Moody`s Corp (MCO) — Q4 2022 Earnings Call Transcript

Thank you, and good afternoon, 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 2022, our outlook for full year 2023 and an update on our medium-term targets. The earnings press release and the presentation to accompany this teleconference are both available on our website 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 and U.S. 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 and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2021, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor statement, 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. Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results, key business highlights and outlook; after which, he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. I'll now turn the call over to Rob.

Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. I'm going to start with some key takeaways from our 2022 results, and then I'll look ahead to what we're expecting for 2023 before we take your questions. Our fourth quarter and full year 2022 financial results demonstrate the positive momentum and resilience of MA; while at the same time, reflecting the impact of challenging market conditions on MIS. And MA had a very strong finish to the year. It delivered its 60th consecutive quarter of growth and 10% ARR growth. Revenue grew 15% for the year; and for the first time, MA's full year adjusted operating margin exceeded 30%, and those are results that achieve the Rule of 40 distinction. MIS generated $2.7 billion in revenue as it weathered a challenging year for issuance, and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth. And during the fourth quarter, we executed on the expanded expense management program that we announced in October and that's expected to deliver over $200 million in annualized savings in 2023. And it really significantly strengthens our financial position and flexibility for the coming year. Now for the full year 2023, we expect Moody's revenue to grow in the mid- to high single-digit percent range. And in addition, we're maintaining our previously communicated medium-term growth targets with a reset of the base year to 2022. And in what is clearly a fast-paced and ever-evolving landscape, we're investing with intent to grow and scale and to expand our capabilities to deliver on our mission, and that is providing best-in-class integrated perspectives on risk. So turning to our full year financials. Moody's total revenue was $5.5 billion. MA contributed approximately half of our total revenue for the first time in our history. And as I mentioned, MA revenue grew by 15%. And excluding the negative impact of foreign exchange, growth would have been 20%. Organic constant dollar growth for both MA revenue and ARR was 10%. And overall, Moody's achieved a 42.6% adjusted operating margin with an adjusted diluted EPS of $8.57. Now moving on. We remain laser focused on the four strategic priorities that I outlined in February of 2021. In order to realize the potential of our global integrated risk assessment strategy, and the success of this strategy has been made possible by our incredibly talented and committed employees. They've helped us launch new products, expand into new markets and improve the experience for our customers. And it's really wonderful to see our collective work achieve a number of important industry awards. For the first time, Moody's earned the top ranking in the Chartis RiskTech100. And we placed ahead of hundreds of companies in the risk and compliance technology space that ranges from household names in our sector to earlier-stage innovators. And it's really a testament to the momentum of our risk assessment strategy and the quality of our portfolio of solutions. And in addition, for the 11th consecutive year, MIS was voted the Best Credit Rating Agency by Institutional Investor and really demonstrates that we remain the clear agency of choice with investors. In MIS, in 2022, we made several important investments to enhance our ratings presence in emerging markets. And that includes the acquisition of our majority stake in the largest domestic rating agency in Africa and the further expansion of Moody's Local in Latin America. We also met the need for greater transparency in ESG risks, specifically as they relate to credit by rolling out more than 10,000 new ESG credit impact scores across MIS. Now across MA, we enhanced a number of our workflow offerings through the integration of data and analytics, and we created new products to meet evolving customer needs. In fact, newly developed organic products contributed a significant portion of MA sales growth in 2022. I'm going to touch on several of these in a few minutes. Turning to the outlook for MIS. As I mentioned last quarter, we expect that the factors that impacted issuance in 2022 to persist really through the first half of 2023. The inflationary environment, the pace of interest rate increases are still causing volatility in equity and debt markets, and the trajectory of economic growth in major economies remains uncertain. So it's going to take some time for these issues to resolve and for debt market activity to fully resume but refunding needs and pent-up issuance demand and baseline economic growth, they all point to a recovery in issuance, which we expect to pick up in the second half of the year. And in this environment, we are proactively balancing our commitment to serve issuers and investors with the highest quality ratings and research and insights; while at the same time, prudently managing cost. And we expect that the swift and decisive expense management actions that we took in the fourth quarter will enable MIS' adjusted operating margin to return to the mid-50s percent range in 2023. So moving to MA. I want to highlight the impact of the significant investments that we've made in product development and sales and acquisitions. And over the last three years, these investments have helped us deliver $1 billion in additional recurring revenue. And on an organic constant currency basis, recurring revenue growth has been steadily improving each year from 9.2% in 2020 to 9.7% in 2021 and 11.1% in 2022. And we're well positioned for future growth as three of our businesses with revenue of more than $100 million each delivered ARR growth in excess of 10%. In fact, our KYC and compliance business, which is our fastest-growing business, had ARR growth greater than 20%. And even some of our more established products such as Orbis and CreditView, delivered high single-digit ARR growth last year. So let me give you a little bit of insight into how several of our newly-launched products are contributing to this growth. And I'm going to start with our KYC Lifecycle solution, which offers customers a user-friendly configurable portal and risk engine. And it enables fast and accurate checks that leverage our vast company, people and news data sets. And this solution integrates the capabilities that we've built and acquired over the past several years, so it's opening the door to new markets and customer segments with a powerful new workflow tool for financial crime compliance and third-party due diligence. And it is resonating with our customers. In the fourth quarter, we completed one of our largest-ever sales to a nonfinancial corporate customer in MA with a combined offering supporting both customer and supplier vetting and screening capabilities. We also recently launched an enhanced version of our Climate on Demand product, which integrates our very rich climate analytics from RMS and MA and broadens the scope of our capabilities in the banking and insurance sectors and beyond. And Climate on Demand is part of our growing suite of physical and transition risk offerings, which are gaining traction with our customers. For example, we were awarded an important sales mandate late last year as a major U.S. financial regulator selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy. And we were selected because of our ability to bring together some unique capabilities from across Moody's, and that includes our ability to quantify the financial impact of climate risk, physical risk assessment of bank operations and exposures as well as finance emissions. And in banking, we extended our CreditLens origination solution into commercial real estate, and that's one of the largest asset classes on banks' balance sheets. And this product integrates our proprietary property data, market forecast and credit analytics to meet the specific needs of commercial real estate lenders. And we're excited to partner on this product with one of the largest real estate lenders in the United States, and we're encouraged by the positive customer feedback and sales progress to date. So together, these examples, I think, demonstrate how we are integrating capabilities, we're driving product innovation and leveraging our very strong sales distribution to build a robust pipeline as a foundation for continued growth. So let me turn to the outlook for 2023, and I want to highlight just a few of our guidance metrics. We project that Moody's revenue will grow in the mid- to high single-digit percent range and adjusted operating margin to be in the range of 44% to 45%. Adjusted diluted EPS is forecast to be in the range of $9 to $9.50. And for the medium term, we're maintaining our previously communicated growth targets with a reset of the base year to 2022. And in summary, we made strong progress in the fourth quarter to position the business for success, closing out what we'd characterize as both a challenging and a productive year. And indeed, against the backdrop of macroeconomic headwinds, we've continued to unlock the growing potential of MA and reinforced the foundation for MIS to capture the immense opportunity we see once issuance levels recover. So we've entered 2023 in a position of strength, and I have tremendous confidence in the growth potential of the business as we continue to execute and invest in building Moody's as the leading provider of integrated perspectives on risk. And with that, Mark and I would be pleased to take your questions.

Rob, I just wanted to touch on the medium-term guidance for the ratings business, which you’ve maintained at low to mid-single digits even though the base, I guess, has come down a lot. I just wanted to try and flush through a little bit more in your assumptions. And I always thought it was a GDP plus 3 to 4 type pricing business, and your competitor obviously had a more optimistic outlook there too. So just trying to understand how you guys are thinking through that.

Yes. Manav, we've gotten some questions around how quickly things are effectively going to snap back to 2020 and '21. And just to kind of put that in perspective, 2021 total issuance was more than 35% higher than the average from '09 to 2022 if you exclude the 2020 and '21 years. So those two pandemic years were, in fact, extraordinary and unusual years. And so obviously, we are re-baselining off of what we believe are, in fact, kind of more normalized levels of issuance. In fact, if you look at 2022 total issuance, it was down something like 5% from that average that I was talking about, historical average. But another way to kind of look at this, Manav, and you're kind of, I think, getting at, is there also some upside to the way we're thinking about the medium term? So while overall issuance in 2022 was about 5% below that historical average ex those two extraordinary years. If you look at corporate issuance, it was down something like 15%. And if you look at the mix of corporate issuance as a percent of total issuance, we're actually down a good bit in 2022 and as we kind of look forward. So I think in a way, there's been a mix shift against us here. And so if you think that there's more opportunity for corporate issuance as a percent of the total, there might be some upside to the way we think about the medium term.

Yes. And add on to just Rob's remarks, that we do recognize that some investors may now see this guidance as being slightly conservative in nature. We do remain open to the possibility of revisiting and looking at this specific target once we have better insight into the macroeconomic and the issuance environment as the year unfolds.

Okay, got it. Makes sense. And then Mark, just perhaps maybe even an open-ended question to talk about the expense ramp and stuff that you typically do. But what I was looking for is the expense savings that you've talked about, like how does that split between the two segments?

Manav, thank you. So maybe let me start firstly with the expense ramp. So we anticipate operating growth, inclusive of the annual merit increases, the reset of our incentive compensation and then our incremental organic investments to contribute to an expense ramp of between $10 million and $30 million between the fourth quarter of 2022 and the first quarter of 2023 that excludes any restructuring-related items. And then from the first quarter of 2023 to the fourth quarter of 2023, we expect expenses to remain relatively stable and only ramp between $10 million and $20 million. And that's primarily as we realize the benefits of both our 2022, 2023 geolocation restructuring program and any additional cost efficiency actions. On your second sub-question, restructuring. So through year-end 2023, we still expect to incur up to $170 million in aggregate charges, and that will be split into $70 million to $90 million for MIS and $65 million to $80 million for MA, and that's related to both the real estate rationalization and the reduction of personnel as we selectively downsize and utilize alternative lower-cost locations. For the full year 2022, we were able to accelerate some of our actions. And so we accrued $114 million in total restructuring charges for the year, and that is indeed up from the $85 million we guided to back in October. And that splits into approximately $49 million for MA and $65 million for MIS. And then finally, looking forward, we estimate we'll incur up to $15 million in incremental pre-tax personnel-related charges and $20 million to $40 million in real estate charges in 2023.

I have a question related to the previous one but it's related to seasonality. Could you please give a sense of maybe the seasonality in terms of the revenue and also margin expectation on a quarterly basis in 2023?

Owen, good afternoon. So our central case assumption is for the cyclical market disruption that we experienced during the majority of 2022 to really persist through the first half of 2023. And as a result, for MIS, we expect the transaction revenue to be significantly weaker in the first half vis-à-vis the second half of the year when prior period comparables, the capital market conditions and spreads become more constructive. So specifically, the midpoint of our full year 2023 MIS revenue guidance implies first half revenue to decline in the low teens percent range and second half revenue to grow in the mid-20s percent range. And that also underscores our expectation then for higher MIS margins in the second half of the year versus the first half of the year. If I look at MA, we forecasted full year 2023 total revenue will increase by approximately 10%, and that's underpinned by broad-based strength across all lines of business. And given that MA revenue is highly recurring, we expect absolute dollar MA revenue to progressively increase over the course of 2023. And as such, we expect MA's first quarter adjusted operating margin to be similar to our actual fourth quarter 2022 margin before improving through the remainder of the year, obviously, as revenue increases and as we realize the benefits of our cost savings. In addition, as we expand our product capability suite, as we continue to grow the size of our sales force to meet customer demand, we anticipate ARR to also steadily increase throughout the year. And it's going to be similar to what we saw in 2022, ultimately achieving low double-digit percent growth by the end of 2023. On Moody's total operating expenses, our guidance here is for an increase in the low single-digit percent range. And while we don't typically provide expense growth forecast by segment, given we anticipate the majority of our 2023 strategic investments to support MA revenue growth opportunities, the full year segment operating expense guidance would be along the lines of low to mid-single-digit percent decline in MIS and a high single-digit percent growth in MA. And then finally, for EPS modeling purposes, I'd just like to remind you our first quarter effective tax rate tends to be lower compared to the full year results, and that's simply due to the excess tax benefits around employee stock-based compensation.

Thanks so much and really nice results. If we went back, you were able to reaffirm the medium-term targets. Obviously, you reset the base here but a pretty dramatic shift in '22 relative to initial expectations. I don't know if this would be for who, but just any thoughts on puts and takes? Is it that analytics has been overperforming a little bit relative to the downturn in MIS? Just any puts and takes as you think about kind of what the initial targets were.

Kevin, it's Mark. I'll start by discussing our base case assumptions, as our medium-term guidance refers to a five-year period with 2022 as the base year. This incorporates various assumptions as of the end of January, including expectations for U.S. and euro area GDP to stagnate in the near term before recovering, the U.S. 10-year treasury yield to stabilize and fluctuate modestly around current levels, and issuers to continue refinancing maturing debt. On the MA side, we anticipate customer retention rates to stay consistent with historical levels, along with pricing initiatives that align with our previous practices and enhancements to customer value. To address your question, I will highlight two specific examples of tailwinds and headwinds. The first tailwind is that issuance activity generally tracks GDP growth over the medium to long term. Our central case models GDP expansion at levels similar to those before the COVID-19 pandemic. We've relied on GDP and interest rate forecasts from Moody's Analytics, which indicate that the average annual real GDP growth from 2014 to 2019 was between 2% and 3%, and we expect this trend to continue. The second tailwind comes from our maturity wall studies, showing that U.S. corporates have $1.9 trillion in maturing debt, most of which we expect to be refinanced. Similarly, European corporates have refunding needs of around $2.1 trillion. On the headwinds side, one noteworthy point is our projection that interest rates will remain elevated, which could impact opportunistic financing. For instance, in the U.S., we anticipate a near-term increase in the 10-year treasury yield, expected to stabilize at about 4% through 2027. Lastly, in updating our medium-term target base to 2022, we've assumed constant currency foreign exchange rates over the five-year period, specifically the euro at 1.07 and the pound at 1.20, reflecting dollar appreciation compared to the original rates provided last February, which were 1.14 and 1.35.

Can you just shift gears to capital allocation for a second? Maybe I missed it, but the $250 million in share repurchases seems fairly low relative to what you've been doing in the past and obviously also the free cash flow guidance. So is there a shift of thinking on what are the uses of cash? And then obviously, does that also suggest that maybe on the M&A side, you've taken a harder look, again, maybe in a different environment from a buyer and seller perspective?

Alex, best place for me to start is to reaffirm that our capital planning and allocation strategy is unchanged. We remain committed to anchoring our financial leverage around a BBB+ rating, which provides, in our view, the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. Given, however, that our gross leverage as of year-end was above 2.5x, and that, as we know, is driven by the cyclical market conditions we just experienced. And as we head into 2023, we want to retain the financial flexibility to marginally deliver our balance sheet and improve our gross outstanding debt position if needed. And that's similar to the actions that we took in the fourth quarter through our tender offer. And what that means for 2023 is our plan is to return approximately $800 million of our global free cash flow, it's about 53% at the midpoint, to our stockholders, subject, of course, to available cash, market conditions, M&A opportunities, et cetera. And that includes, to your question, the share repurchase guidance of $250 million and approximately $560 million in dividends through a quarterly dividend of $0.77 per share, which is 10% up from our prior quarterly dividend. And it's all about creating that flexibility to evaluate opportunities as the year goes on.

Wanted to ask about the free cash flow guide. Part of the reason why it was maybe a little bit lower than what I thought was the CapEx sort of staying at the $300 million range, roughly, let's call it like 5% of revenue. Should we expect that level to continue? Are you at sort of a different CapEx just percentage-wise because of the change in model? Or I guess, what's driving it? Is 5% the right number to be thinking about for future years as well?

Toni, thank you for your question. Let me maybe start by saying the midpoint of our cash flow guidance range implies growth of approximately 25% off of our reported 2022 free cash flow result. And that's well above the projected midpoint, which is low double-digits for our U.S. GAAP net income. And in addition, what that really means is at the midpoint, the free cash flow to U.S. GAAP net income conversion ratio is approximately 100%. And that's effectively equal to the average free cash flow conversion ratio that we've had over the last four years, meaning specifically from 2019 to 2022. So we feel pretty comfortable with that as a result. In terms of CapEx, 2022 actual result was $283 million. We're guiding to approximately $300 million, i.e., a similar level. And there are a number of factors underpinning that guidance, specifically, for example, continued M&A integration activity, for example, related to PassFort or kompany or RMS. There's ongoing enhancements to IT platform and our real estate infrastructure associated with the workplace of the future program. But one of the big drivers that will carry forward into 2023 is effectively the higher amount of capitalizable work under GAAP related to our SaaS-based solutions for our customers. And that ties in directly with the underlying business strategic shift to provide more SaaS-based, more recurring revenue solutions within MA. And so I think it's a step-up in 2023. I don't think we'll see a separate step-up in future years, but that's really what's driving the underlying numbers.

Terrific. And just as a really quick follow-up. I know last quarter, you were sort of saying that you thought third quarter and fourth quarter would be the trough for the issuance declines, and that it should improve throughout 2023, in particular, second half. I feel like there's some consistency in the messaging that second half is going to be better than the first half. But like, I guess, have you delayed your expectation for issuance recovery? Or is it still similar to where you were thinking it was going to be last quarter?

Not really. Toni, it's Rob. Not really a change. It's pretty consistent with how we thought about it last quarter. I think one thing you're hearing from us is just the first quarter of 2022 has a relatively robust issuance here. So there is the matter of comps, but I don't think there's any fundamental change from how we were thinking about the kind of troughing and recovery in issuance.

I wanted to focus on the Moody's Analytics business. We observed significant strength there, and the guidance suggests further acceleration. Mark, in your response to a previous question, you mentioned seasonality but also noted a similar growth profile across all three units within MA. However, based on the bubble chart on Slide 9, it appears you might have some faster-growing businesses within Decision Solutions. I would like to understand how we should consider the growth opportunities across all three segments within MA.

Yes, it's Rob. I'll start by discussing the ARR growth, particularly focusing on what's driving that. During our last call, we mentioned the inclusion of RMS in the MA ARR figure. However, RMS is not yet growing at the same pace as MA overall. We're working on synergy opportunities to boost that growth and believe we're making progress, but there's still more to be done. The reported figure of 10% included about a 1.5% drag from RMS, which means, without that, our ARR would have been approximately 11.4%. You might recall that in the third quarter, we mentioned a growth rate of 10%. We're observing nice acceleration in ARR on a comparable basis, which can be attributed to our enhanced capabilities that allow us to attract new customers and strengthen our relationships with existing ones. Our sales teams executed exceptionally well in the fourth quarter, which was a key area of investment, as we've discussed. However, it's important to note that our success is not limited to one aspect. We often highlight KYC as a standout area, and it continues to show strong momentum. Additionally, our life insurance and banking businesses are performing well. Notably, we've also showcased two of our more established product lines, CreditView Research and Orbis, which, when excluding KYC use cases, are both experiencing high single-digit ARR growth rates. Overall, we're pleased with the portfolio's performance. Our strategy focuses on identifying risk assessment use cases and integrating various capabilities to assist our customers in making informed decisions. We're seeing solid momentum across the portfolio.

In your prepared remarks, you talked a little bit about some of the indicators you're seeing to give you confidence about a global debt issuance rebound in the second half of the year. Can we get some examples of what you're looking for, what we should be looking for?

Yes, it’s Rob. Let me discuss both the potential opportunities and challenges we face. Starting with the opportunities, we previously mentioned the market's desire for clarity regarding inflation trends and the belief that inflation might be peaking. This understanding is crucial for the Federal Reserve's actions and for the market to assess if we are nearing the end of the tightening cycle. As we moved through the fourth quarter and into January, we observed the market's increased confidence and the rise in issuance. Initially, we expect to see opportunistic investment-grade issuance from those with the best access. Following that, we’ve seen higher-rated speculative grade names entering the market, and we have begun to see some single B names as well. In fact, we’ve recently had our first couple of dividend recapitalizations in months. This activity boosts our confidence that the market is opening up. However, I would describe the recovery as somewhat fragile due to ongoing headline and event risks. Nonetheless, we saw a strong month for investment grade in January, and high yield is beginning to pick up along with sluggish leverage loan activity that is slowly gaining traction. On the topic of mergers and acquisitions, our forecast is rather muted with a generally flat outlook, but increased M&A activity could present upside. I would particularly highlight sponsor-backed M&A and leveraged buyout activity as areas to watch, given that sponsors have substantial capital available. Now, regarding the potential headwinds or derailers, yes, certainly.

Sorry. No. You broke up there. Sorry about that.

No, sorry. Just very quickly, Jeff, what could provide a few headwinds? There is, as I mentioned, a headline risk regarding inflation reports and their implications for the Federal Reserve's actions. Additionally, any unforeseen policy moves by central banks could also pose challenges. I highlighted this concern last year as well. The central banks are faced with the difficult task of addressing inflation while attempting to achieve a smooth economic transition. Therefore, we will be closely monitoring these factors.

You expect 2023 MIS revenue to increase low to mid-single digits, and that's based on an assumption of low single-digit growth in global debt issuance volumes. If you assume pricing growth of perhaps 4% to 5% given higher inflation, the guide implies to the degree of negative mix from issuance. That said, it looks like you're expecting high yield and structured issuance to be the fastest-growing categories in 2023. And these are generally favorable from a pricing mix perspective. So can you help bridge your assumptions for MIS revenue growth and global debt issuance volume growth in 2023?

George, I think you have a good understanding. That's why we have included a range for our outlook. It might be useful to briefly discuss how we view the issuance outlook for 2023. There are many differing opinions, possibly more than I can recall in recent times, about what to expect. When analyzing the reasons behind these differences, it primarily revolves around expectations concerning leveraged finance issuance. Starting with investment-grade, we anticipate modest growth of about 5% for the year. For leveraged finance, particularly high yield, we expect a growth rate of 25%. Last year was among the slowest on record, and I recognize that our outlook is somewhat more conservative than some market participants who have more optimistic forecasts for high-yield issuance. Our perspective is shaped by a landscape of increased funding costs, the risk of a recession, and a stagnant M&A outlook. It's worth noting that we have a robust backlog of first-time mandates that didn't enter the market last year, mostly in the leveraged finance sector, indicating notable pent-up demand. We foresee leveraged loans remaining steady. Referring back to Mark's comments, it seems like we have a dynamic of two halves: loans had a very strong start to 2023, and we expect an increase in the latter half of the year, specifically for 2022.

Rob, you mentioned some of this when discussing M&A, but I want to focus on Decision Solutions in Q4 specifically. It accelerated quite significantly. If I'm not mistaken, RMS was included in that, and you noted that it is currently growing more slowly organically compared to your heritage solutions. Can you provide any further insights on what contributed to the organic acceleration in Decision Solutions in Q4? Is this growth based on underlying factors, or are there any unusual items like one-time revenue recognition adjustments for annual usage or similar factors?

Yes, that’s a great question. Decision Solutions had a strong quarter, achieving 15% growth on an organic constant dollar basis. Last quarter, we discussed a slightly lower reported growth rate, reinforcing the importance of focusing on annual recurring revenue. For the full year, Decision Solutions ARR saw about 11% growth. We’re experiencing strength in various areas, confirming that it’s not just reliant on one segment. In the Know Your Customer space, we’re seeing growth in the low to mid-20s range, and we also have robust life insurance and banking businesses. The demand in the KYC sector is high, not only for the data but also due to our new life cycle product that combines the data with a workflow solution, leading to larger engagements with our customers. This product was launched in the second half of last year. Additionally, our RMS business serves the property, casualty, and reinsurance markets, and we've maintained a strong focus on life insurance. We have an advanced actuarial modeling platform and have developed a suite of solutions for risk and portfolio management, balance sheet management, and capital planning and reporting. Notably, we’ve seen significant growth with our risk integrity IFRS 17 solution, as insurers are required to implement IFRS 17, creating demand for our assistance. In banking, we’ve also experienced good growth across our range of solutions including origination, risk and portfolio management, and capital planning.

I just wanted to jump into that MA organic revenue growth guide of about 10%. When I look at MA's ARR in the fourth quarter coming in at 10% and then the guide really is for it to accelerate to low double digit in '23, I just felt with that accelerating backlog, the bias for MA organic revenue growth would be above 10%. Are there any kind of headwinds, maybe non-subscription revenues to note to kind of just kind of keep it about 10%?

Yes. One challenge we're facing is that, as you know, we've shifted most of our portfolio to recurring revenue, which is about 94%. However, in our banking sector, we still encounter some one-time revenue. We've been discussing our efforts to move away from this, and we’ve almost completely eliminated one-time license revenue. We also have some service-related work that we are deemphasizing, concentrating instead on where there may be a slight difference between annual recurring revenue and overall revenue.

Yes. And Andrew, just to add on to that, if you think about decomposing our guide of 10% organic constant currency growth for MA, you could think about recurring as growing in that low double-digit range when you think about transactional one-time declining in that high teens percent range.

I have two questions on the MIS midterm targets. First, I appreciate the conservatism on the top line. I'm curious that you left your margin target as is despite a lower sort of implied top line. So just wanted some more perspective on that. Is it related to the recent restructuring actions? And then second related question is, you mentioned a private credit market as one of the factors as you think about issuance. We've obviously seen significant expansion in that market in '22. So curious what your thoughts are around private product both for '23 and as you thought about your medium-term targets.

On your question around the MIS adjusted operating margin, we are maintaining our expectation for MIS' medium-term margin to be in the low 60s percent range. And I certainly acknowledge that, that's a meaningful step-up compared to our new base year 2022 results and full year 2023 guidance. While this target is reflective of performance within 5 years, the key, and I think this is the point that you were flushing out, the key to achieving it will naturally be influenced by the issuance recovery pattern we experienced in 2023 and beyond. That said, MIS' medium- to long-term business fundamentals remain firmly intact. And we continue to believe that the disruption in the debt capital markets that we experienced in '22 was really cyclical. It wasn't structural in nature. And that view is informed by several data points and observations. For example, the stock of debt has steadily grown over the last several decades. The price to value is compelling for our customers. There are strong refinancing needs that can help buttress the future transactional revenue base, credit spreads remain around that historical average. And overall, I'd say that the interest burden is still relatively low for corporates. And these factors, in addition to the proactive and decisive expense management actions like we took last quarter, should help to stabilize the '23 margin in that mid-50s percent range, and that will help us obviously set a good base before expanding to that low 60s over the medium term.

Yes. I want to emphasize why we're discussing MIS margin expenses, as I've received questions about ensuring we have the right resources. I assure you that we approached the restructuring thoughtfully. We monitor over $70 trillion in rated debt, and it's vital that we have the expertise and resources to manage that debt and service new issuances. We approached this carefully, considering typical span and layer exercises and identifying initiatives that could be deprioritized for greater efficiency. We're committed to improving efficiency in that business, which is reflected in our medium-term target. Briefly on the private credit space, we've seen significant growth in that market over the past few years. We've been evaluating how we can effectively address the needs in this market. We believe we can assist asset managers, investors, and borrowers. We have substantial relationships with many major private credit lenders and ratings for both asset managers and their portfolio companies, CLOs, and BDCs. We also provide various products across MAs. We've been actively discussing opportunities with various players in this space and believe there's more we can do to support them with critical use cases. This includes offering independent credit assessments for investors to understand the credit quality of their portfolios, as well as assisting asset managers with credit scoring, company data, benchmarking portfolio management, and ESG. We see opportunities to expand our support in these areas and have several initiatives underway across the company.

I would like to inquire about the MIS guidance for 2023. When you examine the composite and the supporting elements for your outlook, how much of your guidance relies on the refi walls that provide inherent support? Additionally, how much is based on the assumption that market conditions will improve over the course of the year, especially in the second half, versus relying on observable improvements? Could you also discuss any changes or updates compared to what you typically do this year?

Hi, Shlomo. It's Rob. I'll start by discussing the various factors that influence our perspective on issuance drivers and our level of visibility and confidence regarding them. Refinancing is one of those factors. First, the mix is important. We've previously mentioned that there's a broad spectrum of potential outcomes for leveraged finance, leading to somewhat less certainty on our end. The diverse opinions on Wall Street contribute to this uncertainty, which is why we present a range in our overall guidance. We have more confidence when it comes to issues originating in the financial institution sector due to our established commercial relationships with banks. In terms of refinancing, we have good visibility regarding the refinancing walls. However, there's always uncertainty about how much of that volume will be pushed forward. Historically, we've estimated that just over a third of transaction revenue each year comes from these refinancing walls. We also need to assess potential market conditions, which are influenced by interest rates and spreads. While spreads correlate closely with default rates and we can monitor those rates, market volatility can cause spreads to fluctuate unexpectedly. I've mentioned some headline risks that could affect 2023, which are difficult to account for in forecasts, as these events are binary in nature—they either occur or they don't. A notable example is the debt ceiling situation, which introduces event risk to the market. While we cannot predict every outcome, we do have some insights that allow us to build our outlook with a certain degree of confidence. I hope this clarifies our position for you.

Okay. And if I could sneak in one just housekeeping. The AR DSO was up a little bit sequentially. Were there any deals that closed particularly towards the very end of the quarter that kind of pushed it up?

Shlomo, this is Mark here. I think this might be a record for a question on an earnings call regarding DSOs. I believe you are looking at our externally reported accounts receivable over the annualized revenue of three months. I estimate that you're seeing a figure around 115 for the fourth quarter and about 110 for the full year. Internally, we can perform a more precise calculation since we can use sales. If we take the ending accounts receivable and divide it by the annualized sales from three months, we arrive at a significantly lower number of around 71 for the full year. This 71 days is slightly higher than what I observed last year. The reason for this increase is mainly due to the integration of acquisitions into our corporate processes as we apply the same discipline and rigor to the DSO processes of the acquired companies.

Just want to go back to this point around the MIS guidance, if I may, to start. If I pose it this way, we've got data that we've been presented with historically that shows there to be perhaps a 5% refi wall in '23 over '22. If I haircut that by a couple of percent for defaults which I think would be conservative, the starting point, therefore, is 3% growth. And as George pointed out, historical pricing is 4% to 5% with the potential for a positive pricing mix, which would get me to sort of 8% to 10% as a baseline growth for next year. And that's without assuming anything for sort of new issuance recovery, and you said new issuance recovery is sort of low single digits. So I'm just trying to square that with this sort of low mid-single-digit guidance because it does seem like there's a big gap there between the way I built it and what your guidance suggests.

This is Mark here. Russell, nice to have you on the call. One other element to add to your model is the reporting of MIS other revenues for 2023 vis-à-vis 2022. Those are down in the range of $10 million to $15 million primarily to reflect the incorporation of some of our ESG products and capabilities into our MA revenue set. That's really what's driving the difference between sort of the issuance outlook and the revenue outlook we provided this morning.

I may follow up with you on that. Mark, I have a question about Decision Solutions. I appreciate there have been several inquiries on this topic, but I was curious about how much of the growth in Q4 was due to pricing versus the increased cross-selling of products where you've been investing in growth. Additionally, do you see a potential upside risk to the guidance if corporate M&A activity picks up?

Yes. To the MA guidance? Yes, I don't really see those two things tied tightly together. There'll be upside to the MIS guidance, obviously, but I don't necessarily think so from an MA standpoint.

I guess, Rob, you've talked about this, let's go a little deeper here. Your medium-term outlook, you said that's five years here, you're talking about low to mid-single-digit MIS revenue growth long term, which is the same range that you're giving for this year. We all know 2022 was obviously a very rough macro year M&A for the marketplace for most of the bloody year was quite low. Debt taken on for share buybacks was quite low last year. Refinancings last year seemed like that was low versus what it should be the next few years, that you agree on that and stuff. And when you think about pricing, historically, you've done 3% to 4% price, maybe it's a little bit higher than that, but at least 3% to 4%. How do you square all that with only up 2% to, say, 5% on average for the next five years with the base year seemingly being so low? Is it just being overly conservative here? I'm just trying to get a better sense of this. I get a lot of questions on this.

I understand that some may see us as conservative. Only time will tell, and I hope that’s correct, Craig. It goes back to what I mentioned earlier regarding the long-term average of overall issuance, how we ended 2022, and what we anticipate for 2023. We believe this aligns with our medium-term targets. However, one aspect to consider about our conservativeness is the different issuance mix. Last year, we saw a higher percentage of issuance from financial institutions compared to corporates. If this mix returns to what we experienced in the six to seven years before the pandemic, we could potentially see faster corporate growth, offering some upside to our medium-term expectations. Yes. So Craig, we always kind of target across the company kind of a 3% to 4% kind of annual price increase. And I think we talked about a little bit on the last call, but what we do in MIS, every year, we do a very detailed review of pricing across sectors and regions. And based on that, we come out with our list prices for the following year. And I think you can expect our list prices for 2023 are going to be a little bit higher than the rate of increase, a little bit higher than maybe it has been historically. But the realization of that will depend on mix, right, where the issuance actually comes from. I'd say it's within that range.

Hey, Rob, you've done a really nice job remixing the business and MA has kind of crossed the 50% threshold. If you look out three to five years, how should we think about what the business looks like? And I don't know if there's a way to maybe frame that organically versus inorganic? I mean, start to kind of parse deals and things, but maybe give us an organic view of kind of where the business sits three to five years from now?

Yes. Kevin, that's an interesting question. And I guess I might start by saying when we think about integrated risk assessment, it's not just MA. It's all of Moody's. The rating agency is a really important contributor to, but also beneficiary of, this integrated risk assessment strategy that we have. But maybe a few things, Kevin. First, I think you're seeing us develop scale in a few areas beyond our ratings business. And we obviously have a world-class fixed income research business in Digital Insights that serves investors. We've got, in Decision Solutions, I mean, you've heard me talk about a little bit meaningful businesses that are supporting both banking and insurance different really critical risk workflows, origination, underwriting, portfolio and risk management and capital planning and reporting. And then, of course, we've got a rapidly growing KYC business that we think has some really industry-leading capabilities. We're really well positioned there. I think that's where you're going to see us continue to invest and really drive growth because those are very important delivery platforms for a range of content across all of Moody's. And you heard me talk about kind of what's driving ARR. And so all this fits together. When I think about that content, I mean, think about it, $70 trillion of debt rated by MIS. It's data ownership and credit scores from 425 million companies. It's massive economic data sets and ESG and physical risk scores on hundreds of millions of companies and locations. And we think of that as kind of our risk operating system, and we are increasingly threading that content through those scaled platforms. And you've heard us talk about it but our commercial real estate lending module for banking. That takes a lot of that property and economic and climate content, and we've got KYC integrations that are on the way into our banking solutions. You've got ESG and climate integration into ratings, banking, insurance and research and so on. So I think ultimately, complementing our ratings business, we're going to have scaled platforms with a suite of cloud-based solutions that serve key customer sets. And they're differentiated by being able to draw on all this proprietary data and analytics that we've got, where and when customers need it, so that they can better identify, measure and manage risk. That's where I think we're going to be three to five years from now.

Okay. Thanks, everybody, for joining. Appreciate the questions, and we look forward to speaking with you on the next call. Have a good day.