Good day, welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year-end 2014 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 Salli Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, thanks for joining us on this teleconference to discuss Moody's fourth quarter and full year results for 2014, as well as our outlook for full year 2015. I am Salli Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year 2014, as well as our outlook for full year 2015. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Raymond 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. 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 Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31st, 2013, 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 call this morning in a listen-only mode. I'll now turn the call over to Raymond McDaniel.
Thank you, Salli. Good morning, thank you to everyone for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2014 results, and Linda will follow with additional financial detail and operating highlights. I will then conclude with a few general updates and comments on our outlook for 2015. After our prepared remarks, we'll be happy to respond to your questions. In the fourth quarter, Moody's delivered revenue of $878 million, an increase of 13% over the fourth quarter of 2013. We again achieved growth in almost all lines of business. Operating expense for the fourth quarter was $533 million, up 14% from the fourth quarter of 2013. Operating income was $345 million, an 11% increase from the prior year period. Adjusted operating income, defined as operating income less depreciation and amortization, was $372 million, also up 11% from the same period last year.
Operating margin of 39.3% was down from 40% in the fourth quarter of 2013. Adjusted operating margin of 42.4% was down from 43% for the same period last year. Diluted earnings per share of $1.12 increased 19% from the prior year period's GAAP EPS and 32% from the prior year period's non-GAAP EPS. For full year 2014, Moody's revenue was $3.3 billion, an increase of 12% from 2013. Revenue at Moody's Investors Service was $2.3 billion, an increase of 9% from 2013. Moody's Analytics revenue of $1.1 billion was 19% higher than the prior year period. Operating expense for full year 2014 was $1.9 billion, up 9% from 2013. Operating income of $1.4 billion increased 17%. Adjusted operating income of $1.5 billion increased 16%. Operating margin for 2014 of 43.2% was up 170 basis points from 41.5% in 2013.
Adjusted operating margin of 46% was up 130 basis points from 44.7%. Reported diluted earnings per share of $4.61 was up 28% from $3.60 in 2013. Non-GAAP EPS of $4.21 was up 15% from $3.65 in 2013. Full year 2014 non-GAAP EPS excluded a $103 million non-cash pre-tax gain, or $0.37 per share, resulting from Moody's acquisition of a controlling interest in ICRA in the second quarter, as well as a $0.03 benefit from the resolution of a legacy tax matter in the third quarter. Full year 2013 non-GAAP EPS excluded a litigation settlement charge of $0.14 in the first quarter and a legacy tax benefit of $0.09 in the fourth quarter. I'll 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 increased 13% to $878 million. Foreign currency translation unfavorably impacted MCO revenue by 3%. U.S. revenue of $479 million was up 15% from the fourth quarter of 2013. Non-U.S. revenue of $399 million was up 10% and represented 45% of Moody's total revenue. Recurring revenue of $444 million represented 51% of total revenue. Looking now at each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter, which included results from ICRA, was $565 million, up 7% from the prior year period.
Foreign currency translation unfavorably impacted MIS revenue by 3%. U.S. revenue increased 14% to $344 million. Revenue outside the U.S., $221 million, declined 2% and represented 39% of total ratings revenue. Moving to the lines of business for MIS, first, global Corporate Finance revenue in the fourth quarter was up 9% to $263 million, reflecting increased U.S. investment-grade bond issuance and growth in the number of credits monitored. Partially offsetting these gains was the contraction of global high yield bond and bank loan issuance. U.S. Corporate Finance revenue increased 15%, while non-U.S. Corporate Finance revenue decreased 2%. Second, global Structured Finance revenue for the fourth quarter was $119 million, 9% above the prior year period, reflecting continued strength in global CLO issuance, as well as increased RMBS issuance in Europe and the U.S.
These gains were partially offset by reduced ABS issuance in the U.S. and Europe, as well as fewer covered bonds issued in Europe. U.S. and non-U.S. structured finance revenue increased 11% and 5%, respectively, year-over-year. Third, global financial institutions revenue of $85 million decreased 4% from the same quarter of 2013, primarily due to lower bank issuance in Europe and the U.S. Partially offsetting this was increased issuance from Chinese and South Asian financial institutions. U.S. and non-U.S. financial institutions revenue decreased 7% and 2%, respectively, year-over-year. Fourth, global public project and infrastructure finance revenue increased 9% year-over-year to $90 million. Gains in the U.S. were partially offset by decreased infrastructure issuance in Europe and Asia. U.S. public project and infrastructure finance revenue increased 26%, while non-U.S. revenue decreased 14%.
MIS Other, a new line of business which consists of non-rating revenue from ICRA and Korea Investors Service, or KIS, contributed $7.9 million to MIS revenue for the fourth quarter, compared to $3.2 million in the prior year period. Turning now to Moody's Analytics, global revenue for MA of $312 million was up 23% from the fourth quarter of 2013. Foreign currency translation unfavorably impacted MA revenue by 3%. Excluding revenue from 2014 acquisitions, MA revenue grew 18%. U.S. revenue grew by 15% year-over-year to $135 million. Non-U.S. revenue increased by 30% to $177 million and represented 57% of total MA revenue. Moving now to the lines of business for MA. First, global research data and analytics, or RD&A, revenue of $150 million increased 11% from the prior year period and represented 48% of total MA revenue.
Growth was primarily driven by strength in sales of credit research, ratings data licenses, and economic analysis and data, as well as the October 2014 acquisition of Lewtan Technology. RD&A's customer retention rate remained strong at 96% for the fourth quarter. U.S. revenue was up 13%, and non-U.S. revenue was up 7%. Second, Enterprise Risk Solutions, or ERS, revenue of $120 million grew 42% from last year, resulting from strong growth across nearly all product offerings. In particular, the asset liability and capital solutions, credit origination, insurance, and stress testing verticals. ERS also benefited from the acquisition of WebEquity Solutions in July 2014 and saw early completion of some customer projects, leading to better than expected results for the quarter. Revenue was up 10% in the U.S. and 65% outside the U.S. Trailing 12-month revenue and sales for ERS increased 25% and 16%, respectively.
As we've noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Third, global professional services revenue grew 28% to $43 million, primarily reflecting the acquisition of Amba Investment Services in December 2013, as well as mid-single-digit growth in our training and certification business. U.S. revenue increased 56%, and non-U.S. revenue increased 18%. Turning now to expenses. Moody's fourth quarter expense increased 14%, $533 million, primarily due to hiring and added operating expenses from acquisitions. Foreign currency translation favorably impacted expense by 2%. As Ray noted, Moody's reported operating margin and adjusted operating margin were both down slightly in the quarter to 39.3% and 42.4%, respectively. Moody's effective tax rate for the quarter was 28.1%, compared to 30.6% for the prior year period, primarily due to a higher portion of income in lower tax jurisdictions.
Beginning with the fourth quarter of 2014, Moody's consolidated ICRA's results of operations on a three-month lag. In the fourth quarter, ICRA contributed approximately $12 million of revenue to MIS. Details on changes to line of business revenue reporting made subsequent to our acquisition of a majority stake of ICRA can be found on page 13 of our fourth quarter and full year 2014 earnings press release. I'll now provide an update on capital allocation. On December 17th, Moody's increased its quarterly dividend 21% to $0.34 per share of Moody's common stock. During 2014, Moody's returned $236 million to its shareholders via dividend payments. During the fourth quarter of 2014, Moody's repurchased 4.6 million shares at a total cost of $440.3 million and issued 301,000 shares under employee stock-based compensation plans.
For full year 2013, Moody's repurchased 13.8 million shares for $1.2 billion or $88.41 per share, and issued 4.9 million shares under employee stock-based compensation plans. Outstanding shares as of December 31st, 2014, totaled 204.4 million shares, down 4% from the prior year. In the fourth quarter of 2014, the board of directors authorized a $1 billion share repurchase program, which will commence following the completion of the existing program. Included in this incremental program, as of December 31st, 2014, Moody's had $1.6 billion of share repurchase authority remaining. Also at year-end, Moody's had $2.5 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility. Total cash equivalents, and short-term investments at year-end were $1.7 billion, down $428.7 million from the year earlier due to shareholder returns via dividends and share repurchases.
This was partially offset by Moody's 2014 bond offering of $750 million of senior unsecured notes. As of year-end, approximately 75% of our cash holdings were maintained outside the U.S. Full year 2014 free cash flow was $944 million, up $59.5 million or 7% from 2013. With that, I'll turn the call back over to Ray.
Thanks, Linda. We've received a number of questions about recent media reports that the Department of Justice is in the early stages of looking into Moody's. As we've been disclosing in our 10-Q and 10-K filings, Moody's, like other financial services firms, has had heightened scrutiny since the financial crisis from a wide range of governmental organizations. Where we believe specific matters are material, we communicate them in our filings and other disclosures to the market. In this regard, currently, we have nothing new to report that would alter our existing disclosures. That I will conclude this morning's prepared comments by discussing our full-year guidance for 2015. Moody's outlook for 2015 is based on assumptions about many 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 some degree of uncertainty, and results for the year could differ materially from our current outlook. Moody's guidance assumes foreign currency translation at end-of-year exchange rates, with the exception of the British pound and the euro, which assume foreign currency translation of $1.51 to GBP 1 and $1.15 to EUR 1, respectively. Moody's expects full-year 2015 total revenue to grow in the mid-single digit % range. Operating expense is also expected to grow in the mid-single digit % range. On a constant dollar basis, Moody's 2015 revenue and operating expense growth rates would each be approximately 300 basis points higher. Moody's projects an operating margin of approximately 43% and an adjusted operating margin of approximately 46%. The effective tax rate is expected to be approximately 32%-33%. The company expects diluted earnings per share of $4.55-$4.65.
Moody's expects 2015 share repurchases to be approximately $1 billion, subject to available cash, market conditions, and other capital allocation decisions. 2015 capital expenditures are expected to be approximately $110-$115 million, driven primarily by technology investments in MIS, our corporate systems, and the integration of our recent acquisitions. These investments are expected to continue over the next several years. Depreciation and amortization expense is expected to be approximately $120 million. Moody's incremental compliance and regulatory expense is expected to be approximately $5 million, primarily due to the continuing maintenance cost to comply with global regulation. Free cash flow is expected to be approximately $1 billion. For MIS, Moody's expects 2015 revenue to grow in the mid-single digit % range. MIS U.S. and non-U.S. revenue are both expected to increase in the mid-single digit % range.
Corporate finance revenue, structured finance revenue, and financial institutions revenue are all expected to grow in the mid-single digit % range. Public project and infrastructure finance revenue is projected to grow in the high single-digit % range. Our issuance expectations underlying our 2015 MIS revenue outlook are largely in line with the consensus view of various global banks, acknowledging that there is a wide range of views in the market. For MA, 2015 revenue is expected to increase in the mid-single digit % range. U.S. revenue is expected to grow approximately 10%, and non-U.S. revenue to increase in the mid-single digit % range. RD&A is projected to grow in the high single-digit % range. Enterprise Risk Solutions is expected to grow in the mid-single digit % range in 2015, following its 25% growth rate in 2014, which benefited from the early completion of some customer projects.
With regard to professional services, as part of our integration of Copal and Amba in 2014, we discontinued certain non-core product offerings. As a result, 2015 professional services revenue is expected to be approximately flat. This concludes our prepared remarks, and joining us for the question and answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investors Service, and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.
Thank you. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you have signal prior to hearing the instructions on today's call, you can press star one at any time to ensure your equipment has captured our signal. We'll go first to Andre Benjamin from Goldman Sachs.
Hi, good morning.
Good morning.
My first question. I know the outlook you issued is your official view of the guidance, particularly on the issuance side, I was wondering where, as we think about 2015, you think there is the most upside versus downside risk to the guidance?
Well, just because it's the largest area of our business, I would look to the corporate bond rating area. As we said in our prepared remarks, our outlook is largely in line with the outlooks of the large global banks for bond issuance, both in the U.S. and in Europe. We did note there is a wide variance in those outlooks. Some of the more optimistic outlooks could certainly generate some material upside for us, particularly in the high-yield and in the bank loan area.
Andre, it's Linda, and I'll speak a little bit about what we're seeing on investment-grade, high-yield, and leveraged loans. For each of these, I'll talk about what we've seen in terms of issuance in the U.S. year-to-date, what's expected for the full year. I'll talk about fund flows and the state of the current pipeline in each of those areas. For U.S. investment-grade bond issuance, year-to-date 2015, we've seen about $100 billion of issuance for January, which is a strong month. For the year, we're expecting a trillion dollars of U.S. over year. Fund flows have been good year-to-date, $12 billion into the investment-grade marketplace. The current pipeline is described by the banks we've spoken to as above average. High-yield bonds, year-to-date, we've seen about $20 billion of issuance.
For the year, U.S. is expecting $275 billion of issuance, which is down about 10% from 2014. Fund flows are positive year-to-date, total inflows of $2.5 billion. The current pipeline is said to be above average, that is a recent development. The pipeline appears to be building at this point. For leveraged loans, year-to-date, issuance has been about $30 billion. For the year, expecting about $350 billion of leveraged loan issuance, which would be down about 20% from 2014. Fund flows have been slightly negative, down $2 billion thus far. The market hasn't seen any daily inflows yet on the leveraged loan sector. Current pipeline, though, is average to above average. The deal calendar is noted to continue to build at a steady pace. The really interesting point here is what's going on with European issuance. The European investment-grade market is in very good shape.
Reverse Yankee issuance is expected to be more active as U.S. companies are looking to issue in Europe, given the largest interest rate differentials in 10 years between the euro and the U.S. dollar. The European high-yield bond market is off to a strong start. 2014 also was a very strong year in the European leveraged loan market. There's optimistic view on that going forward. M&A issuers should help with that on the loan market front. We've got some interesting conditions, investment-grade looking pretty good. High-yield and leveraged loans off to a slower start but building. Really the very interesting bright spot here is the number of U.S. companies looking to issue in Europe. A bit of a lengthy explanation, but I think that sets the tone for what we're looking at.
No, that's very helpful. I guess my second question would be for Mark Almeida. I was wondering if you could maybe provide some update on the enterprise risk area of Moody's Analytics. Maybe provide some color on why the guidance assumes a normalization of mid-single digits next year after such a strong year in 2014. Is that based more on what's been contracted and your view on the pipeline, or is it simply being conservative after a tough comp?
Andre Benjamin, I think you nailed it in your note this morning. We had some projects that got completed sooner than expected in the fourth quarter, so we booked the revenue in 2014, pulling it out of 2015. I think we've got a tougher comparable as we move into 2015. The pipeline's very healthy, I would say really, you got to think of two pipelines, the pipeline of projects that are already contracted that we're working on and delivering, as well as the pipeline of prospective new deals coming in. I think the story for 2015 is that from an underlying perspective, business is just as strong, if not stronger than what we've been talking about over the last couple of years.
Really what we're seeing both at the end of 2014 and into 2015 is the impact of the volatile timing of when revenue gets recognized in this business.
This is Raymond McDaniel. One thing I would just add to Mark Almeida's comments is
As we have developed this business, we have been getting some larger sales, more complex projects that have longer implementation installation phases. That is a characteristic that we are dealing with now. We certainly like those larger sales, that also puts some of the revenue out into 2016 that we might otherwise see in 2015.
Thank you.
Thank you. I'll go next to Doug Arthur with Evercore ISI.
Yeah. Good morning. I was struck by your comments in the structured business about the strength in residential mortgage securities, particularly in Europe. Ray or Linda, can you sort of summarize the residential versus commercial mortgage-backed market? The numbers that I've been looking at look sort of weak in terms of total issuance, it looks like you're seeing something different.
Yeah. Let me first turn it to Michel to comment on the European side, if you would, Michel.
Yes. Well, I think, first, you have to put these numbers in perspective. The base, while we have a high growth in percentage term, the $ number are not that large. What is happening in Europe is we had higher volume of issuance in RMBS coming out of the U.K. and Russia. That is what drove the, for Europe, actually, the improvement we've seen in RMBS. We also had, similar to what we've seen in the U.S., a strong volume of CLOs, basically, which also contributed to the growth we've seen in structured finance.
Is that true in the U.S. as well?
Yes. Maybe Ray will want to comment on that. We have the same situation in the U.S., where for CLOs, we've seen strong activities. In RMBS, what we really had is we had a, what I would describe as a number of non-traditional transactions where we've seen growth. Typically, things such as single-family rental and agency risk-sharing transactions where we've seen growth basically from prior volumes.
Yeah. Doug, certainly in the U.S., while we are seeing growth, just keep in mind, it is off of a very low base. The significance of that line in 2014 and going into 2015 is small compared to, for example, CLO or CMBS areas of structured finance.
Okay, thanks.
Thank you. I'll go next to Manav Patnaik with Barclays.
Hey, guys. I just wanted to clarify, the mid-single digit total revenue guidance includes a 300 basis point FX headwind. Is that correct?
Yes, Manav, that's right.
Is that the same for all the other line items, like the separate categories, that includes an FX headwind?
Generally, yes. If there's anything else to be said about this, I'll encourage Mark and Michel to speak about it. We would've been pretty close to our double-digit growth target were it not for the FX headwinds. You can see in our earnings release the rates at which we're using to prepare our guidance.
To the extent you're asking, is it in our EPS guidance as well as our revenue guidance? The answer is yes.
Okay. How much of the growth is coming from M&A, just to get a sense of the contribution from the deals there?
Well, as you saw, the fourth quarter inclusion of ICRA was about $13 million. I'll turn to Mark to ask him if he would comment on the acquisitions that are on the Moody's Analytics side.
Yeah. In MA for 2014, our growth was substantially organic. For the year, we're talking about in excess of 90% of our revenue growth was organic.
I'm referring just to 2015, like, with the inclusion of, I guess, WebEquity and Lewtan. How much does that contribute?
Yeah. Again, the majority of our growth in 2015 will be organic.
Okay
We are getting some benefit from acquisitions.
Okay. I guess, Mark, just on the margin expansion guidance that you'd given us at Investor Day. Does the solid quarter change that outlook to maybe get to some of those numbers earlier than expected? Was this just truly one of those lumpy things you experience in your business?
No, I think it was more than just lumpiness in the business, although that certainly helped. It's also, I think, the improvement in the margin is the result of all the work that we're doing to get us there. Now, I think we're seeing the results of the operational adjustments we're making across the company, particularly in ERS, to drive more margin expansion. We did get a bit of a bump in the fourth quarter, so I would be cautious about extrapolating the fourth quarter results out on a linear basis over the next couple of years. We are going to see the margin move around a bit from quarter to quarter. I think nevertheless, the trend is definitely going in the right direction, and I would expect that the operational adjustments we've made will continue to keep us on track to expand margin into MA.
Okay. Just last one from me, Linda, you did a couple of debt raises last year. From where we are today, just your thoughts on leverage and what you anticipate there.
Sure. Manav, we're comfortable with our leverage. We do have some room. We like our rating, and we want to stay comfortably within that rating. We probably have $600 million, $700 million of room in terms of what we could do within this current rating. We'll see how the year progresses.
Okay. Thanks, guys.
Thank you. We'll go next to Craig Huber with Huber Research Partners.
Thank you. I've got a few questions. Linda, can you just help us? What was the incentive comp in the quarter? I believe it was $47 million fourth quarter a year ago.
Hang on just a second, Craig. Yeah. For the fourth quarter, incentive comp was just about $53 million for the fourth quarter of 2014 as compared to $46.8 million previous year. Stock-based compensation was about flat at $20 million. This year we did a little bit better. We had profit sharing. In the fourth quarter, we had to put up $7 million profit sharing because we finished the year stronger than we had expected. For the full year, incentive compensation was $173 million, Craig. Stock-based comp was about $80 million, and total profit sharing was $9.3 million.
Linda, in your EPS guidance for the year, I'm curious, FX gain that you guys posted in the fourth quarter, roughly $18 million. How much are you budgeting that line to be for 2015 in your EPS guidance?
Sure. Craig, if you take a look at the earnings release, if you look at page 23, I think it is, we've got that outlined. What we're doing is we're assuming foreign currency translation at the end-of-year rate with the exception of the specific example of the British pound sterling and the euro, and we're looking at those at $1.51 to £1 pound sterling and $1.15 to €1 euro. We've budgeted flat at those levels, and we're not taking a dynamic view from there.
You said page 23. I thought this press release was only 12 pages. Am I missing something?
You should have a full 24 pages of our at-strength press release here, Craig.
Okay, I'll have to look that up. Ray, the CalPERS case that your competitor, S&P, just settled for $125 million. Does that make it any more likely that you guys will be settling CalPERS anytime soon, or no change on that front?
No, I think there's really no change on that front. We're in discovery in the CalPERS case. Once the discovery's completed, the next step is to move for summary judgment. We're not at a point in this case where the merits have been addressed.
Okay, lastly, Linda, like I always ask you, if you could just break out within your four segments within ratings the dollars for high yield versus bank loans, et cetera, percentages or however you want to do it.
Sure. Craig, do you want the fourth quarter over as compared to the third quarter? Do you want the year to date?
Just the fourth quarter would be helpful.
Okay. Let's look at fourth quarter 2014 versus third quarter 2014, we'll look at corporate first. For investment grade, we had $80 million of revenue in the fourth quarter 2014, which is up dramatically from $39 million of revenue in the third quarter 2014. Spec grade moved in a different direction. We had $34 million of revenue versus third quarter's $54.5 million. On bank loans, we had $37 million of revenue versus the third quarter's $62 million of revenue. On other accounts, we had $112 million of revenue versus the third quarter's $105 million. Interestingly, the percentages and the total in corporate, as we said, for the fourth quarter was $263 million. The percentages in the fourth quarter for investment grade was 30% of the revenue. Spec grade was 13%. Bank loans were 14%, and other was 43%. Interestingly, in the third quarter, things were different.
Investment grade was only 15%. As a percentage, investment grade doubled in the fourth quarter. Spec grade was 21% in the third quarter, and bank loans were 23%. The majority of the revenues for the fourth quarter were, in fact, in investment grade. You can see how these things move around and how we can have pretty strong offsets. That's not to say that will happen every quarter. Going to structured, Craig. Fourth quarter 2014, asset-backed, $22 million, which was 18% of structured revenue. RMBS, which includes covered bonds, $20 million or 17%. Commercial real estate, almost $36 million or 30%, and structured credit was $40.3 million or 34%. Total of $118.5 million. As compared to the third quarter, ABS is down a little bit. RMBS is about flat. Commercial real estate is up in terms of percentage terms.
It was only 26% in the third quarter. Structured credit was about flat at 34% in the fourth quarter. Looking at FIG, fourth quarter of 2014, about $60 million in banking revenue, 70% of the revenue line. Insurance at $19.2 million was 23%. Managed investment, I'm sorry, $4.3 million, which was 5% of the revenue line. The other was $2.1 million, total of $85.3 million for financial institutions. Banking a little bit stronger in the fourth quarter with 70% of the revenues. Insurance a little bit lighter than in the third quarter, where insurance was 30% versus fourth quarter's 23%. Going to PPIF. Fourth quarter, we saw almost $48 million in PFG and sovereign. That was up pretty nicely from $40 million in the third quarter. Project and infrastructure, $42 million, down a little bit from the $44.8 million in the third quarter. Other is negligible.
The total was $90 million in PPIF. Do you want Moody's Analytics as well, Craig, or will that do it for you?
I'm good on that. I do have one last quick question.
Sure.
Your overseas operations, Linda, what % of the revenues are booked overseas in U.S. dollars?
Craig, we're not going into that level of detail on FX. I think the statement that we made is that revenue was about 55/45 U.S., non-U.S., we're not going into the currencies in which we're billing.
Can I ask you, is it a significant number? Is it north of 10% of your stuff overseas in U.S. dollars? Can you help us at all on that?
We don't disclose that, Craig.
Okay. Thank you.
Thank you. We'll go next to Alex Kramm with UBS.
Hey. Hello, everyone. Just want to come back to a lot of detail you've given on the guidance. Maybe not to pick one in particular, but if you look at the U.S., where Linda, you talked about the issuance environment in particular, mid-single digit growth is the guidance. Obviously, there's no FX impact. Basically, you said IG flat and high yield and leveraged loan down pretty substantially. Help us gap what gets you there. Obviously, you have pricing power, you have recurring revenue growth. Just help us a little bit here to get to the delta.
Yeah. We do have price opportunities. I caution you on that side that some of what we can do with price relates to volume of issuance. If there's a change in a bond rating fee and bonds are not issued, we wouldn't see that pricing opportunity. I think probably the biggest thing that may not be top of mind is the increase in monitoring fees. We've had almost 2,000 new rating relationships developed since the beginning of 2013. Over the last two years, almost 2,000 new names are being followed, and we do take annual monitoring fees. A lot of that, the majority of that, does come out of the corporate sector.
Anything to outside of the U.S. to point out, or do you think in other regions, the issuance and the revenue growth are more in line with each other?
Yeah, I think they are. In particular, I think we see some upside opportunity coming out of Asia. There's been good growth in new rating relationships and bond issuance in Asia, not just in corporates, but in financial institutions, the banking sector as well.
Okay, great. Just maybe switching topics because I think in general, folks are pretty down on the outlook for issuance. Let's say if you get into this environment where maybe it is even worse than what you're seeing here, what are the levers you can pull? I think, Linda, you mentioned the incentive comp and things like that. Can you share a little bit what the goals are there or the ranges in terms of where that could come out and perhaps any other levers you can pull on the margin side?
Sure, Alex. We generally view that we have about $50 million of expense flexibility that we can execute without causing a lot of difficulty. I would caution that forecasts on issuance, those forecasts are notoriously wrong. Last year, we started off with investment-grade issuance for 2014 said to be down 10%, and we finished up 10%. You have to be careful about that. The first thing that we can do is we would probably look to slow our rate of hiring if we see difficulty. We can slow up on certain technology projects, for example. We think we've taken a good middle-of-the-fairway view here in terms of our guidance, and I'll let Ray comment a little bit further if he'd like to.
No. As Linda says, we do have tools available to manage expense in more extreme environments. Frankly, if what we're looking at is just some uneven cyclical conditions, we're probably going to continue to invest through those because we see some very good long-term opportunities, and we want to be ready to seize them.
All right. Very helpful. Thanks.
Thank you. I'll go next to Peter Appert with Piper Jaffray.
Thanks. Ray, appreciate your comments on the legal front. Of course, I want more. You guys don't see any need, apparently, in the context of the aggressive buyback to reserve cash for potential legal settlements. I'm wondering if you could talk about just where things stand on other cases. Are there any you'd call out that you think we should be paying particular attention to? Then any commentary on the direction of legal costs for you guys.
As I have said on the previous calls, the number of active cases is down dramatically from what we had in the peak following the financial crisis. It's down to about a dozen cases here in the U.S. We have not had any new litigation since 2013. The litigation that we have is uniformly in early stages. Nothing has gone to summary judgment. There are no imminent trials. There's not a lot of new news on the litigation front from our previous communications to you.
Peter, it's Linda. We talked about the financial strength and flexibility of the corporation in the prepared comments. We have very significant cash balances of almost $1.7 billion, an undrawn credit line of $1 billion. We're going to run our capital allocation plans in accordance with the guidance that we've given. Beyond that, we're just not going to speculate on hypotheticals.
Okay. Fair enough. Linda, how about any color on how the costs will build in 2015?
Yes, Peter, we've been taking a look at that. I think what we wanted folks to do was take a look at the expenses. A first quarter number you might want to focus on, we're never sure if we have this quite right, we ended the fourth quarter at an expense run rate of about $532 million. We think folks should probably back that off to a little bit over $500 million in the first quarter of 2015. We see our ramp this year as being a bit more gradual because in 2014 we had a lot of acquisitions to take into account. Those are pretty expensive to bring online. We had strong incentive compensation builds in the fourth quarter as we did better than we expected.
We would expect the ramp to go from sort of $500 million in expenses to maybe $530 or $540 million. That will largely see a pickup in the fourth quarter. You want to take the ramp up $30 million-$40 million. It'll be relatively smoother over the first three quarters would be sort of how we're looking at it. We often don't get this right because of the incentive comp piece.
Right. Got it. Okay, thanks. Then Linda, ICRA's margin is quite a bit lower than what MIS does, correct?
I will pass that one over to Ray or Michel.
Yeah. It is a lower margin business. They do have public financials, so those are available to you.
Right. That's what I thought. Okay. Do you guys now run the business actively?
We have majority control, but as I said, it is a public company, so we're involved through the board of directors. We have a majority of the board of directors, but there are also independent directors. We have someone that we've known for a long time as group CEO. We are managing the business, but in the context of it being a public company with minority shareholder rights and procedures that have to be followed in an Indian context.
Understood. Okay, great. Thank you.
Thank you. We'll go next to Bill Bird from FBR.
Good afternoon. I was wondering if you could speak to what's happening on the investment grade line. I was really struck by the spike in investment grade revenues in Q4. If I look back over the last three years, investment grade typically throttles at $40 million to $60 million a quarter. I was just curious if there's kind of anything different going on in terms of how you're pricing the product, or if this is tie-in to Ray's comments on monitoring fees. Thank you.
The fourth quarter was a strong issuance quarter for investment grade. It was also supported by mix. There were some large transactions and some issuers that even though their investment grade might not fall into our frequent issuer pricing so that they were on a per issue pricing basis. It was both good volume and good mix. The monitoring, as you mentioned, that continues to ramp.
Bill, this is how you can see the strength of the M&A financing pipeline coming through. I think we had commented when I read through the various market sectors earlier we do see a backlog of M&A financing from deals that have been announced, and that's helpful to us.
Separately, as you look at the year and based on the pipeline that you see right now, how do you see growth sequencing this year? Are we going to likely start stronger than we finish? What do you see as the shape of growth this year?
This is also something that we notoriously don't perhaps do as well as we'd like to in terms of the timing, because we're really subject to how the market looks from quarter to quarter. Recently, we've seen the second quarter and the fourth quarter be the stronger revenue quarters, Bill. I think we would probably continue to see that. MIS has that pattern. I think for Mark's business, the Moody's Analytics business, the fourth quarter is always the strongest. It's quite strong, and you saw that in 2014 as well. Beyond that, I'll invite Greta to give any further comments. That sawtooth pattern would be something that I think we'd expect to see again.
Yeah. On the MIS side, that's what really has been driving the sawtooth. Mark's business, Moody's Analytics, tends to grow sequentially, whereas Moody's Investors Service follows the sawtooth, and being larger tends to drive a sawtooth pattern for Moody's Corporation. We've said, there are a lot of different opinions about issuance expectations for 2015. They are subject to, in my view, a more than customary number of uncertainties, which create both risks and opportunities. Certainly, looking at the strong job creation in the U.S. and how that might influence the Fed's thinking on interest rates balanced against the weakness in global growth in most places that are not the United States, and trying to manage that from a monetary policy perspective. We will be watching that, just as everyone else is.
I would imagine that that is going to lead to periods of very active growth and periods of relative softness throughout the year.
Just one final question related to structured finance. Was wondering if you could just speak to the new CLO risk retention rules and how you see them impacting the market.
Yeah, the market's going to take some time to adjust to that. We don't see, for example, that there's going to be an elimination of CLOs. There may be more of a concentration in some of the large CLO arrangers. It seems unlikely, to me at least, that the banking sector is going to be able to step in and provide the capital absent some sort of securitization process. I would imagine the market is going to be looking for ways to continue to do that process in a way that is regulatorily compliant and economically attractive. It's happened historically, and I would expect to see that again this year going into 2016, where it becomes effective.
Bill, one other thing I just want to caution you and all the other analysts and people who take a look at Moody's. As I said, the issuance pipeline in Europe looks very strong. In fact, we're told by the banks that it's difficult to get a roadshow slot to show your bonds in Europe right now. There's that much traffic for issuing into Europe. Sometimes some folks take an overly U.S.-centric view of things, Moody's is completely agnostic as to where companies issue. We're just pleased that they're issuing. You should take a look at what's going on over in Europe as particularly the first quarter unfolds. Asian issuance is looking pretty good for us as well. Just keep an eye on the global pattern this year, which might be a little bit different.
Thank you.
Thank you. We'll go next to Joseph Foresi with Janney.
Hi. I wonder if we could drill down on what drove margins in the fourth quarter in the Moody's Analytics business. I just want to get a sense of sort of what took place there and maybe a better understanding of the trajectory. I know you expect them to increase in 2015.
Mark, do you want to-
Sure. Well, again, it was really two things going on. One were what I would characterize as the structural changes that we're making in the business and some of the operational disciplines we're bringing in to drive more margin, particularly in Enterprise Risk Solutions. I think we're just doing a better job. We're being much more disciplined about pricing projects to ensure that we can deliver the kinds of profitability that we expect and require for the business. That's a piece of it. The other piece of it is the fact that we just, as we discussed, we had a number of projects that completed sooner than expected, for which we wound up recording revenue in the fourth quarter. We had an inflow of revenue on the top line and our expense base was our expense base.
That was driving a bit of a spike in the fourth quarter.
You've got two things going on. You've got the structural and then the cyclical, if you will. Is that helpful?
It is helpful. I wonder, is there any way to think about the trajectory of long-term margin expansions or even the trajectory of 2015? Will they step back down and then gradually go up or
Again, I guess I'm going to hold to my commitment that we're going to grow margin in this business in ERS over the next several years. We're going to get a number of points of margin expansion over several years. I think that's the way to think about it. I wouldn't guide you to think about a meaningful shift in margin one way or the other going into 2015. Maybe that's the best way to set your expectations for this year.
Okay, thanks. Obviously we're kind of excited about the European issuance market there. How do we think about either the profitability or the revenues coming in from the European market in light of the currency and the move in currency? I know you've given overall guidance for the total piece. I'm just wondering, as you look at those two factors together, how should we be thinking about those?
Sure. Joe, let me talk a little bit about what we're seeing with FX. We spoke about that for 2015, we would be pretty close to double-digit revenue growth were it not for the FX piece. Of course, it hurts us on revenues and it helps us on expenses. About 3% loss on revenue from FX and about the same help on the expense line. The main exposures for us that we're working with are the euro and the pound. We are able to hedge a portion of our exposure using some derivatives that are discussed in our K's and Q's. It's pretty effective, pretty easy to hedge transaction exposure, which would be in something like acquisitions or debt issuance activities. A little bit trickier to hedge translation exposure.
For us, a good rule of thumb for everyone to think about, if the euro declines from the $1.15 we've budgeted for by another $0.05, that'll hit us about $20 million in revenue, and that will be offset by about $4 million of benefit in expense. Net $16 million on the operating income line. The EPS impact of a $0.05 decline in the euro would be about $0.05 on the EPS line. You can think about that, use that as a rule of thumb, and that's assuming that the pound is pretty static in this equation because the euro is the currency that's been moving around.
Yeah, that's assuming the pound at $1.51 and just the euro moving.
Yep.
Okay.
Does that help you, Joe?
It helps very much. Just lastly, I know it's often difficult to find sort of the niche acquisitions that you're looking for. How does that pipeline look in general, and are there any specific areas that you're looking to capitalize on in 2015?
We are always looking. We remain disciplined about what we try to pull the trigger on. More of the opportunities are on the Moody's Analytics side. The opportunity that we had with ICRA on the MIS side last year was a little more unusual. In terms of the specifics on the Moody's Analytics side, I think we'd rather wait until we have something to announce. Just so we can look around confidentially.
Joe, also just in case you want to think about the EPS impact of the acquisitions that we've done, and 2014 was a pretty active year for us. The acquisitions were dilutive by about $0.05 in 2014, and we expect that to be about the same in 2015, about $0.05 of dilution from the acquisitions.
From our existing acquisitions.
Existing acquisitions rolling forward. Wanted to just give you that number, which might be helpful.
It is helpful. Thank you.
Thank you. We'll go next to Bill Warmington with Wells Fargo.
Good afternoon, everyone.
Hello.
I had a question for you on Copal and Amba. You've mentioned that as a result of discontinued product lines, the revenue expectation there was going to be flat for 2015. I wanted to ask what you thought the longer term, how we should think about the longer-term growth rate for that group going forward, and also speak perhaps to the demand that you're seeing from U.S. financial institutions for those types of services.
Sure. Bill, it's Linda. I'm managing the Copal Amba business, I'll take this one. You're right, we did discontinue a product line, it's going to make it a little trickier to have the professional services line grow this year. Historically and going forward we'd expect Copal Amba to be growing in the lowish teens. Its margins, which we don't disclose, are quite strong, and we're very pleased about that. Given the need for U.S. financial institutions and in fact, global financial institutions to watch their expenses, we see very good demand for this high-end knowledge process outsourcing that we do. Legacy Copal supports investment bankers in producing pitch books and valuation models. Legacy Amba is more focused on providing support for equity research analysts. Both of those businesses are doing very nicely. We wanted to focus on those core areas.
Mark might want to comment just a little bit more about what's going on with the rest of professional services, which he's managing.
Yeah. On the training and certification side of professional services, the business is doing better. We had a couple of years where things were fairly soft in that area. The fundamentals in the business have improved nicely. We are taking a pretty big whack there with the strength of the dollar, because much of that business is outside the United States.
Thank you. A second question for you on CapEx and the $110 million-$150 million guidance. I wanted to just ask, if you look at the CapEx over the past three, four years, it's gone from sort of the mid-40s to $75 million this past year to $110 million-$150 million. Maybe talk a little bit about what's driving that, and also if the $110 million-$115 million, we should think of that as kind of the new normal for the way the business is being run.
Yeah, sure, Bill. You're right, we have had an increase in CapEx costs. Given the revenue line of the business, we're still running a pretty CapEx-light kind of business. The main thing that we're doing here is pretty typical of other financial services companies as well, which would be what we're doing here is we're making capital investments on the technology front. Over the next few years, primarily that involves Moody's Investors Service as the main beneficiary, and then our corporate systems secondarily. Part of what we're doing here is we're providing for a more scalable and flexible infrastructure for MIS. We're hoping to make our analysts ever more efficient and have flexibility to deal with any kinds of regulatory changes that might come in the future. Those are multi-year projects. Our businesses are performing really well. We're very pleased with how 2014 has come in.
We think it's appropriate that we continue to invest in those businesses. Yeah, $110 million-$115 million is probably right for the next couple of years. For the size of our business, it's still not a particularly heavy CapEx line. Hope that helps you out.
It does. A couple housekeeping items. I just wanted to double-check. The contribution from acquisitions on a total company basis, it looks like it was about 2-300 basis points. Is that a good number? Looks like about 13% reported, 3% from FX get you to about 16% constant currency, 2-300 basis points off of that for acquisitions to get to an organic-
Are you looking at the revenue line or the operating income?
I am. The revenue line. I want to just get to an organic constant currency numbers.
Yeah. I don't have the specific number in front of me, approximately, your range is correct. That is looking at Amba, which was a 2013 acquisition. If you're specifically asking about the 2014 acquisitions, it would be a much smaller number.
Got it. Just also asking the share count exiting the quarter.
Sure. I think the simple share count was about 204 million shares. We took out about 4% net of the share count in 2014. That's probably reasonable to model as a net number over 2015, though we can never be sure exactly how that will work out because as we said, we're shooting for $1 billion. Lacking any other better ideas, you probably ought to just look at that pro rata over the year. We run, as you know, systematic share repurchase programs. We try to stay in the markets all the time, and we set those programs ahead of time so we can stay in the market despite most things that are going on with the company. I would run that about $250 million a quarter, something like that.
Excellent. Thank you very much.
Thank you. The next to Tim McHugh with William Blair.
Yes, thanks. Just want to ask about in the Corporate Finance segment, the other accounts. Can you remind me, I guess, what's in there and what's driving the growth that's grown quite a bit as a % of revenue for Corporate Finance?
Yeah. The MIS other line is a combination of Korea Investors Service and ICRA non-ratings businesses. They both have some non-ratings activities. That's what's captured in that line.
Tim, it's Linda. Are you asking about specifically other within the CFG line? Is that what you're asking for?
Yes. That's what I was.
Sorry. We're prepared to answer differently here. Let me take a shot at that. What's in that line and the reason why it's growing, it includes fees from monitoring, which Ray has talked about are really nicely moving in our favor because of the increased number of credits we're looking at. There's some other things. Medium-term note programs, shelf programs, commercial paper, a smallish business on estimated ratings and other indicative and corporate family ratings. As Ray said, the ICRA rating revenue as well. It's a group of different things, but it is a large and nicely growing line item for us.
Is the monitoring fees the piece that's driving it to grow so much as a percentage of revenue?
Yeah, that is the largest driver.
Okay. You were being asked about the MA margins in general for 2015. I guess if I missed it, did you say something or give your view on MIS' margins? Do you expect them to improve next year or be flat? I guess, what's the outlook?
No, I don't think we would anticipate margin expansion at MIS, if in fact we're in a mid-single-digit revenue growth environment. Certainly, if we get surprised on the upside with issuance volume or rated coverage, I would anticipate having good incremental bring down from that upside surprise. We'll have to wait and see.
Okay. Thank you.
Thank you. I'll go next to Vincent Hung with Autonomous.
Hi, good afternoon.
Hi.
Just going back to the guidance of investment grade flat, high yield down 10% and loans down 20%, that's just U.S., right?
Yeah. Vincent, it's Linda. This is not guidance. It's rather the view of a group of issuing banks that we talk to. It sort of sets the tone in terms of what the various banks are seeing in terms of trends for this year. You're right, that's U.S. only.
Do you have a similar sort of sense for Europe?
What I might do is turn it over to Michel, who might have a better sense of that.
Yes. Well, I think as Linda said, I think we expect a more positive story on investment grade. High yield, we should benefit from sort of the environment in Europe and the sort of search for yield we're seeing across the board. As I think Ray or Linda mentioned, last year was a good year for leverage d loan, and we expect that to continue. That's sort of directionally what we're seeing at the moment.
Okay. Just on the comment that the pipeline for high yield was above average in developing, is that just because it's been so weak year-to-date?
I think you have a good point there, Vincent. High yield is very subject to market conditions. As we started January with oil bouncing around, with overall rates coming down but spreads widening a bit, the pipeline has only recently firmed, that is a positive development for us. Again, we'll continue to watch it and with fund flows being positive, that's good as well. We'll have to see. We're encouraged by the recent strengthening.
Okay. Just lastly, on the investment grade strength in the fourth quarter, I think you noted the helpfulness of the M&A pipeline. Is that supported by the higher fees associated with having to do the deals quicker?
It can be, but not necessarily so. Many of these are very large deals and the frequency of M&A deals and the size of them have generally been helpful to us.
Okay. Thanks a lot.
Sure.
Thank you. We'll go next to Patrick O'Shaughnessy with Raymond James.
Hey, good afternoon, guys.
How you doing, Patrick?
Hi, Patrick.
I'm doing well. Couple of quick follow-up questions for you. Within structured finance, that derivatives or structured credit bucket obviously had a very strong fourth quarter. Can you refresh my memory kind of what products kind of fall within that and where was the specific strength during the fourth quarter?
Sure, Patrick. Structured credit is pretty much a CLO story these days, and that would speak to much of the strength in the fourth quarter. One of the things I was noticing as I was pulling this data together, CLO volume so far for 2015 issuance volume is $3 billion. 2014 issuance volume for CLOs was $124 billion, which is just a very significant number. We'll see what happens with that number in 2015. That's what most of structured credit consists of these days.
For both the fourth quarter and the full year CLO strength, there was real strength in the U.S., I would also point to Europe. Although it's a smaller market, a smaller component of the business, there was also strong growth there.
Great. Thanks. Then a follow-up question on the expense ramp over the year. I appreciate how it's kind of tricky to figure out exactly what that slope is going to look like. Given the numbers that you talked about, I think you said maybe start the first quarter barely over $500 million, then kind of finish the year, maybe $530 million, $540 million. If we take, let's say, the low end of that average, say the average quarter is $510 million, you multiply that by four, that gets you to $2.04 billion. If I divide that by what your expenses were last year, $1.895 billion, I'm getting something like 8% expense growth, and your full-year guidance is more like mid-single digits. Am I screwing something up with my math, or is it just pretty tricky to figure out what that ramp is going to look like?
It's pretty tricky to figure out the ramp, we're not going to go into it quarter by quarter. It is mid-single digits, take a little bit of a look at what you're doing. We return back to target incentive compensation, which would mean 100% incentive compensation and no profit sharing. I think as I mentioned, profit sharing was a little over $9 million this year, incentive compensation, because we had a good year-end, was a little bit higher. We normalize those things as we go into the view of the expense ramp for 2015. You're close, you might want to think about it a little bit more.
Okay, great. I appreciate that insight. Thank you.
Sure.
There are no further questions at this time.
Just a couple of housekeeping matters for everybody who might be trying to run models. We did note that regulatory and compliance costs will be about $5 million incrementally for 2015. We wanted to make sure that that was noted by everyone who's working on their models. Additionally, we wanted to note the tax rate of 32%-33%. In 2014, particularly in the fourth quarter, we had some positive resolution of one-off international tax matters. To keep our lives exciting, the U.S. approved a reenactment of extender legislation at the very end of 2014. At this point, that has not been extended into 2015, which is why we're looking at a 32%-33% rate for 2015. I think with that, we've got most of the housekeeping out of the way, unless anybody else has any last final questions.
Just before we end the call, I would like to announce that we'll be hosting our annual Investor Day again this year. We'll be doing it on Wednesday, September 30th here in Manhattan. More information will be available on the investor relations website as we get closer to the event. Thank you all for joining us today.
This concludes Moody's fourth quarter and full year 2014 earnings call. As a reminder, a replay of this call will be available after 4:00 P.M. Eastern Time on Moody's website. Thank you.