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Moody’s Corp. (MCO - Analyst Report) reported earnings of 83 cents per share (including 14 cents of litigation charge) in the first quarter of 2013, which jumped 9.0% from the year-ago quarter but missed the Zacks Consensus Estimate.

Quarter Details

Revenues surged 13.0% year over year to $731.8 million and exceeded the Zacks Consensus Estimate of $718.0 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 $406.1 million in the reported quarter. International revenues increased 8.0% year over year to $325.7 million in the quarter.

Segment wise, Moody’s Investors Service (MIS) revenues jumped 15.0% year over year to $521.2 million. MIS revenues in the U.S. leaped 21.0%, while revenues outside the U.S. increased 8.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues surged 29.0% year over year to $258.3 million, while Global Structured Finance revenues declined 1.0% year over year to $93.0 million.

Global Financial Institutions revenues increased 10.0% year over year to $86.5 million in the quarter. Global public, project and infrastructure finance revenues were up 5.0% year over year to $83.4 million.

MA revenues grew 9.0% year over year to $210.6 million, buoyed by an increase in Research, Data and Analytics revenues (up 8.0%), Professional Services revenues (up 7.0%) and Enterprise Risk Solutions revenues (up 10.0%).

MA revenues increased 10.0% in the US, while outside the U.S, it rose 8.0% on a year-over-year basis in the reported quarter.

Operating expenses (including litigation charges) increased 19.0% year over year to $451.4 million. Nevertheless, operating income increased 4.0% year over year to $280.4 million in the first quarter. Operating margin was 38.3% compared with 41.6% in the year-ago quarter.  

Net income soared 8.6% year over year to $188.4 million in the reported quarter.

Moody's exited the quarter with $1.77 billion in cash and cash equivalents and short-term investments. At quarter end, Moody’s had $1.64 billion in outstanding debt.

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 $500 million. Capital expenditures are projected to be approximately $50 million. Moody’s expects approximately $100 million in depreciation and amortization expense.

MIS revenues for 2013 are expected to increase in the high single-digit percent range. In the U.S., MIS revenues are expected to increase in the low double-digit percent range, while non-U.S. revenues are expected to increase in the low single-digit percent range.

Corporate finance revenues are projected to grow in the low double-digit percent range. Revenues from structured finance are now expected to be flat, 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 high single-digit percent range. Non-U.S. revenues are expected to increase in the high single-digit percent range.

Revenues from research, data and analytics is projected to grow in the high single-digit percent range, while revenues for enterprise risk solutions is expected to grow in the low double-digit percent range. Professional services revenues are each 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, competition from the likes of privately held Fitch, McGraw-Hill's division Standard & Poor's, Dun & Bradstreet (DNB - Analyst Report) and Euronet (EEFT - Snapshot Report) remains major concern in the near term.

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

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