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Moody’s Corp. (MCO - Analyst Report) reported earnings of $1.00 per share in the second quarter of 2013, which jumped 32.0% from the year-ago quarter and comfortably surpassed the Zacks Consensus Estimate by 9 cents.

Quarter Details

Revenues surged 18.0% year over year to $756.0 million, comprehensively beating the Zacks Consensus Estimate of $726.0 million. The better-than-expected result was driven by strong performance from both Moody’s Investors Service (“MIS”) and Moody's Analytics (“MA”) division.

Domestic revenues soared 18.0% year over year to $408.4 million in the reported quarter. International revenues also increased by the same magnitude to $347.6 million in the quarter.

Segment wise, Moody’s Investors Service (MIS) revenues jumped 22.0% year over year to $537.3 million. MIS revenues in the U.S. leaped 21.0%, while revenues outside the U.S. increased 22.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues surged 37.0% year over year to $262.9 million, while Global Structured Finance revenues increased 7.0% year over year to $97.2 million.

Global Financial Institutions revenues increased 9.0% year over year to $84.5 million in the quarter. Global public, project and infrastructure finance revenues were up 14.0% year over year to $92.7 million.

MA revenues grew 10.0% year over year to $218.7 million, buoyed by a strong increase in Research, Data and Analytics revenues (up 7.0%), Professional Services revenues (up 7.0%) and Enterprise Risk Solutions revenues (up 17.0%).

MA revenues increased 8.0% in the US, while outside the U.S, it rose 11.0% on a year-over-year basis in the reported quarter.

Operating expenses increased 12.0% year over year to $405.2 million due to increased headcount, annual compensation increases and higher technology expenses.

Nevertheless, operating income increased 26.0% year over year to $350.8 million in the second quarter. Operating margin was 46.4% compared with 43.5% in the year-ago quarter.  

Net income soared 30.7% year over year to $225.5 million in the reported quarter.

Moody's exited the quarter with $1.6 billion in cash and cash equivalents and short-term investments. At quarter end, Moody’s had $1.6 billion in outstanding debt. The company bought back 4.1 million shares for $259.1 million during the quarter.

Guidance

Moody’s expects 2013 revenues to grow in the high single-digit percent range. Operating expenses are projected to increase in the mid single-digit percent range. Operating margin is projected to be between 41% and 42%. Earnings for 2013 are expected to be in the range of $3.49 to $3.59 per share.

For 2013, share repurchases are expected to be approximately $1.0 billion (up from $500 million). Capital expenditure is projected to be approximately $50 million. Moody’s expects approximately $100 million in depreciation and amortization expense. Free cash flow is expected to be $850.0 million.

MIS revenues for 2013 are expected to increase in the high single-digit percent range. Both U.S. and non-U.S. MIS revenues are expected to increase in the high single-digit percent range.

Corporate finance revenues are projected to grow in the low teens percent range. Revenues from structured finance are now expected to decline in the low-single-digit percent range, while revenues from financial institutions are expected to grow in the low single-digit range. Public, project and infrastructure finance revenues are expected to increase in the low double-digit percent range.

MA revenues for 2013 are expected to increase in the high single-digit percent range. In the U.S., revenues are expected to increase in the low double-digit percent range. Non-U.S. revenues are expected to increase in the mid single-digit percent range.

Revenues from research, data and analytics are projected to grow in the high single-digit percent range, while revenues for enterprise risk solutions are expected to grow in the low double-digit percent range. Professional services revenues are expected to grow in the high single-digit percent range.

Our Recommendation

We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities. Moreover, strength in new domestic debt issuance and improving clarity over regulatory climate in Europe are positives.

However, increasing competition from the likes of privately held Fitch, McGraw Hill Financial’s (MHFI - Analyst Report) Standard & Poor's division, Dun & Bradstreet (DNB - Analyst Report) and Euronet (EEFT - Snapshot Report) is a major concern going forward.

Currently, Moody’s has a Zacks Rank #3 (Hold).

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