Moody’s Corporation — Q1 2023 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2023. Moody’s operates Moody’s Analytics (MA), which provides data, research and risk-management solutions, and Moody’s Investors Service (MIS), which provides credit ratings and related services. Unless otherwise stated, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,470 | $1,522 | -3% |
| Operating income | $554 | $656 | -16% |
| Operating margin | 37.7% | 43.1% | -540 bps |
| Adjusted operating income (non-GAAP) | $656 | $734 | -11% |
| Adjusted operating margin (non-GAAP) | 44.6% | 48.2% | -360 bps |
| Net income attributable to Moody’s | $501 | $498 | +1% |
| Diluted EPS | $2.72 | $2.68 | +1% |
| Adjusted diluted EPS (non-GAAP) | $2.99 | $2.89 | +3% |
| Effective tax rate | 1.0% | 18.2% | -1,720 bps |
Revenue and operating income fell as lower MIS activity outweighed growth in MA. Net income and EPS increased primarily because tax resolutions produced a substantial tax benefit, rather than because operating performance improved.
Segments and revenue composition
- MA: External revenue rose 6% to $737; constant-currency growth was 9%, and annualized recurring revenue (ARR) increased 10% to $2.752 billion. Adjusted operating income was $214, down 4%, and adjusted margin declined to 28.9% from 32.1%, as expense growth exceeded revenue growth.
- MIS: External revenue declined 11% to $733; rated issuance volumes fell 13%, and transaction revenue decreased $98. Adjusted operating income fell 13% to $442, with adjusted margin down to 56.8% from 58.6%.
- MIS declines were led by Structured Finance revenue (-31%) and Corporate Finance (-15%). Financial Institutions grew 8% and Public, Project and Infrastructure Finance grew 5%.
- Recurring revenue was $994, or 68% of total revenue, versus $949, or 62%, a year earlier. Transaction revenue fell to $476 from $573.
Cash flow, liquidity and debt
- Operating cash flow was $608, versus $470; free cash flow (non-GAAP) was $535, versus $411. The year-over-year operating cash flow increase mainly reflected higher incentive compensation payments in Q1 2022.
- Cash and cash equivalents were $2.119 billion and short-term investments were $78 at quarter-end, totaling approximately $2.2 billion. About $1.7 billion was held outside the U.S.
- Total debt carrying value was $7.462 billion, including $499 of current debt; principal debt outstanding was $7.758 billion. Moody’s reported compliance with debt covenants and no cross-defaults.
- The company had approximately $1 billion of capacity under its commercial paper program, backstopped by a $1.25 billion revolving facility. Management said it expects positive operating cash flow and believes available resources are sufficient for cash needs over the next 12 months.
- Quarterly dividends paid were $141. The Board declared a $0.77 per-share dividend payable June 9, 2023. Approximately $807 of share repurchase authority remained at March 31.
Material changes and unusual items
- Operating and SG&A expenses increased 3% to $814; depreciation and amortization rose 13% to $88, primarily due to internally developed software. The quarter included $14 of restructuring expense.
- The 1.0% effective tax rate reflected approximately $117 of net reductions in uncertain tax positions and $6 of excess tax benefits from stock compensation. Management attributed about $0.75 per diluted share of Q1 EPS to tax resolutions.
- Other non-operating items included a $23 foreign-exchange loss from an immaterial out-of-period adjustment relating to fiscal 2022. Total other non-operating income or expense was approximately zero.
- Q1 2023 operating cash flow benefited from working-capital movements, including a $296 increase in deferred revenue; first-quarter renewal timing is a recurring driver of deferred revenue growth.
Outlook, commentary and risks
- The filing provides no specific consolidated revenue or earnings guidance. Management described issuance declines as predominantly transitory but said it cannot predict the severity or duration of macroeconomic and geopolitical uncertainty or its effect on future rated issuance.
- Inflation, higher interest rates, recession concerns, capital-market volatility and stress in the banking sector weighed on rated issuance. Russia’s invasion of Ukraine and related volatility also remain concerns; Moody’s said it no longer conducts commercial operations in Russia and has withdrawn MIS ratings on Russian entities.
- The 2022–2023 geolocation restructuring program is expected to be substantially complete by year-end 2023. It is estimated to generate annualized savings of $120–$140, with personnel and real-estate charges and cash costs extending through 2024. Management expects some savings to support strategic investment and employee initiatives.
- Material risks include market and issuance-volume weakness, competition and disruption, regulation of rating agencies, litigation and investigations, cybersecurity and operational failures, foreign-exchange movements, tax audits, and execution of restructuring and acquisitions. The filing does not quantify potential losses from legal and regulatory contingencies; outcomes and timing are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether rated issuance volumes recover, and how persistent weakness in MIS transaction revenue affects consolidated margins and earnings.
- Whether MA ARR growth converts into recognized revenue and whether its elevated investment and expense growth moderates.
- The sustainability of reported net income and EPS after the unusually large tax benefit; the Q1 effective tax rate may not indicate future tax rates.
- Actual restructuring charges, cash outlays and realized annual savings versus management’s estimates.
- Debt maturities, refinancing and interest costs, alongside capital returns and liquidity needs; the filing estimates $334 of debt interest and fees over the next 12 months.
- Developments in tax examinations and legal, regulatory or other contingencies, for which the filing gives no clear aggregate exposure value.