Moody’s (MCO) reported second quarter revenue of $450.7 million that was above the consensus estimate of $428.9 million. This was, however, down 7.6% from $487.6 million reported in the year-ago quarter.
Excluding restructuring charges and benefits relating to the resolution of certain legacy tax matters, pro forma EPS of 43 cents was above the Zacks consensus estimate of 39 cents, but down 15.7% from 51 cents per share reported in the year-ago quarter.
Excluding certain legacy tax matters and restructuring efforts, the effective tax rate was 38.8% for the second quarter of 2009, compared to 39.6% in the prior-year period. The lower tax rate has boosted EPS.
Although results indicate a slight improvement in the credit market as reflected in the broadening of corporate bond issuance from investment grade into high yield, the company was impacted by an unfavorable impact of foreign currency translation. Excluding the foreign currency impact, revenue declined 4.0% year-over-year.
Revenue decreased due to a decline in Moody’s Investor Services (MIS) revenue, which fell 12.8% year-over-year. Structured Finance revenue also decreased due to limited new issuance in commercial and residential mortgage-backed securities. Moody’s Analytics (MA) revenue grew 6.5%, as the Software businesses grew 83.2% year over year, with flat Subscriptions and Professional Services revenue.
As a result of international diversification, international revenue was down only 4.7% year over year in the quarter compared to a 10.0% decline in U.S. revenue.
Excluding restructuring charges, operating expenses rose 2.5% from the prior-year period, resulting in an operating margin of 42.2% versus 47.9% in the year-ago quarter. The decrease in margin was due to the decline in revenue and increase in expenses.
Moody’s remained cautious about its 2009 results, but raised its full year EPS guidance to $1.45-$1.55 from its previous outlook of $1.40-$1.50 due to better-than-expected first-half results. Although the full-year profit outlook was raised, it fell short of analyst estimates.
Consequently, we expect weakness to linger in the second half of 2009. Revenue is expected to decline in the mid single-digit percentage range with no significant improvement until later in the year. The MIS business is expected to decline in the high single-digit percentage range, while Moody’s Analytics is expected to grow in the low single-digit percentage range. Operating expenses are expected to increase in the mid-single-digit percentage range, leading to an operating margin of mid to high-thirties percentage range.
Although the economy is showing signs of revival, we remain cautious about the recovery in the debt market in 2009, and expect a slow recovery in the company’s results as it faces a tempered credit environment. We maintain a neutral stance on the stock.
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