Moody’s Corporation (NYSE:MCO) Q4 2023 Earnings Call Transcript

Moody’s Corporation (NYSE:MCO) Q4 2023 Earnings Call Transcript February 13, 2024

Moody’s Corporation misses on earnings expectations. Reported EPS is $2.19 EPS, expectations were $2.32. Moody’s Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone. And welcome to the Moody’s Corporation Fourth Quarter and Full Year 2023 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.

Shivani Kak: Thank you. And 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 fourth quarter and full year of 2023, as well as our outlook for full year 2024. The earnings press release and a presentation to accompany this teleconference are both available on our Web site 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 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 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, 2022, and in other SEC filings made by the company, which are available on our Web site and on the SEC’s Web site. These, together with the safe harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

I will now turn the call over to Rob.

Rob Fauber: Thanks, Shivani. Good morning. And thanks to everybody for joining today’s call. We’re here from a snowy New York City. I’m going to start with some highlights from 2023 and then discuss our expectations for 2024. And after my prepared remarks, Steve Talinko, who is the President of Moody’s Analytics; and Mike West, the President of Moody’s Investor Service, will be joining me along with Caroline Sullivan, our Interim CFO for the Q&A portion of the call. And before we get into it, I have some very exciting news. As you may have seen this morning, we announced the appointment of Noemie Heuland as our new Chief Financial Officer, and she’s reporting directly to me. And Noemie brings a wealth of knowledge to Moody’s after nearly 25 years in senior roles at global public companies, including most recently as CFO of Dayforce, formerly Ceridian, and over a decade with global enterprise application software provider SAP, during which it transitioned to a global software as a service business model.

So as CFO, she’s going to lead the global finance organization that includes accounting and controllership, financial planning and analysis, financial systems, Investor Relations, strategic sourcing and procurement and tax and treasury. And her firsthand experience in scaling high growth category leading public software companies, along with her extensive global experience, I think, really make her the ideal CFO for Moody’s as we invest in and grow our subscription-based analytics businesses and continue to expand our ratings business around the world. So it’s an exciting time for Moody’s and I look forward to Noemie jumping in beginning April 1st, and of course she’s going to be a regular fixture on this call going forward. Before we get into the results, I also want to thank Caroline Sullivan, who is here with me for her immense contributions and support over the last few months as Moody’s Interim-CFO and Caroline will remain as our Chief Accounting Officer and Corporate Controller.

So with that, moving on to our results. 2023 really was a defining year for us here at Moody’s. We delivered 8% revenue growth, we grew adjusted diluted EPS by 16% and we were an early mover in GenAI adoption and innovation launching our first ever GenAI enabled product in December. And I have to say that the energy and excitement across the organization really was palpable throughout the year as we launched new products, we entered into strategic partnerships with some of the world’s leading tech companies and we increased the gap in our Chartis RiskTech100 number one ranking. And as we grew, we also increased our margin by over 100 basis points for the year, all while investing across the firm in technology, in products and in people. And amidst what was a pretty challenging operating environment for our financial services customers, MA delivered ARR growth of 10% with retention rates in the mid-90s.

And looking at the three reporting lines of business in MA, that’s decision solutions, data and information, and research and insights, we delivered ARR growth of 11%, 10% and 7% respectively. And as we have upped the pace of product development to meet the strong market demand, for tools to better manage risk and to digitize and transform workflows for 2024, we expect MA revenue to grow at approximately 10% with ARR growth in the low double digit percent range. MIS meanwhile delivered 19% growth in the quarter and 6% for the full year. Corporate finance, financial institutions and public project and infrastructure finance, they all achieved double digit revenue growth compared to 2022 on gradually improving market conditions. And I think I used the phrase fragile when describing the markets back on our third quarter earnings call.

And this turned out to be true for the Q4 where despite a very active November, December issuance was more muted than we had expected. And we’ve seen a very constructive start to the year, and consequently our revenue expectations for 2024 are in the high single to low double-digit percent range for MIS and I’ll touch on this a bit more on the call, as well as I’m sure some asset specific issuance guidance. So looking out over 2024 and beyond, we’re really excited about the great momentum in the business and the tremendous growth potential that we’ve got in front of us. And to capitalize on these opportunities, we’re accelerating and increasing the level of organic investment this year in three critical areas, that’s GenAI, new product development and platforming and technology.

And this is a delivered investment program to fully capture the power of AI across our business, to expand the reach and connectedness of MA Solutions and accelerate the technology enablement of the ratings agency, all to deliver on our ambitious medium-term targets. Now our capital allocation priorities remain unchanged. First, invest in our business whenever we see great opportunities and we are in fact doing that. And second, return capital to stockholders. And this year, we expect to nearly double the amount of capital we return to our stockholders through dividends and share repurchases. And that brings me to our EPS guidance. We’re anticipating adjusted diluted EPS to be in the range of $10.25 to $11 for 2024. This incorporates a little bit wider range at the beginning of the year to capture some of the uncertainty around issuance and we would expect this to narrow during the course of the year.

And of note, as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16.9% and for 2024, we’re expecting the rate to be in the range of 22% to 24%. And if you look through the 2023 benefit at the midpoint of our 2024 range, our 2024 adjusted EPS represents 24% growth rate since 2022 and that’s in line with the low double digit percentage growth that we’ve targeted over the medium term. Now looking at 2023, I want to take a moment to touch on a few data points that highlight what a powerful franchise we have, and also put our 2023 accomplishments into some perspective amidst, as I said, what was a very challenging operating environment for many of our customers last year.

And despite relatively modest MIS rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company. And today, we have a base of recurring revenue of over $4 billion while our more transactional oriented revenue model across a $74 trillion universe of rated debt gives us upside as debt velocity improves. And together, this underpins our confidence in accelerating our revenue growth to the high single to low double digit percent range in 2024. And over the years, we have really built a customer base that’s almost like no other company with 97% of the Fortune 100 and 87% of the Forbes 1000 being a Moody’s customer today. And the world’s leading companies turn to us, they trust our market leading solutions and that gives us a tremendous base to sell into.

This shows up in the many external accolades and awards that we’ve received. We had over 150 last year alone. And I want to give a special shout out to our MIS team as we were awarded best credit rating agency for the 12th year in a row by Institutional Investor, that is great stuff. And I think we all understand our market leading position in ratings, but we’ve also built a market leading position with our MA business. And for the second year in a row, we were ranked number one in the Chartis RiskTech100 and that was supported by category wins in strategy, banking and insurance, and a number of solutions categories ranging from climate risk to credit risk, to financial crime data and a number more. And understanding the critical importance of attracting and retaining the best talent in this environment, we continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world’s great challenges.

So to sustain our growth, you frequently hear about the investments that we make in our solutions to help our customers make better, more informed decisions about risk and we achieved a number of important milestones in 2023, too many to get into on this call, but I am going to focus on just a few of the highlights. In ratings, we continue to expand the markets we serve through Moody’s Local. We also developed dedicated teams in digital finance and private credit so that we’re at the forefront of opportunities in the global debt markets. In private credit specifically, we’re coordinating across our ratings franchise so that we have the engagement, the methodologies and the analytical and commercial resources to be the agency of choice for players in this market, ranging from BDCs to alternative asset managers, insurance companies and debt funds.

To further address the private credit opportunity, we added more than 12,000 unrated entities to our CreditView research service in November that triples the breadth of our coverage and provides a new runway for growth for our research business. Another growth opportunity in our Research and Insights business that many of you have heard about is our Research Assistant product, that’s our first GenAI enabled product that we launched commercially on December 1st. And it’s the first of a number of Gen AI enabled tools that we’re developing and we’re excited about the initial customer feedback and early traction with this product, and I’m sure we’re going to touch on this a bit more in the Q&A. We also continue to enhance and expand our massive company database in important ways to create valuable early warning signals for our customers and address the increasing demand for third party risk management.

And there were really three elements to that in 2023 that I’ll call out. First was integrating our predictive analytic tools and credit scores on over 450 million companies into Orbis. The second was expanding our coverage of over a million AI curated and scored new stories a day that are available in companies in Orbis. And third, leveraging our investment in BitSight over the course of 2023, we integrated over 6 million cyberscores into Orbis, and that number continues to grow. Across decision solutions, we developed new solutions and integrated more datasets to expand the utility of our offerings. And in KYC, our new entity verification tool combines real time registry content with our Orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk.

With the launch of our most recent Sanctions360 tool, we are the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches. In banking, we integrated climate analytics into a broad range of workflow solutions from loan origination to portfolio management to stress testing. And in insurance, in just a year, we more than doubled the number of customers using our cloud based intelligent risk platform, that’s a versatile cloud-based risk analytics platform that enables customers to analyze hundreds of millions of commercial and residential locations. It’s not just being used by insurers, we are attracting a diverse set of customers who have a tangible and growing need for our more sophisticated climate data and analytics.

I have to say I’m proud to report that at the end of January, we signed one of the world’s largest banks as a new customer of our climate and catastrophe modeling solutions to support the in-depth climate analysis for required regulatory disclosures and stress testing. And underpinning all of this is our ongoing foundational investments in the business, and these investments will enhance our ability to integrate our data state across all of our customer use cases more efficiently and more effectively. So I hope as you get a sense, there are a lot of exciting things that are happening here at Moody’s. And as I take a step back to consider the many opportunities for growth ahead, I really am energized by all that’s in front of us. And there are three things that we are doing to really drive future growth, that is land new customers, expand customer relationships and then innovate continuously to deliver more value.

And I just touched on the breadth and quality of our existing customer relationships. We’ve got a fantastic customer base, especially in financial services where we’ve been developing relationships for literally decades, landing new customers, expanding relationships and innovating with a proven track record of growth. And in recent years, we’ve been successful in growing these relationships further and diversifying into new areas like KYC and supplier risk management. In fact, our net expansion rate in the financial services sector stands at a healthy 109%, and I think that’s a pretty clear indication of our ability to deepen relationships and deliver value. And now leveraging GenAI and our broader content sets and capabilities, expanding and deepening these relationships will continue to be a significant opportunity for us.

Now building on these successes, we’ve got a great opportunity to expand in new customer segments, supporting new use cases. While financial institutions account for about 70% of ARR and MA, there’s been very good demand coming from newer relationships beyond the financial services segment, 14% new sales compound annual growth rate over the last two years in these sectors and that’s the corporate and public sector. And over that period, we’ve established significant relationships with major companies in the United States and Europe. We’re leveraging our expertise for customer and supplier risk assessment. Our ratings business also has some opportunities to serve existing and new customers, and I think of those as kind of the markets of tomorrow.

We’ve expanded our footprint in domestic and emerging debt markets where the growth is faster than it is in more developed debt markets. And interesting data point, the Moody’s Local initiative in Latin America, which you’ve heard me talk about, it’s a great example of doing that where organic revenue grew 22% in 2023. So these land and expand opportunities are supported by major secular trends that are driving demand for our offerings, and I would cite a few of those. We’re poised to capitalize on the content, unlock opportunities from GenAI enablement and innovation; the widespread digitization and transformation programs across banks and insurers, the growing demand for third party risk management solutions and the ongoing growth of the private credit sector.

And with our wide range and capabilities that we’ve put together to deliver this holistic view of risk, I think we are uniquely well positioned at the intersection of these trends. So I can assure you that we reflected a lot on these opportunities as we entered our annual operating plan cycle this fall. And not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives. On the efficiency side, we expect to generate savings from resource redeployment, alternative staffing models, automation and GenAI enablement and geolocation strategies, and we’re prioritizing investment spending on areas that are enabling us to deliver at our current growth rates, including SaaS based product development, sales deployment, operational resiliency and ratings workflows.

And these initiatives are really funded within our what we think of as our regular pace of operating margin expansion. But as we exited the initial sprint around GenAI innovation last year, we reflected on the opportunities ahead of us. We considered the deep customer relationships that I’ve just touched on, our unique data assets that you hear us talk about, the market trends that I just mentioned, together with our growth strategy. And we proactively upped the organic investments that we started in the summer of last year. And we are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas. First, and I’m sure this isn’t particularly surprising is GenAI. We’re increasing product related investments across MA that will continue to build on our early mover momentum from 2023 and investments across the company and initiatives to accelerate employee adoption and improve productivity.

On the product side, we have a few really interesting things that are moving ahead fairly quickly. So CreditLens, which is our flagship banking origination solution will be the next to launch a GenAI enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities that is stored natively in our software. And we’re going to be saving loan officers and credit professionals countless hours compiling information and generating the first draft of the documents that are produced with virtually every commercial loan. We’ve got our first beta customer already and we are currently in preview with a number of other customers. I’m also very encouraged by our new GenAI enabled commercial real estate early warning system that we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors.

And I actually just sat through a demo of this in the last week or two. And the early warning system integrates a wide range of our data sets. It enables the evaluation of news events in real time, running scenarios and calculations that link together market forecasts, listings and property data, tenant data and valuation and credit models. And again, the early feedback has been very positive and we’re already looking to extend these capabilities beyond just commercial real estate. Now from an internal perspective, we’ve rolled out GitHub Copilot and some other GenAI tools to more than 1,500 engineering professionals across the company. And as a result of our experience last year, we’ve specifically planned for efficiency gains in our engineering budgets in 2024.

We’re also rolling out our next generation of AI enabled tools for our sales teams across the company over the next several months. So that’s the first area. The second area is product development. And as part of our land and expand strategy in MA, we are building on the success and momentum of our KYC business, which has grown to over $300 million of ARR in just a few years. And I think those of you who’ve been on this call for a while, you’ve heard me mention before that Know Your Customer is probably too limiting of a term for this business as it continues to expand. So this year, we’re increasing investments to develop solutions focused on the growing market demand really for solutions to serve their customer and supplier risk needs. And we’re especially encouraged by recent wins with a number of large government and Fortune 100 customers.

So this year, we’re going to make investments in product, technology and data and go-to-market capabilities to be able to scale in these customer segments. The ratings ecosystem also continues to evolve. In early January, we were just provided with the very first — we just had the very first rating on a tokenized bond fund. And while digital finance is still nascent, we’re going to be ready to help our customers delivering our ratings on the platforms wherever they are going to issue. So that’s second. And then third is around technology platforming. So we’re building on the platforming work that we highlighted in our Innovation Open House event back in September. And as we explained then, this work is critical to strengthening the interoperability of all of our data estate and improving the synergies across our solutions.

By investing in our platforming and engineering capabilities, we’re going to accelerate our time to market, enhance the customer experience, better enable cross sell and upsell and deliver engineering efficiencies. The faster this work gets done, the sooner we will realize the revenue and efficiency benefits, so we have decided to hit the accelerator. The same is true in ratings, where more tech enabled workflow is really key to the quality, speed, efficiency and compliance. And we’ve been on a journey to modernize, digitize and automate our systems. We’ve made some good headway but there is still more work to be done. Now optimizing our data estate and moving more of our workflow into cloud-based applications really has never been more important given the promise of AI and the digitization of financial markets.

So here too, we decided to accelerate our efforts and this will be critical in achieving our medium-term margin targets. So now let me turn to our issuance outlook very briefly. We’re expecting more constructive market conditions in 2024. And I’m sure, as you have all seen, it was a very busy start to the year, over $150 billion in investment grade issuance in January alone. Underpinning our MIS revenue growth outlook of high single to low double digits is an increase in MIS rated issuance in the mid to high single digit percent range. For corporates, we expect that leverage finance will grow faster than investment grade issuance, which should be favorable to revenue mix. And our outlook is built on the macroeconomic assumptions that are detailed on Page 20 of our webcast deck and notably incorporating a soft landing here in the US and rate cuts starting in the second quarter of this year.

And I imagine we’ll dive deeper into both our issuance and macroeconomic assumptions in the Q&A session. Now before moving off of MIS, I do want to highlight that early last year, we committed to reviewing our medium-term guidance for MIS revenue growth once we saw a sustainable improvement in the debt markets. And I’m happy to share that following 6% revenue growth in 2023 and the expectation of at least high single digit growth in 2024, we have updated our medium term revenue growth target for MIS to be in the mid to high single digit percent growth range. Now moving back to our 2024 annual guidance. Moody’s revenue is expected to grow in the high single to low double digit percent range. The Moody’s adjusted operating margin is projected to be in the range of 44% to 46%, that’s about 100 basis points of margin improvement at the midpoint.

And the Moody’s revenue and adjusted operating margin guidance ranges incorporate the variability of that MIS transaction based revenue and then balanced against the subscription base in MA where nearly 95% of our revenues are recurring. In regards to M&A, we’re guiding to a tighter range of approximately 10% revenue growth and low double digit growth in ARR. Now MA’s adjusted operating margin is expected to be in the range of 30% to 31% this year, that’s absorbing the impact of the incremental organic investments that I just talked about. In the medium term, we expect MA’s adjusted operating margin to be in the mid 30s percent range. And as I have discussed with a number of you, the path to that target is not exactly linear. For 2024, MIS’ adjusted operating margin is expected to be in the range of 55.5% to 57.5%, that is a 200 basis point improvement versus 2023 at the midpoint and that is solidly on towards the medium-term target of low 60s percent.

Our expenses overall are expected to grow in the mid to high single digit percent range. A couple of factors worth noting, first, we closed out our 2022, ‘23 geolocation restructuring program at the end of 2023. Caroline can talk more about that. Second, we’re expecting depreciation and amortization expenses of approximately $450 million in 2024, that’s an increase of approximately 20% as compared to 2023. And that growth is largely related to the cumulative effect of our shift towards developing exclusively SaaS based solutions starting back in 2021, and coupled with the increased capital expenditures associated with the three primary areas of incremental organic investment that I just talked about. And we’re expecting free cash flow of between $1.9 billion and $2.1 billion and adjusted EPS to be in the range, as I said earlier, of $10.25 to $11, again, a 24% increase at the midpoint versus 2022 looking through those tax benefits that I touched on.

So I’ll wrap up by just saying it was a really great year for us here in 2023. I’m expecting an even more exciting one ahead. I’m energized by our strategy. We’ve got fantastic engagement across the company. And we believe that now is the time to invest in the opportunity that’s in front of us to fully embrace the power of AI across our business, to accelerate the build out of our technology platform and to bring together our content to build new solutions with unique value propositions that will accelerate growth. So with that, I welcome Caroline, Steve and Mike to join me for Q&A. And operator, please open the call up to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of George Tong with Goldman Sachs.

George Tong: I wanted to ask about your planned incremental strategic investments in GenAI products and platforming. Can you talk a little bit more about the timing of these investments as well as benefits you’re expecting and the margin impact for 2024?

Rob Fauber: Yes, I might start by — maybe I’ll just give you a little more insight into kind of what’s in those three main components, and then we’ll talk about some of the timing and margin impact. As it relates to GenAI, we’ve got a generative intelligence team, we’ve stood up an MCO infrastructure, we’ve got some incremental engineering costs, we’ve got additional licenses. I mentioned, GitHub Copilot. We will get the benefit of that, but we had costs upfront. And of course, we have incremental cloud costs and token costs relating to large language models. On the product development side, really, it’s about the build-out of our customer and supplier risk offerings for the corporate and public sector and that’s data, workflow and go-to-market.

And then on technology and platforming, as we talk about building out that MA platform, it’s things like engineering around single sign-on and entitlement. So as I said, we can get those benefits faster. Let me turn that over to Caroline and see if you want to just help George around the timing of all of that.

Caroline Sullivan: So we anticipate, if you look at both MIS and MA, to deliver — MIS has delivered an operating margin in 2023 of 54.5%, roughly in line with our target of 55%. And in 2024, we’re expecting adjusted operating margin to increase by about 200 basis points. MA’s margin is going to remain consistent with what we saw based on 2023. Without that $60 million that we talked about in Rob’s comments related to the investments, MA margins would have been on track to increase and expand by 120 basis points.

Operator: Your next question comes from the line of Toni Kaplan with Morgan Stanley.

Toni Kaplan: Rob, I wanted to take a step back for a second, and not asking about ’24 at all, just in general. Where do you think a normalized level of issuance is? How much upside is there from here to get back to a more normal growth environment, and maybe particularly with rates at maybe at a higher level than they have been in the last couple of years?

Rob Fauber: So maybe a couple of ways to kind of triangulate around this. I think as far back as 2022, you remember, we had that significant decline in issuance from the pandemic years. On the call, I talked about how total — when we look at total global issuance, it was modestly below what was a, I’ll call it kind of a 10 year average from, at the time it was, I think, 2012 to ’22, excluding the two pandemic years. And I think total issuance in 2022 was something like 5% below that average. So it’s not a big number. And remember, that was in the context of like a 30% decline in issuance that year. But we drilled down, and I think we made the point that corporate issuance was something like 15% below that long term average excluding the pandemic.

And if you actually drilled even further and got into leverage finance, it’s even farther. And as you know, corporate issuance, and in particular leveraged finance issuance, is quite favorable to our revenue mix. So it’s interesting, Toni. Now as you as you kind of go forward and when you look at where 2023 ended relative to that average, it’s roughly in line. Corporate issuance was closer to in line, I’d say, modestly below that long term. And with 2024, actually issuance will be slightly above that long term average, and that holds true for corporate issuance, where obviously, we have a little bit stronger growth expectations. So from that aspect, I think you might say, well, we’re getting back to something that feels more like a normalized level of issuance.

The caveat to that, I guess, this idea of debt velocity. So over that period of time, there’s been an enormous amount of debt issued, right? So the stock of debt has grown significantly. And when we look at annual issuance as a percent of the total stock outstanding, that’s what we think of debt velocity. That number still looks a good bit lower than the averages over, call it, the last decade, which would imply that there’s still room for issuance growth. And the last thing I’d say is if you look at where structured finance is at the moment, that’s significantly below kind of that 10 year average for reasons that we may get into later in the call. Hopefully, that gives you some insight.

Operator: Your next question comes from the line of Manav Patnaik with Barclays.

Manav Patnaik: Maybe I could just ask about 2024 in terms of the cadence of issuance you’ve assumed either the first half or the back half, and then maybe just some color on how we should think about your nontransaction piece of the MIS business, how that should grow, I guess, this year?

Rob Fauber: Manav, I think I might ask Mike to give us some color around how think about first half, second half, and then I might be able to put kind of a finer point on that.

Mike West: So first of all, I think we’re expecting here issuance in the first half to be stronger than in the second half, and that’s a common pattern if you actually look over previous years. Some of that is due to the constructive conditions that we’re seeing at the moment with spreads tightening and sentiment improving. And these issuers are trying to lock in the rates that they want before any potential volatility. Some of it is actually seasonality that we see each year given that we do expect a slowdown in the second half through summer, and sometimes it tails off when we get into December. The other important factor when you think about issuance is that some of those more frequent issuers in investment grade in corporate and the banks tend to come earlier in the market to secure their funding and manage their balance sheets.

Infrequent issuers, on the other hand, can be opportunistic and will wait for those opportunities and windows that they see fit. Consistent with the comments I’ve just made is what we’ve discussed with the market. And just picking up on Rob’s comment, structured finance actually tends to be more balanced between the first half and the second half. So while we do expect first half to be busier, we do expect the activity will continue into the second market. So Rob, I don’t know if you want to just put a finer point on that one.

Rob Fauber: And I know people want to have a good sense in forming their models. So last year, as Mike said, issuance was more front end loaded. We had a rising rate environment, something like, I don’t know, call it, 56% of 2023 annual issuance was in the first half of the year. And while we do expect a rate decline in the second half year, as Mike said, we still think that issuance will be front end loaded. And our current assumption for issuance is pretty similar to the pattern that we saw in 2023. Now then we got to translate it to MIS revenue, and the impact there is a little bit less pronounced in terms of first half, second half. And I would say that we’re expecting just a little over half, maybe low 50s percent of MIS revenue in the first half.

And that’s a little lower than the issuance mix. Why? Because banks are the ones that tend to issue and do more front end loading of their issuance, and there are different economics for frequent bank issuers. So hopefully, that gives you a sense. One of the things, Manav, I might say, just specifically for the first quarter, I’d say we expect probably close to 30% of annual issuance and probably closer to somewhere between 25% to 30% of MIS annual revenue.

Operator: Your next question will come from the line of Faiza Alwy with Deutsche Bank.

Faiza Alwy: So I wanted to ask about MIS margins. I think, Rob, you alluded to some investments, but maybe put a finer point around that, because I would have thought you would have better sort of margin flow through given the revenues that you’re expecting. So is it all investments, is there some mix, and just give us a bit more color around those investments?

Caroline Sullivan: So just to follow on to what Mike and Rob just said about the phasing of our revenues, because of that, we are forecasting higher margins in the first half of the year versus the second half of the year. So that’s what we will see for MIS. But overall, we’re expecting adjusted operating margins to increase by 200 basis points.

Operator: Your next question will come from the line of Ashish Sabadra with RBC Capital Markets.

Ashish Sabadra: I just wanted to better understand how we should think about the ROI for the strategic investments. Obviously, the investments that you made in the prior year has accelerated the MA revenue growth. I was wondering, how should we think about the growth accretion from these investments? And maybe just a follow-up on that one is how should we think about the GenAI monetization in ’24 but also midterm?

Rob Fauber: Maybe I’ll start with that and then hand it to Steve. I’d say just in general, as you think about the return on these investments, I would say that we’re investing in the highest growth parts of our business. So GenAI products, that’s going to augment growth across our SaaS and hosted solutions. And Steve will touch on that in just a second. We’re investing, as I talked about, in enhanced solutions for corporates and the public sector around customer and supplier risk. And I had a data point that we’ve had 14% CAGR in terms of sales growth over the last two years from those sectors. And we think we can even enhance that growth at scale as we invest in products specifically for those customer segments. And then lastly, platforming.

We expect revenue growth from our SaaS and hosted solutions to grow something like low teens this year, that’s in line with our medium-term targets. And the growth has been even higher in decision solutions, it’s been more like high teens from SaaS and hosted solutions we’re looking for this year. So yes, I think there’s a pretty strong case for investment in these high growth parts of our business. But Steve?

Steve Talinko: Maybe just a couple other comments. We’re doing what we do well, developing good, solid product development pipelines; creating new product life cycles to generate revenue growth and support customer value propositions; continuing to invest in the sales force. And then what we’ve said today is making even more an incremental investment in GenAI and especially in areas where we think we can land new blue chip customers, maybe outside of financial services. We have such a tremendous franchise with the financial services sector, we see great opportunities and have demonstrated great growth trends with some new customers in corporations that may be are nonfinancial in their orientation or public sector entities. I think you’ll see lots of new products coming online this year, in the GenAI space in particular.

Rob mentioned a couple that are coming down the pike in the next quarter or so, maybe second or third quarter. We are actively engaged throughout the product development and engineering teams to build more value propositions and leverage GenAI to support our customers and help them not just do their business faster and save some money, but be more effective and be more productive when they’re doing it, actually make better decisions, develop better analyses. And the Research Assistant, which we’ve launched already, I would expect you’d start to see some contributions in the research and insights line toward the end of this year, because as the sales start to ramp up, our growth numbers will start to move as well. So we expect to see actual contributions in the numbers before we turn the page on 2024.

Operator: Your next question comes from the line of Alex Kramm with UBS.

Alex Kramm: This is actually a direct follow-up to the prior question. Because Rob, I think a couple of quarters ago, I asked you about this GenAI being potentially part of your guidance already for this year in terms of revenue contribution. So it would be helpful to give a little bit more specificity in terms of both revenue and ARR. What are you actually budgeting in terms of contributions here for the year since you obviously raised some pretty high expectations? And maybe just related to that, I mean, you mentioned some early feedback. So just obviously very interested in your ability or signs of your ability to actually upsell people, and people not just coming back to you and saying, like, look, you’re asking for more money all the time. Of course, you should enhance all products, but we’re not going to be willing to pay up as much as you think you can. So a little fleshing out there would be helpful.

Rob Fauber: So I think we’ve learned a good bit over the last few months as we’ve been engaging with customers, as we’ve been signing customers, as we’ve been building the pipeline, and all of that is informing how we’re thinking about our guidance. I think, Steve, why don’t I hand it to you just to give some insight into what we’ve learned and how we think about that then flowing through the MA business.

Steve Talinko: So just a quick short answer to your question, Alex, is the research and insights line is where you’ll see the biggest contribution coming from GenAI related products, because that’s where we’ve got a product in market already. Sales cycle takes some time to develop. We are seeing some pretty interesting patterns, to Rob’s point. It’s interesting. Maybe investment managers and hedge funds that are smaller teams, a little bit more agile and able to make a decision right now are the ones that are buying this product literally right away. So our first sales that are coming in are coming in from these players where the boss is sitting at the table with the people who are the users, the boss maybe a user. And they’re saying, wow, this is really going to make a difference.