Moody's (MCO) Misses on Q3 Earnings & Revenues, Cuts View

Moody'sMCO reported third-quarter 2018 adjusted earnings of $1.69 per share, which missed the Zacks Consensus Estimate of $1.78. However, the bottom line improved 11% from the year-ago quarter.

Weak global bond issuance volume hurt the results and also adversely impacted performance of Moody's Investors Service segment. However, stable expenses and decent Moody's Analytics segment performance were the tailwinds.

After taking into consideration amortization of all acquisition-related intangible assets, Moody's net income was $312 million or $1.59 per share. This compared unfavorably with net income of $319.7 million or $1.63 per share in the prior-year quarter.

Revenues Increase, Costs Stable

Quarterly revenues of $1.08 billion lagged the Zacks Consensus Estimate of $1.12 billion. However, the top line increased 2% year over year. The quarter witnessed higher international revenues. Foreign currency translation had immaterial impact on the top line in the reported quarter.

Total expenses were $614 million, relatively stable year over year. Inclusion of Bureau van Dijk operating expenses and incremental compensation costs related to salary adjustments and hiring were offset by lower accruals for 2018 incentive compensation awards. Notably, foreign currency translation favorably impacted operating expenses by 1%.

Adjusted operating income of $514.2 million increased 3% year over year.

Adjusted operating margin came in at 47.6%, up from 47.2% a year ago.

Segment Performance

Moody's Investors Service revenues decreased 7% year over year to $644.8 million due tolower U.S. revenues as well as international revenues. The impact of foreign currency translation on revenues was negligible.

Corporate finance revenues declinedowing to fall in U.S. investment grade and global high yield bond issuance activity. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. CMBS rated issuance, partially offset by contribution from collateralized loan obligations.

Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to a decline in global infrastructure and project finance issuance.

However, financial institutions' revenues improved, primarily reflecting growth in issuance activityfrom M&A-related financing in the U.S. insurance sector.

Moody's Analytics revenues grew 18% year over year to $436 million, mainly driven by higher U.S. revenues as well as international revenues. Notably, foreign currency translation unfavorably impacted the segment's revenues by 1%.

The segment recorded growth in research, data and analytics revenues and professional services revenues, while Enterprise Risk Solutions revenues were stable.

Strong Balance Sheet

As of Sep 30, 2018, Moody's had total cash, cash equivalents and short-term investments of $1.15 billion, down 3% from Dec 31, 2017 level. Further, Moody's had $5 billion of outstanding debt and $975 million of additional borrowing capacity under its revolving credit facility.

Share Repurchases

During the reported quarter, the company repurchased 0.4 million shares for $66.2 million. As of Sep 30, 2018, Moody's had nearly $380 million of share repurchase authorization left.

2018 Earnings Guidance Lowered

On the assumption of soft debt issuance into the fourth quarter, Moody's lowered its adjusted earnings outlook in the range of $7.50-7.65 per share from $7.65-$7.85.

On GAAP basis, earnings are now expected to be in the $6.95-$7.10 per share range (down from the prior outlook of $7.20 to $7.40).

Further, in response to this slowdown in bond issuances, the company plans to undertake cost management initiative, which will result in restructuring charge of $30-$40 million in the fourth quarter and an aggregate charge through the first half of 2019 in the range of $45-$60 million. These efforts are projected to lead to incremental annualized savings of $30-$40 million, going forward.

Moody's anticipates revenues and operating expenses to rise in the high-single-digit percent range.

Our Take

Moody's performance was dismal in the quarter. Though the company remains well positioned for growth on the back of strong market position, strength in its diverse operations and strategic acquisitions, elevated expense levels will likely hurt the bottom line. Weakness global bond issuances also remain a concern.

Moody's Corporation Price, Consensus and EPS Surprise

Moody's Corporation Price, Consensus and EPS Surprise | Moody's Corporation Quote

Currently, Moody's carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Earnings Schedule of Other Stocks

Ares Capital Corporation ARCC , Hercules Capital, Inc. HTGC and LendingClub Corporation LC are slated to announce results on Oct 31, Nov 1 and Nov 6, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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