Moody’s Corporation (NYSE:MCO) Q3 2023 Earnings Call Transcript

Owen Lau: So going back to MA, I think the margin was pretty strong at 33.6%. And I know you maintained the margin guidance for MA. But going forward, given that you have been investing into GenAI, how should we think about the sustainability of your margin?

Rob Fauber: Owen, great question. And just on the margin, maybe I — just one thing I’ll say is I’m not sure I’d get too wound up about a margin in any given quarter. And you’ve heard us talk about some seasonality in both expenses and the way that revenues can come in. Obviously, it was a good quarter for us. I think I would say that we have really tried to be disciplined across the business and to think about how we are reprioritizing across the business to make sure that we are putting resources against the highest and best opportunities. And obviously, we have made some investments to date in GenAI. In fact, I was just with our team that is providing our LLM as a Service across the company, it’s probably 25 people. Some of those are from different parts of Moody’s and some of those are new to Moody’s.

I guess, what I would say, Owen, is looking forward, I mean, you’ve heard me talk about we want to lean into growth and invest in growth. And one reason that’s so important is, in some of these markets, you have literally new customers coming into the market adopting solutions. So we talk about KYC and how that’s broadening beyond just meeting regulatory requirements into wanting to understand who you’re doing business with, what your supplier risk looks like. That means you have new customers coming into the market. And you’ve seen our retention rates, pretty similar. Many other players in the market who provide services like this have very robust retention rates. That means those customers are sticky. So once you get that customer, it’s hard to dislodge that customer.

So while we have a lot of market growth, we want to make sure we invest in the products and the sales distribution to make sure that we get those customer relationships. And then over time, as we continue to build more and more scale, we will have the opportunity to grow the margin. Next year, I guess, the other thing I would say with just GenAI investment, it’s early days, right? I mean, yes, I’ve got a team here I mentioned, but we haven’t started putting customers on the products yet. And so that means that we’re going to have growth in our expenses around compute capacity and other things. I imagine we’ll continue to be building out kind of our capabilities across the firm next year. But we’ll also balance that with making some hard calls and being very disciplined in where we invest across the entire business.

So hopefully, that gives you a little feel, Owen.

Operator: We’ll take our next question from Seth Weber with Wells Fargo.

Seth Weber: I wanted to actually follow up on that question. The — I was intrigued by the KYC discussion in your remarks. I think you said 20% of MA customers buy KYC today. I was just wondering, can you just talk to what that trend line has looked like and where you think that could go from like a wallet share perspective? And I think you may have touched on this a little bit. But are these customers that are not using your — are these new wins? Are they customers that aren’t using anything today? Or are they conquests? Or just how we should think about that opportunity?

Rob Fauber: Yes, it’s a great question. And this is probably something we’re going to be talking with you more about next quarter, would be my guess. But again, if you think about what has gone on historically, that customer base, it really started really in financial institutions and mostly in banks. And then it started to evolve as all corporates had to start complying with different sanctions regimes around the world. But also, as corporates said, hey, we want to start — this trend I talked about around better understanding who you’re doing business with has driven a need from our customers to really get foundational master data and then build a set of — leverage analytics on top of that to help them think about things like sales and marketing optimization, extending trade credit, onboarding and monitoring customers and thinking about supplier risk.

Those are — that’s a set of activities that almost every one of our companies, our customers is doing. And so we’re having conversations with more and more and more of our customers around, “Well, how do you think about the master data and linking then the data and the analytics that you have at your firm and that we can layer on top of that to help you get a better, more holistic view of who you’re doing business with and to power those different use cases?” And so that gives us some confidence that we’re really going to be able to grow in the corporate and government sector even faster than what we’ve done. It’s a small — you can see the customer split. But we think we have an opportunity to really get some growth there. And I think you’ll hear us talk more about that in the next quarter when we start to talk about what our product pipeline looks like for 2024.

Operator: Our next question comes from George Tong with Goldman Sachs.

George Tong: On Slide 10, you trimmed your issuance guidance from mid-single-digit growth to low to mid-single-digit growth. And the cuts are centered around investment grade, leveraged loans and structured finance. How much of your updated issuance outlook is locked because of refinancing needs versus discretionary in nature and more influenced by macro considerations? And then related to that, does the refinancing pipeline, particularly in high yield, what does that tell you how quickly that issuance can expand for next year?

Rob Fauber: George, I’d tell you what, I’m going to try to give you some insight. You’re asking about fourth quarter, right, the assumptions going into the fourth quarter. And you talked a little bit about refinancing and how much does that give us confidence, how much is “kind of in the bag.” But let me give you some insight, and I think it’s going to be helpful for everybody on the call, into how we are thinking about fourth quarter from both an issuance and revenue standpoint. And I’m going to talk a little bit — I’m going to talk — focus more on really sequential growth in issuance and revenues than maybe perhaps I normally do. Because I think in some ways, at the moment, it’s a little easier to triangulate back to the environment that we’d just experienced in the third quarter versus was a very different environment a year ago.

So overall, we’re assuming low to mid-single-digit decline in total sequential issuance growth for the fourth quarter versus the third quarter of ’23. And that translates into high-teens growth on a year-over-year basis now for Q4, looking back to Q4 ’22. And then that gets us to our low to mid-single-digit issuance guide for the year. And let me drill down, George, because you were touching on corporates, we’re assuming that corporate issuance grows, call it, mid-single digits for the fourth quarter versus the third quarter of ’23. And that translates to something like mid-single-digit revenue growth for corporates in the fourth quarter versus the third quarter, okay, so mid-single-digit issuance and revenue growth sequentially in the fourth quarter.

For all other ratings lines, we expect pretty flattish revenue growth versus the third quarter of ’23. And if you — if now I come back up to overall MIS revenue, that translates to something like low single-digit revenue growth for the fourth quarter versus the third quarter of ’23. And now when I go back to looking at 4Q ’22, something like mid-20s percent growth, obviously given it was a much lower comp. And I would acknowledge I’ve got a wider range at this point than we normally do, but there’s just — there’s a little more uncertainty in the market. So I want to be very clear to everybody about what we’ve assumed. And then again, in some ways, I’m anchoring to the third quarter here so that you can get a sense — if you see a variance one way or the other versus the third quarter, you’ve got a good sense of what that’s going to do to revenues — to MIS revenues and in turn earnings.

And again, just to — George, just to put a finer point on it, a key assumption really then is around corporate issuance for fourth quarter, and that’s mid-single-digit growth versus the third quarter that we just finished. And I would say there’s — at the moment, there’s probably a little more downside than upside to this. But we’re not even a full month into the quarter, so we’ll see. I hope that’s helpful in helping you think about what’s going on in the fourth quarter.

Operator: We’ll take our next question from Ashish Sabadra with RBC Capital Markets.