In its first-quarter 2018 earnings report released April 27, Moody's Corp. (NYSE:MCO) reported record first-quarter revenue growth, as well as a healthy improvement in operating income. The ratings specialist is benefiting from a relatively smooth integration of business analytics provider Bureau van Dijk, following its purchase of the firm last August. After reviewing the quarter's raw numbers, let's walk through the dynamics of the combined company:
Moody's: The raw numbers
|Metric||Q1 2018||Q1 2017||Year-Over-Year Growth|
|Revenue||$1.13 billion||$975.2 million||15.8%|
|Net income||$372.9 million||$345.6 million||7.9%|
|Diluted earnings per share||$1.92||$1.78||7.9%|
What happened this quarter?
Moody's credit rating arm, MIS, achieved revenue growth of 8%, to $719.9 million. In line with a recent trend, non-U.S. revenue grew at a fast pace, chalking up a 17% increase over the prior-year quarter, to $286.5 million. U.S. revenue rose 3% to $433.4 million.
MIS' total revenue was propelled by a 7% increase in the division's largest business, corporate finance, which reached $377.7 million during the quarter. MIS' structured finance business also turned in a convincing performance, as revenue surged 29% to $129.7 million. Management cited strength in securitization markets, and in particular, vigorous collateralized loan obligation formation, as factors behind the success in structured finance.
Moody's analytics segment (MA) posted 33% growth, to $406.8 million. The acquisition of Bureau van Dijk contributed to a 53% leap in MA's research, data, and analytics (RD&A) revenue, which crossed $269.0 million during the quarter.
More specifically, Bureau van Dijk added $74 million to MA's top line in the reporting period. The contribution would have been greater, but conformance to acquisition accounting rules resulted in a deferral of $10 million in Bureau van Dijk's revenue beyond the first quarter.
Even without the acquisition effect, the MA segment booked impressive growth in the first three months of the year. Organic segment revenue rose 9%, with much of this originating in the RD&A business, which enjoyed brisk sales of credit research and ratings data feeds.
Moody's reported a 230-basis-point decrease in operating margin, to 43.6%. However, due to the contribution of additional revenue from the Bureau van Dijk acquisition, operating income dollars expanded by nearly 10%, to $490.8 million.
The slight decrease in operating margin is partly attributable to higher depreciation and amortization expense now that the Bureau's assets are on Moody's books.
During Moody's earnings conference call, management addressed shareholder return items, reiterating that the company would aim for a modest $200 million in share repurchases in 2018 -- just enough to offset dilution from employee share issuance.
- Executives are taking a conservative approach to capital allocation in order to pay down the debt issued to complete the Bureau van Dijk deal. As of the last balance-sheet date of March 31, 2018, Moody's total long-term debt stands at $5.5 billion. The company's current debt-to-EBITDA ratio of roughly 2.5 times indicates moderate, but not extreme borrowing.
What management had to say
During the first-quarter earnings conference call, Moody's CEO Raymond McDaniel Jr. provided the following update on the progress of the integration of Bureau van Dijk into the Moody's system:
After nearly nine months since closing the acquisition, our integration efforts are on track.
We've met our legal and regulatory requirements, and executed cost reductions without disruption to the business. In March, we completed a right-sizing program to realize efficiencies across the combined employee base, thus reducing compensation expense.
Having co-located Moody's Analytics and Bureau van Dijk's staff in seven cities, and with consolidation of additional offices expected through year-end, we are well positioned for significant reductions in real estate costs. We've applied Moody's Analytics sales operations practices to Bureau van Dijk in order to gain increased sales productivity. By pursuing joint marketing efforts in specialized product areas, we are building a solid pipeline of near-term, cross-selling opportunities.
In short, we're making good progress on the synergies that we anticipated when we announced the transaction, and the legacy Bureau van Dijk business continues to deliver results consistent with its historical performance.
Moody's management made some slight tweaks to full-year earnings guidance alongside the first-quarter report. Within the MIS segment, Moody's now expects slightly slower growth in corporate finance, and a bit faster expansion within structured finance.
Together, these modifications don't change the big picture. The company still expects a full-year revenue increase in the low double digits, and forecasts diluted earnings per share of between $7.20 and $7.40. Hitting the middle of this range would represent a 40%-plus jump against 2017 earnings.