanding how I can get this independent view of credit risk. So I think you're going to see in MA through our credit scoring tools, I think you'll see that as a revenue opportunity for us as well to capitalize on private credit.

Our next question will come from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

I wanted to circle back to MA. I know you slightly reduced your ARR guidance. You talked about the federal government exposure. I understand that. But beyond that, are you seeing any other kind of slowdown or uncertainty in those businesses? Because some of the metrics kind of look like they are slowing down a bit. Thanks.

Yeah, I'll take a crack at that. Not really. I mean we talked about the two things that primarily were impacting ARR in the quarter and obviously that impacts our guidance for the year. And that was as you noted federal government not surprising, I think to many people. We had some ESG related attrition as customers or some customers are actually going straight to MSCI. I think we kind of anticipated and understood that. I would say in regards to we get questions about pipeline and sales cycle. And we've had a number of questions over the years as we go into these periods of turbulence about are the sales cycles extending? And I would say no, not at the moment. But it's early, right? And so in 2023 when we saw stress with the regional banks in the United States, it's not so much that we saw the sales cycles extend, but we saw some of the sales cycles push farther out in the calendar year, right, where banks just say, hey, I'm not ready to make a decision yet. I need to get more certainty about the operating environment and let's revisit some of this. So the second thing is our pipeline across MA is quite robust. It's up double digits from the same time last year. So the pipeline is good. We're not seeing at the moment delays in sales cycles. But when we think about our guidance for the year, I think you're seeing us just acknowledge that it's a possibility. We want to acknowledge in an environment of heightened uncertainty, it's possible we could see some of this push out and we're also acknowledging these two attrition kind of themes from the first quarter.

Our next question comes from the line of Alex Kramm with UBS. Please go ahead.

Just coming up coming back to MIS for a second. I didn't fully understand the commentary you made from a seasonal pattern perspective. So maybe you can just give a little bit more detail there, what you said about the second and the third quarter. I think you said second to third is stable, but I don't I think from a second quarter perspective, you didn't really say much in terms of what you expect pulling this toward April. Are you expecting May and June to get better? Or what exactly should we be thinking about here from a seasonal perspective? Sorry about the short term focus, but clearly a lot in flux.

I'll start and Noemie feel free to jump in. I think the way we thought about this obviously, we're incorporating the soft start to April obviously in our 2Q. And when we kind of think about the quarters, the biggest adjustment that we made in terms of thinking about revenues for the ratings business is in the second quarter. And we don't know exactly how long some of this turbulence is going to last. I can talk a little bit about the current pipeline if people are interested, kind of what we're seeing. But I would say the biggest adjustment to revenues was in the second quarter and then less in the third and less in the fourth. We're thinking ratings is going be down somewhere in the kind of ratings revenue, down somewhere in kind of the mid-single digit range in the second quarter, down in kind of the low single-digit range in the third quarter and up in the mid-single digit range in the fourth quarter and that gets us to somewhere between flat to mid-single digit revenue growth for the year.

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

I wanted to ask about MIS margins and expenses more broadly. I think Rob, you had talked about GenAI related efficiencies more broadly in the business. I think you might be talking about MA, but I'm curious to the extent the environment worsens from an issuance perspective relative to how you're thinking about it at the moment, how much flexibility do you have in terms of whether it's pulling back on investments or just some these efficiencies that are coming through?

There's two things I'd say here. First of all, we've managed through all these air pockets over the years. I can't tell you on how many of these calls I've been on where there's some turbulence in the markets and we get these questions about how are we thinking about being able to manage expenses. And the reality is that we've got what I'd call kind of the traditional levers that we're able to pull. So if we see cyclical declines in issuance, typically we are very effective at managing headcount and all of that kind of stuff. That's the first thing that we would look at and that's what you would expect us to do in a declining issuance environment. Only if there's structural changes would we say, hey, we need to fundamentally think about the resourcing of any particular. But in this case, I think we definitely think this is a cyclical issue. So there's the traditional levers of just being able to manage hiring very effectively, which we've done over the years. And then second, we talked about this idea of becoming increasingly volume agnostic within a range of a band of issuance while maintaining strong controls. And we've really been working at doing that by - it's not just the AI tools. Those are helpful, but it's also about building modern applications for our analysts, analytical applications, rating workflow applications, those kinds of things that deliver efficiency to them, right? So that over time we're able to actually be able to handle more credits per analyst, right? That's obviously the goal and to be able to do that with consistent rating quality and engagement with the market and high quality research. The advent of AI gives us the opportunity to deploy more tools to the analysts, but of course we have to make sure we do that in a way that respects our regulatory environment and has the right control environment around it. So like many banks, we're more deliberate in how we deploy AI in the rating agency because we need to make sure we have transparency on how we're using AI across the agency.

Our next question comes from the line of Owen Lau with Oppenheimer.

So going back to your partnership with MSCI, could you please add more color on the revenue model of the independent risk assessments? What are the use cases? What your clients are looking for? And also how big this opportunity can become longer term?

Owen, thanks for the question. We haven't disclosed kind of the revenue model or opportunity, but I think we all understand that the private credit market is significant and growing rapidly. And what I would say is in our engagement with investors and that includes everything from pension funds and long only investors to insurance companies who are big allocators to private credit. We've heard that there's a lot of desire to have a rigorous third party credit assessment of the investments that these entities are invested in. So if you think about how we're serving the private credit market, we serve the alternative asset managers and GPs and we also are now have an opportunity to really serve the investors. And so what we're doing with MSCI, they have by virtue of their current platform, they have some very rich in-depth data on private credit investments across the fund universe. And now they have the ability to leverage our models to be able to provide our EDFX, our quantitative credit risk scores to those investors. Over time, I think you would imagine that as we have the opportunity to provide these scores, so the customers are going to opt in. And over time, you can imagine working together to build benchmarks and research and indices and all sorts of other things that continue to provide additional transparency and insight into the private credit market.

Our next question comes from the line of Pete Christiansen with Citi.

I was just curious if we could just drill down into the assumption on first time mandates. I guess there's a lot of confidence there that's going to continue throughout the year. Just curious if you could just walk us through your confidence in that number throughout the year.

You're right. First time mandates have actually continued to be the momentum that we had in 2024, has continued into the first quarter. First quarter FTMs, first time mandates were almost 200. That was up 20% versus the prior year quarter and we saw growth in really all regions except Asia Pacific. Corporate finance was the largest source of first time mandates, but I would also say that and I mentioned this with private credit, there's this new dynamic now where we're seeing much more first time mandate growth coming out of our financial institutions franchise related to private credit, right? So these are again BDCs, asset managers, private credit funds, all of these kinds of things that are getting rated for the first time. In fact, I think something like a third of our first time mandates in FIG were serving the private credit market both in the US and to a lesser extent in EMEA. So we haven't changed the guidance at this time. Obviously, a lot of first time mandates are related to leveraged finance. So that is something to watch, but we have a bit of a tailwind in the FIG franchise.

Our next question comes from the line of Sean Kennedy with Mizuho. Please go ahead.

It was nice to see strong growth in KYC this quarter. And you touched on this on the prepared remarks, but I was wondering if tariffs and heightened macro uncertainties are acting as a catalyst for helping penetrate the corporate market. And could you also touch on the total opportunity and go to market strategy there?

It's interesting. This point about your question about our tariffs actually driving some - have the potential to drive some demand for our solutions around KYC and supply chain supplier risk? And I think the answer is potentially yes. Because we've talked about on the call before that this massive amount of company data and then we've been enriching it with these other data sets to serve these various use cases, right? It started with KYC. It's a very high growth scale use case for us. But we talked about this corporate platform that we've deployed, we call it Maxsight, where we're not just serving KYC, but we're also now serving for instance supplier risk and elements of supply chain and so on. So we launched that platform in the first quarter for corporates, got something like 150 quoted opportunities in the pipeline. So there's a lot of really good dialogue with customers around these kinds of use cases and we're seeing some early traction in that dialogue in areas like kind of logistics and healthcare and TMT. So I think again when we see areas where there's uncertainty what you see is customers wanting to try to work through that uncertainty, get additional tools, get additional data site and I think that's part of what we're seeing here.

Our next question comes from the line of Joshua Dennerlein with Bank of America.

Just trying to tie some of your comments today on expense management and margin versus maybe what we've seen in your history. If I look back to 2022, we saw like a fairly significant slowing in missed revenues and margins really compressed. Is that not a good analogy to what might happen if missed revenues slow a lot more than you expect this year?

Yes. And I think just when I kind of zoom out, you kind of look at the financial profile, the margins and so on. This is still a very strong financial profile for the business.

Our next question will come from the line of Jason Haas with Wells Fargo.

This is Jimmy on for Jason Haas. Just wanted to follow-up on the KYC question earlier. Curious to what extent you consider the current MA profile as countercyclical and are there any other specific sub segments that hold up better than others during downturns, maybe like insurance?

We've talked about over the years, in general I'd say much of the MA portfolio tends to be, I don't know if I'd say countercyclical, but it tends to weather these, acyclical may be a way to think about it. That's probably the right word, probably acyclical. And you've seen 68 quarters of growth, consecutive growth through all sorts of different periods where ratings revenue has gone up and down. And if you think about why is that, it's because, think about the use cases that we're serving across the various businesses. So, in banking you've got customers using not only our software but our data for everything from lending to stress testing to CECL to impairment testing and ALM and that stuff is just very, very sticky as you'd imagine. These are not things that you just unwire when you hit an air pocket. In fact, if anything, we'll see the usage oftentimes go up. Same with our research. There's more demand in these environments to access the research and access our analysts and get our insights in these kinds of markets. Insurance, same thing. If you think about what's going on with the extreme weather events, has nothing to do with financial markets. It's completely uncorrelated. So this need to be able to invest in these tools to better be able to understand and address physical risk and underwriting needs is not really in that case correlated to the market. So last thing I'd say, you asked specifically about KYC. There's another great example. What we do see are banks trying to become two things, more efficient and more effective. So there's no question that that is going on. But what we don't see is our banks saying, hey, KYC is somehow less important. I don't need to invest in it. This is a place that I'm going to cut. You do that and next thing you know you have a fine or a consent order. And so I think banks have been very clear. They want to make sure they have regulatory compliance, but they also want to make sure they can get more and more efficiency. And that's why I mentioned this AI screening agent because that is a fantastic opportunity to help banks with compliance to be more effective, to reduce false positives, but to be much more efficient. And so I think we're expecting to see some good demand there.

And that will conclude our question and answer session. And I will now turn the call back to Rob for any closing remarks.

Okay. Well, thank you very much for the questions. And we look forward to speaking with you on the next call. Have a good day, everybody.