Moody's Corporation Cuts Profit Forecast Amid Decline in Global Bond Issuance

Moody's (MCO -1.58%) reported first-quarter results on April 29. The credit ratings and analytics giant saw its sales and profits dented by a sharp reduction in credit-related activity in the global financial markets, causing the company to lower its full-year outlook.

Moody's results: The raw numbers

Data Source: Moody's Q1 2016 earnings press release.

What happened with Moody's this quarter?
Global revenue fell 6% year-over-year to $816.1 million, including a 2% negative impact from foreign currency movements. US revenue decreased 4% to $480 million, while non-US revenue declined 8% to $336.1 million.

Revenue for Moody's Investors Service (MIS) was $525.1 million, down 13% from the first quarter of 2015.

Aside from its financial institutions segment, which saw revenue rise 1% to $94.9 million, MIS revenue was down across the board. Corporate finance revenue plunged 20% to $240.3 million, due to a reduction in speculative-grade and investment-grade bond offerings. Structured finance revenue fell 11% to $90.6 million, as securitization activity slowed in the commercial mortgage-backed security and collateralized loan obligations markets. And public, project, and infrastructure finance revenue decreased 9% to $91.5 million, as U.S. project finance activity and European infrastructure-related issuance declined amid turbulent market conditions.

Helping to offset those declines was an 11% rise in revenue for Moody's Analytics (MA) to $291 million.

MA revenue from research, data and analytics increased 10% to $164.9 million, with the segment enjoying record customer retention. Enterprise risk solutions revenue rose 16% to $89.5 million, mainly from accelerated project deliveries. And revenue from professional services remained flat year-over-year at $36.6.

Expenses for the first quarter were $512 million, an increase of 4% from the year ago quarter, due mostly to higher compensation costs and Moody's ongoing technology investments.

All told, operating income fell 18% to $304.1 million, while adjusted operating income (operating income before depreciation and amortization) decreased 16% to $334 million. Net income, which was negatively affected by higher interest expense versus Q1 2015, decreased 20% to $184.4 million. And earnings per share, which were helped somewhat by share buybacks, declined 16% to $0.93.

Cash flow and capital returns
Moody's first-quarter free cash flow was $211 million, down 13% from the prior year period primarily due to the year-over-year decline in net income and changes in working capital.

Still, Moody's returned $334 million to its shareholders during the quarter, including $72 million in dividends and $262 million in share repurchases.

Looking forward
Moody's cut its full year outlook, with the company now projecting revenue to increase in the "low-single-digit percent range," compared to its prior forecast for growth in the "mid-single-digit percent range."

Management also reduced its 2016 EPS guidance to between $4.55 and $4.65 --down from its previous projections for EPS of $4.75 to $4.85 -- and lowered its free cash flow projections to approximately $1 billion from $1.1 billion.

Moody's does, however, still plan to repurchase approximately $1 billion in shares in 2016.

"Reduced global bond issuance in the first quarter weighed on Moody's financial performance despite strong results at Moody's Analytics, which is not sensitive to debt issuance activity," said CEO Raymond McDaniel in a press release. "Given market conditions, we have scaled back our revenue and earnings expectations for full year 2016, and are managing our cost base accordingly."