Moody’s Corp. (MCO) reported third quarter 2011 earnings, which beat the Zacks Consensus Estimate of 49 cents by 8 cents (up 16.3%).
However, Moody’s reported pro forma earnings of 57 cents per share which decreased 1.7% from 58 cents per share in the year-ago quarter. The negative surprise was primarily attributed to sluggish revenue growth and higher expenses.
Operating Performance
Operating income, excluding restructuring charges and legacy tax, came in at $196.3 million in the third quarter, up 3.7% year over year. Operating margin remained flat on a year-over-year basis to 36.9% in the quarter.
On a dollar basis, operating expenses increased 3.4% year over year to $335.0 million. Moody’s effective tax rate was 28.5% in the quarter versus 24.4% in the prior-year quarter.
Net income decreased 3.9% year over year to $130.7 million, with net margin contracting 190 bps year over year to 24.6%.
Revenues in the reported quarter totaled $531.3 million, up 3.5% from $513.3 million reported in the year-ago quarter, but below the Zacks Consensus Estimate of $543.0 million. Moody’s Business Analytics (MA) was the primary growth driver in the reported quarter.
Revenue from the U.S. (51.6% of the total revenue) decreased 1.4% year over year to $274.3 million, while international revenue (48.4%) increased 9.4% to $257.0 million.
Segment wise, Moody’s Investors Service (MIS) revenues dipped 1.9% year over year to $351.4 million. MIS revenues in the U.S. declined 4%, while revenues outside the U.S. spiked 1.0% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues declined 11.0% year over year in the U.S., and 10.0% outside the U.S., primarily due to weaker issuance activity in speculative-grade bond. Overall, Global Corporate Finance revenues decreased 11.0% year over year.
Global Structured Finance revenues jumped 17.0% year over year to $82.0 million. The increase was mainly due to a 20.0% growth in the U.S. Structured Finance revenues, reflecting strength in commercial real estate.
Non-U.S. Structured Finance revenues increased 14.0% year over year, mainly driven by higher issuance volumes in European covered bonds.
Global Financial Institutions’ revenues decreased 2.0% from the year-ago quarter. U.S. financial institution revenues inched down 1.0%, while Non-U.S. revenue fell 3.0% year over year.
Global public, project and infrastructure finance revenues declined 2.0% from the year-ago quarter. U.S. revenue was 8% lower than the prior-year period, reflecting lower-than-expected growth in project and infrastructure finance. International revenues were up 13.0%, driven by strong growth from infrastructure finance.
Moody’s Analytics (MA) revenues grew 16.0% year over year to $179.9 million, buoyed by an increase in Research, Data and Analytics revenues (up 9.0%) and Risk Management software (up 12.0%) revenues. In the U.S., MA revenues increased 6.0% while outside the U.S., the same rose 24.0% annually.
Liquidity
Moody’s exited the quarter with $867.5 million in cash and cash equivalents and short-term investments compared with $938.5 million in the previous quarter.
At quarter end, Moody’s had $1.24 billion of outstanding debt and additional debt capacity of $1.0 billion available under its revolving credit facility.
2011 Guidance
Despite reporting weak third quarter results, Moody’s reiterated its fiscal 2011 earnings guidance. The company expects diluted earnings per share in the range of $2.38 to $2.48 for fiscal 2011. Currently, the Zacks Consensus Estimate is pegged at $2.34 for fiscal 2011.
For fiscal 2011, Moody’s expects revenue to increase in the low-double-digit percent range (previous guidance was in the low-teens-digit percent range). However, expenses are expected to increase in the high-single digit percent range (prior outlook was low-double-digit percent range).
Management expects operating margin of 39% and effective tax rate to be approximately 31.0% for fiscal 2011.
Management intends to continue with its share repurchase program in 2011, subject to available cash flow and other capital allocation decisions.
Segment wise, global MIS revenue is expected to increase in the high-single digit percent range for fiscal 2011. Domestic MIS revenue is estimated to increase in the mid-single-digit percent range, while overseas revenue is expected to grow in the low-teens percent range.
Corporate finance revenue is anticipated to increase in the low-double-digit percent range. Structured finance revenue is projected to grow in the mid-teens percent range.
Revenue from financial institutions is expected to grow in the mid-single-digit percent range, while public, project and infrastructure finance revenue is estimated to be flat on a year-over-year basis.
MA revenue will likely increase in the low-double-digit percent range for fiscal 2011. MA revenue in the U.S is expected to increase in the high-single-digit percent range and in the mid-teens percent range outside the U.S.
Revenue growth is expected in the mid-single-digit percent range for Research, Data and Analytics and in the low- to mid-single-digit percent range for Risk Management software. Professional services revenue is expected to double in 2011, driven by incremental revenue from the acquisition of CSI Global Education in late 2010.
Recommendation
We believe Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth.
However, a sluggish global economy, increasing regulatory complications, and increasing competition from Dun & Bradstreet Corp (DNB) and privately held Fitch Ratings Inc. and Standard & Poor’s Financial Services LLC may hurt its profitability going forward.
We remain Neutral on a long-term basis (6-12 months). Currently, Moody’s has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).
