Moody's Beats by a Dime - Analyst Blog

Moody's Corp. (MCO) reported fourth quarter earnings, beating the Zacks Consensus Estimate of 48 cents by a dime. The growth was primarily driven by strong top-line growth.

Operating Performance

Moody's reported pro forma earnings of 58 cents per share, 38.1% year over year as compared with 42 cents in the previous-year quarter. Net income increased 35.9% year over year to $137.5 million, with net margin increasing 360 basis points (bps) year over year.

Operating income, excluding restructuring charges and legacy tax matters, came in at $196.7 million in the fourth quarter, up 10.6% year over year.

On a dollar basis, operating expenses increased 19.4% from the year-ago quarter, primarily due to increased headcount and incentive compensation and higher spending related to legal and regulatory requirements. As a result of higher expenses, operating margin decreased to 34.9% from 36.6% in the year-ago quarter.

Moody's effective tax rate was 19.5% in the quarter compared with 38.3% in the prior-year quarter.

Revenues

Revenues in the reported quarter totaled $564.3 million, up 16.2% from $485.8 million in the year-ago quarter. Revenues were well above the Zacks Consensus Estimate of $473.0 million.

Excluding the unfavorable impact of foreign currency translation, revenues grew 17.0% year over year. The revenue growth was driven by increases in both the Moody's Business Analytics (MA) and Moody's Investor Services (MIS) segments.

U.S. (52.3% of total revenue) and international revenues (47.7%) increased 20.4% and 11.8%, respectively, to $295.1 million and $269.2 million.

Segment wise, Moody's Investors Service (MIS) revenues increased 15.0% year over year to $382.7 million. MIS revenues in the U.S. rose 25.0% while revenues outside the U.S. grew 4.0% from the year-ago quarter.

Within MIS segment, Global Corporate Finance revenues shot up 59.0% year over year in the U.S., mainly attributable to the strength in high-yield bank loan. Outside the U.S., revenues were up 20.0% year over year, primarily attributable to the strength of issuance activity in Asia and Europe. Overall, Global Corporate Finance revenues escalated 43.0% year over year.

This was partially offset by a 3.0% year-over-year decrease in Global Structured Finance revenues. The decrease was mainly due to a decline of 2.0% in U.S. Structured Finance revenues, with lower consumer asset-backed activity partially offset by improved issuance in commercial real estate finance.

Non-U.S. Structured Finance revenues fell 4.0% year over year, mainly due to lower European derivatives and securitization issuance.

Global Financial Institutions' revenues declined 9.0%, compared with the year-ago quarter. U.S. and international financial institution revenues increased 10.0% and 8.0%, respectively, primarily reflecting lower activity in most of the regions.

Global public, project and infrastructure finance revenues increased 15.0%, compared with the year-ago quarter. The U.S. increased 20.0% year over year, due to strong growth in most sectors. International revenues were up 6.0%, driven by strong growth from Asia.

Moody's Analytics (MA) revenues grew 18.0% year over year to $181.6 million, given an increase in revenues for Research, Data and Analytics (up 3.0%) and Risk Management software (up 37.0%). Professional services segment increased 154.0% year over year. In the U.S., MA revenues increased 7.0% while outside the U.S., revenues rose 26.0% in the quarter.

Fiscal 2010 Results

In fiscal 2010, earnings were $2.13 per share, surpassing the Zacks Consensus Estimate by 17 cents and meeting the high-end of management's guided range of $2.08 to $2.14. Earnings per share increased 25.3% year over year from $1.70 reported in the prior year.

In fiscal 2010, operating income excluding restructuring charges and legacy tax matters came in at $772.9 million, up 9.6% year over year. Operating margin declined to 38.0% from 39.2% in the prior year, primarily attributable to higher operating expenses that increased 15.3% year over year.

Revenues increased 13.1% year over year to $2.03 billion in the fiscal year, in line with management guidance.

Liquidity

Moody's exited the quarter with $672.3 million in cash and cash equivalents and short-term investments compared with $804.5 million in the previous quarter.

During the quarter, the company repurchased 3.9 million shares for $104.0 million. At December end, the company had $1.2 billion remaining in its share repurchase authority under the current program.

At quarter end, Moody's had $1.2 billion of outstanding debt and $1.0 billion of additional debt capacity available under its revolving credit facility. 

2011 Guidance

For fiscal 2011, Moody's expects revenue to increase in the high-single-digit percentage range. Expenses are expected to increase in the mid- to high-single-digit percentage range.

Management expects fiscal 2011 operating margin to be in the range of 38% to 40% and the effective tax rate is expected to be approximately 36.0%.

Share repurchase is expected to continue at modest levels in 2011 subject to available cash flow and other capital allocation decisions.

The company expects diluted earnings per share for fiscal 2011 in the range of $2.12 to $2.22. Currently, the Zacks Consensus Estimate is pegged at $2.12 for the fiscal year.

Segment wise, for the global MIS business, revenue is expected to increase in the mid- to high-single-digit percentage range for fiscal 2011. Domestic MIS revenue is expected to increase in the mid-single-digit percentage range, while overseas revenue is expected to increase in the low-double-digit percentage range.

Corporate finance revenue is projected to increase in the high-single- to low-double-digit percentage range. Structured finance revenue is expected to remain flat year over year.

Revenue from financial institutions is expected to grow in the mid-single-digit percentage range, while public, project and infrastructure finance revenue is projected to increase in the low-double-digit percentage range.

MA revenue is expected to increase in the high-single- to low-double-digit percentage range for fiscal 2011. MA revenue is expected to increase in the high-single-digit percentage range in the U.S. and in the low-double-digit percentage range outside the U.S.

Revenue growth is expected in the mid-single-digit percentage range for Research, Data and Analytics and in the low- to mid-single-digit percentage range for Risk Management software. Professional services revenue is expected to more than double, due to additional revenue from the acquisition of CSI Global Education.

Our Take

We expect Moody's to benefit from the gradual recovery of the US macro environment and to deliver a strong top-line driven by Investor Service and Analytics business over the long term. However, we believe weak Structured Finance business and increased expenses can hurt profitability in the near term.

We have a Neutral rating on a long-term basis (6-12 months). Currently, Moody's has a Zacks #2 Rank, which implies a Buy rating over the short term.

 
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