Good day, and welcome, ladies and gentlemen, to the Moody's Corporation first quarter 2018 earnings conference 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 question and answers following the presentation. I will now turn the conference over to Steve Mayer, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter 2018 results, as well as our current outlook for full year 2018. I am Sivam Mayer, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the first quarter of 2018, as well as our current outlook for full year 2018. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. During this call, we will be presenting non-GAAP or adjusted figures. To view the nearest equivalent GAAP figures and GAAP reconciliations, please refer to our earnings release that was filed this morning.
Before we begin, I call your attention to the safe harbor language, which can be found toward 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 31st, 2017, 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.
I'll now turn the call over to Ray McDaniel.
Okay. Thank you, Steve. Good morning, and thank you to everyone for joining today's call. I will begin by summarizing Moody's first quarter 2018 financial results. Steve is going to help me out with the prepared remarks by following up with some additional first-quarter financial details and operating highlights. I will conclude with comments on our current outlook for 2018. After our prepared remarks, we will be happy to respond to your questions. In the first quarter, Moody's achieved record revenue of $1.1 billion, a 16% increase from the first quarter of 2017, reflecting not only a strong contribution from Bureau van Dijk, but also solid organic growth from Moody's Analytics. Moody's Investors Service contributed broad-based transaction revenue growth, particularly from structured finance activity, as well as recurring revenue growth as 2017's new rating mandates became monitored credits.
Operating expenses for the first quarter of 2018 totaled $636 million, up 20% from the prior year period, including 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and non-recurring acquisition-related expenses. Operating income was $491 million, up 10% from the first quarter of 2017. Adjusted operating income of $541 million was up 13%. Foreign currency translation favorably impacted operating income and adjusted operating income by 4% each. The operating margin was 43.6%, and the adjusted operating margin was 48%. Moody's diluted EPS for the quarter was $1.92 per share, up 8% from the first quarter of 2017. Adjusted diluted EPS for the quarter was $2.02 per share, up 35%, and excludes $0.10 per share related to amortization of acquired intangible assets and acquisition-related expenses.
First quarter 2017 adjusted diluted EPS primarily excludes a $0.31 per share gain from strategic realignment and expansion involving Moody's China affiliate, CCXI. Our business remains well-positioned to benefit from continued global economic expansion in 2018, as such, we are affirming our full year 2018 guidance of $7.20-$7.40 for diluted EPS and $7.65-$7.85 for adjusted diluted EPS. I'll now turn the call back over to Steve to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the first quarter was a record $1.1 billion, up 16%. U.S. revenue of $598 million was up 3%. Non-U.S. revenue of $529 million was up 33% and represented 47% of Moody's total revenue. Recurring revenue of $603 million was up 26% and represented 54% of total revenue. Foreign currency translation favorably impacted Moody's revenue by 4%. Looking now at each of our businesses, starting with Moody's Investors Service. Total MIS revenue for the quarter was $720 million, up 8%. U.S. revenue increased 3% to $433 million. Non-U.S. revenue of $287 million was up 17% and represented 40% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 3%. Moving to the lines of business for MIS. First, Corporate Finance revenue for the first quarter was $378 million, up 7%.
This result reflected strong contribution from EMEA bank loans and U.S. investment grade, as well as growth in recurring revenue resulting from an increase in new mandates in 2017. U.S. and non-U.S. corporate finance revenues were up 1% and 20% respectively. Second, structured finance revenue totaled $130 million, up 29%. This result reflected broad strength in securitization markets, with particularly strong levels of new CLO formation. U.S. and non-U.S. structured finance revenues were up 30% and 28%, respectively. Third, financial institutions revenue of $114 million was up 2%. This result reflected growth in issuance from the EMEA banks and U.S. insurance companies, partially offset by a decrease in activity from Asian and U.S. banks. U.S. financial institutions revenue was down 4%, while non-U.S. revenue was up 7%. Fourth, public project and infrastructure finance revenue of $93 million was down 5%.
This result primarily reflected a decrease in U.S. municipal issuance due to the loss of tax exemptions for advanced refunding transactions. U.S. public project and infrastructure finance revenue was down 15%, while non-U.S. revenue was up 13%. Turning now to Moody's Analytics. Total revenue for MA of $407 million was up 33%. U.S. revenue of $164 million was up 6%, while non-U.S. revenue of $243 million was up 60% and represented 60% of total MA revenue. Foreign currency translation favorably impacted MA revenue by 4%. Organic MA revenue for the first quarter of 2018 was $333 million, up 9% from the prior year period. Moving now to the lines of business for Moody's Analytics. First, research, data, and analytics, or RD&A revenue of $269 million was up 53%. U.S. RD&A revenue was up 11%, and non-U.S. RD&A revenue more than doubled.
Bureau van Dijk's revenue contribution of approximately $74 million included a $10 million reduction as a result of a deferred revenue adjustment required under acquisition accounting rules. Organic RD&A revenue was $196 million, up 12% from the first quarter of 2017, driven by strength in sales of credit research and ratings data feeds. Second, Enterprise Risk Solutions, or ERS, revenue of $100 million was up 4% from the prior year period. This result reflected strength in software subscription revenues, partially offset by a revenue decline for one-time projects and licenses. U.S. ERS revenue was down 4%, while non-U.S. revenue was up 11%. Trailing 12 months revenue for ERS increased 6%, while sales were approximately flat. We continue to make progress on shifting the mix of the ERS business to emphasize higher margin products, with trailing 12-month product sales up 5% and service sales down 14%.
Recurring revenue represented 81% of total ERS revenue in the first quarter of 2018, up from 76% in the prior year period. Finally, professional services revenue of $38 million was up 5%. U.S. professional services revenue was down 4%, while non-U.S. revenue was up 10%. Turning now to operating expenses. Moody's first quarter operating expenses totaled $636 million, up 20% from the prior year period. 12 percentage points of this increase were attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and acquisition-related expenses. Other drivers of expense growth include additional compensation expense for merit increases and hiring. Foreign currency translation unfavorably impacted operating expenses by 3%. On January 1st, 2018, the company adopted the new ASC 606 revenue accounting standard using the modified retrospective approach. The impact of adoption was immaterial to both revenues and expenses in the first quarter of 2018.
The impact of ASC 606 is expected to be immaterial to Moody's Corporation in the remainder of the year. However, it could create some quarterly volatility. As Ray mentioned, Moody's operating margin was 43.6% and adjusted operating margin was 48%. Moody's effective tax rate for the first quarter of 2018 was 14.6%, down from 23.4% in the prior year period. The decline in the tax rate reflects a lower U.S. statutory tax rate, net uncertain tax position benefits related to a statute of limitation expiration, and a higher benefit related to the tax accounting for equity compensation. Now I'll provide an update on capital allocation. During the first quarter of 2018, Moody's repurchased approximately 300,000 shares at a total cost of $43 million, or an average cost of $161.10 per share. Moody's also issued a net 1.2 million shares as part of its employee stock-based compensation plan.
The net amount includes shares withheld for employees' payroll taxes. Moody's also returned $84 million to its shareholders via dividend payments. On April 24th, the board of directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock. This dividend will be payable on June 11th, 2018, to stockholders of record at the close of business on May 21st, 2018. Outstanding shares as of March 31st, 2018, totaled 191.9 million, approximately flat to a year ago. As of March 31st, 2018, Moody's had approximately $500 million of share repurchase authority remaining. At quarter end, Moody's had $5.5 billion of outstanding debt and $910 million of additional borrowing capacity available under its revolving credit facility. Total cash equivalents, and short-term investments at quarter end were $1.4 billion, an increase of 16% from December 31st, 2017.
Cash flow from operations for the first three months of 2018 was $392 million, an increase from negative $512 million in the prior year period. Free cash flow for the first three months of 2018 was $377 million, an increase from negative $531 million in the prior year period.
These increases in cash flow were largely due to payments the company made in the first quarter of 2017 pursuant to its 2016 settlement with the U.S. Department of Justice and various state attorneys general. With that, I will turn the call back over to Raymond McDaniel.
Okay. Thanks, Sivam. Before discussing the changes to our full year guidance for 2018, I'd like to provide some highlights on our progress with Bureau van Dijk integration and synergy activities. 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 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 are 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. I will conclude this morning's prepared comments by discussing the changes to our full year guidance for 2018. A complete list of Moody's guidance is included in table 12 of our first quarter 2018 earnings press release, which can be found on the Moody's Investor Relations website at ir.moodys.com. Moody's outlook for 2018 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability, and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook.
Our outlook assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.40 to £1 and for the euro of $1.23 to €1. We are now expecting corporate finance revenue to increase in the mid-single digit % range. Structured finance revenue is now expected to increase in the high single-digit % range. Before turning the call over to Q&A, I would like to provide an update on Moody's corporate social responsibility strategy. Earlier this week, we launched a global approach to CSR focused on empowering people around the world with the information, resources, and confidence they need to create a better future for themselves, their communities, and the environment. We also announced Reshape Tomorrow, our signature financial empowerment initiative to help people succeed in growing small businesses.
Reshape Tomorrow will provide small business owners access to vital information about the credit process and help them connect with sources of financing. Moody's is seeking partnership proposals from organizations for Reshape Tomorrow programs and resources that provide essential financial knowledge to increase their chances of success. For more information and to submit a proposal, please see the CSR press release that we issued on April 24th or visit moodys.com/csr. This concludes our prepared remarks, and joining Sivam and me for the question and answer session are Mark Almeida, President of Moody's Analytics, and Robert Fauber, President of Moody's Investors Service. We'd be pleased to take any questions you may have.
Thank you. Ladies and gentlemen, if you would like to ask a question, please dial star one on your telephone keypad. If you are on a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We will ask that you please limit yourself to one question with a brief follow-up. You are then welcome to rejoin the queue for any additional questions you may have. Again, that is star one to ask a question. Our first question comes from Conor Fitzgerald with Goldman Sachs.
All right. Good morning.
Please go ahead.
Just wanted to get a little dig in a little bit on the recurring revenue on the ratings side, where you had a pretty good quarter, particularly in Corporate Finance. Just can you talk a little bit about the trends you're seeing in this space and how sustainable you think the pace of growth is?
Sure. Happy to, Conor, I'll ask Robert Fauber to offer some initial thoughts on that.
Yeah. I think your first question was around recurring revenue. Similar to the fourth quarter, among other things, we saw increases in monitored credits, particularly in Europe and Asia, where we've seen some very strong first-time mandate growth, and we also got a modest benefit from FX. If you recall, we had over 1,000 first-time mandates in 2017, that's helping support the current revenue growth. I think your second question was around corporate generally. Looking at corporate issuance, globally, it was down somewhere in the neighborhood of 20%. Obviously, our CFG revenues were up. We benefited from some favorable mix, some good commercial execution, the higher new mandates that I mentioned, monitored credit growth, and FX. We also saw some good growth in other transaction revenue, and that includes our rating assessment service that's typically driven by M&A activity.
In the rest of world, the issuance declines were really largely confined to European investment-grade issuers, which mitigated the revenue impact to some extent.
Yeah. I would just add that as far as recurring revenue at MIS, to the extent that is driven off of new rating mandates, and we're benefiting from the strength of that in 2017, we do expect another robust year for new rating mandates in 2018.
Conor, let me just take the opportunity to give an update on what we're hearing from The Street as we do every quarter. Again, keep in mind, these are your consolidated consensus views from a variety of different large investment banks. It includes both financial and non-financial, though it doesn't necessarily align with the way we categorize revenue. Hopefully, we'll be instructive to at least what we're hearing on the ground in the bond markets here in the U.S. and in EMEA. For investment grade, guidance for full-year levels are about $1.2 trillion. That's down roughly 5%-10% from what were record levels in 2017. Overall conditions remain stable, and fundamentals remain relatively strong, and they're seeing a solid pipeline out front. This week, for instance, another around $20 billion of investment grade.
I think calling next week for slightly higher than that as earnings blackouts start to roll off in May, which is typically a fairly active month. From what we're hearing, is shaping up to be so. Credit spreads have widened in the first quarter given equity market volatility, but rallied a bit in April. The Bloomberg Barclays U.S. Aggregate Bond Index is roughly 10 basis points wider year-to-date, though. The round trip is showing modest widening on a year-to-date basis. Another thing I'd point out, some cash repatriators have been out of the market so far in Q1, so we'll have to keep an eye on that. Moving to high-yield. The forecast for full-year volume is $275 billion. That's about flat to 2017. Equity market volatility and interest rate hikes, we've already seen one so far this year.
The Fed is, or the futures market is pricing in between two and three incremental hikes. Likely, the next one will be in June with a 90%+ probability. Issuance to date has primarily been driven by refinancings in the high-yield bond market. Demand from investors remains strong. The credit spreads there, I would say similar story to investment grade in terms of the journey that they've taken year-to-date, given the tightening in January and then selling off in February, March, and then some rallying over the last several weeks. Year-to-date, relatively unchanged on credit spreads for high-yield bonds. On the leveraged loan side, full-year forecast that we're hearing is roughly $500 billion. Again, this is flat to down 10% on what was really just a gangbuster year for this asset class in 2017, so a very high base.
The leveraged loan market does remain strong. Spreads are narrow, and it's obviously an attractive asset class in a rising rate environment. Repricing and refinancing activity still remains robust. That was a big driver last year, and we're seeing that trend continue. Full-year 2018 expected to be slightly down, as I mentioned, from what was a record 2017, with some potential upside if we see M&A activity accelerate or rising rates create more demand for floating rate paper than we've already seen. Moving to Europe. On the investment grade side, issuance has picked up from the beginning of the year. Demand remains solid is what we're hearing. Spreads have moved a bit wider from the beginning of the year but remain tight by historical standards, so similar dynamic to what we're seeing on U.S. dollar spreads investment grade.
The Euro area continues to see strong growth in GDP and corporate profits. That's a happy condition. On the spec grade side, both high yield and leveraged loan markets are in good shape, though issuance levels face tough comps over what was a strong 2017. Spreads are narrow due to strong demand, fueling opportunistic issuance. Pipeline is healthy and similar to the U.S., driven by refinancings and repricings. Hope that helps.
Very helpful. Thank you. Then just one on capital and capital return. Cash was up at the end of the quarter. I know you've got some debt paydowns coming in as we get through the rest of the year. Just want to get your updated thoughts on what you're thinking about doing with the free cash flow. I think based on your guidance, you still have a little extra wiggle room if I put all the moving pieces together for buybacks, debt paydown, et cetera. Just wanted to get your updated thoughts. Thanks.
Yeah. Our thinking there really hasn't changed, Conor. We've been very up front really since we announced the Bureau van Dijk acquisition that our near-term priority would be de-leveraging from the debt that we took on to finance that acquisition. We haven't come off that. As you know, we took down our share repurchase target for 2017 to $200 million. 2018, the same amount. That's enough to offset dilution from employee share issuance. We're still marching along those same lines to the extent that we are able to reach our leverage targets sooner than we expected. I would say at this point, we are a bit ahead of pace than we had initially thought. We'll, of course, reevaluate what we want to do there. Right now, near term, it's absolutely prepaying debt.
Thank you for taking my questions.
We'll take our next question from Toni Kaplan with Morgan Stanley.
Hi, good morning.
Morning.
You had a good quarter in corporate finance. Revenue up basically 7% globally and really difficult comp in that business. I think I was just a little bit surprised that the revenue guide for the year, you lowered it. Can you just talk about, I guess you just talked about what's going on in the markets, but I'm just not totally sure as to what to think for the rest of the year given the lowered guide, but okay first quarter.
Yeah. Rob may want to provide some additional color, but the high-level answer is we do have a moderation of issuance expectations for US high yield and EMEA investment-grade bonds.
You add to that what we anticipate will be an adverse shift in foreign currency translation. That's really contributing to the modest reset in our guidance.
Great. For Moody's Analytics, we noticed that the margins were up about 200 basis points, they were down sequentially from the second half of 2017. We were just wondering if you had to look at the legacy business margin expansion as opposed to just BvD being included, how should we think about the legacy margin expansion if you exclude that? Thanks.
Yeah. Mark, do you want to
Sure
try and address that?
Yeah, Toni, we did have what we thought was good year-on-year margin expansion. Moreover, we've got another quarter of margin expansion on a trailing 12-months basis. I think that's five consecutive quarters now that on a trailing 12-months basis, the margin's expanding. That's really the number that we focus on because you can get some weird things going on with the numbers if you look at any one discrete quarter. The margin expansion is coming from both the legacy business as well as from Bureau van Dijk. Both pieces are contributing to expansion. That's in spite of the haircut on the Bureau van Dijk revenue associated with the accounting and also the extra overhead allocation that Moody's Analytics is now attracting because of the growth in the scale of the business relative to MIS with the addition of Bureau van Dijk.
Actually, we're quite pleased with the way the margin is expanding, and we feel like we really are delivering on what we talked about with respect to delivering consistent gradual progress in expanding the margin. Again, focusing very heavily on the trailing 12-months performance rather than the discrete quarters.
I would just comment too, Toni, on the deferred revenue haircut Mark just mentioned. We experienced $10 million of it this quarter. We're most of the way through it. We've got about five and some change left. Five should likely hit next quarter, and then Q3 it'll be largely gone. After that, it goes away. That'll be a nice uplift for us.
Great. Thank you.
Our next question comes from Alex Kramm with UBS.
Yeah. Hey, staying on, I guess, BvD analytics for a minute here. I think a lot of people were surprised this morning by the revenue performance in RD&A, and in particular in BvD. Maybe you can talk about a little bit more why maybe some of us got that wrong in terms of the seasonality, and how this will ramp throughout the year. But maybe most importantly, I think the adjusted number for BvD was flat quarter-over-quarter. I guess I would've expected some growth in particular, given that FX was helpful. Maybe a little bit more color would be great.
Sure. Mark?
Yeah. Alex, taking your second point first. The Bureau van Dijk numbers, if you add back the haircut to what we reported, you're right that it's flat from the fourth quarter to the first quarter. What you're missing there is that we did take a hit to the top line in the first quarter because of the transition to the new accounting standard, ASC 606. That did hurt us on the top line. We also had some timing delays in closing some of our renewal contracts. That really relates to operational matters as opposed to commercial matters. We don't have issues with the customers or with the business. We just didn't get some of those contracts booked in the first quarter as expected. We expect to get them shortly, and we will see an acceleration. We'll have a catch-up on the revenue recognition once we get those booked.
That's what's going on there. The underlying business is performing well. As Ray said, it's very much in line with, if not better than, the historical standalone performance of the business. We feel very good about what's happening there. On the other point, I think that what you're seeing is that we do expect RD&A's growth rate to accelerate, particularly in the second half of the year. You need to keep in mind that what's happening here is that as we get into the third quarter, Bureau van Dijk's numbers will start to roll into our organic calculations because we will have had them in the half of the third quarter and the full fourth quarter of 2017. As Steve just pointed out, that deferred revenue haircut will go away.
We're going to see very healthy growth in the organic RD&A figures as we get into the second half of the year.
I guess just one other point I would make, Alex. You made a comment about expecting a nice lift from FX. The average rate on the euro really wasn't materially different in Q4 versus Q1. Obviously, the euro strengthened pretty meaningfully last year, but most of that took place early to mid-year, so it was relatively flat quarter-to-quarter.
Okay. Fair enough. I thought it was up 4% or 5%, but it's okay. I'll double-check. Secondly, just quickly, I think when you gave the update on the issuance outlook, leveraged loans were still cited as an area of strength, and I think your colleague said this yesterday too with flows into bond funds and demand for variable paper. While spreads are tight and there's demand, what about the corporate side? Is there a point where some of these high yield issuers are seeing the variable rates just too high, or do you think we're still pretty far away from that? Any color would be helpful.
Yeah. This is Ray. The absolute borrowing costs are still attractive. I think there's room, even in a rising rate environment, for borrowing conditions to remain attractive. We may see, later in the year, some rebalancing between the relative attractiveness of floating versus fixed-rate paper. Really depends on both policy and market reactions to policy on interest rates. We'll see, but we do see a broadly positive environment for borrowing continuing.
That's helpful. Thank you.
We'll take our next question from Manav Patnaik with Barclays.
Thank you. I guess you answered my question I had on BvD, but maybe if you do the rest of the Moody's Analytics business, I think the organic growth of 9% you called out, I believe that includes FX benefit. If I assume it's about 4%-5% growth, I guess can you just help understand? It feels a little slower than we would have expected. Any moving pieces, maybe timing in the other pieces of RD&A, ERS, and so forth?
Yeah, Manav. Like I said, we do expect acceleration in the growth rate as we get into the second half of the year. Bear in mind, we guided to low double-digit growth for MA organically, and we came in at 9% in Q1. Of course, our guidance includes our expectations about FX. I think things are running substantially as we expected. We don't see a big deviation from where our guidance is and where we see the business performing.
That's fair. I guess if I do a true organic constant currency number, that 9 is probably 4 or 5. We've always thought that it should be more high single-digit growth. Does timing explain why that isn't higher, I suppose, I guess was what I was trying to get at.
Well, RD&A organically, constant currency, is up 7% in the first quarter. Again, it feels pretty solid to us.
Okay, that's fair. Just a follow-up, maybe just on the backdrop. It sounds like you guys still remain constructive on the issuance backdrop as you were at Investor Day. Maybe just on the structured side, it was pretty strong, obviously, in the quarter. How much of that do you think was pull forward and you see weakness and so forth? I know pull forward is a word we've been using for many years now, but just some thoughts there would be helpful.
Yeah. As we talked about a little earlier in the year, our expectations for a robust issuance environment were relying more on global GDP growth, economic momentum, mergers and acquisition activity, as opposed to refinancing that was going to be needed because of maturing debt in 2018. That being said, you're correct. We've had a continuing pull-forward narrative and dialogue. So as interest rates increase in 2018, we have to look out to 2019, 2020 and see what corporations are thinking about the utility of refinancing in 2018 with rates where they are now versus their expectations for rates in 2019, 2020. We will have to watch and see where those decisions get made.
Okay. Thanks, guys.
We'll take our next question from Joseph Foresi with Cantor Fitzgerald.
Hi. I was wondering if you could be a little bit more specific on what caused the renewal delays or timing in RD&A, and how you rectified it. Mark?
Sure. It's pretty simple. Frankly, we've seen this before when we've acquired subscription businesses. The practices at Bureau van Dijk have not historically been as rigorous as we do things in Moody's Analytics, and we haven't quite gotten the discipline around getting our renewal contracts signed and booked on a timely basis. I think we're making progress in getting them with the program and getting that work done the way we get it done across Moody's Analytics.
We haven't quite gotten them to the level that we'd like. That's really what I was referring to. It's not a massive amount of business, but it does affect our numbers a little bit in the first quarter. As I said, we fully expect to get those sorted out in short order, and we'll have the revenue catch up once they get booked. I should note that attrition in the business is holding very steady at kind of their historical experience. We don't see any problems with the underlying business. It's really just an operational matter.
Okay, thanks. Just to go back to guidance, why not raise the guidance at least on the margins or the earnings side of things? Is there a change you're expecting to the cost structure, or was that due to the lower revenue outlook you mentioned a little bit earlier?
Yeah. I hope we are being cautious on the top-line outlook. We have some robust comps that we are going to be lapping for the rest of the year. We are in an environment where rates are moving up at least modestly. Spreads have widened out a bit. We're taking, I think, a prudent, but you might say cautious approach, to what the top-line opportunity is for the rest of the year.
Joe, I would just add, just to give an update to help you with your modeling on the expense ramp, we are expecting it still to increase between $60 million and $70 million from Q1 to Q4. The starting point is obviously now $636, which is actually right in line with what we had talked about on the last call. We're still expecting growth as we move through the year. That's part of why we're being thoughtful about our guidance on the margin.
Thank you.
Our next question comes from Peter Appert with Piper Jaffray.
Thank you. Good morning. Mark, I want to make sure I fully understand the impact of deferred revenue at BvD on the profitability. Is it correct to say that you're deferring revenue, but all costs have to be recognized as incurred, and therefore you're perhaps understating the margins currently, and we might anticipate some fairly meaningful spike in margin in the third and fourth quarter? Do I have this right?
Yes, you understand that perfectly, Peter. The only tweak I might make to what you said is just I forget now exactly what word you used, but you maybe said it with a bit more vigor than I would have in terms of the amount of additional margin we'll see when we stop haircutting the top line with these accounting adjustments. Yes, absolutely. We're absorbing and we're recording all of the expense, but we're not recording all of the revenue on the P&L.
Is it possible to quantify that a bit more then, Mark, in terms of, for example, in the first quarter, you deferred $10 million of revenue. Would that imply if this is a 40% margin business, the operating income would have otherwise been $4 million higher?
Well, you did the math right. Yes.
Okay.
Peter, just to clarify, the deferred revenue haircut would have added $10 million to the top line, and there would be taxes on that, but otherwise, there's no additional expense associated with it. We're recognizing all of the expenses.
Correct. Also, just a reminder to everyone how that works. The majority of it was taken in Q3 and Q4 of 2017. It was roughly $50 all in. About $39 of that was taken a little north of $50. $39 of that was taken in 2017 in Q3 and Q4, the remainder, the $16 is left in 2018. Again, we recognized the $10 this quarter, projecting $5 next quarter, then there's just a very trace amount.
Great. Thank you.
We'll take our next question from Jeffrey Silber with BMO Capital Markets.
Thanks so much. I was wondering if we can get an update on the CFO search.
Sure. It's ongoing. We've seen some excellent candidates. We have good candidates both inside Moody's, and we are conducting an external search as well. I hope to be able to close out the search in the near future. It's still in process.
Okay. When you say near future, can you remind me, have you put a time expectation on that beforehand?
Well, I'd like to have it done today, but I want to make sure that we get the best possible candidate. I'm not going to put a deadline on it. I'm just going to keep working at it.
I understand. I appreciate that. Just one quick numbers question. I know the tax rate was lower this quarter. You highlighted some of the items. What should we be using going forward for the tax rate for our models?
Yeah, no, that's fair. It was quite a bit lower, and we commented on the last call to expect exactly that. We had estimated excess tax benefit related to the stock comp accounting of roughly $40 million for the year. We said that it was going to be weighted toward the first quarter. In fact, it was. It was about 75%, $30 million was taken in the first quarter. There's 10 or so remaining that'll be fairly evenly spread out. That was one piece that was impacting the tax rate. Another item that you really wouldn't have visibility into, but there was also a net benefit that we received in the first quarter from a statute of limitations expiration on some uncertain tax positions that we had reserved for. We reversed those out, so that further brought down the ETR.
Going forward, Jeff, obviously 14.6% in Q1. We haven't changed our guidance of 22%-23%, so the math would indicate that it's going to likely have to be slightly higher than that 22%-23% for the remaining quarters in order to average out to the 22%-23% guidance.
Okay. Thanks so much for the color.
Yep.
We'll take our next question from Craig Huber with Huber Research Partners.
Thank you. Ray, would you mind just talking further about your outlook here for bank loan issuance for the rest of the year here? I know you talked with the investment banks thought it would be flat to down 5% in the U.S. What is your thought for the year on how that will play out here and in this environment?
As you saw for bank loans, we had a good first quarter. There was a lot of strength in our European bank loan business. I will let Rob provide a little more color on that. Overall, we are looking at flat to slightly up revenue expectations for bank loans for the full year, which would be a little bit better than what we're expecting in terms of the direction of issuance volume, which would be slightly down. We think that we have opportunities to increase our coverage in bank loans. Again, I would point to the strength in Europe that we've seen. Rob, I don't know if there's anything you wanted to add on that.
Yeah. That's right, Ray. I think we're seeing a very active bank loan market. I think we have to keep in mind when we're talking about the issuance outlook for the full year, we're coming off a year where global issuance last year was something north of 30% growth, I believe. The bank loan market's been a bit more active than the high yield market. We're seeing a lot of issuers come through the bank loan market. We're also seeing a lot of issuers that are rated very low in the credit spectrum. As Ray said, in Europe, we saw some nice revenue growth in bank loans on generally flattish issuance this quarter. The issuance mix worked in our favor there. Leveraged loan volumes in Europe, while again, kind of flattish, are at a record pace.
There's very good M&A activity supporting the loan volumes there compared to the prior year quarter where we saw a bit more refi activity. Also in Europe, we've got institutional investors and CLO originators that have got very strong bids for these loans. That's driving down the funding cost and keeping spreads tight for issuers there.
One thing I'd add on to Rob's comment is with some of these bank loan borrowers profiling as a high credit risk, low-rated entities. There is some potential volatility that could enter the equation if the default rates don't continue to decline. We believe they will through the year. If there is an increase in default rates, that makes those deep speculative grade names less attractive, and they may not have market access.
Also, if I could just quickly ask two quick ones if I could. For BvD, what was the underlying growth rate if you put aside the revenue adjustment for accounting purposes? Also the up 7.7% ratings revenue growth, the whole division. How much of that would you tie into being directly from the new mandates? Was it half of it coming from there? Roughly how much, please?
I think it's going to be less than that, Craig. I don't have a number for you right away. We can check on that. It's not going to be the majority, no.
On Bureau van Dijk, Craig, we're not disclosing the precise numbers for Bureau van Dijk on a standalone basis. Suffice to say, it's performing at a rate that is very consistent with what we would have showed you when we announced the acquisition in terms of its historical growth rate.
Mark, that historically was what? nine percent, 10%?
Yeah, it was running in the high single digits, around nine percent.
You're suggesting pretty close to that then.
Yes, absolutely.
Perfect. Thank you.
Our next question comes from Bill Warmington with Wells Fargo.
Good afternoon, everyone.
Good afternoon.
Bill, first question for you on the structured finance segment. You highlighted the CLO and the CMBS demand being particularly strong, but it also looked like the demand was really pretty broad. I wanted to ask about what was driving that, and then also to ask if there was any pull forward there to highlight.
Yeah. Go ahead.
Let me take that. I think you're right. Generally, we saw broadly higher securitization volumes. You're right, we've called out U.S. CLOs, but we've seen experienced and robust activity across a number of other sectors. Just to touch on CLOs because it was such a big driver for the quarter, we've seen very strong refi activity on tighter spreads. We also saw a higher proportion of new CLO formation as a percent of total deals in the first quarter, higher than any quarter that we had in 2017, and that's helped in part by the easing of risk retention. The U.S. obviously a bigger market for structured credit, but a similar story in Europe with European CLO volume supported by refi. As I said earlier, also a very hot leverage loan market.
We saw an uptick in CMBS deals and very robust ABS volume on very strong investor demand. In Europe, we saw RMBS volumes up, particularly in the U.K. and the Netherlands. In the U.K., volumes were benefiting from the conclusion of the Bank of England's term funding scheme in February, which was a cheap source of funding for banks. I would also note that Q1 2017 was a little bit of an easier comp for structured. If you think all the way back to Q4 of 2016, we did see some pull forward because of the implementation of risk retention in the beginning of 2017. It was a little bit of an easier comp as well.
I would just add on to that. After this call, we will post on the IR website, as we always do after earnings calls, the breakdown of components for the lines of business of revenue for the rating agency. You'll see CLO quarter-over-quarter Q1 '17 and Q1 '18 structured credit line is up 58%, ABS up 24%, RMBS up 19%. Broad-based strength across pretty much all the asset classes.
Got it. For my follow-up question, I wanted to ask about the war for IT talent, which seems to be intensifying as you see tech services companies across verticals looking to leverage our artificial intelligence and machine learning. I wanted to ask whether you're finding that you're able to get the talent you need, and whether there are any changes that you're thinking about making to ensure that you continue to get the talent you need.
I think broadly speaking, we do feel that we're able to attract very talented IT professionals, whether it's in our centralized IT function or embedded in the businesses. A lot of this is how attractive the opportunity is in terms of what we would have people working on. Whether it's robotic process automation or product development. It is an attractive offering. You're correct that there is a lot of competition for the best people. We've got to stay on top of that. We will adjust and make sure that we continue to retain our best people and recruit the best people. Those adjustments, they may be financial, they may be in terms of job content. We're paying attention to it like almost any organization today would. Mark, do you want to add to that?
I'd just add that what we're also seeing is that there is a lot of talent available in many different locations around the world. Certainly, it's quite challenging if you're recruiting in San Francisco and New York City and some other major centers. We've got operations in many different places around the world. We've got a big operation in Omaha, for example, and we find that to be a terrific source of talent. In many of our other operational centers around the world, we're able to attract the kind of talent we want. I think having the broad-based footprint that we have really helps us in that respect.
Thank you very much. Appreciate the insight.
We'll take our next question from Tim McHugh with William Blair & Company.
Thanks. One, can you update it on incentive comp, how much you accrued in the quarter, and I guess any change to the outlook versus what you're expecting for the full year now?
Sure, Tim. Happy to provide that. For the first quarter, incentive comp was $45 million. That was down 13% from first quarter of last year and 37% sequentially. As you know, we had to take that up pretty significantly in the back half of 2017 as we raised guidance given the performance of the business. Going forward, I would say sort of the 50-ish number is probably the best way to think about it. As you know, that will likely change depending on how the business performs, depending on what we do with guidance. That I think is probably a good starting point.
Okay, thanks. ERS product sales on a trailing 12-month basis was actually a little slower. Our services sales is something you've been de-emphasizing, but I guess I was a little surprised about the pace of product sales growth. Is there anything happening there that you can elaborate on?
I think, Tim, it's performing pretty much as we expected. I think we've got a number of new product launches that we've put into the market recently that have been very well-received. Our new loan origination product is doing quite well. The product that we have in the market to help our customers comply with the new CECL accounting standard is being very well-received. We have a very nice pipeline building there. If you drill down a little bit more into these numbers, you see that we've got continued double-digit sales growth for renewable products, which is really where we're putting our emphasis. I think we've got at least five or six quarters now of double-digit growth in renewable product sales. I think things are going very much in line with our expectations there.
As we've told you, we expect 2018 to be a fairly soft year for ERS as we work through this transition. We feel very good about some things that are happening in the business, and that should play out very nicely for us over a longer period of time.
Okay, great. Thank you.
Our next question comes from Vincent Hung with Autonomous.
Hi. How much of the non-transaction revenue comes from rating assessment services? If you can't give us that, what was it up year-over-year? Because I think S&P said it was up 40%.
Our revenue from rating assessment services is not very significant, to tell you the truth. I don't have the year-on-year growth rate in front of me. Again, it's not a material number.
Okay. On RD&A, if we think about the core RD&A excluding BvD, should we be looking at 12% organic as the right run rate for the rest of the year?
Again, our guidance for RD&A organic is mid-teens for this year. We did 12% in the first quarter. We expect that to accelerate, as I said, because we'll be layering in Bureau van Dijk, which is going to help. I guess you're asking me, am I expecting 12% growth from RD&A on an organic basis excluding Bureau van Dijk? Is that the question?
Yeah, exactly.
Again, I don't think we can give you guidance at that granular a level. I would expect that the RD&A business organically would continue to perform at a level similar to what we did in the first quarter if you were to pull out the Bureau van Dijk business. Let's put it this way, I wouldn't expect the growth rate to be slowing.
Great. Thanks.
Our next question comes from Shlomo Rosenbaum with Stifel.
Hi. Thank you for taking my questions. First, just a regular numbers question. What was the organic constant currency growth for the whole company? If you just kind of strip out both Bureau van Dijk and then the positive impact from FX, some of which went into Bureau van Dijk.
Sure, Shlomo. We had said that 16% top line for Moody's Corporation, half of that was due to the contribution from Bureau van Dijk, and the FX impact on all that revenue was 4%. If you strip that out, that gets you down to 4%.
Yeah. The thing is that if you take MIS at 5%, and then MA seems to be kind of 9% when you take out BvD, it implies it's a little bit higher than that. That's why I'm trying to get at a number. It seems to be a little bit higher.
That's the math, at least for the first quarter.
Can you comment a little bit on the dichotomy and the performance between the U.S. and outside the U.S. for ERS and professional services?
Sure. I'll let Mark start with this, and I may add a couple of comments onto it.
I think a couple of things going on there. First, we had some pretty significant FX benefit, which is obviously impacting the business outside the U.S. Also, we had some very strong sales growth outside the U.S., particularly in ERS last year, related to work that we were doing associated with our customers' adoption of the IFRS 9 accounting standard. That gave us some very good sales growth outside the U.S. last year relative to the U.S., which I think is now showing up in the U.S., non-U.S. revenue results.
Professional services?
A similar story. In our two businesses within professional services, they both tend to be a little bit more heavily oriented toward customers outside the U.S. than in the U.S. I think it's just the nature of those businesses is such that we've just got a bigger base of customers and a bigger base of business to work with outside the U.S.
To the extent that those businesses are performing better, we're seeing most of the improved growth outside the U.S.
Thank you.
We'll take our next question from Patrick O'Shaughnessy with Raymond James.
Hey, good afternoon, guys.
Hi, Patrick.
What's been the impact of tax reform on synthetic repatriation bond issuance thus far in 2018? I was reading the other day that the 10 largest holders of overseas cash haven't tapped the U.S. bond market so far this year after issuing roughly, I think it was $80 billion or so the last couple of years, but obviously that doesn't seem to be weighing on your corporate finance revenues so far.
No. This follows up on a brief comment that Rob had made earlier, that it is providing at least a modest headwind, it is very concentrated in terms of the number of firms that have large cash hoards overseas and may not feel they want to tap the debt markets given that repatriated cash. The numbers, if you look at the $, you might think it provides more of a headwind to our business than in fact it is. I would just add that with so much of our business being in the spec-grade sector, those are not companies that typically have a lot of overseas cash to bring back. Again it is a headwind, not a serious one at this point.
All right. Thank you very much.
We'll take our next question from Alex Kramm with UBS.
Hello again. I actually had a follow-up on the tax rate, that got answered already. A couple of things while I'm here, I guess. One, I know you don't really give near-term guidance, would be interested with the commentary you've said in terms of the updated outlook, how you think about more near term. I mean, the first quarter had, on the MIS side this is, right? Had a little bit of volatility. Some of this volatility has persisted. Typically, the second quarter gets a little bit of a seasonal bump from the 1Q. I'm just wondering if you feel like seasonally the second quarter should be stronger than 1Q just given seasonality, maybe some things were delayed and are coming in the second quarter, or if it's just too uncertain of an environment.
I guess I would say you probably see the pipeline developing pretty real time. Any color will be great.
Yeah. Let me try that, Alex. I'm going to talk a little bit about kind of the pipeline and market tone and kind of what we're seeing and what we're expecting. I think in general, I would say the pipelines look healthy. I would note that we've worked through a good bit of the big M&A backlog that we had earlier in the year, but we are also seeing M&A deals in kind of preliminary stages and we're seeing that through our rating assessment service. We've also got a very good pipeline of first time mandates. That gives us some visibility. We talked about in the spec-grade market, spreads remain very tight, and as I said, we're seeing a lot of low-rated issuers tapping the market, a very strong CLO bid for that kind of paper.
I would also note, just in terms of fund flows, so on the high yield side, after we saw a lot of outflows earlier in the year, we're starting to see some inflows back into high yield funds. We saw $3 billion in inflows last week. That was the largest week since mid-December 2016. On the loan side, inflows continue to be strong. We've had now nine consecutive weeks of inflows. I think we expect on the investment-grade side, we're coming out of blackouts. We're seeing good activity, and I think we expect steady issuance here in the second quarter.
Great. Then maybe just lastly, Ray, I think M&A hasn't really come up as a topic. I know you're pretty busy integrating BvD still, but just curious about appetite right now as you look at the world and maybe also what the environment is like for deals in areas that you are interested in. Is there a good bid- ask, or are things just too expensive, or is just not really anything out there that you are taking a look at?
Well, things are always too expensive. There's the starting point. We have an active corporate development function at Moody's M&A function. We look at a lot. As you know, we don't pull the trigger very often. There are things that we're looking at that are of interest to us, but it would be the same thing I would answer in any other quarter. There is nothing unusual going on in the M&A environment that is causing us to either step back and say, "It's too rich for us," or to say, "We've got to act right now. This is the moment in time to pull a trigger." We're being disciplined. We are looking. We'll see if something attractive is offered at a fair price.
That's fair enough. Thank you very much.
It appears there are no further questions at this time. Mr. Ray McDaniel, I'd like to turn the conference back to you for any additional or closing remarks.
Okay. I just want to thank everyone for joining today's call, and we look forward to speaking with you again in the summer. Thanks.
This concludes Moody's first quarter 2018 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the first quarter 2018 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 P.M. Eastern Time on Moody's IR website. Thank you.