Moody's Corporation Earnings Rise 15% as Bond Issuance Activity Strengthens

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Moody's (MCO 0.02%) reported third-quarter results on Oct. 21. The credit ratings giant delivered solid increases in sales and profits as the global debt market returned to growth.

Moody's results: The raw numbers

Data source: Moody's Q3 2016 earnings press release. YOY = year over year.

What happened with Moody's this quarter?

Global revenue rose 10% year over year to $917.1 million as U.S. revenue jumped 13% to $545.7 million, while non-U.S. revenue increased 5% to $371.4 million.

Revenue for Moody's Investors Service (MIS) was $612.3 million, up 12% from the third quarter of 2015.

With the exception of structured finance revenue -- which declined 7% to $104.2 million, mostly as a result of lower commercial mortgage-backed securities collateralized loan obligation -- the increase was broad-based. Corporate finance leapt 21% to $299.6 million, mainly because of higher levels of bank loan and speculative-grade bond issuance. Global public, project, and infrastructure finance revenue increased 16% to $105.2 million, boosted by strong U.S. public finance issuance. And financial institutions revenue rose 7% to $95.8 million, driven by increased Asian banking issuance.

Revenue for Moody's Analytics (MA) also improved, increasing 6% to $304.8 million.

MA research, data, and analytics revenue rose 6% to $167.7 million on strong sales of credit research and ratings data feeds. Enterprise risk solutions revenue increased 10% to $101.5 million as the segment benefited from Moody's recent acquisition of actuarial software provider GGY, as well as growth in its credit assessment and stress testing product lines. However, global professional services revenue fell 3% to $35.6 million.

Moody's second-quarter operating expenses were $519.6 million, an increase of 7% from the prior-year period, mainly due to the higher compensation costs incurred as the company has grown its headcount.

All told, operating income rose 14% to $397.5 million. Net income increased 10% to $255.3 million, and earnings per share -- boosted by share buybacks -- jumped 15% to $1.31.

Cash flow and capital returns

Moody's free cash flow for the first three quarters of 2016 totaled $771.8 million, a 7% decrease from the year-ago period primarily due to the year-over-year decline in net income.

Still, Moody's returned nearly $900 million to its shareholders during those nine months, including $678.9 million in share repurchases and $214.5 million in dividends.

Looking forward

Moody's reiterated its guidance for full-year revenue growth in the "low-single-digit percent range" and raised its EPS forecast to $4.62 to $4.72 from its previous outlook of $4.55 to $4.65. Free cash flow is still anticipated to be approximately $1 billion, but the company said it now expects full-year share repurchases to be approximately $750 million, down from its prior estimate of $1 billion.

In a press release, CEO Raymond McDaniel explained:

Moody's revenue increased 10% in the third quarter primarily as a result of record third quarter revenue for Moody's Investors Service, driven by higher leveraged finance issuance and U.S. public finance activity, as well as solid growth from Moody's Analytics. In light of the strong third quarter performance, coupled with continued expense management, we are increasing our full year 2016 GAAP EPS guidance range to $4.76 to $4.86 and our non-GAAP EPS guidance range to $4.62 to $4.72.