Operator: We’ll go next to Craig Huber at Huber Research.
Craig Huber: Noemie, I’m curious, you’re new CFO here. You’re falling roughly 20 years, very strong, the prior two CFOs, your company there and stuff. What are you thinking you can improve upon at the Company that you’re willing to talk about publicly here?
Noemie Heuland: Thanks for the question. I think the — if I think about stepping back a bit about the Company’s priorities and where we’re headed, I think my priorities are very much aligned with where the Company is going and what we’re focused on to accomplish our medium-term targets and beyond. The first thing I’d say is continuing to focus on very thoughtful capital allocation, balancing the investment spend to drive future growth and really move from legacy onetime revenue into full recurring, which will then in turn expand the margin. I think that’s very important. I have worked with companies before who evolved their business model from on-premise, lower margin, into SaaS recurring and scale businesses. And I think that’s an area that really excites me.
What I’ve seen so far really resonates with me, and that’s really what I want to focus on. And then obviously, continuing to drive efficiencies both internally as well as for our customers and talking to a lot of our customers. The other thing I want to do as well, spend some time with you all to understand what are the things you’re looking at, what things you think we’re doing well, things where you’d like us to see do differently, and I’m really much looking forward to that as well.
Rob Fauber: Yes. And Craig, I will add. I think Noemie is also going to bring a wonderful perspective and I think help communicate to the market the real value of this business and using the perspective that she’s had from software and SaaS businesses in the past. So, we’re really excited about it.
Operator: We’ll take our next question from Jeff Meuler at Baird.
Jeff Meuler: Great to hear the progress on RMS. On the revenue acceleration, does the revenue lift come as the upgraded — as they do the platform upgrade? Or is it that the platform upgrade enables follow-on sales? Just trying to understand the sequencing. And then on the synergies bit, it sounds like, correct me if I’m wrong, but mostly two-way cross-sell synergies between heritage RMS and Moody’s products. Where are you on, I guess, net new product synergies that combine the capabilities from each of the firms?
Rob Fauber: Yes. Jeff, great question. RMS is really turning into a nice story for us. And I guess I would — maybe I’ll call it core RMS ARR that is now growing in line with MA ARR. And that is a far cry from the quite low single-digit percent growth when we acquired the business. And part — there’s a couple of things going on there just with the core business, excluding the synergies. One is, in fact, an acceleration of the migration of customers from on-prem to the Intelligent Risk Platform. And those of you who know the history of RMS know that we — RMS struggled with a prior SaaS rollout. The Intelligent Risk Platform is the real deal, its industrial strength. And we’re really seeing some very nice migration. And to your question, there are — there’s two things.
So, one, there are commercial benefits as we move customers over. And two, exactly as you said, Jeff, once you’re there, it’s much easier to adopt additional solutions because now you’ve got all the data in one spot, you can integrate your own models, third-party models. So, there are a lot of benefits driving customers to migrate to the SaaS platform and to continue to grow their relationship with RMS. The second thing is just good old-fashioned sales blocking and tackling. We moved our — one of our most experienced sales managers in to be the Head of Sales and really have even more discipline around the RMS sales program, and that has also paid dividends. And then the nature of the synergies, I mean, you’re exactly right. So, I’ll give you one very exciting example of what I would call kind of outbound synergies.
So, this is RMS IP to other Moody’s customers. We just signed one of the world’s largest banks as a customer of the Cat model. So, this isn’t even kind of our Climate On Demand for banks. This is literally the full Cat models. So, this is a bank who wanted to have a very sophisticated view of the impact on — of climate and extreme weather events on their portfolio and to be able to do stress testing and all sorts of things. So that’s really exciting. And we’re seeing more and more demand from banks and asset managers and corporates on supply chain who want to do exactly that, the physical risk relating to climate and extreme weather. And then the other is the inbound cross-sell. Again, a very nice story. And a lot of that is around the KYC, know your third party, leveraging our master data in our data solutions team.
So, we have a very nice very nice momentum there. So, all in all, I feel quite good about what’s going on at RMS.
Operator: We’ll go next to Andrew Steinerman at JPMorgan.
Andrew Steinerman: I just wanted to get with the current guide for credit issuance. Are you assuming that issuance on transaction basis will be down in the fourth quarter this year? And also, I just wanted to check your pulse on if you thought we were in the midst of a multiyear issuance recovery following the pullback in ’22?
Rob Fauber: Andrew, great questions. So, thinking about, I guess, a year to go, obviously, we’ve held the issuance forecast range. I mentioned that we expect to be in the higher end of that range. And so obviously, that invites questions about, okay, given the strong first quarter, what does that imply then about the second half? And it does, in fact, imply a, I’d say, for year to go, so that’s three quarters a, call it, mid-single-digit decline in issuance for the balance of the year. And to your point, Andrew, I would say, more focused on the fourth quarter, where we would think the issuance would be down more in the mid-teens range. And part of that again is because some of the uncertainties I talk about and — one of those being elections.
And so, we just assume that people are going to pull out of the fourth quarter where they can. So, for the most part, I’d say our forecast represents really just a change in the calendarization of issuance. But I talked earlier about some of the drivers that we’re going to be looking for. And then maybe, Andrew, to your second point about are we in the midst of a multiyear — I can’t remember the term you used, issuance…
Andrew Steinerman: Issuance recovery given the pullback in ’22.
Rob Fauber: Yes. I do think we are. And I think that’s consistent with — we obviously updated our medium-term targets for MIS, and I think that’s part of that. And I will go back to that point, Andrew, around what — one of the things I — that leads me to that conclusion is — and while we may have — again, we may have a little volatility in the quarters here in the year. But I think the trend line is up. And again, I go back to that debt velocity. Just to give you a number, at least the numbers we work with, when you go back to, like, okay, let’s say, 2009, so just post-global financial crisis, corporate issuance over total corporate outstanding was all the way back down to something like 14%. And we’re well below that still.
So that tells me we’ve got some room just, again, given the huge amount of issuance over the last few years. The one other thing I would say, Andrew, is I get asked — we’ve gotten asked a lot on these calls about private credit and is this disintermediating the public markets. I actually have started to think it almost as another form of maturity wall because look what went on in the quarter. We had 45 deals that got slipped from private markets to public markets. So, I had mentioned that I thought of this as a deferral of issuance, not a cannibalization of issuance. In some cases, of course, there could be some cannibalization, but we’re seeing there’s a lot of just deferral because the private credit players are rational financial actors.
And if they can get cheaper financing in public markets, they’re going to do it, and they are doing it. So that I actually think is supported — I actually starting to think private credit is actually a tailwind for us that will be supportive of this, as you say, recovery in issuance.
Operator: We’ll go next to Russell Quelch at Redburn.
Russell Quelch: Wanted to ask a balance sheet-related question. I see that your gross leverage is now down at around 2.2%, which is the lowest level we’ve seen from you guys in years. And you also slowed the pace of the buyback in Q1. Perhaps that cash on the balance sheet went up by about $300 million in the quarter. That actually was quite stable through 2023. And start the break in trend there. Is there a change in how you’re thinking about capital allocation or the cash you need to hold on the balance sheet? And are you perhaps making room for acquisitions here? Can you just give a bit of color there?
Noemie Heuland: Yes. On capital allocation, we are maintaining our approach, and it’s my intent to continue that. We — on the share buyback, which I think is where you’re going, we — it’s just been one quarter of execution. The pace isn’t out of line with our planned cadence. We expect to catch up in the second quarter and the second half to hit our targets. So, I wouldn’t read anything into that. And then last year, we focused on deleveraging because we had picked up in 2022.
Operator: We’ll move next to Owen Lau at Oppenheimer.
Owen Lau: So, I have two housekeeping questions for modeling purpose. The first one is I want to go back to the margin. Would you be able to provide more color on the seasonality for the margins of MIS and MA for the rest of this year? And then the second one is on the migration to cloud revenue. My understanding is it will impact your upfront revenue growth, but you’ll be better off longer term. Should we expect your MA revenue growth to run below your ARR growth until you completed your migration in RMS and also research?
Rob Fauber: Owen, this is Rob. I’m going to take the first one. No, I don’t think so. I don’t think you’re going to see us kind of have what I would call kind of a big valley as we’re moving from customers from on-prem to SaaS. So that’s not something I would anticipate. And your first question was around the calendarization of MIS margins, I believe.
Noemie Heuland: Yes. MIS margin, we saw a — the top line, we expect this to be growing low single digit in the remainder of the year. For the margin for MIS, we’re forecasting the expenses to decline slightly in the second quarter in the low single digit sequentially from the first quarter. First quarter MIS adjusted operating margin of 64.6%. And expanded full year expectation implies an adjusted operating margin in the range of 53% to 56% on average for the remainder of the year. Especially for the second quarter, if you want to use that following purposes, we expect that to be slightly higher than the upper end of our fiscal year guidance before then decreasing sequentially each quarter through the end of the year, which is pretty much in line with the MIS revenue cadence as well, which is expected to decline in — throughout the year.
For MA, we — again, we expect the margin to evolve in the same pattern as the revenue with an uptick of 30% to 31% in the back half of the year.
Operator: And we’ll take a follow-up from Craig Huber at Huber Research.
Craig Huber: You sort of touched on this, but can you just talk a little further about your expectations for the whole company cost ramp for the remaining three quarters in light of your guidance for cost for the year? That’s my first housekeeping question. The other thing I want to ask you, in the past, you guys have given us your incentive compensation that you booked in the quarter. What’s your outlook for the year there?
Noemie Heuland: Yes. On incentive comp, first of all, we recorded $105 million for the first quarter. We expect, on average, $100 million for the second and third quarter and slightly up in the fourth quarter. So that’s for the incentive comp. And on the expense cadence, we expect the second quarter expense to be flat sequentially in the second quarter versus Q1 and then gradually increasing by about $20 million to $30 million between Q2 and Q3 and then by $15 million to $25 million in the fourth quarter. That reflects our strategic investment, some merit increase, as well as some other variable costs, which are in line with the business growth.
Craig Huber: And one more quick thing. Your private credit as a percentage of revenues and ratings right now, Rob or Noemie, I mean, where does that sit right now? How small is that?
Rob Fauber: Craig, it’s — that’s an interesting question because I think we could get into a bit of a battle of definitions here. As I kind of step back and think about serving the alternative asset managers, these are the Blackstones, the Apollos, they’re both in the public markets and the private markets. And we have, as you’d expect, very significant relationships with a broad range of players in that market. In fact, when you — going back to the FIG revenues for the quarter, part of that opportunistic issuance was coming from our funds and asset management segment — subsegment in FIG. And part of that was actually coming from BDCs and other folks who you would think of as being in the private credit market. So, I guess, Craig, it’s a little bit of a tough question for me to answer because I think of serving the Apollos and the Blackstones, and I think of that as public and private.
And that’s quite significant. We — as you know, we did roll out a dedicated private credit team. We do have an expanded offering for specifically things that you would think of as private credit. So, we’ve got credit estimates for BDCs. We’ve got a number of different kinds of offerings to support fund finance. In fact, we just rolled out a subscription line methodology, and we have a very nice pipeline that I would think of as primarily private credit-related. All of that stuff is growing quite significantly. So, I would say, maybe to cap it off, our relationship with the big — with the alternative asset management community in — and I’m — just in MIS for the moment, is quite significant. As it relates to specifically private credit, yes, for now, considerably smaller, but growing quite quickly.
I hope that gives you some sense.
Craig Huber: Yes. You went a couple of different ways I didn’t think you were going to go, but that’s helpful.
Operator: And we’ll go next to Shlomo Rosenbaum with Stifel.
Shlomo Rosenbaum: Rob, can you just talk a little bit about the KYC growth? It was 18% in 3Q, 20% 4Q, 23% in — now this last quarter. You are kind of accelerating on a larger revenue base. If you can give us some idea as to what’s driving that. And then also, at the same time, you’re seeing the revenue growth, but you’re seeing the ARR kind of still around the 18% — 17%, 18%. And maybe you could talk about that in the context of the revenue growth?
Rob Fauber: Shlomo, thanks for the question. Yes, this is a powerful growth engine there. And it’s — they’re just — there’s a number of demand drivers. You probably heard me talk about on the call before that I’ve gotten to a point where I think KYC is not doing this justice in terms of the name because it talks about know your customer. And you heard me earlier on the call, say, the theme with literally every customer I talk to is know your — who you’re doing business with and being able to connect the dots. So that is a big opportunity for us. And KYC is right in the middle of it. And we are broadening out our solution set, leveraging all of the content that supports KYC. So that’s the massive company database that we call Orbis.
