MOODYS CORP /DE/ Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Acknowledged the tragic loss of Chris Collins and Melissa McCandry.
• 2024 was a record year with revenue growing 20% to over $7 billion, adjusted operating margin expanding by over 400 basis points, and adjusted diluted EPS growing 26%.
• MIS had 18% total revenue growth in 2024, with 29% transactional revenue growth in Q4, 33% ratings revenue growth, and over 500 basis points of adjusted operating margin expansion for the full year.
• MA had 10% recurring revenue growth in Q4 2024 and 9% ARR growth, with Decision Solutions leading at 12% growth.
• Strategic investments included platforming, modernizing, new products, Gen AI, data estate enhancements, and risk and resilience.
• Acquisitions: Numerated, CreditCat, and Tape Analytics to enhance offerings in banking, insurance, and risk modeling.
• Expansion in ratings: Acquisition of GCR (leading domestic credit rating agency in Africa) and expansion of Moody's Local into 6 countries in Central America, with Moody's Local revenues up 16% in 2024.
• MA investments: Enhancements to product cloud, data coverage, workflow solutions, and acquisitions to strengthen banking and insurance businesses.

Segment Performance

• Moody's Investor Service (MIS): In Q4 2024, MIS revenue was $809 million, up 18% year-on-year. For the full year 2024, MIS had 18% total revenue growth, powered by 29% transactional revenue growth in Q4. Ratings revenue grew 33% for the full year, and adjusted operating margin expanded by over 500 basis points.
• Moody's Analytics (MA): Q4 2024 revenue was $863 million, up 8% year-on-year. Recurring revenue, which accounts for 95% of total revenue, grew 10% year-on-year, broadly in line with 9.4% ARR growth. Decision Solutions drove performance with 12% year-on-year growth, with Banking, Insurance, and KYC achieving ARR growth of 9%, 12%, and 17% respectively.

Guidance

• 2025 guidance: MCO revenue expected to grow in the high single-digit range, with adjusted operating margin expanding to approximately 50%. Adjusted diluted EPS guidance range is $14 to $14.50.
• MIS: Expect market conditions constructive, rated issuance growth in the low single-digit range, revenue growth in the mid to high single-digit percent range, and adjusted operating margin 62% to 63%.
• MA: Revenue growth expected in the high single-digit range, ARR growth in the high single-digit to low double-digit range, and adjusted operating margin between 32% and 33%.
• Efficiency program: $200 to $250 million in restructuring charges over two years, with annualized cost savings of $250 million to $300 million upon completion.
• Medium-term targets updated: Adjusted diluted EPS growth range revised from low double-digit to low to mid-teens percent growth range.

Risks

• No specific risks explicitly detailed in the provided transcript, but typical risks include regulatory changes, market volatility, and competitive pressures.

Question and Answer

• Q: Monifin Nayak with Barclays asked about the medium-term guide and organic numbers, specifically regarding M&A.

A: Noémie Heuland responded that they are tracking ahead on MCO revenue and adjusted diluted EPS metrics, with MA delivering strong organic growth, and recent M&A at a smaller scale focused on enriching offerings for strategic growth areas.

• Q: Ashish Sabadra with RBC Capital Markets asked about MIS margin expansion and earnings growth in the midterm.

A: Noémie Heuland mentioned rebaselining incentive compensation at the start of the year providing a tailwind, and continuing investments in ratings workflows, risk and resiliency, and strategic growth areas like private credit and sustainable finance.

• Q: Toni Kaplan with Morgan Stanley asked about MA margins, the efficiency plan, and AI investment.

A: Noémie Heuland and Steve Talinko responded that they are redeploying capital internally, shifting go-to-market to end-to-end solutions, and investing in Gen AI for internal efficiencies, seeing productivity gains in engineering and sales.

• Q: Alex Kramm with UBS asked about rating site outlook, upside from M&A, and biggest risks.

A: Rob Fauber responded that economic growth, spread conditions, investor demand, refi, and M&A activity are key assumptions, with issuance assumptions including a range of refi volumes and M&A activity, and risks including various market and economic factors.

• Q: Scott Wurtzel with Wolfe Research asked about MA demand environment and sales cycles.

A: Rob Fauber responded that sales cycles have not changed materially, new business production was strong in 2024, retention was strong, and pipeline to 2025 is very strong.

• Q: Owen Lau with Oppenheimer asked about revenue growth gap between ARR and revenue, and AI/MSCI partnership impact.

A: Noémie Heuland clarified ARR is organic constant currency, and Rob Fauber mentioned Research Assistant's contribution to sales and pipeline, with it being an important contributor to growth despite being modest in overall revenues.

• Q: Jeffrey Silber with BMO Capital Markets asked about federal government exposure and policy impact.

A: Noémie Heuland and Rob Fauber responded that federal government exposure is less than 1% of consolidated revenue, and policy changes may impact certain sectors, but a stronger economic environment could be good for issuance in general.

• Q: David Motemaden with Evercore ISI asked about higher medium-term MIS revenue outlook and private credit impact.

A: Rob Fauber and Mike West responded that the outlook is anchored on past performance and demand drivers like private credit, sustainable finance, digitalization, and long-term financing needs.

• Q: George Tong with Goldman Sachs asked about MA growth by subsegments.

A: Steve Talinko responded that core franchises like data information and research insights have solid growth, while Decision Solutions has higher growth due to innovation and solving customer problems.

• Q: Peter Christiansen with Citigroup asked about value-based pricing in MA and MIS staffing.

A: Steve Talinko and Noémie Heuland responded that value-based pricing contributions are stable, and MIS is investing in automation and rating workflows to make analysts more efficient, with less staffing growth than revenue growth.

• Q: Craig Huber with Huber Research asked about private credit ratings contribution and incentive comp.

A: Rob Fauber and Mike West responded that private credit is a tailwind with growing mandates, and Noémie Heuland mentioned 2024 incentive comp total was $507 million, with 2025 projection around $420-$440 million.

• Q: Jeff Meuler with Baird asked about medium-term growth guidance implications for 2026-2027.

A: Rob Fauber responded that the outlook is anchored on past performance and demand drivers, with no dampening of growth assumptions for the ratings business.

• Q: Andrew Steinerman with JPMorgan asked about M&A contribution to MA and MIS guidance.

A: Noémie Heuland responded that M&A contribution to 2025 guidance is small, with net-net not material.

• Q: Russell Quelch with Redburn Atlantic asked about KYC growth reacceleration and MSCI partnership.

A: Steve Talinko and Rob Fauber responded that KYC growth is driven by investments in data, models, and software, and there are ongoing conversations with MSCI about expanding partnerships beyond ESG into private credit.

• Q: Shlomo Rosenbaum with Stifel asked about Gen AI adoption in MA products.

A: Rob Fauber and Steve Talinko responded that Gen AI is enabled across multiple products, with encouraging data on customer satisfaction and usage, and early days for some a la carte products but promising pipeline.

• Q: Jason Haas with Wells Fargo asked about MIS transaction revenue delta vs issuance.

A: Rob Fauber responded that the delta was due to high repricing activity in bank loans, which have different economics for transaction revenue.