Moody’s Beats, Outlook Raised

Moody’s Inc.’s (MCO - Analyst Report) third-quarter earnings came in better than the Zacks Consensus Estimate of 38 cents per share. Earnings per share on a non-GAAP basis (excluding restructuring charges) stood at 43 cents, down 4% from 45 cents in the same quarter a year ago.
 
The effective tax rate was 37.5% for the quarter, compared to 38.4% in the prior-year period. This provided a slight boost to earnings. However, higher operating expenses in the quarter led to a lower operating margin and a decline in the EPS from the year-ago period.
 
Excluding restructuring charges, the company’s operating expenses were 12% higher than the year-ago level.  This resulted in a decline in the operating margin to 39% from 43.4% in the year-ago quarter. The decrease in operating margin was due to the decline in revenue and increase in expenses.
 
Revenues for the quarter came in at $451.8 million, up 4% from $433.4 million reported in the year-ago quarter. Excluding the unfavorable impact of foreign currency, revenues increased 6% year over year. The U.S. (50.7% of total revenues) and international revenues (49.3%) increased 5.2% and 3.3%, respectively, or 8% excluding foreign currency impact year over year.
 
The results reflected slight improvement in the credit market due to the broadening of corporate debt issuance from investment-grade into high-yield as well as growth in Moody’s business Analytics.
 
Segment Results
 
For the quarter, revenues at Moody’s Investor Services (MIS) increased 2.9% year over year, or 5% excluding foreign currency impact to $305.3 million.
 
Within the MIS segment, Global Corporate Finance revenues increased in the U.S., primarily due to increased activity in the high-yield market and outside the U.S., primarily due to issuance of investment-grade securities in Europe. This was offset by a decrease in Structured Finance revenue, due to limited new issuance in commercial and residential mortgage-backed securities.
 
Global Financial Institutions’ revenues decreased due to lower issuance in the banking sector. Global Public, Project and Infrastructure Finance revenue was down in the U.S. primarily due to lower issuance in the municipal sector, while non-U.S. revenues increased with strong increases in project and infrastructure finance issuance in Europe.
 
Moody’s Analytics (MA) revenues grew 7%, or 10% excluding the impact of foreign currency to $146.5 million, as the Software businesses and Professional Services revenues increased with flat Subscriptions revenues.
 
Balance Sheet
 
Moody’s exited the quarter with $429.5 million in cash and cash equivalents and short-term investments, compared to $397.7 million in the previous quarter. During the quarter, MCO had no share repurchase activity and issued 0.2 million shares under the employee stock-based compensation plan.
 
At September-end, the company had $1.4 billion of share repurchase authority remaining under its current program. Total debt decreased to $1.28 billion from $1.30 billion in the previous quarter. Moreover, the company declared a quarterly dividend of 10 cents per share payable on December 10, 2009.
 
Outlook
 
Management raised its outlook for fiscal 2009, the second time this year, due to continuing strength in corporate debt issuance. Earnings per share is expected to be in the $1.60 – $1.68 range, up from its previous outlook of $1.45 –$1.55. Revenues for the full year are expected to be flat year over year, versus the previous expectation of a decline in the mid-single-digit percentage range.
 
Operating expenses are expected to increase in the high-single-digit percent range (previously expected to be in the mid-single-digit percent range). As a result, operating margin is now projected in the high-thirties percentage range versus previous projection of mid- to high-thirties percentage range.
 
For the global MIS business, Moody’s expects revenues to decline in the low single-digit percentage range (previously high single-digit percentage range), while Moody’s Analytics revenue growth is still expected to be in the low single-digit percentage range, driven by strong growth in software revenue attributable to the Fermat acquisition.