Moody's Corp. (MCO -0.25%) rounded out 2017 with both of its major segments, Moody's Investors Service (MIS) and Moody's Analytics (MA), continuing their recent quarterly trends of double-digit percentage growth. After a review of summary numbers, let's delve into the quarter's details, and also discuss management's bright forecast for 2018:

Moody's Corporation: The raw numbers

Metric Q4 2017 Q4 2016 Year-Over-Year Growth
Revenue $1.17 billion $942.1 million 24.2%
Net income $25.5 million ($428.6 million) N/A*
Diluted earnings per share $0.13 ($2.25) N/A

Data source: Moody's. *Not applicable; difference too great for a meaningful comparison.

What happened this quarter?

  • Both the quarterly revenue of $1.2 billion, and Moody's full-year revenue of $4.2 billion, set company records.

  • Revenue from MIS, Moody's credit rating service, rose 19% year-over-year to $724.7 million. The segment's U.S. revenue grew 17% to $440.2 million, while non-U.S. revenue increased 23% to $284.5 million.

  • While all of MIS' services areas performed well, financial institutions services notched surprising revenue expansion of 34% to $119.0 million as the company capitalized on banking issuance emanating from some of its infrequent issuers.

  • The MA segment produced even more-pronounced growth, advancing its top line by 32% to $440.8 million. 

  • MA's performance was led by research, data, and analytics (RD&A) revenue, which soared 55%. RD&A benefited from a gross contribution of $62 million from the recent acquisition of business intelligence specialist Bureau van Dijk.

  • The company reported operating income of $462.8 million versus an operating loss of $473.1 million in Q4 2016. The prior year's red ink was due to charges incurred as the company settled complaints with the U.S. Department of Justice and 21 state attorneys general.

  • Adjusting for the prior-year settlement, and a few other items including acquisition expenses, operating margin decreased slightly from 45% to 44.5%. Management cited higher merit and incentive compensation as drivers of slightly greater expenses over the last three months.

  • Moody's recorded a higher than normal income tax expense provision of $379.2 million, to comply with recently enacted U.S. tax legislation. This adjustment reduced pre-tax earnings of $407.7 million all the way down to $28.5 million of net income (before the subtraction of $3 million in net income attributable to non-controlling interests).

Man performing business analysis on several computer screens.

Image source: Getty Images.

What management had to say

During Moody's earnings conference call, CEO Raymond McDaniel updated investors on the Bureau van Dijk merger, which was completed in August:

Our integration efforts are on track and we remain confident about achieving the synergy targets that we communicated when we announced the acquisition. Since closing the acquisition in August, we have enhanced Bureau van Dijk's products with content sourced from Moody's, launched programs to cross-sell Bureau van Dijk products, and initiated measures to enhance sales productivity and efficiency.

In New York, San Francisco and Hong Kong, Bureau van Dijk's staff are now co-located at Moody's offices, with six additional offices in Europe, Asia and South America set to be combined in 2018. Bureau van Dijk's business continues to perform well and we are very pleased with the progress we're making as we pursue our various collaboration and integration efforts.

The synergy targets McDaniel refers to (i.e., expected expense savings from the business combination) are projected to reach $45 million annually by 2019, and $80 million by 2021. 

Looking forward

Moody's also issued healthy full-year guidance. The organization expects its revenue to improve in the low double-digit percentage range, with operating expenses also projected to rise at a low double-digit rate. Moody's outlook calls for adjusting operating margin to hit 48%, roughly in line with its full-year 2017 margin of 47.3%.

The company will benefit from a lower effective tax rate due to the recently passed tax cuts. Management expects Moody's' tax rate to fall between 22% and 23%, down sharply from its 2017 tax rate of 43.6%. The organization has quantified this benefit at approximately $0.65 per share. Overall, Moody's is targeting year-long diluted earnings per share (EPS) of between $7.20 and $7.40, which at the midpoint would represent an impressive improvement over 2017's full-year diluted EPS of $5.15.