Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Third Quarter 2012 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 for questions and answers following today's presentation. I will now turn the conference over to Sallie Schwartz, Global Head of Investor Relations. Please go ahead, ma'am.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's 3rd quarter results for 2012. I'm Sally Schwartz, Global Head of Investor Relations. Moody's released its results Q3 of 2012 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.
Moodys.com. Ray McDaniel, President and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. 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 ks for the year ended December 31, 2011, 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 statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements. I would also like to point out that members of the media may be on the call this morning in a listen only mode. I'll now turn the call over to Ray McDaniel.
Thank you, Sally. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's Q3 2012 results. Linda will follow with additional financial detail and operating highlights. I will then finish with several comments on the current regulatory environment and our outlook for the remainder of 2012.
After our prepared remarks, we'll be happy to respond to your questions. 3rd quarter revenue of $689,000,000 increased 30% over the prior year period and was the highest quarterly revenue Moody's has achieved in its history. We benefited from double digit revenue growth in all lines of business at MIS with particularly strong performance in Corporate Finance as well as continued strong growth in all areas of Moody's Analytics. Expenses for the Q3 were $419,000,000 a 25% increase from the Q3 of 2011. Operating income for the Q3 was $270,000,000 a 38 increase from the prior year period.
Adjusted operating income for the 3rd quarter was $294,000,000 up 36% from the same period last year. Diluted earnings per share of $0.81 for the 3rd quarter, which included a $0.06 legacy tax benefit, increased 42% from the prior year period. Excluding the legacy tax benefit in the current quarter, diluted earnings per share of $0.75 The Q3 of 2012 were up 32% from the prior year period. Based on strong Q3 performance, we are raising our 2012 EPS guidance range to $2.95 to $3.05 or $2.89 to $2.99 excluding legacy tax benefit in the Q3. Turning to year to date performance, revenue for the 1st 9 months of 2012 was $2,000,000,000 a 15% increase from the 1st 9 months of 2011.
Revenue at Moody's Investor Service was $1,400,000,000 for the 1st 9 months of 2012, an increase of 14% from a year ago. Moody's Analytics revenue of $609,000,000 was 19% higher than the prior year period. Expenses for the 1st 9 months of 2012 were $1,200,000,000 up 16% from the prior year period. Operating income of $817,000,000 increased 14% from $716,000,000 for the same period of 2011. Diluted earnings per share of $2.34 for the 1st 9 months of 2012, which included the $0.06 legacy tax benefit, increased 14% from the prior year period.
I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Reg. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the quarter increased 30% to $689,000,000 U. S. 3rd quarter revenue increased 37 percent to $375,000,000 while revenue outside the U.
S. Grew 22% $313,000,000 and represented 45 percent of Moody's total revenue, down slightly from 48% in the year ago period. Recurring revenue of $346,000,000 represented 50% of the total, down from 59% in the prior year period. Looking now at each of our businesses, Moody's Investor Service revenue for the quarter was $474,000,000 up 35% from the prior year period. Foreign currency translation unfavorably impacted MIS revenue by 4%.
U. S. Revenue for MIS increased 45 percent over the prior year period. Revenue outside the U. S.
Increased 21% and represented 39% of total ratings revenue. Global Corporate Finance revenue in the 3rd quarter increased 71% from the year ago period to $221,000,000 Revenue was up 81% year over year in the U. S, primarily driven by issuance in the speculative grade market, including high yield bonds and bank loans. Investment grade issuance is also strong in the U. S.
The corporation is taking advantage of historically low rates. Outside the U. S, Corporate Finance revenue grew 53%, primarily reflecting increased investment grade issuance across all regions. Global structured finance revenue for the 3rd quarter was $93,000,000 14% above the prior year period. In the U.
S, revenue increased 27% year over year, primarily due to strong issuance commercial mortgage backed securities and collateralized loan obligations. International structured finance revenue was essentially flat to the prior year period. Global Financial Tuition's revenue of $83,000,000 increased 15% from the same quarter of 2011. U. S.
Revenue was up 22% as compared to Q3 of 2011, primarily driven by increased insurance company issuance, forward financing and debt funded M and A activity. Non U. S. Revenue was up 10%, primarily due to increased issuance in Latin America and Asia, prompted by refinancing of short term debt, credit expansion due to economic growth and reduced lending by European banks in these regions. Global revenue for the public Project and Infrastructure business rose 13% year over year to $77,000,000 Revenue was up 11% in the U.
S, primarily due to gains in public and infrastructure finance, while non U. S. Revenue increased 16%, reflecting growth in European infrastructure finance. And turning now to Moody's Analytics, global revenue for Moody's Analytics of $215,000,000 is up 20% from the Q3 of 2011. Slightly more than half of the growth is from the late 2000 acquisitions of Copel Partners and Berry and Hibbert.
Excluding the impact of foreign currency translation, Revenue grew 21%. U. S. Revenue grew by 14% year over year to $86,000,000 Non U. S.
Revenue increased by 23% to 100 $29,000,000 and represented 60% of Moody's Analytics revenue. Globally, revenue from research, data and analytics of $124,000,000 increased 7% from the prior year period and represented 58% of total MA revenue. We continue to see demand for credit research via our CreditView offering as well as new sales of our other analytic data and excuse me, data and analytic products. Revenue from Enterprise Risk Solutions of $64,000,000 grew 26% from last year, reflecting the December 2011 acquisition of Barry and Hibbert and strong growth in products and services that support the regulatory compliance needs of our financial services customers. Due to the variable nature of project timing, Risk Solutions revenue remains subject to quarterly volatility.
Professional Services revenue grew 97% to $27,000,000 reflecting the acquisition of a majority stake in Copel Partners in November 2011. Turning now to expenses. Moody's 3rd quarter expenses were $419,000,000 an increase of 25% compared to Q3 2011 or a 27% increase excluding the impact of foreign currency translation. Higher accruals for incentive compensation and Moody's profit sharing plans, reflecting the stronger full year outlook accounted for about half of the year on year expense growth. More specifically, we recorded additional incentive compensation in the Q3 to align with stronger than expected year to date financial performance and the increased full year outlook as reflected in our updated guidance.
Therefore, incentive compensation for the 3rd quarter was $59,000,000 versus $28,000,000 in each of the 1st and second quarters. Additionally, in the Q3, we recorded approximately $8,000,000 of profit sharing expense given the increase in our EPS guidance. As you may remember, our 2012 compensation plan award profit sharing when our pro form a EPS rose more than 10% from the prior year period. Our current pro form a EPS guidance results in a growth of over 10% from 20 eleven's pro form a EPS, whereas our guidance at the end of the second quarter did not. Excluding growth from incentive compensation and profit sharing, expenses for the Q3 were 15% higher than the prior year period, primarily due to increased headcount from growth in our existing businesses and from acquisitions in late 2011.
Moody's reported operating margin expanded 230 basis points year over year from 36.9% in the Q3 of 2011 to 39.2% for the current quarter. Adjusted operating margin was 42.7% The quarter up from 40.5 percent for the same period last year. Our effective tax rate for the quarter was 29.5% compared with 28.5 percent for the prior year period. The increase in the effective tax rate was primarily due to lower taxes in 2011, resulting from the settlement of state tax audits, partially offset by the favorable impact of foreign tax planning initiatives in 2012. Now I'll provide an update on capital allocation.
During the Q3 of 2012, Moody's repurchased 600,000 shares at a total cost of $25,000,000 and issued 1,200,000 shares under employee stock based compensation plan. Shares outstanding as of September 30, 2012, totaled 223,000,000 essentially flat from a year earlier. As of quarter end, Moody's had $700,000,000 of share repurchase authority remaining under its current program. We now expect full year 2012 share repurchases of approximately $225,000,000 subject to available cash, market conditions and other ongoing capital allocation decision. As of September 30, Moody's had $1,700,000,000 of outstanding debt and $1,000,000,000 of additional debt capacity available under our revolving credit facility.
Cash and cash equivalents were $1,500,000,000 as of September 30, 2012, an increase of $664,000,000
from a year earlier, largely due
to our $500,000,000 bond deal in August this year. As of September 30, 2012, approximately 52% of our cash holdings are maintained outside the U. S. For the 1st 9 months of 2012, free cash flow was $461,000,000 a decrease of $452,000,000 from a year ago, due in part to payments of approximately $121,000,000 related to the settlement of state and local tax matters as well as movement in other working capital accounts. We remain committed to using our strong cash flow to create value for shareholders, while maintaining sufficient liquidity.
And with that, I'll turn the call back over to Rick.
Thanks, Linda. I'll continue with comments on our regulatory environment, which has not changed materially since the update we provided during our Q2 earnings call. In the U. S, the SEC's rulemaking pursuant to Dodd Frank is pending. The timing is uncertain regarding Final rules relevant to NRSROs as well as the feasibility study on establishing an alternative system for allocating rating assignments for structured finance products.
Both banking and securities regulatory authorities continue to assess their use of ratings and regulation and are in the process of developing potential alternative measures as replacements. Turning to Europe, as discussed on previous calls, in November 2011, the European Commission released new regulatory reform The Council of Finance Ministers of the individual EU member states each produced its own version of the text and then entered into discussions with the Commission. During these discussions, the 3 institutions seek to resolve any differences among their respective drafts and once a compromise document is produced put to a vote. In May June of 2012, the Council and the Parliament respectively finalized their positions on CRA are underway. However, currently we can't predict the timeline for finalization of CRA 3 with any degree of precision.
Additionally, it's still too early to assess what the likely outcome of these deliberations will be. As always, we will continue to advocate for globally consistent approaches that align with the G20 statements and directives. I'll conclude this morning's prepared remarks by discussing our full year guidance. Moody's outlook for the remainder of 2012 is Based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer borrowing and securitization, and the amount of debt issued. There's an important degree surrounding these assumptions, especially as they relate to Europe and if actual conditions differ from these assumptions, Moody's results for the year may differ materially from the current outlook.
Our guidance assumes foreign currency translation at end of quarter exchange rates. As I mentioned earlier, we are rating our 20 12 EPS guidance to a range $2.95 to $3.05 from the previous range of $2.76 to $2.86 Full year pro form a EPS, which excludes the impact of a legacy tax benefit, is now expected to be in the range of $2.89 to $2.99 Certain components of our 2012 guidance have also been modified to reflect our current view of credit market conditions. For Moody's overall, company now expects full year 2012 revenue to grow in the mid teens percent range. Full year 2012 expenses are also now projected to increase in the mid teens percent range. Full year 2012 operating margin is now projected to 40% and adjusted operating margin for the year is still expected to be approximately 43%.
Our effective tax rate is still projected to be approximately 32 As Linda mentioned earlier, we now expect full year 2012 share repurchases of approximately $225,000,000 Subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are now projected To be approximately $40,000,000 to $50,000,000 and we still expect approximately $100,000,000 in depreciation and amortization Incremental compliance and regulatory expense is now projected to be approximately $15,000,000 For the broader MIS business, revenue for the full year 2012 is now expected to increase in the mid teens percent range. Within the U. S, MIS revenue is now expected to increase in the low 20s percent range, while non U. S.
Revenue is now expected to increase in the mid single digit percent range. Corporate Finance revenue is now projected to grow in the mid-20s percent range. Revenue from structured finance is expected to grow in the mid single percent range. Financial Institutions revenue is now expected to grow in the mid single digit percent range and Public Project and Infrastructure Finance revenue is now expected to increase in the mid teens percent range. For Moody's Analytics, full year 2012 revenue is still expected to increase in the high teens percent range.
Within the U. S, MA revenue is expected to increase in the high teens to 20% range. Non U. S. Revenue is now expected to increase in the high teens percent range.
Research data and analytics is now projected to grow in the high single digit percent range, while revenue growth is still projected in the low 20s percent range for enterprise risk solutions, reflecting the December 2011 acquisition of Berry and Hibbert as well as growth in the base business. Professional services revenue is now projected to grow In closing, I'd like to point out a couple of additional positive developments at Moody's. Moody's Investor Service was voted the best credit rating agency in a 2012 poll of U. S. Fixed income investors conducted by the well known publisher institutional investor.
Also this past week, Automatic Data Processing Incorporated, a leading provider of business outsourcing solutions announced that it has chosen to collaborate with Moody's Analytics to enhance widely followed ADP National Employment Report. I'm extremely pleased with the accomplishments of both businesses and appreciate the market's recognition of our efforts. This concludes our prepared remarks and joining us for the question and answer session is Michel Madeline, the President and Chief Operating Officer of Moody's Investor Service to Mark Almeida, President of Moody's Analytics. We'll be pleased to take any questions you may have.
Thank And we'll take our first question from Peter Appert with Piper Jaffray.
Great, thanks. So Ray, based on the guidance. Obviously, it implies you're seeing some pretty good momentum going into the Q4. Anything interesting or different you can share with us in terms of what you're seeing in the In terms of asset classes or other activity in the market?
Not a whole lot of additional Color I can give you Peter other than we continue to see good issuance pipelines especially in corporate finance. It's obviously in terms of sequential growth from the Q3, it's going to be difficult to achieve that in that area because The issuance was so robust in the 3rd quarter and we have some external events such as the And a couple of short months in the Q4, but nonetheless we still see healthy pipelines and barring something really unanticipated, I think we believe the 4th quarter will be another good quarter.
Linda, let me A little bit about what we're seeing in pipelines and then in high yield and leverage pipelines. First looking at high grade and all this information comes from Morgan October right now stands at $78,000,000,000 of issuance for U. S. High grade and that has been the strongest October on record. The month could break $100,000,000,000 if some big deals that are said to be in the pipeline come next week, though we did experience a warning regarding potential weather delays, which is something new.
For November, expectations are about $70,000,000,000 for U. High grade issuance last year was $77,000,000,000 and the 8 year average is about $63,000,000,000 so a little bit above average for November. For high yield and leveraged, last week we saw $12,000,000,000 in high yield issuance and $9,300,000,000 in leveraged loans. That's still very active. This week, we've seen $7,500,000,000 both in high yield and in leveraged loans.
October saw $41,000,000,000 in high yield and forty 2,000,000,000 in leveraged loans. Q3 issuance was a record post the financial crisis for the leveraged area, dollars 112,000,000 in high yield issuance for the 3rd quarter $81,000,000,000 in leveraged loans. As Ray said, the view is that the 4th quarter will not be as strong as 3rd quarter, but we'll still be very active. The listed pipeline so far that can be seen for November is $19,000,000,000 in high yield $10,000,000,000 in leveraged loans. And again, a bit of a concern that the 1st week in November could be low due to the weather and then following with the election and obviously the usual watch out for anything changing in the European situation.
That's great. Thank you. And I thought it was particularly noteworthy that it looked like the structured finance market seems like it's got some signs of life. Do you have a view on the sustainability or broadening of that recovery going into 2013?
Yeah. The structured finance market has been showing year over year sequential growth pretty steady. And the I think that's an indication of A good, if not spectacular recovery in that market. Commercial mortgage backed Paid a big rebound in 2013 in the residential mortgage backed securities area. But I guess the further reason for optimism in that sector is we seem to be moving away From some of the more regulatory driven causes of issuance into more real market issuance and I would take that as a sign of help.
Right.
And I guess all this gets to the big issue, Ray, which is you've enjoyed very robust performance here in the second half of twenty thirteen, Making the comps more challenging I'm sorry, second half of 'twelve, making the comps more challenging in 'thirteen. So do you have any Early thoughts in terms of how next year could play out?
Well, we will provide our outlook for 20 At the beginning of the year as we do normally and so I'll refrain from commenting on our outlook at this point.
Okay. One last try then. On the cost side of the equation, Linda, the rate of cost growth obviously has been pretty robust This year in the context of all the reasons you guys have laid out, how do we think about that going forward?
Sure, Peter. I just wanted to touch on the actual expense growth for this year. And if you look at the Q3 year over year, You'll see that last year we had $335,000,000 of expenses. This year in the Q3 we had $418,000,000 of expenses. The vast majority Of that change, dollars 59,000,000 or 70% of that is compensation.
So very important to remember that three times this year we've increased guidance. And the main driver of expense increase is, in fact, the over performance and the resulting incentive compensation, which results. Another cause of expense growth is our acquisitions, which added $18,000,000 to the expense in the 3rd quarter. Now some of that breaks out into compensation for new people, about $10,000,000 of it. We have the increase in depreciation and amortization and some other non comp expenses.
And then we have a few other things in there. But again, if you look at the expense increase, which is 25% year over year, it would be 15% without the incentive So probably the best way to think about it is if we normalize back to more normal performance last year. We try as hard as we can to have expense growth not exceed and in fact be less than revenue growth. So we'll see where we get to, as Ray said, for that in 2013. But we're mindful of expense growth, but This is a very fast growing business and we're continuing to support it.
Got it. Thank you.
Thank you. And we'll take
our next question from William Burke with Lazard.
Good morning. Ray, I'm curious if you think you're seeing much pull forward effect from fiscal cliff dynamics. And then second, I was wondering if you could just
Okay. I'll Start with the pull forward. I think it's clear that we have seen pull forward Throughout this year, including in the Q3. So firms are looking at potential for Some market uncertainty around the fiscal cliff potentially as developments occur in Europe. And they're taking advantage of low official rates and good spreads, not historically tight spreads, but good.
That being said, much of the activity that we have seen this year, most of the activity continues to be refinancing As opposed to issuance for mergers and acquisitions and business expansion, share repurchase, etcetera. So yes, similar to comments I've made in the last couple of quarters, it has been a very powerful refinancing engine that we have been experiencing over the course of the year, but many of the traditional most of the Traditional drivers of debt issuance have really not been very strong this year. And so that's what we'd be looking for going into 2013 2014. Linda, did you want to take the share repurchase?
Yes, Bill. On share repurchase For the Q3, as we said, we said $25,000,000 which is frankly less than we had hoped. We put in place our systematic share repurchase program and following our Investor Day, the stock price moved quite rapidly and in fact out of our repurchase loan. Because we realized that our performance was pretty good, We could not go back into the market opportunistically. So given the revised guidance, we're hoping to get back into the share repurchase market here in the Q4 and be able to make some progress.
But all of that, of course, is dependent on market conditions.
Thank you.
Thank you, sir. And we'll continue on to Craig Huber with Huber Research Partners.
Yes, good morning. Thanks. My first question is, I appreciate you guys breaking out the transaction versus relationship across I do have one of those similar questions. If you could break apart the 4 main categories like corporate finance, breaking off high yield revenues, bank loans, investment grade by
Sure, Craig. We can do that. We were thinking of calling Page 14 in the earnings release the Craig table. But going on to the revenue for Corporate Finance, Q3 of 2012, Total dollar corporate finance issuance, dollars 220,700,000 Investment grade comprised $55,000,000 of that We're about 25 percent high yield was $52,000,000 or 24% of the corporate finance total Bank loans, dollars 36,500,000 or 17 percent and other accounts, dollars 77,000,000 or 35%. The big movement there Year over year for the Q3 is the increase in the high yield percentage, which basically doubled as component from this year from last year to this year, Craig.
So that's a strong driver as well as the increase in the bank loan 1.
I I think we do it for structured finance and financial institutions, etcetera.
Sure. Going on to structured for Q3, total issuance $93,100,000 up From $82,000,000 at this quarter last year. So asset backed securities, dollars 25,700,000 28 percent of the total. Residential mortgage backed securities, which does include covered bonds, dollars 20,300,000 22 percent of the total commercial real estate finance, $23,600,000 which is 25 percent of the total and derivatives, dollars 23,400,000 which is 25 percent of the total. Now the bigger changes There would be, as Ray had noted, in the commercial real estate line.
And also interestingly in the derivatives line, we saw more CLO issuance Thus far in 2012 than we did in the entire period of 2008 to 2011. In fact, last week, there were 5 CLOs. That market is doing quite well. Let me go on and go to Financial Institutions Group. Total revenue for the quarter, dollars 82,700,000 Banking, about $57,000,000 of that or 69 percent insurance, dollars 21,000,000 26 percent of it and Managed Investments, dollars 4,600,000 about 6% of the total.
And each of those lines are pretty consistent to what we saw last year. For PPIF, dollars 77,000,000 for the quarter, dollars 38,000,000 in public finance and sovereigns, 49% of the total new needs, dollars 4,400,000 6 percent of the total and project and infrastructure, dollars 34,500,000 About 45% of the total. So everything there looks relatively similar, a little bit of an increase in project and infrastructure. Interestingly, some of that out of Europe, we understand that the ECB bond buying has created a bit of a more favorable environment for that type of issuance in Europe. Is that everything you need, Craig?
On that front, yes. And if I could ask Couple of questions please. 1 on incentive compensation. You mentioned $59,000,000 up from a year ago or your Total numbers, dollars 59,000,000 versus $28,000,000 each of the first two quarters. First off, how does that break down between operating costs and SG and A within the quarter, please?
So we can get
a sense.
We don't disclose that, Craig. Generally, commissions go in SG and A and the incentive comp tracks to what each individual person is doing for the company, but we don't have that split up.
Can you say just generally, is it heavier one way or the other?
No, we don't disclose that, Craig, sorry.
Okay. And then how should we think about that number for the 4th quarter assuming you hit, say, the midpoint of your new guidance here?
Sure. You should think about it. We did $28,000,000 $58,000,000 for the Q3. We're thinking that for the Q4, if we hit The midpoint of our guidance, probably want to look at about $40,000,000 for incentive compensation, which also includes a piece for profit sharing.
Okay. And then I also want to ask just generally, just big picture here. When you guys Looking at your costs aside from incentive compensation, what else do you consider variable? For example, you do, let's say, an incremental 10 extra Debt issuance deals here. What's your variable cost aside from incentive compensation?
Maybe a little bit extra T and E expense, but was there anything else really?
I think the main majority of it would be what goes through to the bonus line. I think that's where we said that each Additional dollar of revenue once we've covered the fixed costs would probably still come down to about $0.60 on the margin line. But it depends if there's anything unusual going on for that quarter, Craig.
Yes. And pacing Hiring and whether we dial that back or dial that up is a source of flexibility. But To the extent that we think market conditions are reacting to short term cycles, we would want to continue to invest Back in our personnel and our business. And similarly for various kinds of projects, whether they are IT related or other projects, We have the ability in some areas to accelerate or decelerate in response to conditions.
Craig, something that might interest you. Since Year end last year, excluding our acquisitions, we've hired about 3 30 people. That's 7% growth excluding acquisitions. Interestingly, about 200 of those are for Moody's Analytics, 110 or so are for the rating agency And only 20 of those are for shared services. So 90% plus of the people that we've added this year are all for the revenue driving part of the business, not for the SaaS part of the business.
So that kind of gives you some idea as to the balance there and what we're trying to achieve.
My last question please, just you gave the backlogs out there. I'm curious if you could talk a little bit further about the fiscal cliff issue, The debt ceiling that's going to get raised here in Washington, D. C, the election, just in general, what's your thoughts as we get later in this year and into early next year? You sense any hesitation out there on debt issuance front that things get pushed out or is it all being pulled forward?
I do think there is some pull forward. I think firms are being somewhat opportunistic. Issuance, The environment is good for issuance right now. And so if you're thinking about issuance in the near term, this is a good time to be doing it. Historically, we have not seen any correlation in bond issuance activity based So that at least in terms of what we've seen in the past would not be an important determinant And again, the fiscal cliff is going to Inevitably create headlines just as some of what's going on in Europe creates headlines and that creates Windows, very short term windows, week to week where the market participants are feeling more optimistic or more pessimistic.
So I We're going to see choppiness going into the New Year, but nothing that's going to freeze up the markets.
Great. Thank you.
Thank you. And we'll go to Manav Patnaik with Barclays Capital.
Hey, good afternoon, everybody. Congratulations on the quarter. First question, given the hiring being made into the businesses are going to be just in terms of trying to model where the expense growth is going to come next year and the years forward?
Manav, looking at my colleagues here who are running the lines of business that generate revenue, I think they're probably pretty happy with those sorts of splits. We have had increases on the staff side for regulatory compliance, IT and other such things. And we hope we've come largely through that, as we've said on previous calls. We will continue to add headcount to drive very strong growth in both these businesses, but it does take investment in people and resources to achieve double digit revenue growth, which is pretty Unusual in terms of the companies we've been reporting this week. We're feeling pretty good about these numbers, but we will need to continue to invest.
And Hopefully, yes, that will continue to go to the revenue generating part of business.
Okay. And in terms of the regulatory compliance expansion, $15,000,000 that you've got or incremental $15,000,000 that you guided for this year. I understand Europe, we don't know yet, but excluding that, Does that incremental $15,000,000 imply that other than that there's not much more You know, incremental expense required for what we already know about?
I'll take a shot and then Ray can add some more. I think we've come through some of that, but not all of it. As Ray stated in his prepared remarks, we do not yet have fully final rules I'm Doug Frank from the SEC. So it would be premature for us to say that we're through everything yet. And as Ryalsa said, We don't know what the timing or the final shape of the RA3 will be, which makes it pretty difficult to put numbers on things.
And at this point, it's been a bit easier for us to plan and spend Around the anticipated SEC rules because we feel we have a better idea Of what the final rules are likely to look like. The CRA 3 situation in Europe, again, is more uncertain in more of A speculative stage in terms of what the final product is going to look like and how we will have to react and over what time frame.
Got it. And one last one. I think you explained why the, I guess, the share buyback guidance came down from what you said last month. I was just curious if you could explain why the CapEx number is dropping so much?
Sure. We've basically just rescheduled some of the things we're going Due here going into the end of the year, we await the final Dodd Frank rules and frankly we've held some capacity to deal with that. So it's nothing more than just trying to figure out what has to go first and what we can deal with next year.
All right. Thanks a lot, guys.
Thank you.
Thank you. Our next question comes from Doug Arthur with Evercore.
Yes. Two questions. And Ray, I'm wondering if you can just update us on CalPERS. I mean, there's been a lot of motions, moves between District Court and Appellate Court. And so I'm just interested as to where that stands right now on a timing point of view.
And then Linda, There seems like there's a lot of different trends in your financial area right now. Insurance was very strong In the Q3, was that a one off thing or do you see that continuing and this deleveraging issue with the banks, Is that likely to keep the banking side of financial institutions slow for a while? So I'm just kind of interested in sort of the different trends there.
Sure. I'll start with CalPERS. There's not a lot new in recent months in the CalPERS litigation. As we mentioned on our prior earnings call, we filed an appeal in the California Court of Appeals seeking reversal of the lower court's Decision, which is denying our motion to dismiss under this anti SLAPP statute in California. The briefing on that appeal is not going to be completed until the end of the year and After that, the court will set a date for all arguments.
So we don't currently, we don't know when the course when the case will be argued or when it will Got it. So it's moving along quite slowly. With respect to deleveraging and the banking sector, I'll make just a quick comment and then Linda or Michelle may wish to add to that. The deleveraging is continuing. We are seeing a reduction in bank loans, particularly in Europe and the deleveraging that's associated with that.
We believe that is going to continue for a relatively long time as the banking system retrenches. The benefit of that as we've talked about is that that encourages And municipal entities to go to the bond market and seek ratings. And our financial Institutions area is the area that is most dominated of the ratings businesses by recurring revenue. A majority of our revenue in that area is recurring. And so we are less sensitive to the deleveraging in that area.
We also In the same degree that there is deleveraging or retrenching. And to follow-up, Doug, insurance Year over year in Q3,
it moved from $18,500,000 last year to $21,300,000 this year. So It's a whole $2,800,000 difference. It's not enormous. The guidance for FIG now is to increase in the mid single digits for this year, which is up from flat to slightly up, which is what we had had previously. So I think we expect that the activity will continue.
It's not the biggest grower amongst our revenue lines though.
Yes, fair enough. And just as a follow-up on the Deleveraging in Europe, the Yankee bond situation where corporations in Europe coming over to the U. S. To issue, I mean that has been strong and is that becoming a really sizable sector for you now or not yet?
Yes. It has been strong this year and much stronger than we've seen in previous years. How enduring a phenomenon that will be, I think, is somewhat uncertain. Right now, There's an interest more of an interest in risk coming from U. S.
Investors than European investors. And so The European issuers have taken advantage of that. Whether that is going to change and the issuance will revert back To the EU going forward is uncertain, but I think we're in a position to rate in either case.
Okay, great. Thank you.
Thank you. Bill Warmington with Raymond James has our next question.
Good afternoon, everyone.
Question for you on Copal and the strong growth that you're putting up there. Once you anniversary the acquisition, what Kind of organic growth rate do you think you can generate there?
I'll let Mark Almeida address that, Bill? Yes. I don't think we've disclosed an outlook for the professional services business, which is where the Copal segment wise for 2013. But that's a it's a relatively high growth business. It won't be our highest growth business, but it's a good strong double digit growth business.
I think that's about as much insight as we can offer at this stage.
Okay. And then one question for you on the residential mortgage backed security market. So, your thoughts on what needs to happen there before we see that market come back in size?
Well, I guess there's I put it in 2 categories. 1, there are some incremental things that can be done In terms of reducing mortgage qualification limits That can go to Fannie and Freddie and that would move more of the market to the The private label market and would be more likely to be rated. But then there's the Bigger structural question of the role that the government is going to play in the mortgage market on a long term basis and that is A politically and fiscally very, very challenging set of issues that the government is going to have deal with. And so that's why we are cautious about any Sizable expansion of the RMBS market in the near term because of the difficult political dynamics.
Got you. And then one final question on enterprise risk, just what products within that segment are driving the growth and how long are the tails on those products?
When you say tail on the products, do you mean the sale or the actual product placement?
And the ongoing revenue generated by the product.
Okay. Sure. Mark, do you want to? Yes. Well, the ERS segment is doing very, very well largely driven by regulatory driven demand that we're seeing from Our banking and insurance customers.
And we would expect to continue to see very healthy demand for that product over the next Couple of years.
Got you. Thank you very much.
Thank you.
Thank you. And we'll take a follow-up from Peter Appert with Piper Jaffray.
So Ray, just a follow on to your comments earlier about What's going on in Europe? Is it possible to get any quantification around this concept of disintermediation and how big you see the market opportunity from that?
Well, we've talked about it not specifically in a European sense, but in terms of the Impact of disintermediation on our overall revenue growth is being a couple of points. And that is It's both anticipating what is happening from deleveraging, but it's also looking at The pace at which we have been getting new rating mandates over the last few years and that has been a reasonably steady pace. And in Europe coming it's associated more with stress in the banking sector. In places like Asia, It has been associated more with economic growth outpacing banking system capacity. So we The underlying drivers of the disintermediation change a bit by geography, but the Consequence, the overall number of ratings mandates has been increasing, as I said, at a pretty steady rate.
I guess I was wondering if maybe given the turmoil in Europe, the 1 or 2 percentage point incremental revenue from disintermediation, it Seems like that potentially could be conservative on a near term basis. What do you think?
No, I don't think so. I hope I'm wrong. But part of the turmoil in Europe is also Corporations taking a conservative posture with respect to borrowing and business expansion. And so Even though if they were to need additional capital or desire additional capital, they're more likely To go to the bond market, they're also in a defensive mode and so that's an offset. Got
it. Okay. Thanks, Ray.
Thank you. Ladies and gentlemen, we have no additional questions. I would like to turn things back over to our speakers for any additional or closing remarks.
I just want to thank you for joining the call today and we look forward to speaking with you again after the New Year. Thank you.
Thank you, sir. And ladies and gentlemen, that does conclude today's conference. Thank you all for your participation and