Moody's Corporation (MCO) Earnings Call Transcript

Yes. I think -- well, we think there's scalability, that's for sure. I think there's 3 big trends there maybe that we should highlight. One is our operating leverage is a little easier to develop when you're talking about revenues derived from products instead of people. Right? So the MAKS business, for example, is a people business. The ERS business has really undergone a transformation in the last few years. We really started in 2015 where we intentionally shifted away from big project work where we were developing IP with our customers, which was good, but the operating leverage was a little harder to come by. So converting from a big project work over to software delivered as a service and subscription-based analytic tools. So that shift's been underway. The addition of BvD and Reis, for example, are both data companies where you can see subscription products develop and your revenue growth can be derived from sources that renew. So that's nice. And of course, you don't need to give your products a bonus when they do a really good job. So that's a little better for us. So yes. So those 3 big drivers of operating leverage for us and growth, we think, are going to help with that scalability.

So the increase from 2019 to 2020, a couple of hundred basis points, would you think that sort of pace of increase is sustainable? Or are there some unique elements to 2020 that are maybe driving above trend scalability?

Yes. 200 basis points every year forever might be a little tricky. I think we have some very positive trends that I think are maybe secular and I think will contribute to margin expansion over time. And maybe the most important one is that the ERS business, which is $500 million-ish in revenue, we're thinking and working with the tools that the ERS team has created very much as a platform or a chassis to help with cross-selling. So I think the loan origination software that we talked about before, one of our fastest-growing products right now is called CreditLens. That is a credit decisioning tool kit and platform that is delivered Software as a Service, and we can integrate into that credit scoring tools, data products as well as other modules that are pretty easy to implement based on what the customers are asking us to do. So you can envision a world where software delivered as a service serves as a platform, incremental capabilities can be added to that really at the request of a customer. We don't need to build them necessarily because we've got a lot of that taken care of through that platform. So I think that's a good source of leverage and -- or opportunity, I should say. And then we've got some very nice growth trends going, especially with this KYC market. We're very excited about that.

And I think kind of building off of that point. And as I said in my introduction, you guys are expecting some pretty healthy growth in 2020, and that follows on the heels of 13.5% organic constant currency growth in 2019. So you have the momentum right now. What are some of the big underlying drivers? And you just touched on one, but what are some of the others?

Yes. Yes, I would say -- and there's a lot of -- if you go to some of our other investor presentations, you've got some slides that we published before that sort of give you some sense for this. But there's really 3 or 4 big drivers. The research business and the research, data and analytics segment. The research business is a very stable, very high retention and high renewal rate kind of business with some growth as well. So we still see new asset managers coming along, hedge funds coming along, maybe new use cases at corporations, for example, where they leverage and are interested in using our content from our rating analysts to understand and explain why we've rated something the way we have. That's a very healthy business for us. The BvD unit where you've got a pretty good source of growth happening outside of the compliance and KYC use case. There are several different places where we sell the Orbis product, and it's going very well, maybe high single digits, maybe low double digits. And then you layer on top of that this compliance and KYC use case, which is growing really well. And that's going to be good for us. And then ERS, we've had some great product launches in the last couple of years, especially around helping people meet new accounting standards. So in addition to the regulatory compliance work we've helped people with for years, the accounting standards have been very interesting for us as well. So many of you are probably familiar with the CECL standard in the U.S., the Current Expected Credit Loss standard, whereby you need to project losses, and Moody's is pretty good at understanding credit and understanding loss and then applying some software to help you project that, maybe some economic scenarios integrated in there to really do that well. In fact, we're just updating that product with some scenario analysis around this coronavirus, just to give you a sense. So we're helping financial professionals, treasurers project what will happen to their book in light of that coronavirus. And then in the insurance space, we've done some pretty interesting things, especially with some accounting standards there, too. There's one called IFRS 17, which is occupying the time of many insurance professionals, especially outside of the U.S., and that's been a good source of growth for us as well.

So upgrades and pricing have historically been a key component of your growth formula. I think typically driving around 8% to 9% subscription sales growth within research, data and analytics. And you guys have this data in charts in your company presentations. What is about the nature -- or what about the nature of those products really is able to drive that sort of pricing and upgrade demand?

Yes. Yes, so we put price increases and upgrades together because sometimes it's hard to tell the difference, right? And from a customer perspective, the core -- maybe the core example that we'd offer is the research service, which is known as CreditView. And CreditView 1 came out 5 or 6 years ago and CreditView 2 was released in the last 18 months or so. So CreditView 2 is a revamped web presence so that our customers can understand what our ratings analysts have done, see the ratings themselves, see all the rating changes, see all the research we've produced and then, of course, talk to the analysts if they want to understand more. So that service underwent a pretty big change maybe 18 months ago, 2 years ago, and a lot of these upgrades that you're seeing are related to that. So as people converted from the old product to the new product, there's an upgrade activity that goes on there. So that's been pretty healthy for us. And that dynamic is true across many of our products. We're always releasing new ones. And so if you already have a product in place and the new thing that you're buying replaces it, we consider that an upgrade. So we have -- basically, it's a good indication of our product pipeline and sort of constant enhancements that are going on among those products. Then you see new business, that would be brand-new customers or products sold to someone for the first time.

When you look at the budgets of your clients, banks, insurance companies, presumably, they're not necessarily looking to raise their spending 8%, 10% every year. How do you have that conversation with them? Like, hey, this is an upgrade, and it's worth more to you guys. And do you ever start to run into that pain point where they say, listen, we're kind of up against what we can pay for this sort of thing?

Given that almost everyone in this room is probably a customer, I think I need to be careful how I answer this. The way we do this is, first of all, pretty intentional. We have a team of relationship managers who do a great job. You would expect that. But we also have a team of account managers. So these are people who are well-trained in how our products work and well-trained in what we're doing with respect to those products in terms of new content or new enhancements. And we do a lot of proactive calling. So just to give you an example. This week, I literally got off the phone this morning with the head of the customer success team. And she has probably 40 or 50 people who are making phone calls this morning, reaching out to customers of our research service around and related to the coronavirus. So they are calling them to say, hey, we've written these 5 pieces. We've got a webinar coming up. We've got these new things that we're doing with an enhancement maybe in some of our products. And just making sure that people see those things as they're happening, just to make sure that we are engaging with customers, that customers are engaging with our products. So we're very proactive about that, with people like that over the world who I consider sort of proactive customer service people, just to make sure that the value proposition is maintained in everyone's brains and that they're aware of why they're paying so much money.

Got it. And then maybe going back to some of your previous comments on enterprise risk solutions. So you talked about how a major driver there has been rolling out new tools to help banks, help insurance companies deal with regulations. And now we're 10-plus years removed from the global financial crisis, at some point, does everybody just kind of catch up, that they've kind of implemented what needs to be implemented? Or do you kind of see new regulations coming up there for as far as the eye can see?

I don't know. We should do a survey of the room. Who here thinks that regulation is done at your institution? The -- I think that certain government or political policies might create some ebbs and flows in that. But I think in general, in terms of the global regulatory requirements, requirements are not going to go backwards. And we are also providing new features to leverage the work that customers are doing with respect to those compliance activities so that they can actually use that for analytic purposes. So a fundamental part of the strategy, you probably heard me say this before, is if you have to do all this work to meet the regulatory compliance submission, you might as well see if you can use it for something internally. So a classic example would be capital adequacy calculations that we do for banks mostly outside of the U.S., especially to meet the Basel requirements. Those capital adequacy calculations can be used if you can apply a couple of what if scenarios, for example. So I have to publish this and submit this, return to the regulator. Well, what if these considerations changed, how would that position change? And then you start to get to the point where some of this work can actually be useful for internal purposes. So we spent a lot of time -- and this is probably the biggest change in ERS, one of the big changes, I should say, in ERS in the last 5 years is how do I make that compliance activity useful for the front office. Yes.

Got it. Switching gears a little bit here. So ESG has been a big topic in the space. And we had MSCI here the other day, and obviously, they're big in the space. You guys have been making a move as well. You did some recent acquisitions, Vigeo Eiris and Four Twenty Seven. And I think it's probably fair to say you're probably applying ESG on both sides of the business, both in ratings and analytics. So how is Moody's approaching the opportunity right now?

Yes. So one thing to note is this is a big deal, especially outside of the U.S. It's very interesting. So if you have -- we have customer conferences in the U.S. We have customer conferences in Europe. ESG is almost a dominating topic in Europe, whereas here, there's still some pockets in the country where they aren't -- people aren't talking about this as much, which is, I think, an interesting dynamic. So the growth here is -- there's a lot of potential. Let's say it that way. How are we approaching it? Maybe the most important thing we are doing is trying to -- well, first of all, we had to spend some time just aggregating all of the capabilities we had. This is one of those things where you say, "Who here is working on ESG?" And 40 people raise their hand. You say, "Oh, my gosh, we've got a lot going on." So that happened maybe 1.5 years ago where we developed an understanding of all the capabilities we have within Moody's Corporation, not just in Analytics and not just in the Rating agency. And then we tried to pool the capability set together so that we can think about how we can leverage that to address the customer questions. So we're getting RFPs now. We're getting RFIs now from some of the world's largest banks, insurance companies, government entities. There are some that are actually spending money on this now. That's the biggest change. A year ago, I would not say anyone spending any money on this, I mean real money. Now they're starting to say, okay, I'm planning to do something different. And in light of that, how can you help me, Moody's? So we're bringing together solutions that I think are going to be pretty powerful. Just to give you a quick example. Four Twenty Seven, an outfit in San Francisco, this is a place in Berkeley. The windows are open when you walk into the office building because they don't use climate control. It's very green. Sometimes uncomfortable. Anyway. They have fantastic information sources on damage you might see, physical risk associated with fire or from flooding or from sea level rise. That data we're associating with geolocation and parcel identification in Reis. And we're combining that with some other capabilities we have around commercial location scoring so that we can see, this property in Manhattan is a Class A space. Its rents are forecasted to produce at this level over the next 5 years. But isn't it interesting? They're also in a flood plain and there are some other issues, right? So you can actually start to see these things in one place in order to make a better decision, a more informed decision. And I think that's the big difference for Moody's is we can bring capabilities like that together and actually help people answer the questions or do the jobs that they have to do. Not just the point solution or the point data point -- the point of information in the data itself. We bring those things together to actually help them make those better decisions.

Got it. I will pause for a second and see if there's any questions in the audience.

Could you expand on your virus commentary? Are you assuming scenarios, how do you approach that? I'm wondering about lockdown.

So -- well, so there's lots of people who are thinking about this. And I would say maybe the one that's most traditional that everyone would expect is the rating analysts need to incorporate expectations related to coronavirus or COVID-19, whatever you want to call it, in each of their sectors and with respect to each of their companies. So the ratings process incorporates this just in terms of the way we actually assign ratings to institutions and to entities. And then you've got, I'll call it, big picture experts who might be health care experts or they might be more familiar with the way the World Health Organization or the CDC organization might work. We might incorporate them into the ratings process as well. We've got scenario analysis that we do in our group that does economic forecasting. So in West Chester and in London and a couple of other places, we have maybe 100-some-odd econometricians. And they produce forecasts at the MSA level and at the bigger picture macro level in order to address questions like this. So we're updating those forecasts right now and incorporating scenarios that are COVID related -- COVID-19 related. So I haven't actually seen that work. I think tomorrow is the day that Mark Zandi, who's the -- you may know Mark Zandi, do comments on TV a lot. His team is going to release some of that information I think tomorrow. I think we actually issued a press release about that. So you might want to take a look at that. The other place that we do this is in our software products. So we have some portfolio tools that look at economic capital calculations or regulatory capital calculations. We have scenarios that can be applied to that to condition the models that generate the results in those software applications. And so I've seen some results for some customers in the last couple of days where they asked us, can you please apply this scenario to our economic capital position to see how much is at risk? Or what the change is in terms of our, say, earnings at risk? So it's a pretty wide range of activities. We're just creating the presence on the web right now so that you can see all of that in one place, and we'll make that available to anyone who's interested regardless of whether they're a customer. So this is something that you should be able to see in the next day or so, where all of our work will be compiled and we'll make it available to the public. We did the same thing around 9/11 and a couple of other big crisis that have happened. Times like this, we just try to make it as much available to everybody as we can.

Very interesting. And on that note, we are out of time. So thank you very much, Steve. And we have a breakout session downstairs.

Thank you, everybody. Thanks.