Good day. Welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and full year 2017 conference call. At this time, I'd 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 would now like to turn the conference over to Mr. Steve Maire, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone. Thanks for joining us on this teleconference to discuss Moody's fourth quarter and full year 2017 results, as well as our outlook for full year 2018. I am Steve Maire, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the fourth quarter and full year 2017, as well as our current outlook for the full year 2018. The earnings press release and a 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. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. 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, 2016, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission'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 listen-only mode. Before I turn it over to Ray, I'd like to remind everyone that Moody's will be hosting Investor Day at the end of this month on February 28th in New York City. Please contact the investor relations team if you would like additional information about this event. I'll now turn the call over to Ray McDaniel.
Thank you, Steve. Good morning, thank you everyone for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2017 financial results. Linda will follow with additional fourth quarter financial details and operating highlights. I'll then conclude with comments on our outlook for 2018. After our prepared remarks, we'll be happy to respond to your questions. In the fourth quarter, Moody's record revenue of $1.2 billion increased 24% from the fourth quarter of 2016, primarily as a result of an increase in rated issuance, the acquisition of Bureau van Dijk, and strong organic performance from Moody's Analytics. Operating expenses for the fourth quarter of 2017 totaled $703 million, down from $1.4 billion in the fourth quarter of 2016.
Operating expenses in the fourth quarter of 2016 included an $864 million charge related to a settlement with the U.S. Department of Justice and the attorneys general of 21 U.S. states and the District of Columbia. Excluding the settlement charge, operating expenses were up 27% 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 $463 million, up from the fourth quarter 2016 operating loss of $473 million. Adjusted operating income of $519 million was up 22%. Foreign currency translation favorably impacted adjusted operating income by 3%. The operating margin was 39.7%. The adjusted operating margin was 44.5%. Moody's diluted EPS for the quarter was $0.13 per share, up from a loss per share of $2.25 in the fourth quarter of 2016.
Adjusted diluted EPS for the quarter was $1.51, up 20%. Excluded a $1.26 one-time charge related to the net impact of changes in tax laws in the U.S. and Europe. Additional adjustments included amortization of acquired intangible assets and acquisition-related expenses. Excuse me. Turning to full-year performance, Moody's record revenue for the full year of 2017 of $4.2 billion was up 17% from 2016. U.S. revenue was $2.3 billion, up 12%, while non-U.S. revenue was $1.9 billion, up 24%. Foreign currency translation favorably impacted Moody's revenue by 1%. Revenue at Moody's Investors Service of $2.8 billion was up 17% from the prior year. U.S. revenue was $1.7 billion, up 13%, while non-U.S. revenue was $1.1 billion, up 23%. Revenue at Moody's Analytics was $1.4 billion, a 16% increase over the prior year.
U.S. revenue of $646 million was up 7%, while non-U.S. revenue of $785 million was up 25%. Organic MA, Moody's Analytics revenue, was $1.3 billion, up 8% from the prior year. Operating expenses for full year 2017 totaled $2.4 billion, down 19% from $3 billion in the prior year, which included the fourth quarter 2016 settlement charge. Excluding the settlement charge and a restructuring charge in 2016, operating expenses were up 15%, which includes five percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets and non-recurring acquisition-related expenses. There was no material impact on expenses from foreign currency translation. Operating income was $1.8 billion, up $639 million in 2016, which included the fourth quarter 2016 settlement charge. Adjusted operating income of $2 billion was up 21%. Foreign currency translation favorably impacted adjusted operating income by 2%.
Moody's operating margin was 43%, up from 17.7%, and adjusted operating margin was 47.3%, up from 45.5% in the prior year. The effective tax rate for full year 2017 was 43.6%, which included net charge in the fourth quarter related to the impacts of tax reform in the U.S. and Europe. The effective tax rate was down from 50.6% full year 2016, which included the non-deductible portion of the settlement charge. Excluding the net charge in 2017, the effective tax rate was 29.9%. Excluding the settlement charge in 2016, the effective tax rate was 31.3%. We're expecting another solid year of growth in 2018, our outlook is for low double-digit % revenue growth, diluted EPS of $7.20-$7.40, and adjusted diluted EPS of $7.65-$7.85. Both ranges include an approximate $0.65 benefit from U.S. tax reform.
I will now turn the call over to Linda 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 fourth quarter was a record $1.2 billion, up 24%. U.S. revenue of $614 million was up 15%. Non-U.S. revenue of $551 million was up 35% and represented 47% of Moody's total revenue. Recurring revenue of $581 million was up 23% and represented 50% of total revenue. Foreign currency translation favorably impacted Moody's revenue by 3%. Looking now at each of our businesses, starting with Moody's Investors Service. This was the fourth consecutive quarter of record revenue for MIS. Total MIS revenue for the quarter was $725 million, up 19%. U.S. revenue increased 17% to $440 million. Non-U.S. revenue of $285 million was up 23% and represented 39% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 3%. Looking now at the lines of business for MIS.
First, corporate finance revenue for the fourth quarter was $334 million, up 20%. This result reflected strong issuance activity in the U.S. investment-grade and speculative-grade bonds, EMEA speculative-grade bonds, and bank loans and Asian investment-grade bonds. U.S. and non-U.S. corporate finance revenues were up 16% and 28% respectively. Second, structured finance revenue totaled $148 million, up 13%, primarily driven by strong contributions from CLOs in both the U.S. and Europe, as well as an increase in rated U.S. REIT transactions. U.S. and non-U.S. structured finance revenues were up 17% and 5% respectively. Third, financial institutions revenue of $119 million was up 34%. This result was largely driven by an increase in banking issuance from infrequent issuers. U.S. and non-U.S. financial institutions revenue were up 36% and 33% respectively. Fourth, public project and infrastructure finance revenue of $119 million was up 16%.
This result reflected increased U.S. public finance issuance as municipal borrowers accelerated financings ahead of anticipated changes in U.S. tax legislation, as well as strength from infrastructure finance. U.S. and non-U.S. public project and infrastructure finance revenues were up 14% and 18% respectively. Turning now to Moody's Analytics. Total revenue for MA of $441 million was up 32%. U.S. revenue of $174 million was up 10%. Non-U.S. revenue of $267 million was up 51% and represented 60% of total MA revenue. Organic MA revenue for the fourth quarter of 2017 was $379 million, up 13% from the fourth quarter of 2016. Foreign currency translation favorably impacted MA revenue by 3%. Moving now to the lines of business for MA. First, Research, Data & Analytics or RD&A revenue of $258 million was up 55%. U.S. RD&A revenue was up 18% and non-U.S. RD&A revenue more than doubled.
Bureau van Dijk's revenue contribution of $62 million for the fourth quarter included a $22 million reduction as a result of a deferred revenue adjustment required under acquisition accounting rules. Organic RD&A revenue was $196 million, up 17% from the fourth quarter of 2016, driven by broad strength in all product lines. Second, Enterprise Risk Solutions or ERS revenue of $143 million was up 10% from the prior year period, driven primarily by demand for products that enable adoption of the International Financial Reporting Standard or IFRS 9 accounting requirement, as well as strong performance in the insurance product line. U.S. ERS revenue was down 5%, while non-U.S. revenue was up 18%. Trailing 12-month sales for ERS increased 7%. 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 14% and services sales down 13%.
Recurring revenue represented 69% of total ERS revenue in 2017, up from 66% in the prior year. Third, professional services revenue of $40 million was up 7%. U.S. and non-U.S. professional services revenues were up 6% and 8%, respectively. Turning now to operating expenses. Moody's fourth quarter operating expenses totaled $703 million, down from the $1.4 billion in the fourth quarter of 2016. Operating expenses in the fourth quarter of 2016 included the $864 million settlement charge. Excluding the settlement charge, operating expenses were up 27% from the prior year period, which includes 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and non-recurring acquisition-related expenses. Other drivers of expense growth included additional compensation expense for merit increases and hiring, as well as increased performance-based incentive compensation. Foreign currency translation unfavorably impacted operating expenses by 1%.
As Ray mentioned, Moody's operating margin was 39.7%, and adjusted operating margin was 44.5%. Now I'll provide an update on capital allocation. During the fourth quarter of 2017, Moody's repurchased approximately 200,000 shares at a total cost of $36 million, or an average cost of $146.85 per share. Moody's also issued 100,000 shares as part of its employee stock-based compensation plan. Moody's returned $73 million to its shareholders via dividend payments during the fourth quarter of 2017. On January 24th, the board of directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock, which is a 16% increase from the prior quarterly dividend of $0.38 per share. This dividend will be payable on March 12th, 2018 to stockholders of record at the close of business on February 20th, 2018.
For the full year 2017, Moody's repurchased 1.6 million shares at a total cost of $200 million, or an average cost of $121.21 per share, and issued a net 1.9 million shares as part of its employee stock-based compensation plan. The net amount includes shares withheld for employee payroll taxes. Moody's also returned $290 million to its shareholders via dividend payments during 2017. Outstanding shares as of December 31st, 2017, totaled 191 million, approximately flat to a year ago. As of December 31st, 2017, Moody's had approximately $500 million of share repurchase authority remaining. At year-end, Moody's had $5.5 billion of outstanding debt and $870 million of additional borrowing capacity available under its revolving credit facility. Total cash equivalents, and short-term investments at quarter-end were $1.2 billion, down $1 billion from December 31st, 2016, primarily due to the acquisition of Bureau van Dijk.
Cash flow from operations in 2017 was $748 million, down from the $1.3 billion in 2016. Free cash flow in 2017 was $657 million, down $1.1 billion from 2016. These declines in cash flow were due to the settlement charge payment in 2017. With that, I'll turn the call back over to Ray.
Okay, thanks, Linda. Before discussing our full-year guidance for 2018, I'd like to provide some highlights on our progress with Bureau van Dijk integration and synergy activities. Our integration efforts are on track, and we remain confident about achieving the synergy targets that we communicated when we announced the acquisition. Since closing the acquisition in August, we have enhanced Bureau van Dijk's products with content sourced from Moody's, launched programs to cross-sell Bureau van Dijk products, and initiated measures to enhance sales productivity and efficiency. In New York, San Francisco, and Hong Kong, Bureau van Dijk's staff are now co-located in Moody's offices, with six additional offices in Europe, Asia, and South America set to be combined in 2018. The Bureau van Dijk business continues to perform well, and we are very pleased with the progress we're making as we pursue our various collaboration and integration efforts.
I will conclude this morning's prepared comments by discussing our full year guidance for 2018. A complete list of Moody's guidance is included in Table 14 of our fourth quarter and full year 2017 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 guidance assumes foreign currency translation at exchange rates as of January 31, 2018. Specifically, our forecast reflects exchange rates for the British pound of $1.42 to the pound, and for the euro of $1.25 to the euro.
As I noted earlier, Moody's expects full-year 2018 revenue to increase in the low double-digit % range. Operating expenses are also expected to increase in the low double-digit % range. The company has projected an operating margin of 43%-44%. Adjusted operating margin is expected to be approximately 48%. The effective tax rate is expected to be 22%-23%. Full-year 2018 diluted EPS is expected to be $7.20-$7.40. Adjusted diluted EPS is expected to be $7.65-$7.85. Both ranges include an approximate $0.65 benefit resulting from U.S. tax reform. Free cash flow is expected to be approximately $1.6 billion. Moody's expects share repurchases to be approximately $200 million subject to available cash, market conditions, and other capital allocation decisions. Capital expenditures are expected to be approximately $120 million. Depreciation and amortization expense is expected to be approximately $200 million.
For MIS, 2018 revenue is expected to increase in the mid-single digit % range. U.S. revenue is expected to increase in the low single-digit % range, and non-U.S. revenue is expected to increase in the high single-digit % range. Corporate finance revenue is expected to increase in the high single-digit % range. Structured finance and financial institutions' revenues are each expected to increase in the mid-single digit % range. Public project and infrastructure finance revenue is expected to decrease in the low single-digit % range. For Moody's Analytics, the 2018 revenue is expected to increase in the mid-20s % range. U.S. revenue is expected to increase in the low double-digit % range, and non-U.S. revenue is expected to increase in the mid-30s % range. Organic MA revenue is expected to increase in the low double-digit % range. RD&A revenue is expected to increase approximately 40%.
The full-year 2018 revenue contribution from Bureau van Dijk will be reduced by an estimated $16 million as a result of a deferred revenue adjustment required as part of acquisition accounting. Organic RD&A revenue is expected to increase in the mid-teens % range. ERS revenue is expected to increase in the low single-digit % range, and professional service revenue is expected to increase in the high single-digit % range. Before turning the call over to Q&A, I would like to talk for just a minute about Linda. As you all know, last month we announced that Linda will be leaving Moody's after more than 12 years of outstanding service as our Executive Vice President and Chief Financial Officer. We're grateful for Linda's service and wish her every success in the next phase of her career.
We're also grateful that Linda has agreed to remain at the company for a transition period. I'm confident with the strong team she has built, her successor will be able to hit the ground running. We're now focused on finding the right person to take on the role. I have begun a comprehensive search. We'll be looking at both internal and external candidates and have engaged a search firm to assist us in this process. Of course, Linda's departure has no effect on our corporate strategy or financial priorities, which have delivered an unprecedented period of growth for Moody's during Linda's tenure. This concludes our prepared remarks. Joining Linda and me for the question and answer session are Mark Almeida, President of Moody's Analytics, and Rob Fauber, President of Moody's Investors Service. We'll be pleased to take any questions you may have.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please dial star one on your telephone keypad. If you are, excuse me. If you're using 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 welcome to rejoin the queue for any additional questions you may have. Again, that's star one to ask a question. Our first question comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Hi. Good morning. Your guidance calls for mid-single digit growth in MIS after a year where the segment grew 17%. It looks like non-U.S. is really the strong part. Could you just give us some color on which geographies and products are really driving this high single digit growth in non-U.S. in 2018, also what you're seeing so far in 1Q, just given that it's the toughest comp for the year? Thanks.
Sure. Maybe we can kick it off by letting Linda talk about the consensus views that we've collected. I know Rob will have some comments on this.
Yeah, Toni, thanks for the question. I'll start with the views from the various banks that we survey, these views are the consensus views of those banks, they may not line up exactly with Moody's revenue categorization. For investment-grade bond issuance for 2018, the call is for $1.25 trillion of issuance, which is flat to down 10% from 2017. Notes include that the market remains robust with tight spreads offsetting rising rates. January 2018 was the second largest January on record after January of 2017. You probably noticed the growing M&A pipeline among investment-grade borrowers, we note the 87% probability of a Fed rate hike in March with an average expectation of three rate hikes in total in 2018. For high yield, the call is for $285 billion of issuance, flat to up 10% from 2017.
Notes include high-yield fundamentals remaining strong with demand for new issues and improving macroeconomic environment in relatively narrow spreads. Issuance remains primarily driven by refinancing. Year-to-date 2018 issuance is already up 10% year-over-year. The forward pipeline is characterized as robust. A potential headwind, though, is tax reform impact on companies with very high amounts of debt and low EBIT and EBITDA. I'm sure we'll talk about that later. On the leveraged loan front, the third category in the U.S., $500 billion is expected for 2018, flat to down 10% from 2017. Notes include that the leveraged loan market remains strong. Spreads are narrow. Full year 2018 is expected to be down slightly from a record 2017 with upside should M&A activity accelerate or if rising rates create further demand for floating rate paper.
Switching over to Europe, investment grade in Europe has had a bit of a slower start to issuance for the year. It is expected to pick up post-earnings season. Spreads are near historical lows. Some concern about the ECB QE tapering, but those are muted. The Euro area continues to see strong growth in GDP and corporate profits. Speculative grade in Europe notes include high yield and leverage loan markets are in good shape with strong forward pipelines, though issuance levels face tough comps as compared to strong 2017. Spreads are narrow due to strong demand. Those are fueling opportunistic issuance. Again, that's the view from the banks. I'll ask Rob to comment a little bit more about the various sectors.
Thanks, Linda. Linda provided the Street estimates for issuance overall for U.S. corporate, generally flattish to slightly down. Our forecast is broadly in line with those estimates, as you'd expect. As you noted, Toni, we're coming off a very strong issuance from the corporate sector in 2017 in really all regions. Just kind of tying this together, several factors influencing our overall issuance outlook this year. Linda touched on a few of these, expanding global economy, this concept of synchronous growth across the G20, first time we've seen all G20 economies growing at the same time since 2010.
Modest geopolitical risks, firming commodity prices, declining default rates that are supporting the tight spreads that Linda talked about. We expect to see some robust M&A activity, which we think will help to offset some of the decline, the expected decline in the refinancing activity that we saw, particularly in the bank loan market last year. There are obviously some risks, namely, the recent increase in market volatility, concerns about inflation and rate increases. Currently our outlook hasn't really accounted for any kind of market disruption to issuance activity in 2018. We didn't have that in 2017. Maybe as we take the issuance outlook and build to the revenue guidance. Obviously there's several factors that go into how that then translates into revenue.
The issuance forecast that I talked about, we also have some assumptions around mix, which you hear us talk about on many of these calls. New mandate activity. I'm happy to talk about the new mandate activity for the year at some point on the call. Recurring revenue growth from an increase in monitored ratings, and I think this is important. This is about a third of our total revenue, the recurring revenue. You've seen some pickup in the recurring revenue growth rate over the last couple of quarters, and that is due in large part to the growth in first-time issuers that we are now rating. Finally, kind of our standard pricing contribution and a bit of favorability from FX. That gets us there.
That's great. Just for my follow-up, Linda, I think this is the question everyone wants to know, what are your plans and what drove your decision to move on?
Thanks, Toni. This is my 51st earnings call for Moody's, and I think it's just time to take a look at some other things that are out in the world and very orderly transition and nothing really too exciting to say. Don't have finalized plans as of this point.
We'll go next to Peter Appert with Piper Jaffray.
Thank you. Linda, I would just like to say thanks for all your great work here over the last couple of years. I am missing you already. Big shoes to fill for sure. In terms of the RD&A business, the organic growth looked particularly strong, and the outlook for 15% growth next year. I just want to be clear, this is ex BvD, right? That's one. Two is what's driving what seems like better than recent performance in the RD&A business. Then I'm going to ask my follow-up in advance. The margins in the legacy MA business, can you speak to the trend you're seeing there? Thank you.
Excuse me, Peter, it's Mark. In RD&A, first, just to be clear about what's in and what's out. In 2017, there's no Bureau van Dijk. When we talk about organic RD&A for 2017, that includes no Bureau van Dijk. In the 2018 guidance we do have in the fourth quarter, Bureau van Dijk becomes organic. We will have Bureau van Dijk in the 2018 numbers and reflected in our 2018 guidance for RD&A. Definitionally, that's what we're working with. Just to provide some color around the very good results we're seeing in RD&A. I guess I'd just call out that we had a very solid low double-digit underlying growth in the credit research and data businesses, which was a result of our work to improve upon and expand the content delivered through our CreditView platform and our data feeds. New business production's been solid.
Customer attrition has remained very low. Our yield from existing customers generated strong growth as customer institutions are upgrading their usage rights and extending access to our content across more users in their organizations. In addition, we gained two or three points of growth in RD&A in the fourth quarter from one-time projects, which was mostly modeling work for customer stress testing and IFRS 9 requirements. Our results were further helped in the fourth quarter by about 300 basis points of favorable FX.
In short, we are seeing very good execution of our product strategy with strong take-up of the range of our capabilities, plus some FX benefits. That's what we saw in the fourth quarter of 2017 that drove the very good numbers we had. As we look into 2018, frankly, it's more of the same. We have good momentum going into 2018. We see continued good performance in all of the businesses, especially as we bring our new content delivery platform, CreditView 2.0, to the market in mid-year. CreditView 2 will provide a more modern interface with expanded content and greater flexibility that accommodates access to a broader range of data, which will enable us to better cross-sell the Bureau van Dijk content. In addition, we will get a strong year-on-year contribution from Bureau van Dijk as the business moves into the organic category in the fourth quarter.
We also expect continued favorable FX impact, which takes up our already strong full-year outlook by another couple of points.
Got it. How about the legacy MA margins and the trend you're seeing there?
Well, you saw in the fourth quarter, we had 300 basis points of expansion in the adjusted operating margin. Most of that is from the legacy Moody's Analytics business, with some additional contribution from Bureau van Dijk. We're seeing good success as we continue to rigorously pursue our strategy to drive margin expansion in MA. You may note that we had no headcount growth in Moody's Analytics next year, ignoring the addition of the Bureau van Dijk staff. We literally had two more people working in Moody's Analytics at the end of 2017 compared with the end of 2016. The strategy is to deploy the resources that we have against our very best opportunities, which we've identified and are pursuing them. We expect to continue to pursue that strategy and feel good about where we're headed.
Peter, it's Ray. I would just add, as we look forward in 2018, Moody's Analytics will be getting a larger allocation of our shared service expense because of the increased size of the business with the acquisition of Bureau van Dijk, primarily. Just in terms of what to expect.
Yeah, I think we will dive into that in some detail at Investor Day.
Peter, also, it is Linda. Just so everyone is aware, we are not helping Mark from the accounting perspective here. As we brought on the BvD business, we had to move through a deferred revenue adjustment. We handled some of that in 2017, some of that will remain in 2018. Just so there is a bit more guidance for modeling purposes, we expect that there is about $16 million left of deferred revenue adjustment for Bureau van Dijk in 2018. Just so you have the detail quarter by quarter that lays out about $10 million in Q1, $5 million in Q2, the rest in Q3. I think we are done with that once we lap the close of the acquisition in August 2018. Mark is nodding. Just a quick addition there in terms of this deferred revenue haircut in case it is not as well understood as it should be.
Great. That helps. Thanks.
Sure.
We will go next to Ames Singh with Credit Suisse.
Hi. Thanks for taking my questions. I was wondering if you could speak on capital allocation a bit, what you plan to do with the proceeds from the tax savings. It seems like you'd probably just de-lever quicker and faster, but wondering if any tweaks or changes to your normal capital allocation priorities as we look at 2018. Thanks.
Sure. It's Linda, and I'll let Ray help me with this one. I think we announced when we took on the Bureau van Dijk business that with the $2 billion of debt we had added for that acquisition, our plans for 2017 and 2018 really centered on de-leveraging after that deal. In 2018, we're planning to reduce our debt by about $500 million, and we're ahead of schedule in that process because we are seeing strong operating cash flow. We think our capital allocation priorities are going to remain about the same. We have some very good opportunities to invest in our business, which will always be job one. In terms of our international cash, we probably have less cash offshore than many corporations do at this point because we spent $1.3 billion of it for the Bureau van Dijk acquisition.
For Moody's, we may end up with $200 million of offshore cash to repatriate, but not a huge amount. I think we're going to stick to our plans and continue to focus on de-leveraging. As I think Ray had mentioned, about $200 million of share repurchase on the docket for 2018. Ray may have something else he might want to add.
No, I agree with how Linda has characterized our priorities. It is de-leveraging first. We are going to be able to be ahead of schedule as compared to our acquisition analysis on the de-leveraging. At the same time, we are going to be able to make necessary investments in the growth of the business.
Okay. Got it. That's helpful. Then for a follow-up, could you just speak to MIS margins down year-over-year in the quarter? I realize it's up strongly on a full-year basis, but this comes despite the strength in revenue growth. How much is driven by mix versus investments or just incentive comp? Help us understand how these shape your outlook for that segment as it relates to your 48% margin guide for 2018. Thank you.
Sure. I'll start on this one. It's Linda. In fact, the MIS operating margin did decline by 110 basis points despite 19% growth in revenue in the quarter. On the full-year basis, it's important to note that the MIS operating margin is up 190 basis points. We had some unusual activity in the fourth quarter. We would really point you toward the full year as being more indicative. In the fourth quarter, we kind of saddled Rob with some additional expenses here. As you know, we had very strong performance in the fourth quarter, so we had to increase our performance-based incentive compensation, our stock compensation, and we had profit sharing in 2017. I think the total amount was a little over $10 million. All of that hit MIS.
The second thing that was important is we had a little bit of a severance charge in one of the non-U.S. businesses. All that comes to a little bit less than $20 million or so. Really just the result of very strong performance and one little item that we rightsized. I think you should see the margin back to as Rob had described previously, but I'll let him follow up on this.
Yeah. Maybe just to give a little color about what we're going to do to continue to drive on the margin. You've seen our results over the last several years. We're continuing to look for further efficiency in managing expenses in a disciplined fashion. A couple of things I might just point to that I think will support that. First, we just this year completed a reorganization of our junior staff into a dedicated support organization. That's going to help us manage our staffing more effectively through the inevitable ebbs and flows of issuance and drive up our resource utilization. Second, we're leveraging technology in a variety of ways across MIS. We just launched our first bots in October as part of our robotic process automation initiative, and these bots are automating manual repeatable tasks that are currently being done by people.
We're also developing workflow and analytical tools that are going to help the analysts be more efficient and spend their time focused on higher value-added activities. The last thing I'd say is we're hiring more staff in low-cost locations like India, and we're looking to open an office in Costa Rica this year through MIS so that we can make sure we have the right jobs in the right places. This past year, to give you a sense, about half of our headcount growth was at our support center in India.
Okay, got it. Thanks so much.
We'll go next to Manav Patnaik with Barclays.
Yeah, thank you. My first question was just around guidance. I usually think when you give guidance in the beginning of the year, it's conservative, I guess there's a few areas where I just need a little bit more help here. I think one of the areas was on the corporate finance group, which I think Rob explained with mix and new mandates maybe. Similarly, the PPIF group, it sounds like at least in the U.S. it's going to be down quite a bit. Maybe there's an international mix here where it helps you down only low single digits. We would've thought more. Sort of interesting part: the guidance part was just around FX.
Linda, if you could tell us the contributions you've assumed on the revenue and margin front, I presume that's a benefit because your guide is above the spot rate, which is unlike prior years, I believe.
Sure. Why don't we let Rob start off on the outlook around PPIF and corporate?
Keep in mind, our PPIF segment has several rating lines in it. We do have a mid-single-digit revenue decline as our guidance, but we think that the U.S. public finance issuance is going to be significantly adversely impacted from the changes to the U.S. tax law. That's really around the loss of tax-exempt status for advanced refundings in U.S. public finance, which was, depending on the year, somewhere between 20% and 30% of the market. The pull forward that we saw in the fourth quarter. That's right. We saw some pull forward activity. I think probably a modest slowdown in infrastructure after a very strong year around the globe and a pretty stable issuance environment in sub-sovereign and all that then kind of builds ultimately to our revenue outlook.
It's Linda. On the corporate side, before we move away from Rob, I always encourage him to speak a little bit about what he's seeing in new mandates because analysts have expressed interest in this. Why don't you go ahead and cover that, Rob?
Sure. That also is going to touch on I think one of Toni's questions around the guidance around non-U.S. growth. A really good story in the fourth quarter, 260 first-time mandates. That's up about 47% on the year-over-year quarter. That took us above 1,000 new mandates for the year. It set a new record. We expect somewhere slightly below that number, but still another strong year for first-time mandate activity. The strength in first-time mandates that we had continued. We see that into the pipeline. Interestingly, as we look at the mix of first-time mandates and the growth
The European and Asian first-time mandates grew at a rate of growth that was about 2x first-time mandates in the U.S. That then is contributing to that higher rate of growth for non-U.S. revenues, at least in part.
Manav, on the FX point, you're right. FX, the spots have been moving around quite dramatically. We expect FX to have a 3% positive impact on revenue in 2018, and 3% positive impact on adjusted operating income. As you know, our main exposures are to the euro and the pound, and we put a pin in it with the pound at $1.42 to the dollar, as Ray said, the euro at $1.25. Probably for your planning purposes, the rule of thumb here is that a $0.01 decline in the euro takes about $0.01 off our EPS. The $0.01 decline in the pound basically doesn't move our EPS all that much. We're a little bit more sensitive to the euro, and hopefully that will help you out. We do note that the currencies are moving around a bit.
Okay, got it. If I could just have you give us the expense build that you typically give us going into the fourth quarter and maybe just that 3-point revenue growth. I presume MA has more of that, if you could just help price that out.
Let me give you the expense ramp for next year, which is what I think you're looking for. For 2018, we're looking for an expense ramp of $60 million-$70 million. I'll get somebody to give me a first quarter expense number so we know what we're starting from here in just a minute. The expense ramp, as you know, can be very strongly impacted by timing of expenses, FX movements, and as we saw this year, very strong late period changes in incentive compensation. $60 million, $70 million is given what we know now. We'll look at that as we go through the year. Let's use a starting number for first quarter of 2018, maybe sort of $635 million might be a good place to start. Then look at $60 million-$70 million increasing ramp as we move through the year.
All right. Thank you.
We'll go next to Jeff Silber with BMO Capital Markets.
Thanks so much. I hate to go back to tax reform, but I'm going to. Even in your prepared remarks or I think maybe in Bankers' remarks, you note about the potential adverse impact of tax reform in a high yield market. I know it's still early. Are you seeing any of that? Even on the corporate side or the investment grade side, excuse me, I know there was some noise early on about the limits on corporate interest expense deductibility, and I know that were watered down a little bit, but again, are you hearing anything from your potential customers on that front as well? Thanks.
Yeah. Rob, do you want to talk about what you've heard from people?
Yeah, it's a good question. As you can imagine, we're in very regular contact with the issuers on this topic. I think the general view is it's still very early days in terms of seeing any kind of change to corporate behavior. The highly leveraged companies that we're speaking with have not indicated that this is a significant issue, at least not yet. Obviously that remains to be seen because that's where the impact could be more noticeable. I would note, though, that there's an enormous amount of money that's been raised by the private equity firms that needs to be deployed. We're seeing this in the form of a very active LBO market at this time.
I'd just add, in terms of the caps on interest rate deductibility, that is really going to only have an impact for firms that are at the bottom of the speculative grade rating scale, so say B3 and below. Obviously the actual impact will vary by individual company.
Okay. That's helpful. I'm going to stick with the tax theme for my follow-up. In terms of the guidance, the 22%-23% tax rate for this year, is that inclusive of the stock-based comp benefit that you're getting in the first quarter, or is that the number that we'd be using on a normalized basis in second, third, and fourth quarter? Thanks.
That's inclusive of the benefits in the first quarter. I think your point is well taken that that may weigh a little bit more heavily toward the first quarter. I'd put the majority in the first quarter just because that's when we would expect a heavier exercise of options, I'd lighten it up a little bit in the second and third quarter, we should be pretty much through that. I think we had a number somewhere around in these documents, approximately $40 million for that. You can kind of spread it as I had said.
Okay, great. That's very helpful. Thanks so much.
We'll go next to Craig Huber with Huber Research Partners.
Thank you. Linda, I just want to say you did a heck of a job, and you'll be missed.
Thanks, Craig.
My first question, Ray, or whoever would like to answer this. On the bank loan outlook for this, you've given the strength the last couple of years. Can you just talk a little bit further about your outlook for that? I know you said some investment banks you checked in with for this year down 0%-10% or something. Just what the puts and takes are to move that number higher or lower this year. What are we looking for there on bank loans?
Certainly to the extent that floating rate debt is relatively more attractive in a more volatile interest rate environment, that could have a positive impact, at least relative to competition from the spec-grade bond sector. Beyond that, I think so far we are seeing good activity in the bank loan sector. Reasonable pipeline. It's very early days.
The only thing I would add to that is that we had an enormous refi wave over the last 18 months. The question will be, as we see an expected pickup in M&A, will that offset to some extent what we think will be a decline in the refinancing activity?
Okay, then also, just real quick, if I could. Linda, what was the incentive comp in the quarter versus a year ago? I might have missed that. And then also, if I could just sneak this in, what % of your high yield ratings outstanding, Ray, or say B3 and lower as you were talking about earlier?
Craig, let me start with incentive compensation for the fourth quarter of 2017. We've got about $72 million. That was up from $59.6 last year. Call it around a $12 million increase, 20% increase or so. Ray may-
Yeah. With respect to the B3 and below, I don't have a number for you off the top of my head. If we can find a number during the call, we'll be happy to get back on and quote it.
The one thing I might say, though, is that the number of B3 and below credits is a good bit lower now than it was in 2016, which was actually at an all-time high. We've seen that proportion decline. I just don't have the absolute % on hand.
Craig, I just want to give you some more.
It sounds like you don't think. Go ahead.
I'm sorry. Why don't you.
Go ahead, Craig.
follow up there?
Sorry, I was just going to ask. It sounds like though you guys don't think this interest expense deductibility issue from the tax reform is going to have a material impact on your high yield piece of your business. Is that a fair statement?
I think that is a fair statement. It's a headwind, but it's not a tremendously strong one in our opinion.
Yeah, Craig.
Rob was just telling me that B3 and below is about 14%, 15% of our spec grade.
Craig, it's Linda. I just wanted to speak a little bit more about incentive compensation because I think the detail would help. We had some very lumpy quarters for 2017. Incentive comp went $52 million, $51 million, and then the third quarter was $83.4 million, and then about $77 million in the fourth quarter. Within the third quarter, we added to incentive compensation $5 million of profit sharing for the employees worldwide, and $5.5 million in the fourth quarter. Profit sharing requires that we put up some pretty good numbers in order to have that take effect. Again, a total of $10.5 million for profit sharing, which falls into incentive compensation for the third and fourth quarter. If you were looking to model this for next year, for 2018, we're kind of thinking maybe $50 million-ish as incentive compensation kind of returns back to more normal numbers.
Again, if we put up really big numbers, the incentive compensation number does move up. Conversely, if we miss, the incentive compensation number comes down as the bonus pools takes the first hit. Just wanted to make sure you understood the lumpiness there.
Understood. Thank you.
We'll go next to Joseph Foresi with Cantor Fitzgerald.
Hi. Linda, congratulations on a good run, and best of luck.
Thanks.
Just to be clear about what's in the issuance guidance. We're expecting no change to issuance from the tax reform at the corporate level, and you built in some expectations for at least a couple interest rate increases. Is that a fair way of thinking about it?
Yes. We certainly are expecting interest rate increases this year. There are puts and takes to the tax reform. Obviously, there's going to be repatriation of cash. There are the interest deductibility caps. At the same time, we think that this is going to support stronger economic activity, possibly mergers and acquisitions activity boost, and investment back in business growth and business expansion. It's really going to depend on how those puts and takes balance out against each other over the year.
And Joe, it's Linda. If you look at the futures, I think the markets are looking, as I said, for three interest rate increases with the first in March with an 80%-plus probability on that. It's pretty important though that potential investors in Moody's take a look at times when this has happened before. Would point you back to our investor deck. We've had periods where rates have gone up more than 100 basis points in a year. We often cite 2008 to 2009 when rates went up 100 basis points. Then 2012 to 2013, rates went up 120 basis points. As Mario Draghi had said he'd do what it takes to hold the euro together. In both of those periods, MIS revenues went up.
It's very important to understand, as Ray has said, that growth is a very positive condition for Moody's, and we haven't had this synchronous growth for quite a long time. For us, if things move along as they are predicted to do, this could be very helpful for us. We're going to have to see how things pan out. Of course, the present volatility is something we're keeping a close eye on. As Rob had said, the bond market's reaction to all of that has seemed to be relatively subdued as compared to the equity market's volatility. Hope that helps you a bit.
Got it. As my follow-up, just as a point of clarification, how has issuance been at the beginning of this year with the markets kind of moving around a little bit? Maybe if I could sneak one more in, how's the competitive positioning of BvD within MA? I think you talked about some takeaway wins last quarter. Thanks.
Yeah. I was going to say, Rob, do you want to tackle the first part?
Yeah. I think, in general, we've seen issuance in line with our expectations, specifically, very recently, in regards to the recent volatility. I mean, first of all, many of the issuers are in blackout periods, this is normally a little bit lighter period of issuance. In general, obviously, rates are up. Spreads have widened a bit. I would say that the pipelines look steady, and that's everything that I'm hearing indicates that, as Linda said, the bond market took this a bit in stride. If you think about the spreads, they did move out about 25 basis points, but they were at kind of four-year tights before they did that. In the U.S., we've seen a deal or two postpone. I would say those were on the more aggressive end of structures.
We've also seen some sizable deals get done this week and in this market, one recently for some acquisition financing. I think the general view is still constructive. At least that's what we're hearing now. Issuers, I think, will continue to come to market if they have a financing need. What we may see is some of the opportunistic issuance taking a bit of a pause to wait on the market to digest some of this volatility. In Europe, I think a pretty similar story. You've got investors with very robust cash levels. The debt markets, I'd say, they're perhaps being a bit more selective, again, a pretty constructive tone is what we're hearing. The loan market there, a little bit slower to react to this volatility. We're seeing continued flow of primary issuance in the loan market.
You know that last year was quite a strong year of issuance in the European loan market.
Unlike 2017, but like earlier years, when we get volatility like this, I think it is particularly important to keep an eye on the pipelines, because issuers will wait for relative periods of calm, then they will be poised to go opportunistically. The pipelines become a very important indicator for future health of the market. Mark, did you want to comment on BvD?
Yeah. Could you repeat the question, please? I just want to make sure I am being responsive.
No, it looks like we lost Joe.
The business is together.
Joseph, if you get back on. Oh, okay. Sorry. Go ahead.
I think last quarter you had talked about some competitive takeaways now that you had MA and BvD together. I was just curious if you could give us an update on what's happening in the competitive environment as you go after some market share with the two companies now together.
Sure. Frankly, it's still relatively early days for us to execute on some of the plans we had and what we could do together with Bureau van Dijk. We're making good progress on some joint product development efforts. Again, there were some products that we had planned to build and launch in Moody's Analytics that Bureau van Dijk already had a reasonably well-developed product in that area. We've been working together with them to complete the build-out of that product and add some of the additional features and enhancements that we had planned to create independently. We will be going to market with that product early this year, and we feel very positive about the opportunity and the prospects there.
Thank you.
We'll go next to Tim McHugh with William Blair & Company.
Hi. Just to follow up on that, if you're willing, I guess, any sense for the underlying growth rate of Bureau van Dijk kind of on a pro forma basis and, I guess, in the fourth quarter and kind of what you're thinking about going forward into 2018?
Yeah. Tim, what I'd say is that Bureau van Dijk has historically been growing at high single digits, low double digit kinds of rates. In the back half of 2017, after the acquisition, we saw sales growth at those kinds of rates, and we see that momentum flowing into 2018, and that's sort of inherent in our outlook for the business and its contribution to MA overall. We see the business continuing to perform well at or maybe a little bit above the overall Moody's Analytics growth rate.
Okay, great. I know it's a smaller piece, professional services, it's picked up lately, and the guidance is good. I imagine currency's impacting that a bit, is there a story, I guess, to the improved performance there lately?
Yeah. The story, Tim, is that we've got two pieces to that business, our Knowledge Services business where we outsource our research and analytical staff from our platform in India to our clients around the world, our training and education business. Both of those businesses struggled a bit over the last couple of years, we've done a number of things operationally to get them on track, early in 2017 or mid-year 2017, they both sort of turned it around, we're starting to see good results coming out of both of those product lines. Customer attrition is down. New business production is up. We're seeing good progress and good momentum in both of those businesses. You're also quite right. Both of those businesses, particularly the training business, we're seeing some benefit from FX there as well.
Generally, we think we have two good turnaround stories there, we're optimistic going into 2018.
Tim, it's Linda. Just a quick follow-up on that. Earlier in 2017, we turned over the MAKS business, which I had been running for two years to get it up to SOX compliance standards for a U.S. public company. We turned that over to someone from the sales organization, in Mark's organization. Quite frankly, we've seen very nice results on the sales front as we've done that. Now the business is operating very nicely within the Moody's framework, quite safely with an interesting journey from two Indian private companies to a U.S. public company standard. Mark's team has really turbocharged that on the sales front. That has been a happy story, thank you for noting that change.
Thank you.
We'll go next to Alex Kramm with UBS.
Hello, everyone. I'm going to go back to the beginning when Rob, I think, mentioned the strong issuance last year and how that could lead or should lead to higher recurring revenues in MIS this year. Can you put a little bit more meat around that? I think in past years when we've had strong issuance, I've seen that monitoring fees are up in the high single digits, and obviously FX helps that too. Is high single digits kind of what we should be thinking about on the recurring MIS side here, or could it even be better? Any color?
I don't think we typically guide on that, but you have seen an acceleration of the growth rate of the recurring revenue over the last few quarters. Just because we have issuance doesn't necessarily mean we're going to have growth in recurring revenues because that issuance could come from existing issuers. You really have to look at the growth of the first-time issuers, first-time mandates, and that really is, I think, the best future indicator of recurring revenue growth.
Yeah. You'll recall that we had a little over 1,000 new rating mandates in 2017, and that rolls forward into monitoring relationship on a going-forward basis.
Great. Thank you. Just switching to BvD also for a minute here. I know that you've owned the company for a few months. You've gone through a few renewals with clients. Can you just tell us about the pricing opportunities you have seen as you renew? Related to that, is there actually seasonality in renewals or any seasonality you would call out as we think about modeling 2018 for BvD or RD&A combined now?
Yeah. Well, let me take the second part first, Alex. No, there's not any particular seasonality in the underlying business. I don't think you need to really think about that too much. On the business generally and the opportunities there, the business is performing well. We have a Moody's Analytics executive now running the business and applying some of our processes and practices to the Bureau van Dijk business. It's a good solid business, and it continues to perform very well. It's not as though it was broken to begin with. We do continue to see some substantial opportunities for us on the cross-selling side, on the product development side as we share content between Bureau van Dijk and Moody's Analytics, and with regard to pricing. Candidly, we have not hit that particular lever real hard just yet.
We'll continue to look at that, and we'll look at that in the context of the other work that we're doing on the product development side.
Very helpful. Thank you.
We'll go next to Vincent Hung with Autonomous.
Oh, hey. Just one from me. If the fears around high rates persist, would you expect maybe an acceleration of issuance from pre-funding of late 2018 and 2019 maturities?
No, we're not counting on a lot of pull forward from 2019 into 2018. In our view, the positive side of the story is really going to be around economic growth, business expansion, borrowing for business expansion, and around M&A. That's where we'll look for the upsides more than pull forward from 2019 or even 2020.
Thanks.
Stuart with Goldman Sachs.
Hi, good afternoon. Just one on the potential impacts of an infrastructure bill to your business. As we potentially at least maybe see a bill make its way through Congress, what will be the key provisions you'll be watching that could indicate whether it's going to have a meaningful impact on your business or potentially not much at all?
We've certainly seen the media coverage on the infrastructure bill. It should have a potential positive impact on our PPIF business, but of course that depends on how the final legislation is actually structured. To the extent that it would allow for use of tax-exempt bonds to finance infrastructure projects, that could increase the sale of debt. That would be a positive. Rob, do you have anything to add on that?
A few things to look for. Obviously, there's been some discussion about an infrastructure bill. Talking about $1.5 trillion, not large in the overall scheme of the U.S. economy, but it would be an increase, I think a significant increase over the current level of infrastructure spending in the United States. I think we then want to look at the mix of federal versus state and local funding, understand that will have an impact on how that translates into issuance. Another topic is around regulatory approvals and time frames and how long will it take this infrastructure investment to actually make it to the market. I know there's been some discussion about shortening those approvals, but some are at the federal level, and others are at the state and local level.
That's helpful color. Thanks. Just wanted to ask on the cash position and how to think about the leverage in the business. Just post-tax reform, any thoughts around changing how you think about how levered Moody's should be, just given you convert a higher percentage of your EBITDA into actual cash income? Just on the debt paydown, looking at your guidance for $1.6 billion of free cash flow, looking at $500 million for dividends and buybacks, $500 million for debt paydown, and then CapEx another $120 million, it still feels like you've got some extra dry powder there. Just wondering to think about how that could get deployed.
Yeah, it's Linda. I think we intend to proceed as we had said on our ratings level and our leverage levels. We don't like to be right at the edge on any of those things. Your observation is correct. We probably have a few hundred million dollars of potential additional dry powder if things continue as we're seeing now, which we could potentially use in another way. In terms of what we're going to do with the interest paydown, I'll let Ray add some further observations to this. We've got an additional $39 million in interest expense from BvD throughout 2018. That addition is $11 million in the first and second quarter, and it kind of ramps down to $9 million and then $8 million in the third and fourth quarter. We're probably going to prepay the most expensive debt first as you would probably imagine.
That's how you can probably take a shot at modeling that. We sort of like our leverage levels. We like to remain consistent and with a little bit of luck, we'll do perhaps a bit better than we had expected. We could delever a bit more quickly or have a little bit more dry powder, and maybe Ray would like to expound on that.
No, the only thing I would add is to the extent that we are able to delever ahead of what we had previously been anticipating, we certainly will go back and look at our capital policy and how we want to handle that.
That's helpful. Thank you for taking my questions.
We'll go next to Shlomo Rosenbaum with Stifel.
Hi, good morning. Thank you for squeezing me in here. First question, just, Linda, would you be able to bracket the tax impact on free cash flow through the tax legislation?
Sure. We were able to for 2018, add about $150 million to free cash flow from the reduction in the tax rate, which is helpful. Might be interesting, Shlomo, to take a look at the increase in our 2018 adjusted diluted EPS guidance. We're moving from, if I've got this right, about $6.07 to a midpoint of a little over $7.70. I think what we have there is about $0.65 of that from U.S. tax reform, about $0.40 each from BvD and the business, and maybe $0.15 coming from FX and other things. $0.80 of our increase there is really coming from our business and the acquisition, $0.65 from tax reform, and the rest from FX. In terms of the operating margin expansion, we also got the question about how much of that is from FX.
If you look at that 70 basis points, only 10 basis points is from FX. We're doing most of that the hard way. I hope that all of that is helpful to you in thinking about where we're going with 2018.
Okay, great. Thanks. Just as a follow-up, just a little on BvD. A prime competitor of theirs in Benelux was D&B, and they sold that business to a private investor about a year and a half ago. Is there any change in competitive environment back then? One of the reasons they sold was because they were being challenged by BvD. I want to know if the old D&B business has become more competitive for you guys over there.
Bureau van Dijk has a terrific market position in Europe, and has for a very long time. We have not seen any meaningful change to the competitive situation there, which is not to say that there isn't competition, but we feel that we're very well-positioned. We feel good about where we are.
Okay, great. Thank you very much.
We'll go next to Bill Warmington with Wells Fargo.
Good afternoon, everyone. Linda, I just wanted to say phenomenal run, congratulations, and I look forward to when our paths cross again.
Thanks, Bill.
I wanted to ask a question on RD&A. You talked about the strong organic growth there and some of the drivers, a nice pickup in the core research business. You also highlighted 2-3 points coming from one-time projects, and you also mentioned the BvD deferred revenue adjustment. I'm trying to weigh those pieces, and I want to ask for your help in terms of how I should think about the constant currency, organic revenue growth for RD&A, normalized for all these things kind of going forward.
Yeah. I guess, Bill, going forward, I think you can think about the underlying legacy business performing at high single-digit kinds of rates. We've got a number of things that boost the overall results. We've got the addition of Bureau van Dijk, we've got the FX impact, which takes us up from there.
Got it.
Is that helpful?
Well, not to put words in your mouth, but it sounds like once you've normalized for the factors as you're exiting 2018, it sounds like you're going to be low teens, maybe mid-teens, as kind of an organic growth on that piece. Is that the way to think about it, or am I missing it?
Yeah, that sounds a little high, Bill. I'm not sure how you did that.
Okay, fair point. All right. One last question then for my follow-up on the low single-digit growth on ERS. Maybe give us some color there in terms of what's driving that.
Yeah. A continuation of the story we've been talking about for a while there, and I guess there are really two pieces to it. There's the very intentional product strategy that we're pursuing, where we're moving away from a business where growth was driven rather substantially by lots of one-off project work that we were doing as large customers were asking us to install our software and configure it in a highly bespoke manner for them. We were moving away from that business now that we've established what I think is a pretty strong market position. Moving away from that very customized kind of business to delivering much more standard product where we can sell a larger number of units, ideally on a subscription basis, and reduce the amount of low-margin services work that we're undertaking. We've got the services business declining very intentionally.
We're taking on less and less of that work. The product business is growing at a good clip. As we make this transition from a services-led business to a product-led business, we have this period where the decline in services is offsetting the growth in product. As we work through that more this year, that situation will start to stabilize, and then we'll be growing off of a more stable base as we move into 2019. That's one part of the story, which I guess I would characterize as the idiosyncratic part of the story. The market part of the story is that ERS was growing very well over the last number of years through 2016, driven heavily by new regulation that banks were dealing with around capital adequacy and liquidity and stress testing, et cetera. That regulatory wave has matured.
We don't see nearly as much new regulation being placed on banks with respect to those kinds of issues. The regulatory driver of demand has dissipated. We're also dealing with a softer market environment at the same time that we're executing this shift in product strategy. We have two things going on that is constraining growth in the ERS business.
Hey, Bill, it's Linda. In terms of other things we're doing to make Mark's life a little bit more tricky, you may have heard about the new revenue recognition standard 606. We have to bifurcate software subscription licenses. That requires a lot of accounting work to reclassify some of these things. Near term, that's going to add a little bit more volatility, maybe a 1% negative on MA's overall results in 2018 as we move through that. That should smooth out as we get later on in the year. It's a pretty technical set of changes, but just wanted to let you know that is going on and it's something that all software companies have to adopt. You'll be seeing more of that, detail on that as we release our 10-K.
Got it. Thank you very much.
Welcome.
We do have a follow-up question from Craig Huber with Huber Research Partners.
Yes. Hi. Can you just flesh out a little bit, if you would, this very strong growth you had in the fourth quarter in finance institutions, and obviously for the year as well in 2017. You're looking for, I guess, up mid-single digit revenue growth in that segment this upcoming year, so decent growth on top of a stellar year. Just what's going on there, please? Thanks.
Yeah. A large part of the story was the interestingly titled issuance from infrequent issuers in the fourth quarter. There was strength in that outside the U.S., as well as inside the U.S. Rob, I don't know if there's more detail you have on that.
Yeah, that's right. In the U.S., it was across banks, insurance companies, cards, securities brokerages. In Europe, really driven by this continued issuance as part of the move towards building levels of bail-in-able capital as part of TLAC and the resolution regimes in Europe. That's been a kind of a full-year trend. In Asia, we saw some good issuance from Chinese asset management companies, ASEAN, and we even saw some good issuance activity from our affiliate in Korea, where there was a good bit of issuance from subsidiaries of foreign banks. Like Ray said, a lot of issuance that tended to come from issuers who aren't hitting the markets frequently. As you know, Craig, there's a more relationship-based construct. You can see our guidance. We would expect to move back to something that looks more like that in 2018.
Thank you.
That concludes today's question and answer session. Mr. Ray McDaniel, at this time, I'll turn the conference back to you for any additional closing remarks.
Okay. I just want to thank everyone for joining the call today, and we look forward to speaking with you at Investor Day on February 28th. Thanks again.
This concludes Moody's fourth quarter and full year 2017 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the fourth quarter and full year 2017 earnings select section of the Moody's IR homepage. Additionally, replay of this call will be available after 3:00 P.M. Eastern Time on Moody's IR website. Thank you.