Two quarters into the year, Moody's Corporation (NYSE:MCO) continues to benefit from robust global debt issuance, which has boosted revenue in its credit ratings arm, Moody's Investors Service (MIS). Below, we'll review performance in both the MIS and Moody's Analytics (MA) segments, after first reviewing the headline numbers.

Moody's Corporation: The raw numbers

Metric Q2 2017 Q2 2016 Year-Over-Year Growth
Revenue $1 billion $928.9 million 7.8%
Net income $312.2 million $255.5 million 22.2%
Diluted earnings per share $1.61 $1.30 23.8%

Data source: Moody's Corporation. 

What happened with Moody's Corporation this quarter?

  • The MIS segment recorded a revenue increase of 10%, to $686.7 million. Corporate finance revenue in particular drove the segment's results, increasing 17% over the prior year to $355.8 million.
  • Noticeably within MIS, non-U.S. revenue outpaced the domestic top line, growing by 21% to $274.3 million, versus 3% growth stateside to $412.4 million.
  • Financial analysis and risk management segment Moody's Analytics also expanded, though at a slower rate than MIS. The MA segment reported a 3.5% revenue increase, to $313.8 million, propelled by its research, data, and analytics (RDA) business, while the enterprise risk solutions (ERS) business remained flat against the prior-year quarter.
  • Moody's reported higher expenses due to salary increases and higher incentive compensation accruals, as well as costs related to its impending $3.3 billion acquisition of business intelligence firm Bureau van Dijk, which was announced in May.
  • However, Moody's appreciable top-line growth provided operating leverage, and the company's operating margin increased roughly 150 basis points, to 45.7% in the second quarter.
  • In anticipation of the closing of the Bureau van Dijk transaction, the company issued $1 billion in debt during the second quarter, in the form of unsecured senior notes with maturities ranging from 2023 to 2028. The debt carries an aggregate interest rate of 2.9%. At the end of the second quarter, Moody's reported total long-term debt of $4.89 billion.
  • Through the first half of the year, Moody's has generated negative operating cash flow of $47.7 million and negative free cash flow of $42.8 million, due to payments the company made in the first quarter pursuant to a 2016 settlement with the Department of Justice and a number of state attorneys general. Shareholders will soon see more typical cash numbers: By the year's end, management projects positive operating cash flow of roughly $600 million.
  • Moody's engaged in $79.5 million of share repurchases in the second quarter. To date, the company has repurchased 1.2 million of shares, a total outlay of $134.5 million. In the same period, Moody's has issued 1.9 million shares through its employee stock compensation program. So investors looking for a net share count reduction in 2017 will have to see how buybacks fall out in the back half of the year.
Hand holding magnifying glass over financial statement

Image source: Getty Images.

What management had to say

Within Moody's second-quarter earnings press release, CEO Raymond McDaniel praised the company's performance and raised earnings per share (EPS) estimates for the full year:

In the second quarter, Moody's recorded $1.0 billion in quarterly revenue, as well as double-digit EPS growth. Given the strength of the first half and a supportive market environment, we are raising our full year 2017 diluted EPS and adjusted diluted EPS guidance ranges to $5.69 to $5.84 and $5.35 to $5.50, respectively.

We continue to expect our previously announced acquisition of Bureau van Dijk to close in the third quarter of 2017 and look forward to further extending Moody's position as a leader in risk data and analytical insight.

Looking forward

Moody's guidance revisions of diluted EPS quoted above represent a bump of roughly 4% from previously announced targets. Supporting this higher estimate, management lifted a few other benchmark numbers.

Moody's now expects revenue to increase in the "high-single digits" from the "mid-single digits" previously outlined. To translate this corporate-speak, mid-single digits usually means between 5% and 7%, and high-single digits typically indicates a range of 7% to 9%.

Management's tailoring of estimates reflects its optimism that the primary push behind 2017 revenue growth -- namely, global debt issuance -- will maintain its momentum. Given a relatively favorable interest rate environment and steady if not vigorous global economic growth, conditions appear favorable for Moody's to meet its own full-year targets -- provided, of course, that it continues to execute on its objectives.

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