Moody’s Inc.‘s (MCO) second-quarter 2010 earnings beat the Zacks Consensus Estimate by 5 cents on higher revenues that also exceeding expectations. The results reflect strong activity in corporate and financial institution debt markets, largely driven by high-yield bond and loan issuance.
Despite better-than-expected first half 2010 results, the company remains uncertain regarding issuance levels and inconsistent credit market conditions due to increased volatility and expects structured finance business to remain weak in the second half of the year. The company reaffirmed its earnings guidance but lowered its revenue estimates due to a cautious business outlook.
Operating Performance
Excluding restructuring charges, quarterly earnings stood at 49 cents per share, up 14.0% from 43 cents reported in the year-ago period. Earnings surpassed the Zacks Consensus Estimate of 44 cents per share.
Operating income, excluding restructuring charges and legacy tax matters, came in at $190.8 million in the second quarter of 2010, flat year over year. On a dollar basis, operating expenses increased 10.2% from the year-ago period, primarily due to an increased headcount and incentive compensation and higher spending related to legal and regulatory requirements. As a result of higher expenses and an increase in revenues, operating margin decreased to 39.9% from 42.2% in the year-ago quarter.
Moody’s effective tax rate was 31.1% for the quarter, compared with 36.4% for the prior-year quarter. The decrease was primarily due to a reduction in unrecognized tax benefits and other tax-related liabilities resulting from the closing of various tax audits, lower taxes on foreign income and the favorable resolution of a legacy tax matter.
Revenues Details
Revenues for the quarter totaled $477.8 million, up 6.0% from $450.7 million in the year-ago quarter. Revenues were above our estimate of $469 million. The revenue growth was driven by increases in both the Moody’s Business Analytics (MA) and Moody’s Investor Services (MIS) segments.
The quarter had a negligible impact from the foreign currency fluctuations. U.S. (55% of total revenue) and international revenues (45%) increased 10% and 1%, respectively, to $261.5 million and $261.3 million. Excluding the impact of foreign currency translation, international revenues remained flat compared with the year-ago period.
Segment wise, revenues at MIS inched up 6% year over year to $328.6 million. MIS revenues in the U.S. rose 12%, while revenues outside the U.S. fell 2% from the year-ago period.
Within the MIS segment, Global Corporate Finance revenues shot up 30% year over year in the U.S., due mainly to the strength in high-yield bank loan origination, which more than offset reduced issuance in the investment-grade bond market. Outside the U.S. revenues were up 1% year over year, primarily due to the strength of issuance activity in Asia and Latin America, partially offset by decreased activity in Europe and Canada. Overall, Global Corporate Finance revenues escalated 19% year over year.
This was partially offset by a 2% year-over-year decrease in Global Structured Finance revenues. The decrease is mainly attributable to a decline of 4% in U.S. Structured Finance revenues, primarily due to increased issuance activity from commercial real-estate financing, which was more than offset by reduced activity in derivatives and asset-backed commercial paper programs. The non-U.S. Structured Finance revenues increased 1% year over year, due mainly to European covered bond issuance activity, which was partially offset by a lower securitization activity due to market and regulatory uncertainty and reduced use of government-sponsored facilities.
Global Financial Institutions’ revenues decreased 6%, compared with the year-ago quarter. U.S. and international financial institution revenues plunged 9% and 4%, respectively, primarily due to issuance declines in the U.S. and European insurance and banking sectors.
Global public, project and infrastructure finance revenues increased 6%, compared with the year-ago period. The U.S. increased 13% from the second quarter of 2009, thanks to stronger public and project finance sectors. However, International revenues decreased 8%, primarily due to a reduced issuance for European infrastructure finance.
Moody’s Analytics revenues grew 6% year over year to $149.2 million, given an increase in revenues for research, data and analytics (up 3%), risk management software (up 16%) and professional services (up 14%) segments. In the U.S., MA revenues increased 6% while outside the U.S., revenues rose 7%, primarily driven by the delivery of risk management software projects.
Balance Sheet
Moody’s exited the quarter with $486.0 million in cash and cash equivalents and short-term investments, compared with $503.9 million in the previous quarter. During the quarter, the company repurchased 2.8 million shares at a total cost of $70 million and issued 0.1 million shares under employee stock-based compensation plans. At June end, the company had $1.3 billion share repurchase activity remaining under its current authorization program. Moody’s board of directors declared a quarterly dividend of 10.5 cents per share.
At quarter-end, Moody’s had $1.1 billion of outstanding debt and $644 million of additional debt capacity available under its revolving credit facility. Moody’s reduced total outstanding debt by $16 million during the quarter.
Guidance
Moody’s reaffirmed its fiscal 2010 earnings guidance for the second time. Earnings per share are expected to be in the $1.75 – $1.85 range, in line with the Zacks Consensus Estimate of $1.82 per share. Share repurchase is expected to resume at modest levels in 2010.
Due to increased volatility in the current credit market, the company lowered its revenue expectation. Full year 2010 revenues are expected to increase in the mid single-digit percentage range versus the previous expectation of an increase in the high single-digit percentage range. Expenses are also expected to increase in the mid to high single-digit percentage range, versus the previous expectation of an increase in the high single-digit percentage range. Operating margin is projected in the high-thirties percentage range, consistent with the previous expectation. The effective tax rate is expected to be in the range of 34% to 35% versus previous expectation of 37% to 38%.
Segment wise, for the global MIS business, Moody’s expects revenues to increase in the mid single-digit percentage range for 2010. Within the U.S., the company continues to expect MIS revenues to grow in the low double-digit percentage range, while non-U.S. revenues will likely decline in the low single-digit percentage range. Corporate finance revenues are expected to increase in the high-teens to low-twenties percentage range. Structured finance revenues are expected to decrease in the high single to low double-digit percentage range. Revenues from financial institutions are expected to be flat compared with the prior year, and revenues from public, project and infrastructure finance will likely increase in the mid-single-digit percent range.
Moody’s Analytics revenue growth is expected to increase in the mid single-digit percentage range. MA revenues in the U.S. and outside the U.S. are anticipated to increase in the mid single-digit percentage range. Research, data and analytics revenues are expected to grow in the low-single-digit percentage range, while risk management software revenue growth is expected to grow in the low-double-digit percent range and professional services in the mid single-digit percent range.
Moody’s has a Zacks #4 Rank, indicating a short term Sell rating on the stock. Over the long term we have a Neutral rating on the stock.
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