Moody's Corporation Reports Results for Third Quarter of 2007
Moody's Corporation (NYSE: MCO) today announced results for the
third quarter of 2007.
Summary of Results for Third Quarter 2007
Moody's reported revenue of $525.0 million for the three months
ended September 30, 2007, an increase of 6% from $495.5 million for
the same quarter of 2006. Operating income for the quarter was $250.5
million and declined 7% from $268.8 million for the same period of
last year. Diluted earnings per share were $0.51 in 2007 versus $0.55
in 2006, or a 7% decrease.
Raymond McDaniel, Moody's Chairman and Chief Executive Officer,
commented, "Moody's delivered revenue growth in the third quarter
despite significant deterioration in credit market activity in August
and September; however, operating income and earnings per share both
declined as the impact of actions to manage expenses lagged the pace
of reduced market activity. Based on expectations of continued
weakness in the debt markets, we are revising our 2007 earnings
guidance downward. We now expect full year revenue to grow in the
high-single-digit to double-digit percent range. Given this revised
outlook, we are moving aggressively to reduce expenses and expect to
record a restructuring charge in the fourth quarter. Full-year
reported earnings per share are expected to be about flat with 2006
results, excluding the impact of any restructuring charge. We now
expect earnings per share in 2007 to grow in the mid- to
high-single-digit percent range, excluding any 2007 restructuring
charge, the 2006 gain on the sale of our building and the effects of
legacy tax matters."
Third Quarter Revenue
Revenue at Moody's Investors Service for the third quarter of 2007
was $487.9 million, an increase of 6% from the prior year period.
Foreign currency translation positively impacted operating results,
mainly due to the weakness of the U.S. dollar relative to the euro and
the British pound, increasing revenue and operating income growth by
approximately 190 and 160 basis points, respectively.
Ratings revenue totaled $404.7 million in the quarter, rising 2%
from a year ago. Growth in revenue from global corporate finance,
financial institutions and public finance ratings was somewhat offset
by a 6% decline in global structured finance ratings.
Global corporate finance revenue totaled $105.1 million in the
third quarter of 2007, an increase of 17% from the same quarter of
2006. Revenue in the U.S. rose 6% from the prior year period,
reflecting outstanding growth from rating investment grade bonds
largely offset by a 43% decline from rating speculative-grade
securities. Outside the U.S., corporate finance revenue increased 40%
driven by notable growth across all segments, particularly the 84%
increase in revenue from rating investment grade bonds in Europe.
Global financial institutions and sovereigns revenue totaled $68.8
million for the third quarter of 2007, 7% higher than in the prior
year period. Revenue increased 4% in the U.S., driven primarily by
strong issuance in the banking sector and new relationships in the
insurance sector, partially offset by weakness in the residential
mortgage and related credit markets negatively weighing on issuance
activity and causing a decline in real estate revenue. Outside the
U.S., revenue grew 10% based largely on solid growth in the European
banking and finance and securities sectors.
Global structured finance revenue totaled $200.8 million for the
third quarter of 2007, a decrease of 6% from a year earlier. U.S.
structured finance revenue fell 14%, with strong growth from rating
commercial mortgage-backed securities more than offset by declines
across all other asset classes, led by a 52% decrease in revenue from
rating residential mortgage-backed securities. International
structured finance revenue rose 10%, benefiting from strength across
most asset classes including exceptional growth from ratings of
residential mortgage-backed securities and credit derivatives in
Europe.
U.S. public finance revenue was $30.0 million for the third
quarter of 2007, 12% higher than in the third quarter of 2006, driven
by growth in the municipal and healthcare sectors of the business.
Moody's global research revenue rose to $83.2 million, increasing
29% from the same quarter of 2006. The quarter's growth was primarily
driven by strong sales of Moody's core research products to existing
customers and growth in new customers, especially in Europe. Revenue
at Moody's KMV for the third quarter of 2007 was $37.1 million,
modestly higher than in the third quarter of 2006, due primarily to
growth in risk product subscriptions and professional services.
Moody's U.S. revenue of $306.6 million for the third quarter of
2007 was essentially flat with the third quarter of 2006.
International revenue of $218.4 million was 18% higher than in the
prior year period and included approximately 450 basis points of
positive impact from currency translation. International revenue
accounted for 42% of Moody's total revenue in the quarter compared
with 37% in the year-ago period.
Third Quarter Expenses
Moody's operating expenses were $274.5 million in the third
quarter of 2007, 21% higher than in the prior year period. About half
of the increase was driven by additional lease expense related to
Moody's headquarters move and international expansion, as well as
incremental technology investments; the other half was attributable to
higher personnel costs mostly associated with the impact of hiring
from late 2006 and the first half of 2007. Moody's operating margin
for the third quarter of 2007 was 47.7%, compared with 54.2% in the
prior year period.
Third Quarter Effective Tax Rate
Moody's effective tax rate was 43.3% for the third quarter of 2007
compared with 40.9% for the prior year period. The increase was due
primarily to the absence of the prior quarter's favorable adjustment
for certain tax credits and the impacts of the U.K. corporate tax rate
change.
Year-to-date Results
Revenue for the first nine months of 2007 totaled $1,754.1
million, an increase of 21% from $1,447.1 million for the same period
of 2006. Operating income of $918.9 million was up 15% from $796.2
million for the same period of 2006. Currency translation had a
positive impact on these results, increasing revenue growth by
approximately 190 basis points and operating income growth by
approximately 170 basis points. Reported earnings per share for the
first nine months of 2007 were $2.08, 29% higher than the reported
$1.61 for the prior year period and included a $0.19 per share benefit
from the resolution of certain legacy tax matters.
Ratings and research revenue at Moody's Investors Service totaled
$1,643.5 million for the first nine months of 2007, an increase of 22%
from the prior year period. Global ratings revenue was $1,407.3
million for the first nine months of 2007, up 22% from $1,157.2
million in the same period of 2006. Research revenue rose to $236.2
million for the first nine months of 2007, up 26% from the same period
of 2006. Finally, revenue at Moody's KMV for the first nine months of
2007 totaled $110.6 million, 7% higher than in the prior year period.
Share Repurchases and Capital Structure
During the third quarter of 2007, Moody's repurchased 9.1 million
shares at a cost of $484.3 million which more than offset
approximately 0.5 million shares issued under employee stock-based
compensation plans. Share repurchases through the first three quarters
of 2007 were funded using a combination of excess free cash and
borrowings. As of September 30, 2007, Moody's had $2.3 billion of
share repurchase authority remaining under its current program.
Additionally, at the end of the quarter, Moody's had $1.6 billion of
existing debt capacity of which $600 million remained available under
its credit facilities.
Assumptions and Outlook for Full Year 2007
Moody's outlook for 2007 is based on assumptions about many
macroeconomic and capital market factors, including interest rates,
corporate profitability and business investment spending, merger and
acquisition activity, consumer spending, residential mortgage
borrowing and refinancing activity and securitization levels. There is
an important degree of uncertainty surrounding these assumptions and,
if actual conditions differ from these assumptions, Moody's results
for the year may differ from its current outlook.
Based on expectations of continued weaknesses in the global debt
markets, especially markets related to certain areas of structured
finance, we have revised our outlook downward for the full year 2007.
For Moody's overall, the Company now projects revenue growth in the
high-single-digit to double-digit percent range for the full year
2007. This growth assumes foreign currency translation in the fourth
quarter at current exchange rates. We are taking aggressive actions to
reduce expenses and expect to record a restructuring charge in the
fourth quarter of 2007. Excluding any restructuring charge, we expect
the total dollar amount of operating expense in the fourth quarter of
2007 to be lower than the third quarter amount.
We now project the full-year operating margin, excluding any 2007
restructuring charge and the 2006 one-time gain on the sale of Moody's
99 Church Street building, to decline by approximately 220 basis
points in 2007 compared with 2006. The full-year margin decline
reflects higher personnel costs, mostly associated with the impact of
hiring from late 2006 and the first half of 2007, in addition to
investments to sustain business growth including: international
expansion, improving analytical processes, pursuing ratings
transparency and compliance initiatives, introducing new products,
improving technology infrastructure and relocating Moody's
headquarters in New York City.
Reported earnings per share in 2007 are now projected to be about
flat compared to 2006 results. Excluding any 2007 restructuring
charge, the one-time gain on the building sale from 2006 results and
the impacts of legacy tax matters in both years, we now expect
earnings per share in 2007 to grow in the mid- to high-single-digit
percent range.
In the U.S., Moody's continues to project high-single-digit
percent revenue growth for the Moody's Investors Service ratings and
research business for the full year 2007. In the U.S. structured
finance business, the Company now expects revenue for the year to be
about flat to 2006, including low-double-digit percent growth in
commercial mortgage-backed securities and low-teens percent growth in
credit derivatives ratings, offset by a decline in revenue from U.S.
residential mortgage-backed securities ratings, including home equity
securitization, in the low-thirties percent range, which is a greater
decline than the high-teens percent range previously forecast.
In the U.S. corporate finance business, Moody's now expects
revenue growth for the year in the high-teens percent range, which is
lower than the mid-twenties percent range previously forecast. This
assumption anticipates continued good growth in investment grade
issuance offset by a decline in growth in speculative grade issuance
and bank loans. We note considerable uncertainty in the speculative
grade and bank loan segments for the remainder of the year.
In the U.S. financial institutions sector, the Company now expects
revenue to grow in the low-teens percent range, down from previous
guidance of mid-teens percent range. For the U.S. public finance
sector, Moody's now forecasts revenue for 2007 to grow in the
low-double-digit percent range, up from previous guidance, due to
stronger issuance expectations from the positive impact of lower
interest rates. The Company now expects growth in the U.S. research
business to be in the low-twenties percent range, modestly up from
previous guidance of about twenty percent.
Outside the U.S., Moody's now expects ratings revenue to grow in
the low-teens percent range with low-double-digit to twenty percent
growth across all major business lines, led by growth in Europe of
corporate finance and financial institutions. The Company also now
projects growth in the thirty percent range for international research
revenue, up from previous guidance of mid-to-high-twenties percent
range.
For Moody's KMV globally, the Company continues to expect growth
in sales and revenue from credit risk assessment subscription
products, credit decision processing software, and professional
services. This should result in mid- to high-single-digit percent
growth in revenue with significantly greater growth in profitability.
Moody's is an essential component of the global capital markets.
The company provides credit ratings, research, tools and analysis that
help to protect the integrity of credit. Moody's Corporation (NYSE:
MCO) is the parent company of Moody's Investors Service, which
provides credit ratings and research covering debt instruments and
securities; Moody's KMV, a provider of quantitative credit analysis
tools; Moody's Economy.com, which provides economic research and data
services; and Moody's Wall Street Analytics, a provider of software
tools and analysis for the structured finance industry. The
corporation, which reported revenue of $2.0 billion in 2006, employs
approximately 3,700 people worldwide and maintains a presence in 27
countries. Further information is available at www.moodys.com.
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Moody's Corporation
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
Amounts in millions, except per
share amounts
--------------------------------------------------- -----------------
Revenue $ 525.0 $ 495.5 $1,754.1 $1,447.1
--------------------------------------------------- -----------------
Expenses
Operating, selling, general and
administrative expenses 262.9 216.9 804.2 622.4
Depreciation and amortization 11.6 9.8 31.0 28.5
------------------ -----------------
Total expenses 274.5 226.7 835.2 650.9
--------------------------------------------------- -----------------
Operating income 250.5 268.8 918.9 796.2
--------------------------------------------------- -----------------
Interest and other non-operating
income (expense), net (9.0) (3.1) 5.5 1.0
Income before provision for
income taxes 241.5 265.7 924.4 797.2
Provision for income taxes 104.6 108.7 350.2 321.9
--------------------------------------------------- -----------------
Net income $ 136.9 $ 157.0 $ 574.2 $ 475.3
--------------------------------------------------- -----------------
--------------------------------------------------- -----------------
Earnings per share
Basic $ 0.52 $ 0.56 $ 2.13 $ 1.66
Diluted $ 0.51 $ 0.55 $ 2.08 $ 1.61
--------------------------------------------------- -----------------
Weighted average shares
outstanding
Basic 262.2 280.7 269.8 287.1
Diluted 267.6 287.9 276.1 294.9
--------------------------------------------------- -----------------
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Moody's Corporation
Supplemental Revenue Information (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
Amounts in millions 2007 2006 2007 2006
--------------------------------------------------- -----------------
Moody's Investors Service (a)
Structured finance $ 200.8 $ 214.4 $ 725.7 $ 605.0
Corporate finance 105.1 89.5 360.9 274.4
Financial institutions and
sovereign risk 68.8 64.1 229.3 196.9
Public finance 30.0 26.9 91.4 80.9
--------- -------- -------- --------
Total ratings revenue 404.7 394.9 1,407.3 1,157.2
Research 83.2 64.7 236.2 186.8
--------- -------- -------- --------
Total Moody's Investors
Service 487.9 459.6 1,643.5 1,344.0
Moody's KMV 37.1 35.9 110.6 103.1
--------- -------- -------- --------
Total revenue $ 525.0 $ 495.5 $1,754.1 $1,447.1
--------------------------------------------------- -----------------
Revenue by geographic area
United States $ 306.6 $ 310.3 $1,084.3 $ 917.2
International 218.4 185.2 669.8 529.9
--------- -------- -------- --------
Total revenue $ 525.0 $ 495.5 $1,754.1 $1,447.1
--------------------------------------------------- -----------------
(a) Certain prior year amounts have been reclassified to conform to
the current year presentation.
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Moody's Corporation
Selected Consolidated Balance Sheet Data (Unaudited)
September 30, 2007 December 31, 2006
------------------ -----------------
Amounts in millions
Cash and cash equivalents $ 421.1 $ 408.1
Short-term investments 4.6 75.4
Total current assets 870.6 1,001.9
Non-current assets 681.0 495.8
Total assets 1,551.6 1,497.7
Total current liabilities 1,085.8 700.0
Notes payable 600.0 300.0
Other long-term liabilities 475.3 330.3
Shareholders' equity (609.5) 167.4
Total liabilities and
shareholders' equity $ 1,551.6 $ 1,497.7
Shares outstanding 258.4 278.6
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Moody's Corporation
Reconciliation to Non-GAAP Financial Measures (Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
---------------------------- ----------------------------
Amounts in
millions,
except per
share
amounts
Non-GAAP Non-GAAP
As Adjust- Financial As Adjust- Financial
Reported ments Measures* Reported ments Measures*
-------- ------- --------- -------- ------- ---------
Revenue $1,754.1 - $1,754.1 $1,447.1 - $1,447.1
Expenses 835.2 - 835.2 650.9 - 650.9
-------- ------- --------- -------- ------- ---------
Operating
income 918.9 - 918.9 796.2 - 796.2
Interest and
other non-
operating
income
(expense),
net 5.5 (31.9)(a) (26.4) 1.0 - 1.0
-------- ------- --------- -------- ------- ---------
Income before
provision
for income
taxes 924.4 (31.9) 892.5 797.2 - 797.2
Provision for
income taxes 350.2 20.4 (a) 370.6 321.9 2.4 (a) 324.3
-------- ------- --------- -------- ------- ---------
Net income $ 574.2 $(52.3) $ 521.9 $ 475.3 $(2.4) $ 472.9
-------- ------- --------- -------- ------- ---------
Basic
earnings per
share $ 2.13 $ 1.93 $ 1.66 $ 1.65
-------- --------- -------- ---------
Diluted
earnings per
share $ 2.08 $ 1.89 $ 1.61 $ 1.60
-------- --------- -------- ---------
----------------------------------------- ----------------------------
In addition to its reported results, Moody's has included in the table
above adjusted results that the Securities and Exchange Commission
defines as "non-GAAP financial measures." Management believes that
such non-GAAP financial measures, when read in conjunction with the
company's reported results, can provide useful supplemental
information for investors analyzing period to period comparisons of
the company's growth. The table above shows Moody's results for the
nine months ended September 30, 2007 and 2006, adjusted to reflect
the following:
(a)To exclude benefits for the first nine months of 2007 and 2006,
respectively, related to the resolution of certain legacy tax
matters.
* May not add due to rounding.
Note: There were no adjustments for the three months ended September
30, 2007 and 2006.
*T
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
Certain statements contained in this release are forward-looking
statements and are based on future expectations, plans and prospects
for Moody's business and operations that involve a number of risks and
uncertainties. Moody's outlook for 2007 and other forward-looking
statements in this release are made as of October 24, 2007, and the
Company disclaims any duty to supplement, update or revise such
statements on a going-forward basis, whether as a result of subsequent
developments, changed expectations or otherwise. In connection with
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the Company is identifying certain factors that
could cause actual results to differ, perhaps materially, from those
indicated by these forward-looking statements. Those factors include,
but are not limited to, matters that could affect the volume of debt
securities issued in domestic and/or global capital markets, including
credit quality concerns, changes in interest rates and other
volatility in the financial markets; possible loss of market share
through competition; introduction of competing products or
technologies by other companies; pricing pressures from competitors
and/or customers; the potential emergence of government-sponsored
credit rating agencies; proposed U.S., foreign, state and local
legislation and regulations; regulations relating to the oversight of
Nationally Recognized Statistical Rating Organizations; possible
judicial decisions in various jurisdictions regarding the status of
and potential liabilities of rating agencies; the possible loss of key
employees to investment or commercial banks or elsewhere and related
compensation cost pressures; the outcome of any review by controlling
tax authorities of the Company's global tax planning initiatives; the
outcome of those legacy tax and legal contingencies that relate to the
Company, its predecessors and their affiliated companies for which
Moody's has assumed portions of the financial responsibility; the
outcome of other legal actions to which the Company, from time to
time, may be named as a party; the ability of the Company to
successfully integrate acquired businesses; a decline in the demand
for credit risk management tools by financial institutions; and other
risk factors as discussed in the Company's annual report on Form 10-K
for the year ended December 31, 2006 and in other filings made by the
Company from time to time with the Securities and Exchange Commission.