Moody’s Corp. (MCO) reported strong first quarter 2011 earnings, beating the Zacks Consensus Estimate of 53 cents by 14 cents (26.4%). The positive surprise was primarily driven by strong top-line growth across all segments.

Based on the strong results, Moody’s revised its full-year guidance, expecting higher revenues from most of its operational segments.

Operating Performance

Moody’s reported pro forma earnings of 67 cents per share, up 42.3% year over year compared with 47 cents in the comparable prior-year quarter. Net income increased 35.6% year over year to $155.5 million, with net margin surging 290 basis points (bps) year over year to 26.9%.

Operating income, excluding restructuring charges, came in at $250.1 million in the first quarter, up 27.1% year over year.

On a dollar basis, operating expenses increased 16.9% year over year to $250.1 million, primarily due to increased headcount, higher incentive compensation and higher technology spending. As a result of the higher expenses, operating margin increased to 43.3% from 41.3% in the year-ago quarter.

Moody’s effective tax rate was 33.2% in the quarter versus 37.2% in the prior-year quarter.

Revenues

Revenues in the reported quarter totalled $577.1 million, up 21.1% from $476.6 million in the year-ago quarter. Revenues handily beat the Zacks Consensus Estimate of $519.0 million.

Moody’s Business Analytics (MA) and Moody’s Investor Services (MIS) segments were the primary growth drivers in the reported quarter.

U.S. (52.2% of the total revenue) and international (47.8%) increased 18.0% and 24.0%, respectively, to $301.4 million and $275.7 million.

Segment wise, Moody’s Investors Service (MIS) revenues climbed 23.0% year over year to $412.6 million. MIS revenues in the U.S. rose 22.0%, while revenues outside the U.S. grew 25.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues shot up 52.0% year over year in the U.S., and 31.0% year over year outside the U.S., primarily attributable to the strength of issuance activity in both investment-grade and high-yield markets. Overall, Global Corporate Finance revenues escalated 44.0% year over year.

Global Structured Finance revenues jumped 25.0% year over year to $89.4 million. The increase was mainly due to an 11.0% growth in the U.S. Structured Finance revenues, reflecting strength in commercial real-estate finance issuance, partially offset by declining asset-backed securities.

Non-U.S. Structured Finance revenues were up 39.0% year over year, mainly due to higher demand for ratings for securitizations placed with government-sponsored facilities in Europe and increased covered bond issuance.

Global Financial Institutions’ revenues inched up 1.0%, compared with the year-ago quarter. U.S. financial institution revenues decreased 2.0%, while Non-U.S. revenue grew 3.0% year over year.

Global public, project and infrastructure finance revenues rose 5.0%, compared with the year-ago quarter. However, in the U.S, revenue for the same decreased 10.0% year over year, due to weakness in most sectors. International revenues were up 35.0%, driven by strong growth from infrastructure finance.

Moody’s Analytics (MA) revenues grew 17.0% year over year to $164.5 million, buoyed by an increase in revenues for Research, Data and Analytics (up 5.0%) and Risk Management software (up 19.0%). In the U.S., MA revenues increased 9.0% while outside the U.S., revenues rose 23.0% from the year-ago quarter.

Liquidity

Moody’s exited the quarter with $726.2 million in cash and cash equivalents and short-term investments compared with $672.3 million in the previous quarter.

During the quarter, the company repurchased 4.3 million shares for $128.0 million. At the end of March, 2011, the company had $227.8 million shares remaining under its current authorization program.

On April 26, 2011, Moody’s increased its quarterly dividend by 22% to 14 cents per share.

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

Based on better-than-expected first quarter results, Moody’s revised its fiscal 2011 guidance. For fiscal 2011, Moody’s expects revenue to increase in the low-double-digit percent range (previous guidance high-single-digit percent range). However, expenses are expected to increase in the mid- to high-single-digit percent range.

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

Management intends to continue with its share repurchase program 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 $2.22 to $2.32 (previous guidance was $2.12 to $2.22). Currently, the Zacks Consensus Estimate is pegged at $2.18 for the fiscal year.

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

Corporate finance revenue is anticipated to increase in the high-teens percent range. Structured finance revenue is expected to grow mid-single-digit percent range.

Revenue from financial institutions is expected to grow in the high-single-digit percent range, while public, project and infrastructure finance revenue is estimated to increase in the mid-single-digit percent range.

MA revenue is likely to increase in the high-single- to low-double-digit percent range for fiscal 2011. MA revenue is expected to increase in the high-single-digit percent range in the U.S. and in the low-double-digit 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, driven by revenue generated from the newly acquired CSI Global Education.

Recommendation

We maintain our Outperform rating over the long term. Moody’s achieved strong growth across most segments in the first quarter. We expect Moody’s to benefit from the gradual recovery in the U.S. economy, with the Investor Service and Analytics business delivering strong top-line results over the long term.

Despite tough competition from Dun & Bradstreet Corp (DNB) and privately held Fitch Ratings Inc., we believe Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth.

Moreover, lower operating expense and higher share repurchases will improve profitability going forward.

Currently, Moody’s has a Zacks #2 Rank, which implies a Buy rating in the short term (1-3 months).

 
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