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    MOODYS CORP /DE/ (MCO)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$401.09Last close (Feb 12, 2024)
    Post-Earnings Price$378.43Open (Feb 13, 2024)
    Price Change
    $-22.66(-5.65%)
    • Moody's is investing heavily in Generative AI (GenAI) and seeing early positive customer adoption of its GenAI-enabled products, such as the Research Assistant, which is expected to drive growth in high-growth areas.
    • Moody's expects strong revenue growth and margin expansion in both its Moody's Analytics (MA) and Moody's Investors Service (MIS) divisions in 2024, supported by constructive market conditions and increased issuance activity.
    • New products like the Research Assistant are experiencing rapid customer uptake, with initial sales faster than normal and customers locking into multiyear agreements, indicating strong demand and potential for accelerated growth.
    • The company's ambitious revenue growth guidance relies on macro-economic assumptions, including rate cuts starting in the second quarter of this year, which may not materialize, potentially impacting MIS revenue growth.
    • Despite significant incremental investments of $60 million in GenAI products and platforming, the monetization and ROI are uncertain, with initial contributions expected only towards the end of 2024.
    • Margins are being compressed due to increased investments, particularly in the MA segment, and the company acknowledges that the path to medium-term margin targets is not linear, posing a risk to profitability if expected ARR growth doesn't materialize.
    1. 2024 Debt Issuance Outlook
      Q: What's your outlook for debt issuance in 2024?
      A: Management expects 2024 debt issuance to be slightly above the long-term average. They anticipate stronger issuance in the first half of the year, with around 30% of annual issuance in Q1. Issuance is expected to be driven by constructive conditions, tighter spreads, and improving sentiments. Corporate issuance and leveraged finance are projected to recover, with mid-single-digit growth in structured finance, particularly in ABS and CLOs.

    2. MIS Margin Expansion
      Q: Why aren't MIS margins higher despite revenue growth?
      A: Management expects 200 basis points of adjusted operating margin expansion in 2024 for MIS. They are investing in technology and resources to enhance efficiency and handle issuance surges without adding staff. These investments aim to drive future efficiencies and maintain their low 60s percent margin target.

    3. GenAI Strategic Investments and ROI
      Q: How will GenAI investments impact growth and ROI?
      A: Management is investing in GenAI products, expecting contributions to revenue growth, particularly in SaaS and hosted solutions. New GenAI products are launching this year, targeting both financial and non-financial sectors. Early engagements show fast adoption among smaller clients and transformational projects with larger institutions.

    4. Commercial Real Estate Impact
      Q: How is the commercial real estate stress affecting your business?
      A: The stress in commercial real estate, especially in office sectors, leads to muted CMBS issuance. However, demand for risk assessment tools increases, particularly among banking customers using Moody's CreditLens CRE module. This situation presents an attractive dynamic as clients seek Moody's insights during heightened risk periods.

    5. Increase in Depreciation and Amortization
      Q: What's causing the 20% increase in D&A expenses?
      A: The increase in D&A reflects higher capital expenditures in SaaS product development. Capitalized software costs are depreciated over 4 to 5 years, in accordance with U.S. GAAP. This supports growth in SaaS revenues, expected to grow in low double digits.

    6. Customer Willingness to Pay for GenAI
      Q: Are customers willing to pay more for GenAI enhancements?
      A: Early feedback indicates customers recognize the value of GenAI products. Smaller clients are adopting quickly, with faster decision cycles and multiyear agreements. Larger institutions are engaging at senior levels for transformational projects, suggesting a willingness to invest in these solutions.

    Research analysts covering MOODYS CORP /DE/.