Moody's (MCO) Q1 Earnings & Revenues Beat, Expenses Rise

Moody's (NYSE:MCO) reported first-quarter 2019 adjusted earnings of $2.07 per share, which handily outpaced the Zacks Consensus Estimate of $1.88. Also, the figure improved 2% from the year-ago quarter.

Results were largely driven by impressive Moody’s Analytics segment performance and a strong balance sheet position. As expected, weak global issuance volume hurt the results and also adversely impacted performance of Moody’s Investors Service segment. Also, operating expenses witnessed a rise.

After taking into consideration certain non-recurring items, Moody’s net income was $372.9 million or $1.93 per share compared with net income of $372.9 million or $1.92 per share in the prior-year quarter.

Revenues & Costs Rise

Revenues of $1.14 billion beat the Zacks Consensus Estimate of $1.13 billion. Also, the top line inched up 1% year over year. Foreign currency translation unfavorably impacted the top line by 2%.

Total expenses were $680.4 million, up 7% year over year. The increase was mainly due to additional compensation expenses for hiring activity and merit increases in 2018, operating expenses attributable to Reis and Omega Performance deals, and restructuring charges. Notably, foreign currency translation favorably impacted operating expenses by 3%.

Adjusted operating income of $461.7 million decreased 6% year over year.

Adjusted operating margin came in at 45.4%, down from 48.0%.

Segment Performance

Moody’s Investors Service revenues decreased 7% year over year to $670.1 million due to lower issuance activity. Foreign currency translation unfavorably impacted the top line by 2%.

Corporate finance revenues declined owing to fall in global bank loan issuance, partly offset by increased U.S. and EMEA investment grade bond activity. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. and EMEA collateralized loan obligation refinancing activity.

Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to start to the year in non-U.S. infrastructure finance issuance, partly offset by higher U.S. municipal issuance.

However, financial institutions’ revenues improved primarily driven by rise in non-U.S. revenues.

Moody’s Analytics revenues grew 16% year over year to $472 million, mainly driven by higher U.S. and international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 3%.

The segment recorded growth in research, data and analytics revenues, professional services revenues and Enterprise Risk Solutions revenues.

Strong Balance Sheet

As of Mar 31, 2019, Moody’s had total cash, cash equivalents and short-term investments of $1.3 billion, up 28% from Dec 31, 2018 level. Further, it had $5.5 billion of outstanding debt and $680 million in additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the reported quarter, the company repurchased 0.5 million shares for $73.2 million.

Further, during the quarter, Moody’s initiated a $500 million accelerated share repurchase program with 2.2 million shares delivered upfront and the remainder of the shares expected to be received by late April 2019.

2019 Guidance

Moody’s expects its adjusted earnings to be in the range of $7.85-$8.10 per share and GAAP earnings to be in the range of $7.30-$7.55 per share. Notably, the Zacks Consensus Estimate for 2019 is $7.89, which is within the adjusted earnings guidance.

Moody’s anticipates revenues and operating expenses to rise in the mid-single-digit percent range.

Effective tax rate is anticipated to be 21-22%.

Our Take

Though the company remains well positioned for growth on the back of strong market position, strength in its diverse operations and strategic acquisitions, weakness in global debt issuances will hurt its financials.

Currently, Moody’s carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Schedule of Other Stocks

Santander (MC:SAN) Consumer USA Holdings Inc. (NYSE:SC) , Hercules Capital, Inc. (NYSE:HTGC) and LendingClub Corp. (NYSE:LC) are slated to announce results on Apr 30, May 2 and May 7, respectively.

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