Shlomo Rosenbaum: I wanted to ask a little bit — we talked a lot about GenAI, but I wanted to ask about general sales cycles. Like what are you seeing, are things — cycles getting shorter, staying the same, getting longer? What do you see more on a sequential basis? And then I just want to touch back on the last question about incentive compensation, and ask if there’s any change in the mix of the incentive compensation between the two units, just getting back to kind of the margin expansion in MIS?
Rob Fauber: So on the sales cycle — in the spring last year, we got a lot of questions around are you seeing elongated sales cycles. And I think we gave a pretty good sense for what we were seeing. Sales cycles were lengthening maybe just a little bit, nothing material measured in a number of days perhaps, but we were also seeing higher price points in the proposal and richer value propositions composed in that proposal. So it was consistent with what we’d expect. I’d say that trend has actually extended through 2023. So we’re running right around the same numbers we were in the spring. I looked at this closely the other day. So sales cycles are maybe slightly longer than they were maybe a few years ago, but only because we’re seeing bigger price points and richer value proposition. So pretty happy about that. Let’s see here, sales cycles, yes, that’s probably a good way to finish that one, yes.
Caroline Sullivan: And then on the question on incentive comp, we’re not seeing anything materially different between the segments compared to ’24 versus ’23.
Operator: Your next question comes from the line of Seth Weber with Wells Fargo.
Seth Weber: I guess I just wanted to follow up on the MIS margin question again. I’m trying to just just balance some of the investments that you’re making versus some of the investment spend that you’re doing versus longer term technology benefits, cost saves there. Can you just remind us or update us on how we should be thinking about incremental margins for the MIS business going forward, if there’s been any change to just the incremental margin framework for that business?
Rob Fauber: And maybe I’ll also go back to fourth quarter MIS, because I think we’ve been getting some questions about that. And I think fourth quarter to me really illustrated the tremendous operating leverage that’s in the business. If you look at — to give you a sense of what we were seeing in the fourth quarter for MIS, and then I’ll take it forward into 2024 and beyond. Revenues came in lighter than we had expected, expenses came in almost exactly online in terms of what we had budgeted. I think it was something like 1.5% expense growth over the prior year quarter. So essentially, the entire revenue miss dropped right down to adjusted operating income. And again, that’s what we love about this business. And think about what was going on, this was in the last few weeks of the year, there’s virtually nothing we can do in regards to the expense base at that point.
The majority of our expense base in MIS is people. Also, we have obviously a constructive view on 2024 issuance. And you’ve heard us talk about in the past that we try to think about are things cyclical or structural, and we saw that as a brief air pocket in issuance. And so that then did — again, that dropped right to adjusted operating income. It was not an expense issue. And then you see 200 basis points of margin expansion from that jumping off point at the end of the year. And I would say this and, Mike, feel free to add. So we’ve got our low 60s percent margin target. We still feel very comfortable about that. We believe that this 200 basis points is solidly on track for that. But we are investing back in that business. I talked a little bit about in my prepared remarks, in particular, we’ve been investing in resources in some of these areas like domestic debt markets, like digital finance and private credit, make sure we’ve got the resources.
And then we’ve also been investing in the technology. It’s so important for us to get the technology enablement of the analytical teams for a variety of reasons that I touched on the call. Mike, anything to add to that?
Mike West: Not really. But just on the technology element, it’s about driving efficiencies in the future by investing today and having a very well controlled business. So that’s the only point to add.
Rob Fauber: The bottom line is, as we get more technology enablement, we have surges in issuance, we’ll be better able to handle that without having to to add people.
Operator: Your next question comes from the line of Jeff Meuler with Baird.
Steven Pawlak: It’s Steven Pawlak on for Jeff. I guess going off that last point, you talked about the GenAI tools that you’re deploying internally. Can you describe some of the ones that have gone live, what efficiencies are being harnessed, where do you think you can get the most benefit towards the medium-term targets from those GenAI tools? And then is there like an enterprise wide committee handling decision to build or deploy or are some of these things being handled within individual departments?
Rob Fauber: Steve, you want to start?
Steve Talinko: So we’re doing a lot of the innovation work and trying to accelerate the innovation work through a central team, a team that is really a pretty agile team. Sometimes it’s bigger — it gets bigger and smaller, depending on which project we’re working on. That team is in MA where we’re doing a lot of the experimentation and then developing value propositions that we can use externally and internally. I’ll just give you a simple example. Summarizing a PDF, which is something that you would expect you could do with GenAI tools, you might be able to do that with some tools that are offered through external folks, not just through Moody’s. But leveraging that so you can use it in an industrial strength way, make it a part of your compliance apparatus, make it a part of the way in which you build products, the way in which you do your job every day requires some engineering work as well.
So we’re summarizing maybe a 300 page document. We’re developing summaries across multiple documents at once. We’re incorporating a document that you’re reading today into our other GenAI tools in order to generate inference across not just what you might get from the OpenAI models we’re working with Microsoft on, but also through the content that you’re introducing to your analysis right now and you’re right here. So an experiment that could see being very helpful for the folks in MIS might be I am doing work on this particular industry, there’s three or four documents I might be interested in reviewing and maybe I can incorporate them into understanding, reading them more quickly, taking in gathering data from that much more quickly. So the central team is there to create critical mass in terms of engineering and roll out tools in a compliant way in a way that’s been tested from an industrial strength perspective and is consistent with all of the normal processes that we would want to adopt as a rating agency where it’s appropriate.
Mike West: Just maybe a couple of points for MIS. I mean we’re pretty excited about the potential of GenAI in the ratings business and internally with obviously leveraging the Moody’s Copilot. But we also do envisage that using GenAI across the workflow and doing that to actually enhance our appliance as well as improving the overall efficiency in the business and seeing that GenAI that Steve just referenced as an enabler to human judgment in the ratings process. So again, exciting opportunities for MIS to navigate with this technology.
Rob Fauber: And the only thing I would add, and I’ve said this when this comes up, is that we’re going to be deliberate and transparent in the rating agency in terms of how we leverage generative AI. We’re in dialog with our regulators to make sure that they understand how we’re going to do that.
Operator: Your next question comes from the line of Heather Balsky with Bank of America.
Heather Balsky: Just with regards to your midterm margins, you talked earlier about that you didn’t — that the path wasn’t necessarily going to be linear to get there. But can you help us bridge kind of as we think out over the next couple of years how it could look, especially given some of these areas that you’re investing in? And how comfortable are you kind of — if the opportunity presents itself, would you spend more now for top line growth or I guess, just the commitment to those margins given what you’re seeing in the environment?
Rob Fauber: So I think that’s what you’re seeing us do, right? And we’ve got to make — the investment has got to come before the sales and ultimately, the revenue growth comes. And I feel like we have some ambitious medium term targets that mean that we’re going to continue to accelerate revenue growth in the MA business. And so we’re making the investments that we talked about today to be able to support GenAI product development and platforming, which we think are going to support that acceleration for the reasons we talked about. We continue to feel comfortable with those medium term targets, particularly the — I mean you mentioned the margin. It’s just that in this case, the investment is coming before the ARR growth.
Operator: Your next question comes from the line of Andrew Steinerman with JPMorgan.
Unidentified Analyst: This is [indiscernible]. Could you just talk more about the 20% increase in D&A, is there any change of accounting assumptions or methods? And will D&A kind of stay in this general vicinity as a percentage of revenues?
Rob Fauber: Let me just — I’ll start with that and then I’ll turn it over to Caroline. I think, in general, what you’re seeing with D&A represents the — we’ve been talking about the investments that we’ve been making in our SaaS products, you’ve seen some increased capital expenditures over the last few years, that’s now starting to come through in the form of capitalized software. And I also talked about the higher growth rates that we are seeing with those SaaS products. And I think that’s — you want to be able to look at those two things together. Across all of MA, we’re expecting our hosted and SaaS solutions to be growing in kind of the, call it, low double digits to parts of the MA portfolio like decision solutions, we expect to be growing more like high teens. And that’s where that investment in software development is going. Caroline, do you want to talk a little bit about it from an accounting perspective?
Caroline Sullivan: So certain development costs linked to the SaaS based solutions are capitalized and then they’re depreciated over the useful life of those underlying assets. And that’s usually around four to five years and that’s all in accordance with US GAAP.
Unidentified Analyst: And should it stay in this vicinity, DA, as a percentage of revenues going forward?
Rob Fauber: I think if you look at it as a percent of revenues, I mean, obviously, we’re bumping up the CapEx here a little bit. But I think as we get the increase in revenue growth and corresponding increase in capitalization it should stay relatively in line from a percent — I think a percent of revenue basis.
Operator: [Operator Instructions] And your next question comes from the line of Craig Huber with Huber Research Partners.
Craig Huber: My follow-up here, for 2024, can you just talk a little bit further about your outlook specifically for investment grade, high yield, maybe bank loans and financial institutions in terms of the debt issuance outlook for this year that’s embedded in your overall company outlook? And then also, can you maybe just throw in there, what is your cost ramp assumption over each of the four quarters for the rest of the year?
Mike West: Craig, I’ll take the first part of your question before handing off. If I go by segment, the investment grade issuance growing at 5%, that comes off a 20% growth last year. Underpinning this, steady uptick with regard to upcoming maturities. M&A is supporting in certain key sectors but I would see that as a variable to the upside. As I mentioned earlier, the spreads at the moment are creating favorable conditions at the higher end of the rating scale and down into the Baa. So that’s really on investment grade. For corporates, high yield, again, back to this market uncertainty that’s subsiding, spreads have come in materially over the last 12 months. There’s been some delayed refinancing that’s now coming due. And these tend to be higher quality, spec-grade issuers that will get that opportunity to come into the market should those spreads remain favorable.
And again, still coming off a low base, as Rob highlighted earlier. Leverage loan driven primarily by refinancing, including the amend and extends. There is also a refinancing in the public market of certain deals that got done in the private market, which is nice to see. And again, these tend to be more sensitive at the lower end. So our spreads again coming at lower end that market access to those around the single Bs is there. So again, 20% for the leverage loan. FIG, on the other hand, as we mentioned, a heavy proportion of FIG is frequent issuers. We’ve kept that relatively flat. There are some different variables there. There’s some different central bank support facilities that will start to shrink in ’24, therefore, leading banks to come to the capital markets.
And that will also be a focus on their buffers and broader capital needs, but stable year-over-year. PPIF, mid single digit, largely made up of infrastructure financing and access by some of the larger US PFG issuers. When we think about the transition of monetary policy and the tightening that has occurred that we will probably see an increase in infrastructure projects that are really long dated as they want to lock into some lower rates going forward. And I touched on structured finance earlier at the mid single digit percentage. And you’ve got to look inside structured finance to look at the different asset classes, but really ABS leading in that particular area. So hopefully, that helps.
Operator: I’ll now turn the call back to Rob for any closing remarks.
Rob Fauber: Okay. One public service announcement for those of you in Europe. We’re looking forward to seeing you at our London event and our offices on February 29th. I know that Steve and Shivani and some of our other senior leaders from Moody’s Analytics will be there to provide a spotlight on our MA business like we did in New York in September of last year. So with that, I’m going to bring the call to a close. Thanks, everybody, for joining and we’ll talk to you next quarter. Bye.
Operator: This concludes Moody’s Corporation fourth quarter and full year 2023 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody’s IR homepage. Additionally, a replay will be made available after the call on the Moody’s IR Web site. Thank you.
