Moody's Corporation

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2025 Earnings Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us today. I'm Shivani Kark, Head of Investor Relations. This morning, Moody's released its results for the second quarter of 2025 and updated guidance for select metrics for full year 2025. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moody's.com. During this call, we will also be presenting non-gap or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliations between all adjusted measures referenced during this call in U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K, for the year ended December 31, 2024, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor Statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. Rob?

Thanks, Shivani, and thanks, everybody, for joining today's call. I'm going to kick off with some high-level takeaways on the operating environment and Moody's second quarter performance. Then I'm going to share some progress updates on our strategic investments and opportunities. And later in the call, Noemi is going to provide some details on the second quarter performance and outlook for the second half of the year. And after we finish our prepared remarks, Noemi and I will be glad to take your questions. So on to the results. This past quarter, Moody's provided the insights and expertise that helped markets to make sense of a complex and rapidly changing global landscape. Second quarter, Moody's revenue of $1.9 billion grew 4% year over year. That's an impressive accomplishment given the April issuance air pocket and a tough comparable to the second quarter of last year when revenue grew 22%. Now, we remain focused on and disciplined expense management delivering an adjusted operating margin of 50.9%. That's up 130 basis points from a year ago. And together, this translated to adjusted diluted EPS of $3.56. That's up 9%. And that's actually 60% growth from the same quarter just three years ago. So it illustrates just how much the earnings power of our business continues to grow. On the back of our second quarter performance, We've narrowed our guidance ranges for rated issuance, MIS revenue, and EPS. Now, starting with MIS, we continue to invest in strengthening our position as the agency of choice for issuers and investors. And that pays dividends in times of uncertainty when markets turn to us for our insights and the quality of our analysts. Our ratings franchise delivered $1 billion in revenue this quarter. That's just shy of a second quarter record. And it also marked our second consecutive quarter above the $1 billion revenue mark. And while April started off slowly with several days of no issuance, conditions improved meaningfully as we moved into May and June. And markets stabilized, spreads narrowed back to pre-April levels, and issuance picked up significantly. and that helped to offset the early softness. Both total revenue and transactional revenue growth were stronger than issuance growth, and this outperformance was partially helped by a favorable issuance mix, and to a lesser degree, the growth in products and services not tied to issuance, such as certain private credit ratings. Now, looking ahead to the second half of the year, we're cautiously optimistic. The four key credit themes that we identified at the start of the year remain relevant, and they could influence the balance of 2025 and beyond. And these include U.S. policy on trade, tax, and immigration, geopolitical tensions in the Middle East, the fiscal, economic, and security impact of European defense spending, and potential shocks triggering a pullback in risk appetite. Now, one of the deep currents driving demand in Moody's ratings that we've discussed a good deal on recent calls is the continued growth and evolution of of the private credit markets. And we've invested and engaged to become an important voice in this space, fulfilling a critical need for more transparency and insights. In the second quarter, we published a private credit webinar on the Moody's IR website, and it discusses the trends we're seeing in private credit and how Moody's is serving the market. We also hosted marquee credit conferences in both New York and London that drew nearly 1,000 people from across the entire private credit ecosystem. And these events demonstrate the tremendous convening power of the Moody's brand and also underscore how much interest there is in having us play an important role as the leading opinion provider on credit in this market. Now, continuing the trend from the first quarter, private credit is an important driver of growth in ratings. In fact, in the second quarter, private credit-related transactions accounted for nearly 25% of first-time mandates. and the number of private credit-related deals increased by 50% year-over-year. Revenue related to private credit grew 75% in the second quarter across multiple lines of business and MIS, albeit off of a relatively low base, and it was a contributor to how we delivered flat revenue growth amidst an issuance environment that was down 12%. Private credit investment plays an increasingly important funding role in key sectors such as AI data center investment, transition finance, energy infrastructure. And we are well positioned to address these growth opportunities. In fact, among others, we just rated a 1.5 billion British pounds deal this quarter for a European utility company. That was the largest ever private credit related deal in the UK. And as private credit grows, so too does the use of ratings in this space. As the biggest players in this market realize that that a credible independent assessment of credit risk, be it a rating or a model derived score, from a trusted firm like Moody's provides additional transparency and comparability that broadens the investor base and provides a solid foundation as this market continues to scale. And in addition to how we're addressing this need in ratings, this was also an important driver of our MA partnership with MSCI that we announced back in April. And this presents great opportunities for us to leverage the world's best commercial credit franchise with data, models, ratings, and workflow to serve the emerging needs of a whole new group of investors and asset managers who now need enhanced credit underwriting and monitoring capabilities as they invest in this space. Drilling down into Moody's Analytics, our performance this quarter underscores the the strategic role that MA plays in driving Moody's growth and earnings quality. And we delivered another strong quarter with 11% revenue growth and 12% growth in recurring revenue. ARR grew 8%, led by a 10% increase in decision solutions. And recurring revenue held steady at 96% of MA's total, reinforcing the strength and predictability of our business model. And while we continue to deliver steady growth, I think what really stood out this quarter was margin expansion. MA delivered an adjusted operating margin of 32.1%. And that's a 360 basis point improvement year over year. And that puts us solidly on track to deliver our full year margin guidance of 32 to 33%. Now our best in class solutions continue to earn industry recognition. And recently, Moody's was ranked number one in the Chartist Quantitative Analytics 50 rankings for the third year in a row, winning 13 individual categories. And these third-party awards, they're important because they're an external validation of our ability to deliver innovative and industry-leading solutions that meet the evolving needs of our customers. And this recognition is also echoed in a strong engagement with at our annual banking and insurance customer conferences. At our banking conference, we showcased our integrated suite of products, including the advancements in building a fully end-to-end loan origination solution, incorporating key elements from our numerated acquisition. And this was a great validation of the addition of Numerated's front-end capabilities, as well as the AI enablement across our platform. Our newly launched lending origination package that features Numerated was adopted by several renewing customers as of early July, with an average contract value increase of nearly 15%. And notably, one of the largest Japanese banks cited the enhanced value proposition of the integrated offering as a key reason for their upgrade. And we're optimistic this adoption trend will accelerate as we enter a heavy renewal cycle in the second half of the year. Our insurance conference drew record attendance and showcased new model releases, enhanced underwriting capabilities, and integrations with Cape Analytics, which we acquired back in January. Feedback from customers was overwhelmingly positive, especially around the fit and value of Cape's AI-enabled geospatial intelligence, data, and risk analytics in strengthening our catastrophe models. And we're really encouraged by the early traction here, CAPE's ARR is more than 10% higher than when we closed the acquisition, and we expect that growth to accelerate further through year-end, making it a meaningful contributor to our broader insurance portfolio. Beyond our insurance solutions line of business, we're seeing strong cross-sell into our insurance customer base. Several insurance customers adopted our MaxSite Unified Risk and KYC platform. That includes a large multinational insurer in APAC. that selected Moody's to consolidate multiple screening systems into a single streamlined solution. And that not only simplifies their operations, but it also validates our synergy thesis from the RMS acquisition. And while we delivered a strong quarter from both a growth and margin standpoint, we're not standing still. We continue to innovate, invest, and partner to capitalize on the deep currents driving demand for our solutions. And you've heard me talk about how we're investing in the evolution of the markets. This quarter, that included our partnership with MSCI to provide third-party credit scores on thousands of private credit companies and loans that we discussed on the last call. And this past quarter, we also made another investment in our domestic ratings franchise in Latin America, building on the really great momentum that we have across the region. We completed our acquisition of ICR Chile, which is a leading provider of domestic credit ratings in Chile, which in turn is the third largest domestic bond market in Latin America. And we're going to integrate this business into Moody's Local. The activity in these markets remains very healthy with Moody's Local new mandates year to date up more than 30% year over year. And that reinforces the importance of continuing to invest in our leading presence across the region and and thought leadership in the debt markets of tomorrow. We also announced several exciting partnerships with major technology and data players. We're really excited about our data integration with SAP's new business data cloud. The first dashboard product is set to launch in Q4 with more to come. That opens up a new distribution channel for our data to thousands of SAP customers. During the quarter, our new onboarding agent, leveraging our massive company database that we call Orbis, was featured during the keynote at Coupa's annual Inspire conference, which drew over 3,000 attendees. And our risk data suite is now available in the Databricks marketplace. That's another important step in our growing partnership with Databricks and significantly enhances the customer access and integration to our content and offers new monetization opportunities. Now, we know there's growing interest in understanding the contribution of Gen AI to our business. And while sales of our standalone GenAI solutions are not material yet, we wanted to provide a few meaningful indicators to demonstrate the progress and value that GenAI is already delivering. First, at a high level, is the deployment of GenAI across our portfolio. So over the past year, we've accelerated the rollout of our GenAI capabilities. And by the end of the second quarter, approximately 40% of our products measured by ARR now include some form of Gen AI enablement, whether offered as a standalone solution, as an upgrade, or embedded within the core product. A second way to look at progress is by looking at the growth of our total relationships with customers who have purchased or upgraded to standalone Gen AI offerings from us. Their total spend across Moody's Analytics, measured by ARR, is approaching $200 million. And that is growing at about twice the rate of MA overall. So this cohort of Gen AI adopters shows stronger and deeper engagement, and that reinforces the broader impact of our Gen AI investments and innovation strategy. Finally, I want to share a milestone in our partnership with Microsoft, and we're excited to share that Microsoft will use Moody's as their primary operational data provider for customer hierarchy and organization data management. Moody's data is helping power decision-making across Microsoft's operations and plays a significant role in facilitating Microsoft's view of their customers. And this partnership integrates Moody's proprietary data sets into Microsoft's supply chain, compliance, credit, and know your customer business functions. And the benefits from this partnership include enhanced risk management, AI innovation, and cost efficiencies. And we believe this collaboration underscores the importance of data-driven decision-making and AI innovation in today's rapidly evolving business landscape. So, some good execution this quarter, even with the choppy environment in April, and we're confident in our strategy. Building, buying, partnering to capitalize on the powerful growth drivers shaping our markets. From expanding our Gen AI capabilities to deepening our presence in high-growth regions and forging strategic partnerships, we're positioning Moody's to lead an increasingly data-driven, AI-enabled world and to deliver long-term, sustainable value for our stakeholders. With that, Noemi, over to you.