Moody’s Inc.
’s (MCO) first-quarter 2010 earnings beat the Zacks Consensus Estimate of 44 cents per share. Excluding restructuring charges, quarterly earnings stood at 47 cents per share, up 14.6% from 41 cents reported in the year-ago period.
 
The results reflected a strong activity in corporate and financial institution debt markets, largely driven by high-yield bond and loan issuance, the company said.
 
Moreover, the company is benefiting from an improvement in the credit market due to the broadening of corporate debt issuance from investment-grade into high-yield grade, boosting the company’s earnings.
 
Operating income, excluding restructuring charges of $196.1 million, increased 22.0% from $160.7 million last year. Despite higher operating expenses (primarily due to higher accruals for performance-based compensation), which increased 13.0% from the year-ago level, operating margin increased to 41.1% from 39.3% in the year-ago quarter due to an increase in revenue.
 
Revenues for the quarter came in at $476.6 million, up 16.6% from $408.9 million reported in the year-ago quarter. The revenue increase was driven by increases in both the Moody’s Business Analytics (MA) and Moody’s Investor Services (MIS) segments.
 
Excluding the favorable impact of foreign currency, revenues increased 14% year over year. The U.S. (53.4% of total revenues) and international revenues (46.6%) increased 21.9% and 11%, respectively. The strengthening markets are a reflection of a recovery at Moody’s.
 
We believe that Moody’s remains a solid franchise in rating debt instruments and will show substantial growth with its diversified credit research business model and international growth, although we don’t expect a major improvement in the company’s Structured Finance business, which is also reflected in the company’s lower guidance for this business. Thus we have a “Neutral” rating on the stock.
 
Segment Results
 
For the quarter, revenues at MIS increased 24.2% year over year, or 21% excluding favorable foreign currency impact, to $335.5 million. MIS revenue in the U.S. increased 30% while revenue outside the U.S. increased 17% from the year-ago period.
 
Within the MIS segment, Global Corporate Finance revenues increased 49% from last year in the U.S. and 53% outside the U.S., primarily due to the strength of issuance activity in the high-yield bond and loan market. Overall Global Corporate Finance revenues increased 50.3% year over year.
 
This was partially offset by a 1.2% year-over-year decrease in Global Structured Finance revenue. The increase of 21% in U.S. Structured Finance revenue was primarily due to increased issuance activity from commercial real-estate financing and asset-backed securities that was more than offset by a 17% decrease in the non-U.S. Structured Finance revenue, driven primarily by declines within Europe in most asset classes as better credit market conditions improved issuers’ access to liquidity, which was partially offset by reduced issuance of new securitizations for government-sponsored facilities.
 
Global Financial Institutions’ revenues increased 35.3%, compared with the year-ago period due to higher levels of issuance in the banking and insurance sectors. U.S. and international financial institution revenues increased 39% and 33%, respectively.
 
Global public, project and infrastructure finance revenues increased 7.0%, compared with the year-ago period. The U.S. revenues increased 6% from the first quarter of 2009, primarily due to stronger public finance issuance across most sectors as well as improved project finance market conditions. Further, International revenues increased 8%, primarily driven by investment-grade activity within project and infrastructure finance.
 
Moody’s Analytics revenues grew 1.7% year over year to $141.1 million, as increased revenues from research, data and analytics and risk management software was partially offset by a decline in professional services revenues. Excluding the favorable impact of foreign currency translation, revenues grew 1%. In the U.S., MA revenues increased 3%, while outside the U.S., revenues increased 1%.
 
Balance Sheet
 
Moody’s exited the quarter with $503.9 million in cash and cash equivalents and short-term investments, compared with $483.9 million in the previous quarter. During the quarter, the company repurchased 1.1 million shares at a total cost of $30 million and issued 1.4 million shares under employee stock-based compensation plans. At March end, the company had share repurchase activity worth $1.4 billion remaining under its current authorization program.
 
At quarter-end, Moody’s had $1.1 billion of outstanding debt and more than $600 million of additional debt capacity available under its revolving credit facility. Moody’s reduced total outstanding debt by $72 million during the quarter. Moreover, the company will pay its quarterly dividend of $0.105 per share on June 10.
 
Guidance Reaffirmed
 
Moody’s reaffirmed its fiscal 2010 guidance, previously given out during the fourth quarter conference call. Despite better-than-expected first-quarter 2010 results, the company reiterated its guidance due to the uncertainty regarding issuance levels that could overcome weakness in its structured finance business in the second half of the year.
 
Full-year 2010 revenues are expected to increase in the high-single-digit percentage range. Expenses are also expected to increase in the high-single-digit percentage range. As a result, operating margin is forecasted in the high-thirties percentage range.
 
The effective tax rate is expected to be in the range of 37% to 38%. Earnings per share are expected to be in the $1.75 – $1.85 range, 2 cents below the Zacks Consensus Estimate. Share repurchase is expected to resume at modest levels in 2010.
 
For the global MIS business, Moody’s expects revenues to increase in the high-single-digit to low double-digit percentage range for 2010. Within the U.S., the company continues to expect MIS revenues to increase in the mid-teens percent range, while non-U.S. revenue is now expected to increase in the low-single-digit percent range.
 
Corporate finance revenue is now expected to increase in the low-twenties percent range with anticipated growth in speculative-grade issuance activity partially offset by moderation of investment-grade issuance from the high volume of 2009.
 
Structured finance revenue is now expected to decrease in the low-single-digit percent range reflecting more limited European issuance activity from asset-backed securitizations and derivatives than previously anticipated. Revenue from financial institutions is expected to increase in the low-single-digit percent range, and revenue from public, project and infrastructure finance to increase in the low-double-digit percent range.
 
Moody’s Analytics revenue growth is expected to increase in the mid-single-digit percentage range. MA revenue in the U.S. is expected to increase in the low-single-digit percent range and revenue outside the U.S. is expected to grow in the mid-single-digit percent range.
 
Research, data and analytics revenue is expected to grow in the low-single-digit percent range, while risk management software revenue growth is now expected to grow in the high single-digit to low double-digit percent range and professional services in the mid- to high-single-digit percent range.

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