Moody’s Corp. (MCO) reported strong second quarter 2011 earnings, beating the Zacks Consensus Estimate of 57 cents by 22 cents (up 38.6%).
Moody’s reported pro forma earnings of 79 cents per share, up 61.2% year over year compared with 49 cents per share in the prior-year quarter. The positive surprise was primarily driven by strong revenues, which comprehensively beat the Zacks Consensus Estimate.
Based on the strong results, Moody’s revised its full-year earnings per share guidance.
Operating Performance
Operating income, excluding restructuring charges and legacy tax, came in at $270.0 million in the second quarter, up 41.5% year over year. Operating margin increased 470 basis points (bps) on a year-over-year basis to 44.6% in the quarter.
On a dollar basis, operating expenses increased 16.8% year over year to $287.0 million, primarily due to increased headcount, higher incentive compensation and higher technology spending.
Moody's effective tax rate was 27.8% in the quarter versus 31.1% in the prior-year quarter.
Net income increased 56.0% year over year to $181.9 million, with net margin surging 560 bps year over year to 30.1%.
Revenues
Revenues in the reported quarter totaled $605.2 million, up 27.0% from $477.8 million reported in the year-ago quarter. Moody's Business Analytics (MA) and Moody's Investor Services (MIS) segments were the primary growth drivers in the reported quarter.
U.S.(52.0% of the total revenue) and international (48.0%) increased 20.0% and 24.0%, respectively, to $315.0 million and $290.2 million.
Segment wise, Moody’s Investors Service (MIS) revenues climbed 33.0% year over year to $412.6 million. MIS revenues in the U.S. rose 26.0%, while revenues outside the U.S. grew 44.0% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues shot up 43.0% year over year in the U.S., and 85.0% year over year outside the U.S., primarily attributable to higher issuance activity in both investment-grade and speculative-grade bond and bank loan markets. Overall, Global Corporate Finance revenues escalated 56.0% year over year.
Global Structured Finance revenues jumped 18.0% year over year to $86.3 million. The increase was mainly due to an 8.0% growth in the U.S. Structured Finance revenues, reflecting strength in commercial mortgage-backed securities issuance.
Non-U.S. Structured Finance revenues increased 28.0% year over year, mainly driven by higher issuance volumes in European asset-backed and mortgage-backed securities, including covered bonds.
Global Financial Institutions’ revenues increased 25.0% from the year-ago quarter. U.S. financial institution revenues increased 27.0%, while Non-U.S. revenue grew 24.0% year over year.
Global public, project and infrastructure finance revenues rose 13.0% from the year-ago quarter. U.S. revenue was 7% higher than the prior- year period, reflecting growth in infrastructure finance. International revenues were up 25.0%, driven by strong growth from infrastructure and public finance.
Moody's Analytics (MA) revenues grew 12.0% year over year to $167.2 million, buoyed by higher Research, Data and Analytics revenues (up 6.0%) and Risk Management software (up 2.0%) revenues. In the U.S., MA revenues increased 4.0% while outside the U.S., the same rose 18.0% from the year-ago quarter.
Liquidity
Moody's exited the quarter with $938.5 million in cash and cash equivalents and short-term investments compared with $726.2 million in the previous quarter.
At quarter end, Moody’s had $1.2 billion of outstanding debt and additional debt capacity of $1.0 billion available under its revolving credit facility.
2011 Guidance
Based on better-than-expected second quarter results, Moody’s revised its fiscal 2011 guidance. For fiscal 2011, Moody’s expects revenue to increase in the low-teens percentage range (previous guidance was in the low-double-digit percentage range). However, expenses are expected to increase in the low-double-digit percentage range.
Management expects operating margin in the range of 38% to 40% and the effective tax rate to be approximately 33.0% for fiscal 2011.
Management intends to continue with its share repurchase program in 2011, subject to available cash flow and other capital allocation decisions.
The company expects diluted earnings per share for fiscal 2011 in the range of $2.38 to $2.48 (previous guidance was $2.22 to $2.32). Currently, the Zacks Consensus Estimate is pegged at $2.34 for fiscal 2011.
Segment wise, global MIS revenue is expected to increase in the low-teens percentage range (previous guidance low-double-digit percentage range) for fiscal 2011. Domestic MIS revenue is expected to increase in the high single-digit percentage range, while overseas revenue is expected to increase in the low-twenties percentage range.
Corporate finance revenue is anticipated to increase in the mid-twenties percentage range. Structured finance revenue is projected to grow in the high-single-digit percentage range.
Revenue from financial institutions is expected to grow in the high-single-digit percentage range, while public, project and infrastructure finance revenue is estimated to be flat on a year-over-year basis.
MA revenue is likely to increase in the low-double-digit percentage range for fiscal 2011. MA revenue in the U.S is expected to increase in the low-double-digit percentage range and in the low-double-digit percentage range outside the U.S.
Revenue growth is expected in the mid-single-digit percentage range for Research, Data and Analytics and in the low- to mid-single-digit percentage range for Risk Management software. Professional services revenue is expected to double in 2011, driven by revenue generated from the acquisition of CSI Global Education in late 2010.
Recommendation
We believe Moody’s, with its diversified credit research business model and international growth, remains a solid franchise in rating debt instruments.
However, a sluggish global economy, increasing regulatory complications, and increasing competition from Dun & Bradstreet Corp (DNB) and privately held Standard & Poor's Financial Services LLC and Fitch Ratings Inc., may hurt its profitability going forward.
We remain Neutral on a long term basis (6-12 months). Currently, Moody’s has a Zacks #4 Rank, which implies a Sell rating in the short term (1-3 months).
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