Moody's Corporation (MCO) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• 22% Revenue Growth and Strong Operating Margin: Moody's reported a 22% revenue growth, an adjusted operating margin of nearly 50%, and 43% adjusted diluted EPS growth for the second quarter of 2024.

• MIS Delivered 36% Revenue Growth: MIS (Moody's Investors Service) experienced a 36% revenue growth and a 63.2% adjusted operating margin, up 730 basis points from the previous year.

• MA Achieved 10% ARR Growth: Moody's Analytics (MA) delivered a seventh consecutive quarter of 10% ARR growth with a 94% retention rate, led by Decision Solutions growing by 13%.

• Significant Investments and Acquisitions: Moody's continues to innovate and invest, launching new products, expanding coverage, and completing the acquisition of GCR, the leading African domestic credit rating agency.

• Sustainable Finance and GenAI Product Launches: Moody's reached a milestone with its 200th second-party opinion in MIS and launched new GenAI-powered solutions, including an automated credit memo and an Early Warning System.

Pessimistic Highlights

• Widened ARR Guidance Due to Uncertainty: Moody's widened its ARR guidance for the second half of the year to account for potential uncertainty in the buying environment.

• Pressure on Banks and Asset Managers: Tight purchasing patterns and cost pressures in the banking and asset management sectors are impacting upsell, pricing retention, and sales pipeline.

Company Outlook

• Raised Guidance for Revenue Growth and Margin: Following robust performance, Moody's raised its guidance for both revenue growth and margin, expecting low-teens percent range revenue growth for Moody's corporation.

• Investment in GCR and Sustainable Finance: The acquisition of GCR reinforces Moody's leadership in domestic rating markets, and the milestone in sustainable finance positions Moody's for growth in this area.

• Focus on GenAI and Strategic Partnerships: Investments in GenAI and strategic collaborations, including with MSCI and Google, are expected to unlock new growth avenues and enhance Moody's offerings.

Q & A Highlights

• Q: Can you provide an updated view on your pull-forward expectation for issuance? (Owen Lau, Oppenheimer & Co.)

  A: We've seen both in-calendar and forward maturities pull forward this year, consistent with historical ranges. The fourth quarter is expected to be more muted in terms of issuance. (Rob Fauber)

• Q: How do you think about the interplay of geopolitical and macro uncertainty and rate cuts at the end of this year and into next? (Andrew Nicholas, William Blair)

  A: Our outlook for the balance of the year is not particularly dependent on what's going to happen with interest rates. We expect a busier first half than the second half of the year. (Rob Fauber)

• Q: Could you update us on the drivers for Research & Insights expected acceleration in the second half? (Greg Parrish, Morgan Stanley)

  A: Drivers include Research Assistant and our coverage expansion. We've seen a strong pipeline, increased deal sizes, and customer satisfaction for Research Assistant. (Rob Fauber)

• Q: Could you elaborate on the MSCI partnership and its impact on your business? (Manav Patnaik, Barclays)

  A: The partnership with MSCI is expected to offer our customers MSCI's market-leading ESG scores and data through our solutions. It's a strategic shift that may impact our sales pipeline in the near term but is seen as a positive medium-term. (Rob Fauber and Noemie Heuland)

• Q: Can you update us on the strategic investments and their impact on revenue growth? (Scott Wurtzel, Wolfe Research)

  A: Investments in GenAI, product development, and technology platforming are on track and expected to drive durable double-digit growth in the years to come. (Noemie Heuland)

• Q: Can you provide an update on revenues from GenAI-related products? (Alex Kramm, UBS)

  A: While not yet material, products like Research Assistant are showing encouraging signs, with doubled customer numbers and deal sizes. Partnerships with Microsoft and Google are expected to open new monetization pathways. (Rob Fauber)

• Q: How are you addressing tighter purchasing patterns and cost pressures from banks and asset managers? (Jeffrey Silber, BMO Capital Markets)

  A: We're focused on articulating the value proposition of our solutions, despite pressures on upsell and pricing retention. We've seen a healthy sales pipeline and strong demand for our products. (Rob Fauber and Noemie Heuland)

• Q: How does the commercial real estate market's challenges impact the banking sector, and how concerned are you? (Craig Huber, Huber Research Partners)

  A: While there's focus on commercial real estate, particularly office space, we're leveraging our analytical teams and modeling capabilities to understand and address these challenges. (Rob Fauber)

• Q: Can you clarify the impact of the MSCI partnership on ARR and future growth? (Shlomo Rosenbaum, Stifel)

  A: The partnership with MSCI, while impacting our sales pipeline in the near term, is expected to be a positive for offering best-in-class ESG content to our customers and leveraging Orbis for broader use cases. (Rob Fauber and Noemie Heuland)

• Q: How do potential government contract renewals impact ARR and revenue growth? (Faiza Alwy, Deutsche Bank)

  A: While government business is our smallest customer segment, we're being prudent about potential risks to renewals due to the upcoming U.S. elections, but it's not a significant impact overall. (Rob Fauber and Noemie Heuland)

• Q: Beyond GenAI product launches, what drives the assumed acceleration in MA in the medium-term? (Jeffrey Meuler, Baird)

  A: Our land and expand strategy, particularly cross-selling opportunities into banks and insurance companies and expanding into corporates, drives our confidence in accelerating growth. (Rob Fauber)

• Q: How does the forecast for an active weather season in the U.S. impact RMS and its growth? (Russell Quelch, Redburn Atlantic)

  A: While an active weather season may not immediately impact revenue or ARR, it underscores the increasing demand for our climate and weather modeling capabilities across various sectors. (Rob Fauber and Noemie Heuland)

• Q: Have you rethought the growth algorithm for MA given the tougher environment? (Heather Balsky, Bank of America)

  A: There's no change to our medium-term outlook. Our highest ARR growth rate and strong performance in Decision Solutions support our confidence in achieving our medium-term targets. (Rob Fauber)