Moody’s Corporation (MCO) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise. Moody’s operates Moody’s Analytics (MA), which provides data, research and decision solutions, and Moody’s Investors Service (MIS), which provides credit ratings and related services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.472B | $1.275B | $4.436B | $4.178B |
| Operating income | $535M | $413M | $1.639B | $1.577B |
| Operating margin | 36.3% | 32.4% | 36.9% | 37.7% |
| Adjusted operating margin (non-GAAP) | 44.6% | 39.0% | 44.3% | 44.3% |
| Net income attributable to Moody’s | $389M | $303M | $1.267B | $1.128B |
| Diluted EPS | $2.11 | $1.65 | $6.88 | $6.10 |
| Adjusted diluted EPS (non-GAAP) | $2.43 | $1.85 | $7.71 | $6.96 |
- Q3 segment revenue: MA external revenue increased 13% to $776M; MIS external revenue increased 18% to $696M. MIS growth reflected higher issuance across most rating lines versus a weak prior-year comparison; structured finance (SFG) was broadly flat.
- Nine-month segment revenue: MA increased 10% to $2.260B and MIS increased 2% to $2.176B. MIS growth in corporate finance, financial institutions, and public/project/infrastructure finance was partly offset by SFG’s 18% decline.
- Recurring business: MA annualized recurring revenue was $2.851B at September 30, up 10% year over year. Management cited demand for KYC, SaaS-based banking solutions, research, and ratings data feeds.
- Cash flow: Nine-month operating cash flow was $1.674B versus $1.097B; capital additions were $198M, producing free cash flow of $1.476B versus $893M (non-GAAP). Management attributed the cash-flow increase partly to lower prior-year tax and incentive-compensation payments, as well as operating growth and working-capital changes.
- Liquidity and debt: Cash and cash equivalents were $2.006B, with $73M of short-term investments, at September 30. Long-term debt carrying value was $6.851B (principal amount $7.223B), down from $7.389B carrying value at year-end 2022. Moody’s repaid $500M of notes during the period and reported compliance with debt covenants. It had about $1B of CP capacity, backstopped by a $1.25B revolving facility.
- Shareholder returns: Nine-month dividends were $424M and treasury-share purchases were $278M. The board declared a $0.77-per-share quarterly dividend payable in December 2023; $572M of share-repurchase authorization remained at quarter-end.
Changes, outlook and notable items
- Q3 revenue grew 15%; operating income rose 30% and diluted EPS rose 28%. Revenue growth outpaced operating and SG&A expense growth, expanding both reported and adjusted operating margins.
- For the nine months, revenue grew 6% and operating income 4%. Reported operating margin fell 80 basis points, while adjusted operating margin was unchanged. MA’s nine-month adjusted margin declined to 30.2% from 30.9%; MIS’s increased to 55.3% from 53.9%.
- The nine-month effective tax rate was 14.6%, versus 21.3%, chiefly due to $116M of benefits from resolutions of uncertain tax positions and $13M of excess stock-compensation tax benefits. Management said the tax resolutions contributed about $0.75 to nine-month diluted EPS; the lower rate is not presented as a recurring earnings run rate.
- Restructuring expense was $27M in Q3 and $51M year to date, primarily for the 2022–2023 geolocation program. The program is expected to generate annualized savings of $145M–$165M and be substantially complete by year-end 2023. The filing estimates $40M–$50M of remaining program cash outlays through 2024.
- Management said macroeconomic and geopolitical uncertainty, inflation, higher interest rates, banking-sector disruption, and the Russia-Ukraine and Israel-area conflicts have contributed to volatile or suppressed issuance in some markets. It considers suppressed issuance predominantly transitory but cannot predict the severity or duration of these conditions or their future effect. No specific consolidated earnings or revenue guidance is provided in the supplied filing text.
- Contingencies and risks: MIS is responding to SEC requests concerning compliance with record-preservation requirements for certain business communications on unapproved electronic messaging channels. The filing does not provide a clear estimate of any potential loss. Moody’s also faces ongoing tax audits and other legal, regulatory and litigation matters; outcomes and timing may be uncertain.
- Other unusual items: Nine-month other non-operating income includes a $23M foreign-exchange loss from an immaterial out-of-period adjustment relating to fiscal 2022. Interest expense was also affected by realized losses on fixed-to-floating interest-rate swaps as rates rose.
Important facts for investors to verify
- Whether issuance volumes recover, particularly in structured finance, and how that affects MIS revenue and transaction-fee exposure.
- Whether MA recurring-revenue and ARR growth continues to support margins amid hiring, technology investment, and higher software amortization.
- The timing and realization of restructuring savings versus remaining charges and cash outlays.
- Developments in the SEC records-preservation inquiry, tax audits, and other contingencies, for which outcomes or potential financial impacts are not quantified clearly in the filing.
- The effects of debt maturities, interest rates, currency movements, and continued dividends and repurchases on liquidity and capital allocation.