Moody’s - Earnings Call - Q1 2025

Executive Summary

• Moody’s delivered a record quarter: revenue $1.924B (+8% YoY), MIS reached its highest-ever quarterly revenue ($1.065B), and adjusted diluted EPS was $3.83 (+14% YoY). Operating margin was 44.0% and adjusted operating margin expanded to 51.7% (+100 bps YoY).
• Results beat Wall Street consensus: EPS $3.83 vs $3.54* and revenue $1.924B vs $1.878B*, driven by strong MIS transactional activity and disciplined expense management; effective tax rate fell to 22.3% (from 23.3%). Consensus figures from S&P Global*.
• Guidance lowered and widened amid macro uncertainty and tariff headlines: FY25 adjusted EPS cut to $13.25–$14.00 (from $14.00–$14.50), MIS revenue now “flat to mid-single-digit” growth, MA ARR trimmed to high-single-digit, and company-level revenue growth reduced to mid-single-digit; free cash flow guided down to $2.30–$2.50B.
• Capital allocation remains active: declared $0.94 quarterly dividend (+11% YoY), repurchased 0.8M shares at $481.77, ended Q1 with $6.8B debt and $2.139B cash; operating cash flow $757M and free cash flow $672M (down YoY due to higher incentive comp payments).
• Catalysts: Private credit tailwinds (143 private credit-related deals; growing contribution in Structured Finance) and AI-enabled product momentum (agentic AI in KYC, Research Assistant) support medium-term narrative; near-term volatility and tariff uncertainty pushed management to conservative guidance.

What Went Well and What Went Wrong

What Went Well

• Record MIS performance: $1.065B revenue (+8% YoY) with adjusted operating margin 66.0% (+140 bps YoY); strength in IG corporates, structured finance refinancing (CLOs/CMBS), and private credit-related activity.
• MA durability and mix: MA revenue $859M (+8% YoY), recurring revenue 96% (+9% YoY), ARR $3.266B (+9% YoY); Decision Solutions ARR +12% led by KYC (+17%) and Insurance (+11%).
• Cost discipline and leverage: Adjusted operating margin expanded 100 bps to 51.7%, with lower ETR (22.3%) supporting EPS growth; restructuring recognized ($33M) as part of efficiency program while margins improved.
• Management quote: “Record quarter for our Ratings franchise… we run our business across market cycles” – Rob Fauber, CEO. “Adjusted Diluted EPS… $13.25 to $14.00… 9% YoY growth at the midpoint” – CFO Noémie Heuland.

What Went Wrong

• Guidance reset on macro volatility: FY25 adjusted EPS cut to $13.25–$14.00, diluted EPS to $12.00–$12.75; revenue growth trimmed to mid-single-digit; MIS revenue now flat to mid-single-digit; MA ARR narrowed to high-single-digit.
• April issuance softness and M&A downshift: Management now expects MIS rated issuance to decrease low-to-high single digit in 2025, and reduced announced M&A assumption to ~15% (from ~50%) on trade-policy uncertainty.
• Cash flow down YoY: Operating cash flow $757M and FCF $672M declined versus prior year due to higher incentive comp payments, despite robust P&L; restructuring charges also elevated.

Transcript

Operator (participant)

Good day, everyone, and welcome to the Moody's Corporation First Quarter 2025 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 questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Shivani Kak (Managing Director and Head of Investor Relations)

Thank you. Good morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's Corporation released its results for the first quarter 2025, as well as our revised outlook for select metrics for full year 2025. 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 reconciliations between all adjusted measures referenced during this call in 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, 2024, 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. Over to you, Rob.

Robert Fauber (President and CEO)

Thanks, Shivani, and thank you very much, everybody, for joining today's call. This morning, I'm going to kick off with some high-level takeaways on Moody's Corporation first quarter performance and an update on our 2025 guidance. Then I'm going to share why we're confident in our market position and how we're strengthening the earnings power of the business. After our prepared remarks, as always, Noémie Heuland and I will be glad to take your questions. On to the results. I think it's safe to say that the past few weeks have been more tumultuous than many have anticipated at the start of the year. There's certainly a lot of noise in the environment with equity markets demonstrating much greater volatility in a headline-driven environment. Understandably, that's making it harder for many businesses to feel confident in making important investment decisions.

As you've heard me say before on these calls, it is times like these when our customers turn to us the most. That's because we've got a vast reservoir of proprietary data and insights, mission-critical software solutions, and decades of experience in understanding credit impacts to countries, industries, and companies. We've done this all over the world, across all sorts of economic cycles and geopolitical events, and this time is no different. Amidst this backdrop, we delivered some very strong results in the first quarter. We achieved a record $1.9 billion in first quarter 2025 revenue. That was up 8% year over year. In fact, both of our businesses grew revenue at 8%. With some very disciplined expense management, Moody's adjusted operating margin reached 51.7%. That's up 100 basis points from the first quarter of last year. Adjusted diluted EPS grew 14% to $3.83.

That really is the power of this franchise shining through. Now, turning to MIS, we delivered 8% revenue growth on issuance growth of 9%. MIS achieved its highest-ever quarterly revenue of $1.1 billion with an adjusted operating margin of 66%. That was up 140 basis points. At this quarter, private credit was a meaningful contributor to growth, particularly in structured finance. In fact, in the first quarter of 2025, we had 143 private credit-related deals. That is up from 69 in the first quarter of 2024. Roughly a third of that volume came from private credit-backed ABS, CLOs, and RMBS structured finance issuance. BDCs and fund finance was almost another one-third. In fact, 20% of first quarter revenue growth in structured finance was attributable to private credit. You can see private credit emerging as a tailwind for our ratings business.

Amidst all the recent market uncertainty, engagement levels for our research and webcasts are at a rate two to three times the levels that we normally see in a more stable environment. In fact, last week's ratings webinar on tariffs attracted roughly 3,000 registrants across 89 countries. Zooming out, the deep currents that I talked about on the fourth quarter call remain intact. For MIS, that includes private credit, transition finance, AI-driven infrastructure investment, and emerging and domestic debt markets. These areas require significant investment in debt financing, and this has not changed despite the recent turbulence. In a recent report on private credit, our ratings team highlighted that data center debt issuance in the asset-backed finance market reached $4 billion in the first quarter of 2025 alone versus the $8.4 billion issued for all of 2024.

In the first quarter of 2025, we rated a $2 billion data center CMBS deal in the US, and that represents the larger scale we expect to see more frequently to finance digital infrastructure. We are actively evaluating several data center financing structures today across a number of teams and regions. These financings are early stage, but they are increasing in both their scale and complexity, and they are a good example of a deep current that we expect will drive debt financing volumes for the foreseeable future. Now, switching to MA, ARR growth was 9%, again led by Decision Solutions, where ARR grew 12%. Recurring revenue increased another notch to 96% of total MA revenue. We continue to make investments in product development, platform engineering, and sales capacity in our strategic growth areas.

We're also executing on our ambitious cost efficiency program designed to significantly enhance MA's operating leverage over the coming years. For 2025, we remain on track to deliver a full year adjusted operating margin of between 32%-33%. Now, underpinning the 9% ARR growth is a very strong first quarter in terms of new business execution. I want to share a couple of sales wins from this past quarter that illustrate that. First was a multi-million dollar KYC deal with a major global bank to help them strengthen financial crime compliance. We've grown this relationship by more than two times since 2020 by expanding the breadth and depth of our products being used across the bank, from credit rating feeds to economic data to early warning detection.

Building on that, we were recently selected as a global strategic data partner for their KYC program based on the high quality of our interconnected data sets. That is a very strong referential customer for other major global banks. The second was our first agentic AI sale in the KYC space with a major crypto trading platform that handles about $1 billion a day in trading volume. In the first quarter, we signed a multi-million dollar contract across a suite of our solutions. They are the first customer using agent review, which is our new KYC AI screening agent that helps onboard customers more accurately and quickly. Given all the manual labor in the KYC space, AI agents have a very compelling value proposition, and we are excited about this opportunity. More broadly, let me provide a quick update on our AI strategy across MA.

Our focus remains on harnessing the transformative potential of generative AI to drive growth, to enhance customer experiences, and achieve a more efficient operating model. On the commercial front, last quarter, I talked about how customers who upgraded to Research Assistant contributed meaningfully to growth in the Research and Insights business in 2024. Beyond Research Assistant, we have introduced three unique generative AI offerings that highlight the power of integrating our proprietary data to accelerate decision-making for our banking and KYC customers. It is the automated credit memo, the early warning system, and the KYC AI agent that I just talked about. Additionally, GenAI Navigators, now embedded in over a dozen MA product lines, are enabling on-demand customer support and improving user experiences across our solutions. These navigators are helping customers maximize the value of our products.

have also deployed generative AI internally across three of our most significant functional job families in MA, including customer service, engineering, and sales. For example, our customer service assistant has enabled a 20% reduction in resources for our support team while significantly improving response times, all without compromising the quality of customer interactions. In engineering, we are rolling out increasingly advanced AI tools to empower our software engineers, setting ambitious adoption targets to accelerate roadmap delivery and drive innovation. We have recently launched a transformative internally built agentic tool that will act as a sales companion for relationship managers and their specific books of business. It is designed to act as a catalyst for tailoring our value propositions, for streamlining prospecting and meeting preparation, and accelerating buying decisions. As you might imagine, our sales and management teams are very excited about the prospects for productivity gains.

These are just a few tangible ways that we're driving greater efficiency and effectiveness in important areas across the firm. Anchoring this back to where I started my comments just a few minutes ago, Moody's value proposition is especially relevant in times of change and uncertainty. We're doubling down on improving the earnings engine of our business and delivering strong results in the face of volatility. While the services that Moody's provides are not directly impacted by tariffs announced to date, we do believe many businesses are being impacted by the uncertainty of impending trade tensions. This uncertainty, in turn, leads to customers delaying financing and investment. We've seen this in the first few weeks of April.

As I think most of you would expect, we're taking a more conservative approach to guidance given the operating environment since we issued our initial guidance earlier this year. We've widened and lowered our guidance range to accommodate a broader range of potential outcomes at this point in the year. Noémie Heuland is going to share more details in her prepared remarks, and I'm sure we'll address this further in Q&A. Now, looking beyond the near-term dynamics in the markets, we feel confident about the deep currents that are underpinning the demand for our solutions. First, the evolution of capital markets, including private credit. Second, the digital transformation and automation in financial services industries. Third, the imperative to know more about who you're doing business with. Fourth, the financial impact of extreme weather events. Fifth, the transformative power of generative AI and the tremendous unlock available from proprietary data.

I want to double-click on a few of these for just a moment. I've highlighted the growth coming from private credit, but I'm particularly excited about the groundbreaking partnership with MSCI that we announced yesterday, where we're going to be providing independent risk assessments for private credit investments at scale. This partnership brings together our world-leading credit scoring models with MSCI's very deep data on private credit investments, enabling investors to understand the credit profile of companies and individual loans. Together, we're serving a critical need for transparency and standards in the private credit market. To support banks in their drive to digitize and streamline their credit and lending workflows, we've integrated enabled AI's front-end capabilities into our flagship lending solution, Credit Lens. Credit Lens supports nearly 500 banks with nearly $27 trillion in assets.

In fact, Credit Lens ARR, which represents over a third of the total banking line of business ARR, grew at 12% over the last 12 months, demonstrating our ability to innovate and enhance our scaled solutions and expand relationships within our core customer base. On the impact of extreme weather events, Aon reported that first quarter economic losses of $83 billion were well above the 21st-century average of $61 billion. In January, we closed our acquisition of Kape Analytics, a leading provider of geospatial AI data and location intelligence for property underwriting. We are now integrating Kape into our industry-leading catastrophe models. This is going to give insurers an incredibly high-definition view of property risk, allowing them to insure more confidently and with greater precision. We feel good about the medium term given these deep currents, and we can and will manage through the short term.

We have an experienced team and a strong portfolio that's built to weather storms and to provide insight when the market needs us most. With that, Noémie Heuland, over to you. Thank you, Rob, and hello, everyone. Thank you for joining us today. This morning, I'll start with our first quarter performance, then walk you through how we're thinking about the rest of the year. Starting with Q1, we achieved record financial results. MCO delivered revenue of $1.9 billion, up 8%. MCO adjusted operating margin improved by 100 basis points, and adjusted diluted EPS of $3.83 was up 14% year-on-year. Moody's Analytics achieved quarterly revenue of $859 million, up 8%. Recurring revenue grew 9% in line with ARR growth. Decision Solutions, which includes our KYC, insurance, and banking solutions, grew ARR by 12% to nearly $1.5 billion.

This line of business is consistently the fastest-growing part of Moody's Analytics, with ARR growth of 17%, 11%, and 8% in KYC, insurance, and banking solutions, respectively. Research and insights and data and information ARR growth rates were 7% and 6% year-on-year. You can see this breakdown on slide 7. Double-clicking into MA's line of business results. First, within Decision Solutions, KYC led the growth with strong demand for our data, analytics, and workflow solutions. KYC ARR growth was driven not only by our banking customers, as Rob illustrated earlier, but also by significant deals with corporate customers to vet suppliers and with European government entities to investigate fraud. In insurance, our climate and specialty insurance risk solutions and HD models are key differentiators in the market, driving ARR growth of 11%.

In the first quarter, we signed an exciting deal for our cyber risk models with one of the largest global property and casualty insurers, showcasing that we are embedding ourselves in the insurance ecosystem across multiple risk domains. In banking, ARR grew 8% as customers are increasingly engaging with us to automate and digitize their lending workflows. In fact, over the last year, we've seen an increase of almost 20% in new business related to our lending solutions. Turning to research and insights, now growing at ARR at 7%, the improved ARR growth rates is primarily driven by the lapping of two attrition events in the first quarter of last year. New business generation continues to be strong, up 20% over the last 12 months. Finally, our data and information business grew ARR by 6%.

The downtick in the growth rate over the last two quarters continues to be impacted by two dynamics that we've talked about in recent quarters: an adjustment to our ESG strategy and attrition in sizable contracts with the U.S. government. Outside of these two areas, ARR growth would have been 10%. Now, pivoting to ratings, record quarterly revenue was driven by corporate finance, especially from investment-grade issuers, and by structured finance with continued momentum in CMBS and CLOs as spreads remained tight and relatively stable through Q1. You can see this on slide 6. As Rob mentioned, private credit was a tailwind. In the first quarter, first-time mandates were almost 200, an increase of 20% year-on-year, broadly in line with our Q1 expectations. Net-net, a record first quarter with very strong execution on the backdrop of a constructive issuance environment up to the first week of April.

Now, looking beyond the first quarter, we believe it's appropriate to pressure test our initial assumptions against a wider range of scenarios and update our guidance range accordingly. The market remains very sensitive to factors including fiscal and monetary policy news flows, economic data, and the potential path and pace to a resolution. Global forecasts for GDP are being revised downwards, and the magnitude and timing of central bank rate cuts remain very much in flux. We currently anticipate high-yield spreads will widen over the next 12 months, and the latest forecast for default rates is also wider. On the global and domestic M&A front, earlier expectations have been dampened by trade policy uncertainty. As such, we now expect 15% growth year-on-year in announced M&A, down from 50% growth in our February assumptions. How does this all translate into a four-year financial outlook?

First of all, we're pleased with the fact that Q1-rated issuance was broadly in line with our forecast, but we're now projecting MIS-rated issuance to decrease in the low to high single-digit range for 2025. Our range accounts for various levels of activity in May and June, after a somewhat muted April, and for variability in how quickly uncertainty resolves in the back half of the year. The breakdown by asset class is in our slide presentation on slide 10. Finally, our issuance assumptions account for a relatively short-term disruption at the high end and more prolonged uncertainty with muted US GDP growth at the low end. While Rob's deal-making activity in the back half and healthy supply of high-yield issuance in the near term are possible and certainly supported by subdued M&A levels and maturity walls, respectively, we do not consider this a base case at this time.

Reflecting our updated issuance outlook, we now expect MIS four-year revenue growth to be in the range of flat to a mid-single-digit % increase for 2025. MIS adjusted operating margin is expected to be in the range of 61%-62%. Turning to MA, we are reiterating our revenue growth guidance of an increase in the high single-digit % range, and we are adjusting the high end of our prior ARR growth guidance with four-year ARR growth now expected to be in the high single-digit % range. There are two reasons for the ARR guidance adjustment. First, we want to acknowledge that the fluidity of the external environment drives uncertainty with customers and could lead to delays in decision-making as the year progresses, although it's important to note this has not been the case so far. Second, we are reflecting higher-than-expected attrition with the US government than originally anticipated.

This includes the impact of what was realized in the first quarter and an increase in probability of attrition for contracts scheduled for renewal in the balance of the year. Having said that, we continue to build a solid pipeline of new business and believe the recent customer wins demonstrate Moody's Analytics' strong value proposition even in this environment. On the margin front, the efficiency program we announced in our Q4 call sets us up very well. It provides us with the capacity to continue investing, to capture demand from the multi-year deep currents Rob highlighted, and deliver on our commitment to scale margins. Bringing this all together, with our adjustments to MIS revenue guidance, we expect full-year 2025 MCO revenue growth in the mid-single-digit range, with an adjusted operating margin expanding by about 100 to 200 basis points to a range of 49% to 50%.

Our adjusted diluted EPS guidance range is a range of $13.25-$14, representing 9% growth at the midpoint versus last year. Now, for modeling purposes, we expect the calendarization of top line and margin for MIS to be below the normal seasonal pattern for Q2, following the strong Q1 results and considering April issuance volumes. We anticipate that revenue will remain stable between the second and third quarter before declining in the fourth quarter sequentially in line with historical norms. For MA, we expect our year-on-year total revenue growth to be in the high single-digit % range, with sequential quarterly increases consistent with the prior year.

Turning to operating expense, and excluding the impact from restructuring and asset abandonment charges, we expect expenses to ramp by about $15 million from the first quarter to the second quarter and gradually increase sequentially in the back half of the year in line with historical trends. The expected savings associated from our efficiency program will partially offset annual salary increases and variable costs as the year progresses. Turning to our balance sheet and capital return, we have a strong financial profile and will continue to return capital to shareholders. We are maintaining our prior share repurchase guidance of at least $1.3 billion for 2025. Capital return represents approximately 80% of our free cash flow, which is now expected to be in the range of $2.3 billion-$2.5 billion for the full year of 2025.

Echoing what Rob shared, we believe we are well-positioned at the center of important deep currents and we are operating from a position of financial strength. With that, I'd like to thank all our colleagues around the world for their contributions to another record quarter for Moody's, and with that, Operator, we'd be happy to take any questions. Thank you. If you would like to ask a question, please dial star one on your telephone keypad. If you are on a speakerphone, please pick up your handset and make sure that your mute function is turned off so that your signal reaches our equipment. We ask that you please limit yourself to one question. The option to rejoin the queue will be unavailable. Again, that is star one to ask a question. Our first question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

Hi everybody, this is Alex. Has song for Andrew Steinerman. Just real quick, can you walk us through your assumptions around what acquisitions were included in the prior guidance versus now? Specifically, was Cape Analytics factored into previous guidance, and how much do you expect it to contribute this year? Thank you. Yeah, there's no change in our M&A assumptions with respect to our M&A revenue guidance. So it was already included before and it continues to be the case now. Thank you. Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead. Thanks for taking my question. Maybe just a question on the issuance guidance. I just wanted to better understand when you reduce that guidance, just given some of the uncertainty, what were the key assumptions that were made in terms of M&A volume?

I believe original guidance was expecting M&A volumes to be up 50%, so what were the new assumptions? Have you also made any changes in any terms of assumptions for the refinancing volume? Maybe just a follow-up there would be just how much visibility do you have for the issuance guidance for the rest of the year? Thanks. Geez, hey, thanks for the question. Maybe just to zoom out when we're thinking about how we're thinking about issuance and the outlook. Obviously, tariffs have been impacting how companies are thinking about spending and investment decisions, so it's created some uncertainty, and we've seen some of that already in April in terms of just a delay in issuance. Spreads have widened out a bit. We've had some risk-off days. You might recall last year we was basically blue sky days the entire year.

As I mentioned, we're in much more of a headline-driven environment at the moment, so we have had some no-issuance days. Now there are questions about the kind of pace and trajectory of rate cuts through the balance of the year. There are just a number of things that are going in to create some uncertainty for issuers. In regards to M&A, we've gotten off to a more modest start. We had thought that it was going to be primarily second-half loaded, but I'd say it was more muted than we had thought, and we have adjusted our own M&A assumptions down. I think we had 50%. We still believe there will be growth in M&A off of a low volume, lower levels last year, something like 15%. Again, I think we would think that that will be generally back-end loaded.

Really no change to how we're thinking about the maturity walls, so those continue to be, I think, very supportive of future issuance. Hopefully, that gives you a sense. That's very helpful. Thank you. Thanks a lot. Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead. Hi, thanks. Good morning. In your M&A business, you saw research and insights growth of 7%, data and information up 6%. For these two subsegments of M&A, can you talk about how sensitive they are to banking and asset manager trends that you're seeing in the current macro environment, and what could be the catalysts for accelerated growth for these two subsegments? Yeah, maybe I could take that, and Rob, feel free to chime in too.

For research and insight, the growth is actually mainly coming from our CreditView product suite, which includes Research Assistant, as you know, as well as credit analytics models and economic data. We continue to expect low to high single-digit growth for 2025. Obviously, we're keeping a close eye on CreditView renewals in our asset manager customer base because they remain under cost pressure. We're having more conversations now with banks about growth. We're expanding the dialogue just beyond just risk and regulation. We think that there's some interesting dialogue with banks around efficiency generated from Research Assistant and CreditView that we think will be supportive for our research and insights going forward. For data and information, we had a bit of a slower growth in the first quarter, as I noted in my remarks, from elevated attrition from US government.

We also had the effect of the ESG partnership that we signed last year, which we talked about extensively in 2024. In terms of outlook for the remainder of the year, we expect high single-digit AR growth in that line. We've made some investments in data quality and interoperability. We also have made some investments in our corporate go-to-market, which we expect will influence our Data and Information business, as well as KYC. We're very encouraged by the dialogue we're having with our corporate customers around Maxite, and we expect this will be, again, a support for the AR growth in Data and Information in the remainder of the year. Very helpful. Thank you. Our next question comes from the line of Russell Quelch with Redburn Atlantic. Please go ahead. Thanks for having me on. Just wanted to ask around the guidance for MIS again.

Could you square the guidance for a decrease in issuance versus flat to increase revenue growth for 2025? Is there a positive mix effect here coming from somewhere? Yeah, hey, Russell. You think about kind of the building blocks to go from issuance to revenue, and we do have our annual pricing initiatives, and we always talk about that being kind of 3-4% on average across the firm, and that continues to be intact. There's actually a positive mix shift from what we believe will be a decrease in bank loan repricing activity as a percent of total, just given we really have minimal economics on repricings. As I said, we do still expect a modest improvement in M&A in the back half of the year, and that typically is mix positive. If we think about recurring revenue, we think that'll be up mid-single digits.

That'll also be supportive in terms of going from issuance volume to total rating revenue. Super. That's great. Thank you. Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Great. Thank you. Can you just talk a little bit further about the costs? I was pretty pleased with your cost containment this last quarter. Obviously, your restructuring charges the last two quarters were higher than normal. Just talk about in a little more depth about where you're pruning the costs out here between the two different divisions. Maybe also touch on your outlook for incentive comp for the year and stuff. Just some more color, please. Thank you. Yeah. You pointed out we've announced an efficiency program in the fourth quarter. We're executing on that program as we planned.

We've talked about the areas where we think we can generate efficiencies within our M&A business this year and also a little bit within our corporate functions, leveraging technology and automation. We are through the integration of our acquired entities that has generated some efficiency gains in Moody's Analytics. Just to give you a bit of color on the margin outlook for the remainder of the year, we expect to be now in the range of 49-50% for the full year. That's up 100-200 basis points. We already had some improvements in the first quarter. That's largely due to the transactional revenue growth, a little bit of effect from the efficiency program that we have initiated, but that will materialize more meaningfully in the remainder of the year. The margin improvement we expect will mostly come from M&A for the remainder of the year.

We expect the M&A margin to ramp sequentially into the mid-30% range by the fourth quarter. The other thing to note for the margin for modeling purposes is the level and timing of incentive comp accruals in MIS, which we've provided details on throughout last year. We're currently forecasting for funding close to target, whereas in 2024, we accrued above through the second half. That will affect the quarterly margin comparison for the upcoming quarters. To your question about incentive comp, we now expect incentive compensation to be between $400 million and $425 million for the full year 2025. In the first quarter, we recorded $109 million. We're forecasting about $100 million for each of the quarters for the remainder of the year. Great. Thank you. Our next question comes from the line of David Motemaden with Evercore ISI. Please go ahead. Hey, thanks. Good morning.

Just another question just on the MIS outlook. Wondering if you could talk about some of the sensitivities if we got more Fed rate cuts, how you think about that potentially impacting your issuance outlook, as well as on the M&A side. If we had flat M&A this year versus the up 15%, how we should think about that impacting your outlook. Hey, David, thanks for the question. I guess I would say the rate cuts are kind of a mixed bag. You hear us talk a lot on this call about one of the fundamental drivers of issuance is economic growth, right? This is companies that are investing. If we have decelerating economic growth, which is we have shaped our growth forecasts, we've thought that tariffs are going to take about a percent off of global GDP growth.

If we've got decelerating economic growth that's leading to Fed rate cuts, again, I'd say it's kind of a mixed bag. The negative impact of decelerating fundamental growth versus the benefit of lower rates. Now, that may impact things like pull forward from the maturity walls and things like that, but I would say it'll be mixed. For M&A, I think we had talked about on the last call that kind of every 10% of M&A we thought would be about, call it $35 million in rating revenue. That gives you a sense of the sensitivity to that assumption. I guess what I'd say is M&A is one assumption among many at this point that you have to look at in terms of thinking about what's going to go on with issuance. Our next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Thank you. Rob, just on private credit, just hoping maybe it's a little bit of a broader question, but obviously, you said a lot of the growth showed up in structured finance. I was just curious which other lines within your Moody's reporting segments do you think you have initiatives where you think that could pop up? Obviously, that's all good news. I was hoping you'd just help us balance that with all the headlines in the near term, I guess, around how the banks are obviously frozen and private credit is in the headlines taking deals here and there. Just balance with some of the negatives out there too, if you could. Yeah. All right. Let me kind of work my way through that, Manav. Great question.

First of all, I'd say it's in times where you've got some volatility in the public markets that we've seen that private credit can step in. We've seen that with we started with post-financial crisis, but we really saw it with COVID. In 2023, when we saw some stress in the U.S. banking system, we saw private credit again step in there as a funding source. I think you got to balance that with there are going to be increasing issues around asset quality across the private credit portfolios, right? These are highly leveraged, typically the direct lending or highly leveraged loans. We're seeing it in a few places, right? We talked about structured finance, so you're seeing a lot of asset-backed finance from private credit sponsors rolling through. We also see it in fund finance. That may not be issuance per se at times.

We've got ratings on different alternative asset managers and fund entities and other things. It's not always showing up in the issuance numbers, but you see it in the first-time mandates. The growth of our FIG first-time mandates is importantly there's important contribution from private credit-related entities. Within FIG, when we talk about fund finance, it's everything from ratings on alternative asset managers and BDCs, but you've also got and I think of some of that as what you might call related to direct lending, right? Those are direct lenders. Then you've got true fund finance where you've got things like subscription lines and NAV loans and rated feeders and all of that. Those are the two places where we're seeing the most of this flow through.

The last thing I would say, Manav, is, and I imagine most of you saw our announcement with MSCI that I mentioned in my remarks, but there is more and more investor desire to understand and have a third-party view of credit risk of the investments that they are invested in through these private credit funds. It is interesting because when we made this announcement, we have gotten some very good inbound from people saying, this is interesting. Tell me more. I am interested in understanding how I can get this independent view of credit risk. I think you are going to see in MA through our credit scoring tools, I think you will see that as a revenue opportunity for us as well to capitalize on private credit. Our next question will come from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Thanks so much for taking my question.

Wanted to circle back to MA. I know you slightly reduced your ARR guidance. You talked about the federal government exposure. I understand that. Beyond that, are you seeing any other kind of slowdown or uncertainty in those businesses? Because some of the metrics kind of look like they are slowing down a bit. Thanks. Yeah. I'll take a crack at that. Not really. I mean, we talked about the two things that primarily were impacting ARR in the quarter, and obviously, that impacts our guidance for the year. That was, as you noted, federal government, not surprising, I think, to many people. We had some ESG-related attrition as some customers are actually going straight to MSCI. I think we kind of anticipated and understood that. I would say in regards to we get questions about pipeline and sales cycle.

We have had a number of questions over the years as we go into these periods of turbulence about, "Are the sales cycles extending?" I would say, "No, not at the moment. It is early, right?" In 2023, when we saw stress with the regional banks in the U.S., it is not so much that we saw the sales cycles extend, but we saw some of the sales cycles push farther out in the calendar year, right, where banks just said, "Hey, look, I am not ready to make a decision yet. I need to get more certainty about the operating environment, and let us revisit some of this." The second thing is the pipeline is our pipeline across MA is quite robust. It is up double digits from the same time last year. The pipeline is good. We are not seeing at the moment delays in sales cycles.

When we think about our guidance for the year, I think you're seeing us just acknowledge that it's a possibility. We want to acknowledge in an environment of heightened uncertainty, it's possible we could see some of this push out. We're also acknowledging these two attrition kind of themes from the first quarter. I appreciate the candor. Thanks so much. Our next question comes from the line of Alex Kramm with UBS. Please go ahead. Yes. Hey, good morning, everyone. Just coming back to MIS for a second. I didn't fully understand the commentary you made from a seasonal pattern perspective. Maybe you can just give a little bit more detail there.

What you said about the second and the third quarter, I think you said second to third is stable, but I think from a second quarter perspective, you did not really say much in terms of what you expect following this poor April. Are you expecting May and June to get better? Or what exactly should we be thinking about here from a seasonal perspective? Sorry about the short-term focus, but clearly a lot in flux. Yeah. No, I will start, and Amy, feel free to jump in. I think the way we have thought about this, obviously, we are incorporating the soft start to April, obviously, in our 2Q. And when we kind of think about the quarters, the biggest adjustment that we made in terms of thinking about revenues for the ratings business is in the second quarter.

We do not know exactly how long some of this turbulence is going to last. I can talk a little bit about the current pipeline if people are interested, kind of what we are seeing. I would say the biggest adjustment to revenues was in the second quarter and then less in the third and less in the fourth. We are thinking ratings is going to be down somewhere in the kind of ratings revenue, down somewhere in kind of the mid-single-digit range in the second quarter, down in kind of the low single-digit range in the third quarter, and up in the mid-single-digit range in the fourth quarter. That gets us to somewhere between flat to mid-single-digit revenue growth for the year. Helpful. Thank you. Our next question comes from the line of Faisa Alway with Deutsche Bank. Please go ahead. Yes. Hi. Thank you.

I wanted to ask about MIS margins and expenses more broadly. I think, Rob, you had talked about some GenAI-related efficiencies more broadly in the business. I think you might be talking about MA, but I'm curious to the extent the environment worsens from an issuance perspective relative to how you're thinking about it at the moment, how much flexibility do you have in terms of whether it's pulling back on investments or just some of these efficiencies that are coming through? Yeah. Faisa, hey, thanks. There's two things I'd say here. First of all, we've managed through all these air pockets over the years. I can't tell you how many of these calls I've been on where there's some turbulence in the markets, and we get these questions about how are we thinking about being able to manage expenses.

The reality is that we've got what I'd call kind of the traditional levers that we're able to pull. If we see cyclical declines in issuance, typically, we are very effective at managing headcount and all of that kind of stuff. That's the first thing that we would look at, and that's what you would expect us to do in a declining issuance environment. Only if there's structural changes would we say, "Hey, look, we need to fundamentally think about the resourcing of any particular." In this case, I think we definitely think this is a cyclical issue. There are the traditional levers of just being able to manage hiring very effectively, which we've done over the years. Second, we talked about this idea of becoming increasingly volume agnostic within a range of a band of issuance while maintaining strong controls.

We have really been working at doing that by it's not just the AI tools. Those are helpful, but it's also about building modern applications for our analysts, analytical applications, rating workflow applications, those kinds of things that deliver efficiency to them, right, so that over time, we're able to actually be able to handle more credits per analyst, right? That's obviously the goal, and to be able to do that with consistent rating quality and engagement with the market and high-quality research. The advent of AI gives us the opportunity to deploy more tools to the analysts, but of course, we have to make sure we do that in a way that respects our regulatory environment and has the right control environment around it.

Like many banks, we're more deliberate in how we deploy AI in the rating agency because we need to make sure we have transparency on how we're using AI across the agency. Thank you. Our next question comes from the line of Owen Lau with Oppenheimer. Please go ahead. Hi. Good morning. Thank you for taking my question. Going back to your partnership with MSCI, could you please add more color on the revenue model of the independent risk assessments? What are the use cases? What are your clients looking for? Also, how big this opportunity can become longer term? Thanks. Yeah. Owen, thanks for the question. We haven't disclosed kind of the revenue model or opportunity, but I think we all understand that the private credit market is significant and growing rapidly.

What I would say is in our engagement with investors, and that includes everything from pension funds and long-only investors to insurance companies who are big allocators to private credit, we've heard that there's a lot of desire to have a rigorous third-party credit assessment of the investments that these entities are invested in. If you think about how we're serving the private credit market, we serve the alternative asset managers and GPs, and we also now have an opportunity to really serve the investors. What we're doing with MSCI, they have, by virtue of their current platform, some very rich in-depth data on private credit investments across the fund universe. Now they have the ability to leverage our models to be able to provide our EDFX, our quantitative credit risk scores to those investors.

Over time, I think you would imagine that as we have the opportunity to provide these scores, the customers are going to opt in. Over time, you can imagine working together to build benchmarks and research and indices and all sorts of other things that continue to provide additional transparency and insight into the private credit market. Thanks a lot. Our next question comes from the line of Peter Christiansen with Citigroup. Please go ahead. Thank you. Good morning, and thanks for the question. I was just curious, if we could just drill down into the assumption on first-time mandates, I guess there is a lot of confidence there that is going to continue throughout the year. Just curious if you could just walk us through your confidence in that number throughout the year. Thank you. Yep. You are right.

First-time mandates have actually continued to be the momentum that we had in 2024 has continued into the first quarter. First-quarter FTMs, first-time mandates, were almost 200. That was up 20% versus the prior year quarter. We saw growth in really all regions except Asia-Pacific. Corporate finance was the largest source of first-time mandates. I would also say that, and I mentioned this with private credit, there is this new dynamic now where we are seeing much more first-time mandate growth coming out of our financial institutions franchise related to private credit, right? These are, again, BDCs, asset managers, private credit funds, all these kinds of things that are getting rated for the first time. In fact, I think something like a third of our first-time mandates in FIG were serving the private credit market both in the US and to a lesser extent in EMEA.

We have not changed the guidance at this time. Obviously, a lot of first-time mandates are related to leveraged finance. That is something to watch, but we have a bit of a tailwind in the FIG franchise. Thank you. Our next question comes from the line of Sean Kennedy with Mizuho. Please go ahead. Good morning. Thank you for taking my question. It was nice to see strong growth in KYC this quarter. You touched on this in the prepared marks, but I was wondering if tariffs and heightened macro uncertainties are acting as a catalyst for helping penetrate the corporate market. Could you also touch on the total opportunity and go-to-market strategy there? Yeah. Hey, Sean. Good to have you on the call.

It is interesting, this point about your question about are tariffs actually driving some have the potential to drive some demand for our solutions around KYC and supply chain and supplier risk. I think the answer is potentially yes because we have talked about on the call before that this massive amount of company data, and then we have been enriching it with these other data sets to serve these various use cases, right? It started with KYC. It is a very high-growth scale use case for us. We talked about this corporate platform that we have deployed. We call it Maxite, where we are not just serving KYC, but we are also now serving, for instance, supplier risk and elements of supply chain and so on. We launched that platform in the first quarter for corporates. We got something like 150 quoted opportunities in the pipeline.

There is a lot of really good dialogue with customers around these kinds of use cases. We are seeing some early traction in that dialogue in areas like logistics and healthcare and TMT. I think, again, when we see areas where there is uncertainty, what you see is customers wanting to try to work through that uncertainty, get additional tools, get additional data site. I think that is part of what we are seeing here. Got it. Very helpful. Thank you. Good luck with the rest of the year. Thanks. Our next question comes from the line of Joshua Dinnerline with Bank of America. Please go ahead. Yeah. Hey, guys. Rob, just trying to tie some of your comments today on expense management and margin versus maybe what we have seen in your history.

If I look back to 2022, we saw a fairly significant slowing in MIS revenues and margins really compressed. Is that not a good analogy to what might happen if MIS revenues slow a lot more than you expect this year? Hey, Joshua, thanks for the question. I'll see if Noémie wants to double-click on this, but I think there's a difference between 2022 and where we believe we are now. In 2022, we had revenues that were down something like 30%-ish off the top of my head. A 30% decline in the span of one year, it's difficult to preserve a lot of that margin. We saw the margins come down below historical levels. I would say within a general range, we have more ability. Obviously, we have incentive comp, which flexes up and down.

We have, as I said, some of these, what I'd say, kind of traditional levers that allow us to preserve more of the operating leverage within a band is how I think about it. Yeah. That's the key. It's within the band of issuance. If you look at our guidance, we've adjusted our operating margin guidance for MIS by just a notch. We're now guiding for 61-62%, which is still a pretty significant year-on-year increase. To Rob's point, we're being cautious with discretionary spend. We also continue to invest in our digital workflows and analytical tools. I think it's important to continue to equip our analysts with the technology that will help us be volume agnostic in the future as well. Again, we're not forecasting at this point anything like 2022 scenario. Yeah.

I think just when I kind of zoom out, you kind of look at the financial profile, the margins, and so on, this is still a very strong financial profile for the business. Thanks, guys. Our next question will come from the line of Jason Haas with Wells Fargo. Please go ahead. Hi. Good morning. This is Junyi, on for Jason Haas. Just wanted to follow up on the KYC question earlier. Curious to what extent you consider the current MA profile as countercyclical and are there any other specific subsegments that hold up better than others during downturns, maybe like insurance? Thank you. Hey, thanks for the question. We've talked about over the years, in general, I'd say much of the MA portfolio tends to be, I don't know if I'd say countercyclical, but it tends to weather these acyclical, maybe a way to think about it.

That's probably the right word, probably acyclical. You've seen 68 quarters of growth, consecutive growth through all sorts of different periods where ratings revenue has gone up and down. If you think about why is that, it's because think about the use cases that we're serving across the various businesses. In banking, you've got customers using not only our software but our data for everything from lending to stress testing to CECL to impairment testing and ALM. That stuff is just very, very sticky, as you'd imagine. These are not things that you just unwire when you hit an air pocket. In fact, if anything, we'll see the usage oftentimes go up. Same with our research. There's more demand in these environments to access the research and access our analysts and get our insights in these kinds of markets. Insurance, same thing.

If you think about what's going on with the extreme weather events, it has nothing to do with financial markets, right? It's completely uncorrelated. This need to be able to invest in these tools to better be able to understand and address physical risk and underwriting needs is not really, in that case, correlated to the market. The last thing I'd say, you asked specifically about KYC. There's another great example. What we do see are banks trying to become two things: more efficient and more effective. There's no question that that is going on. What we don't see is our banks saying, "Hey, KYC is somehow less important. I don't need to invest in it. This is a place that I'm going to cut." You do that, and next thing you know, you have a fine or a consent order.

I think banks have been very clear. They want to make sure they have regulatory compliance, but they also want to make sure they can get more and more efficiency. That is why I mentioned this AI screening agent because that is a fantastic opportunity to help banks with compliance to be more effective, to reduce false positives, but to be much more efficient. I think we are expecting to see some good demand there. Very helpful. Thank you. That will conclude our question and answer session. I will now turn the call back to Rob for any closing remarks. Thank you very much for the questions. We look forward to speaking with you on the next call. Have a good day, everybody. Thank you. This concludes Moody's Corporation First Quarter 2025 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 Corporation IR website. Thank you. You may now disconnect.