Moody's Corporation Q2 FY2025 earnings call

Key Points

• Second quarter revenue of $1.9 billion grew 4% year-over-year, with adjusted operating margin of 50.9% up 130 basis points from a year ago, and adjusted diluted EPS of $3.56 up 9%.
• Ratings franchise had $1 billion revenue this quarter, second consecutive quarter above $1 billion. Private credit markets drive demand, with private credit-related transactions accounting for nearly 25% of first-time mandates in Q2 and revenue related to private credit growing 75% in Q2.
• Moody's Analytics had 11% revenue growth and 12% recurring revenue growth, with ARR growing 8%, led by 10% increase in Decision Solutions. MA delivered adjusted operating margin of 32.1%, a 360 basis point improvement year-over-year.
• Made investments like acquisition of ICR Chile, partnership with MSCI, data integration with SAP's Business Data Cloud, etc. Deployed GenAI across portfolio, with approximately 40% of products measured by ARR having GenAI enablement, and total spend from GenAI adopters approaching $200 million growing at twice the rate of MA overall.

Moody's second quarter revenue was $1.9 billion, growing 4% year-over-year. Ratings franchise delivered $1 billion in revenue this quarter, just shy of a second quarter record and marking the second consecutive quarter above $1 billion. Moody's Analytics had 11% revenue growth and 12% growth in recurring revenue in the second quarter. MIS revenue was flat vs prior year or declined 1% when adjusted for positive FX movement effects, surpassing $1 billion for the second consecutive quarter. Recurring revenue in MIS increased by 7% year-on-year from pricing initiatives and portfolio growth. For Moody's Analytics, Research & Insights delivered 7% ARR growth, Data & Information ARR grew 6%, etc.

Guidance

• Narrowed guidance ranges for rated issuance, MIS revenue and EPS. Now expect full year MIS revenue growth in the low to mid-single-digit percent range, with midpoint having more upside than downside. MIS adjusted operating margin guidance remains at 61% to 62%.
• For Moody's Analytics, continue to expect both revenue and ARR growth in the high single-digit percent range, and full year adjusted operating margin guidance of 32% to 33%.
• At MCO level, expect top line to grow in the mid-single-digit percent range with adjusted operating margin in the 49% to 50% range, and updated adjusted diluted EPS guidance range implies 10% growth at midpoint vs last year.

Risks

• Macro economic and geopolitical uncertainty can disproportionately affect issuance volumes, including factors like tariffs, central bank interest rate policy, inflation, credit spreads, and M&A activity.
• Some business segments may face risks from one-off events like government-related attrition, strategic terminations of partnerships, and account losses related to M&A deals.

Q: So a couple of moving pieces here on the Decision Solutions. I was just curious if you could provide some more color on the strategic termination and the account loss, which is weighing on the KYC and Insurance, particularly, and how do we think about those headwinds? But also, as we think about going into the back half of the year, you have easier comp from the federal contract as well as the Moody's-MSCI contract. So just puts and takes as we think about the Decision Solutions ARR going into the back half of the year.

A: Ashish, it's Rob. So first of all, just a little bit of color on some of the attrition and Noemie touched on it. We had indicated, I think, last quarter that there was some government-related attrition. Noemie mentioned that we had strategically terminated a distribution partnership in KYC. So that -- I think that's -- it counts as attrition, but that's a decision that we took because we thought it was in the kind of the long-term interests of our business. We've continued to have some ESG-related attrition. We saw that in the first quarter, that continued into the second quarter. And as Noemie said, kind of a one-off attrition event, insurance related to an M&A deal. . When we look at the drivers of ARR growth for the balance of the year in Decision Solutions, I'd say maybe three things. So let me start with Banking. You heard Noemie touch on lending. CreditLens is our flagship lending product. And over half the growth that we have in Banking is driven by our lending products and CreditLens. ARR growth is in kind of the low to mid-teens, and we've got a very nice pipeline that has been building. It's 15% higher than it was this time last year. As we talked about in our prepared remarks, that's been supported by the addition of Numerated. So we basically brought in an enhanced set of front-end capabilities. We've been integrating that into the CreditLens platform and then going to market with a more comprehensive solution. And we're seeing some very nice growth from that. And as I mentioned, we're getting ready to go into a renewal cycle and we have the opportunity to upgrade customers into that package. So we think lending is a good driver in Banking. In Insurance, the pipeline has been building. We had a great insurance conference. We've got a very important new model launch coming in the second half of the year that there's a lot of customer demand around that. And as we talked about, CAPE, while it's not in the ARR numbers, we've gotten a great reception from customers and the integration of CAPE into the Intelligent Risk Platform. And CAPE would be accretive to ARR growth if we included it in that this year. And then one last thing, just in KYC, we've got very strong cross-sell continues into financial services customers. That's north of 20% ARR growth. We expect new sales to corporates to really kind of start to ramp in the fourth quarter of the year after we make some enhancements to our Maxsight platform. And we've got some good momentum with the recently signed partnership from a third-party payment platform. And as Noemie said, excluding that attrition event, we'd be in the -- ARR growth would be -- continue to be in the high teens rate.

Q: I just wanted to ask a two-parter on MIS. I mean just wondering if you guys think was any potential pull forward of issuance during the quarter from the second half of the year as the macro environment kind of got a little bit more stable. And then just on the private credit side, there's been talk about how private credit can potentially perform better when public debt markets are a little shaky. Just wondering as like public debt markets essentially got better as we move throughout the quarter, if you saw any changes in the performance of the private credit market as well?

A: Yes. I would say I don't think there was meaningful pull forward shift. Last year, you remember on the calls, we had this whole theme. We had the elections in the fourth quarter of the year and the bankers were telling issuers that they should go ahead and pull issuance forward of the elections in case there was any turbulence in the markets. That hasn't been the case this year. We'll probably talk about at some point on this call, kind of a year-to-go outlook for issuance, and we'll talk a little bit about how we've approached that. But I wouldn't say that's been a meaningful theme. On private credit, I think it's not necessarily a case of either/or. I mean I think what we're seeing here is it's both. We had some healthy performance issuance activity in the public markets, but we continue to see that in the private credit markets. And there's some real demand drivers for that. I mean you heard the numbers that we talked about in our prepared remarks, 75% growth in private credit revenues for the quarter. But I would cite a couple of things that are -- a few things that are kind of driving this ongoing growth of private credit. And it's not -- I think a lot of people think about it as -- private credit as direct lending and as an alternative to going to public markets. But as we've tried to talk about on this call, private credit has become much broader than that, right? So it's not just direct lending, there's fund finance, there's securitization. And you've got a few things going on. You've got insurers continuing to increase allocations to private credit, and that's also driving an increased demand for Ratings. We're seeing rated feeder funds becoming more important in the fundraising stage for private credit. Fund finance itself is becoming a more prominent asset class within private credit. You've got a number of different lenders now in fund finance. And as I said, we've got the growth in ABF, particularly where you've got, I would say, more illiquid assets sitting on bank balance sheets, and private credit is one alternative for funding those assets. So if you just look at the asset flows into private credit, and we've seen the headlines about the potential for going into the retail markets and retirement and so on, that means that there's going to be a lot of investor dollars continuing to come into this market, and that means they will need to be able to find supply.