© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome ladies and gentlemen to the Moody's Corporation First Quarter 2018 Earnings Conference Call. At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question-and-answers following the presentation.
I will now turn the conference over to Steve Maire, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's first quarter 2018 results, as well as our current outlook for full-year 2018. I am Steve Maire, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the first quarter of 2018, as well as our current outlook for full year 2018. An earnings press release and a presentation to accompany the teleconference are both available on our website at ir.moodys.com.
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. During this call, we will be presenting non-GAAP or adjusted figures. To view the nearest equivalent GAAP figures and GAAP reconciliations, please refer to our earnings release that was filed this morning.
Before we begin, I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section and the Risk Factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017 and in other SEC filings made by the company, which are available on our website and on the SEC's website.
These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode.
I'll now turn the call over to Ray McDaniel.
Thank you, Steve. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's First Quarter 2018 Financial Results. Steve is going to help me out with the prepared remarks by following up with some additional first quarter financial details and operating highlights. I'll then conclude with comments on our current outlook for 2018. After our prepared remarks, we'll be happy to respond to your questions. In the first quarter, Moody's achieve a record revenue of $1.1 billion a 16% increased from the first quarter of 2017, reflecting not only a strong contribution from Bureau van Dijk and but also solid organic growth from Moody's analytics, Moody's investor service contributed broad based transaction revenue growth particularly from structured finance activity as well as recurring revenue growth as 2017 new rating mandates became monitored credits.
Operating expenses for the first quarter of 2018 totaled $636 million up 20% from the prior year period including 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets and non-recurring acquisition-related expense.
Operating income was $491 million, up 10% in the first quarter of 2017. Adjusted operating income of $541 million was up 13%. Foreign currency translation favorably impacted operating income and adjusted operating income by 4% each. The operating margin was 43.6% and the adjusted operating margin was 48%.
Moody's diluted EPS for the quarter was $1.92 per share of 8% from the first quarter of 2017. Adjusted diluted EPS for the quarter was $2.02 per share up 35%, and excludes $0.10 per share related to amortization of acquired intangible assets and acquisition-related expenses. First quarter 2017 adjusted diluted EPS primarily excludes a $0.31 per share gain from strategic realignment and expansion involving Moody's China affiliate CC Exxon. Our business remains well-positioned to benefit from continued global economic expansion in 2018 and as such we are affirming our full year 2018 guidance of $7.20 to $7.40 for diluted EPS and $7.65 to $7.85 for adjusted diluted EPS.
I'll now turn the call back over to Steve to provide further commentary on our financial results and other upticks.
Thanks, Ray. I'll begin with revenue with the company level. As Ray mentioned, Moody's total revenue for the first quarter was a record $1.1 billion, up 16%. U.S. revenue was of $598 million was up 3%; non-U.S. revenue of $529 million was up 33% and represented 47% of Moody's total revenue. Recurring revenue of $603 million was up 26% and represented 54% of total revenue. Foreign currency translation favorably impacted Moody's revenue by 4%.
Looking now at each of our businesses starting with Moody's Investors Service. Total MIS revenue for the quarter was $720 million, up 8%. U.S. revenue increased to 3% to $433 million. Non-U.S. revenue of $287 million was up 17% and represented 40% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 3%.
Moving to the lines of business for MIS. First, corporate finance revenue for the first quarter was $378 million, up 7%. This result reflected strong contribution from EMEA bank loans and U.S. investment grade as well as growth in recurring revenue resulted from an increase in new mandates in 2017. U.S. and non-U.S. corporate finance revenues were up 1% and 20% respectively.
Second, structured finance revenue totaled $130 million, up 29%. This results reflected broad strength in securitization markets with particularly strong levels at new CLO formation. U.S. and non-U.S. structured finance revenues were up 30% and 28% respectively.
Third, financial institutions revenue of $114 million was up 2%. This result reflected growth in issuance from the EMEA banks and U.S. insurance companies partially offset by a decrease in activities from Asian and U.S. banks. U.S. financial institutions revenue was down 4% while non U.S. revenue was up 7%.
Fourth, public project and infrastructure finance revenue of $93 million was down 5%. This result primarily reflected a decrease in U.S. municipal insurance with loss tax exemptions for advanced refunding transaction. U.S. public project and infrastructure finance revenue was down 15% while non-US revenue was up 13%.
Turning now to Moody's Analytics, total revenue for MA of $107 million was up 33%. U.S. revenue of the $164 million was up 6% while non U.S. revenue of $243 million was up 60%, and represented 60% of total MA revenue. Foreign currency translation favorably impacted MA revenue by 4%. Organic MA revenue for the first quarter of 2018 was $333 million up 9% from the prior year period.
Moving now to the lines of business for Moody's Analytics. First, research data and analytics or RD&A revenue of $269 million was up 53%. U.S. RD&A revenue was up 11% and non-US RD&A revenue more than double. Bureau van Dijk's revenue contribution of approximately $74 million included a $10 million reduction as a result of the deferred revenue adjustment required under acquisition accounting rules.
Organic RD&A revenue was $196 million, up 12% from the first quarter of 2017, driven by strength in sales of quarterly search and rating data fees. Second, enterprise risk solutions or ERS revenue of $100 million was up 4% from the prior year period. This result reflected strength in software subscription revenue partially offset by revenue decline from onetime projects and license.
U.S. ERS revenue was down 4% while non-US revenue was up 11%. Trailing 12 month revenue for ERS increased 6%, while sales were approximately flat. We continue to make progress on shifting the mix of the ERS business emphasize higher-margin products with trailing 12 month product sales of 5% and service sales down 14%. Recurring revenue represented 81% of total ERS revenue in the first quarter 2018, up from 76% in the prior year period. Finally, professional services revenue of $38 million was up 5%. U.S. professional services revenue was down 4%, while non-US revenue was up 10%.
Turning now to operating expenses. Moody's first quarter operating expenses totaled $636 million up 20% from the prior year period. 12 percentage points of this increase were driven by operating expenses, amortization of acquired intangible assets and acquisition related expenses. Other drivers of expense growth include additional compensation expense for merit increases and hiring. Foreign currency translation unfavorably impacted operating expenses by 3%.
On January 1, 2018 the company adopted the new ASC 606 revenue accounting standard using the modified retrospective approach. The impact of adoption was immature with those both revenues and expenses in the first quarter of 2018. The impact of ASC 606 was expected to be immaterial to the corporation and the remainder of the year, however it could create some quarterly volatility.
As Ray mentioned, Moody's operating margin was 43.6% and adjusted operating margin was 48%. Moody's expected tax rate for the first quarter of 2018 was 14.6% down from 23.4% in the prior year period. The decline in the tax rate reflects the lower U.S. statutory tax rate net uncertain tax physician benefits relating to its statutory limitation exploration and higher benefit related to the tax accounting for accretive compensation.
Now, I'll provide an update on capital allocation. During the first quarter of 2018, Moody's repurchased approximately 300,000 shares at a total cost of $43 million or an average cost of $161.10 per share. Moody's also issued a net 1.2 million shares as part of its employee stock-based compensation plans and net amount includes the shares with held for employees payroll taxes. Moody's also returned $84 million to its shareholders via dividend payments and on April 24, the Board of Directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock. This dividend will be payable on June 11, 2018 to stockholders of record at the close of business on May 21, 2018.
Outstanding shares as of March 31, 2018 totaled $191.9 million, approximately flat to a year ago. As of March 31, 2018, Moody's had approximately $500 million of share repurchase authority remaining. At quarter-end, Moody's had $5.5 billion of outstanding debt and $910 million of additional borrowing capacity available under its revolving credit facility. Total cash, cash equivalents and short-term investments at quarter end were $1.4 billion, an increase of 16% from December 31, 2017.
Cash flow from operations for the first three months of 2018 was 392 million and increase from negative 512 million in the prior year period. Free cash flow for the first three months of 2018 was $377 million, an increase from negative $531 million from the prior year period. These increases in cash flow were largely due to payments the company made in the first quarter of 2017 pursuing through 2016 settlement with the U.S. Department of Justice and various states attorneys general
And with that, I'll turn the call back over to Ray.
Okay, thanks Steve. Before just discussion the changes to our full-year guidance for 2018. I'd like to provide some highlights on our progress with Bureau van Dijk integration and synergy activities. After nearly nine month since closing the acquisition our integration efforts are on track with not only legal and regulatory requirements, and executed cost reductions without disruption to the business.
In March, we completed a rightsizing program to realize efficiencies across the combined employee base plus reducing compensation expense. Having co-located Moody's analytics and Bureau van Dijk staff in seven cities and with consolidation of additional offices expected through year-end we are well-positioned for significant reductions in real estate costs. We deployed Moody's analytics sales operations practices to Bureau van Dijk in order to gain increased sales productivity.
Our pursuing joint marketing efforts and specialized product areas, we are building a solid pipeline of near-term cross-selling opportunities. In short, we are making good progress on the synergies that we anticipate when we announced the transaction. And the legacy Bureau van Dijk's business continues toward the results consistent with its historical performance.
I'll conclude this morning's prepared comments by discussing the changes for our full year guidance for 2018. A complete list of Moody's guidance is included in table 12 of our first quarter 2018 earnings press release, which can be found on the Moody's investor relations website at ir.moodys.com. Moody's growth for 2018 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, merger and acquisitions, consumer borrowing and securitization and the amount of debt issued. These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook.
Our outlook assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of the $1.40 to £1 and for the euro the $1.23 to €1. We are now expecting corporate finance revenue to increase in the mid-single-digit percent range. Structured finance revenue is now expected to increase in the high single-digit percent range.
Before turning the call over to Q&A I would like to provide an update on Moody's corporate social responsibility strategy. Earlier this week we launched a global approach to CSR focused on empowering people around the world with the information, resources and confidence they need to create a better future for themselves their communities and the environment. We also announced We Shape Tomorrow, our signature financial empowerment initiative to help people succeed in growing small businesses.
We Shape Tomorrow will provide small business owners access to vital information about the credit process and help them connect with sources of financing. Moody's seeking partnership proposals from organizations for We Shape Tomorrow programs and resources that provide essential financial knowledge, increase their chances of success. For more information and to submit a proposal, please see the CSR press release that we issued on April 24 or visit moodys.com/csr.
This concludes our remarks and joining Steve and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics and Rob Fauber, President of Moody's Investor Service. We would be pleased to take any questions you may have.
And our first question comes from Conor Fitzgerald with Goldman Sachs. Please go ahead.
Just wanted to dig a little bit on the recurring revenue on the rating side where you had a pretty good quarter particularly in corporate finance. Just can you talk a little bit about the trends you are seeing in this space and how sustainable do you think the pace of growth is?
Sure happy to Conor and I'll ask Rob Fauber to offer some initial thoughts on that.
Yes, so your first question was around recurring revenue. So somewhere to the fourth quarter among other things we saw increases in monitored credits, particularly in Europe and Asia where we have seen some very strong first time mandate growth and we have also got a modest benefit from FX. And if you recall we had over 1,000 first time mandates in 2017, so that's helping to support the current revenue growth. And I think your second question was around corporate generally. So looking at corporate issuance globally it was down somewhere in the neighborhood of 20% on this CFT revenues. Whereof we benefitted from some favorable mix, some good commercial execution, the higher new mandates that I mentioned, monitored credit growth and FX. We also saw some good growth in other transaction revenue and that includes our rating adjustment service that's typically driven by M&A activity and the rest of world issuance declines were largely confined to the European investment grade issuers which mitigated the revenue impact to some extent.
And I would just add that as far as recurring revenue at MIS to the extent that is driven off of new rating mandates and we are benefiting from the strength of that in 2017. We do expect another robust year for our new rating mandates in '18.
And then Connor let me just take the opportunity to give an update on what we're hearing from the street as we do every quarter and again keep in mind these are consolidated consensus views from a variety of different large investment banks has included both financial and non-financial that we would be necessarily in line with the rate and categorized revenue but hopefully will be instructed to at least what we're hearing on the ground in the bond markets here in the U.S. and in India. But so far investment grades guidance for full-year levels are about 1.2 trillion that's down roughly 5% to 10% from what were record levels in 2017.
Overall conditions remain stable and fundamentals remain relatively strong and we are seeing a solid pipeline out front this week. For instance another was around 20 billion of investment-grade, I think calling next week or slightly higher than that as earnings blackout start to roll-off in May which is typically a fairly active month as from what we're hearing is shaping up to be so. Credit spreads have widened in the first quarter given equity market volatility but rallied a bit in April. The Barclays, Bloomberg aggregate bond index is roughly 10 basis wider here today. So the round trip is showing sort of modest widening on a year-to-date basis.
And then other thing I've pointed out some cash repatriates have been out in the market so far in Q1 so let's keep an eye on that. Moving to high yield the forecast for full-year volumes 275 billion that's about flat to 2017, every market volatility and interest heights we've obviously seen one so far this year. The Fed is or the future market is pricing in between two and three incremental heights likely an excellent will be in June with a 90% plus probability.
Issuance today is primarily have been driven by refinancing and high yield bond market but demand from investors remained strong and on the close I would say a similar story as to investment grade in terms of the joining has been taken year-to-date given the and tightening in January and selling off in February and March and then some rallying over the last several weeks but year-to-date relatively unchanged in credit spreads volume of bonds.
On leverage loan side full-year forecast that we are hearing is roughly 500 billion. Again this is flat to down 10% on what was really just a game buster to the year this asset class in 2017, so a very high base. As the leverage loan market does remain strong as we now know and is obviously an attractive asset class in a rising rate environment. Repricing and refinancing activity this still remains robust that was with regard to last year and we're seeing that trend continue. Full-year 2018 expected to be slightly down as I mentioned somewhat was directed through that 2017 with some potential upside if we see M&A activity accelerate or rising rates create more demand for floating rate base than we already think.
Moving to Europe on the investment grade side issuance has picked up in the beginning of the year. The demand remained solid as [we are hoping]. The spreads have moved a bit wider from the beginning of the year but remain tight by historical standard so similar dynamics to what we are seeing on the U.S. dollar spread investment grade. Bureau van Dijk continues to see strong growth in GDP and corporate profits. So that's the happy condition.
On spec rate side both high yield and leverage loan markets are in good shape, though issuance levels face tough comps over what was a strong 2017. And spreads are narrow due to strong demand fueling opportunistic issuance, our pipeline is healthy and some of the -- some of our refinancing and repricing. So I hope that helps.
And then just one on capital and capital return, cash is up at the quarter and you have got some debt pay downs coming in as we get through the rest of the year. I just wanted to get your updated thoughts on what you are thinking about doing with the free cash flow? I think based on your guidance you still have a little extra wiggle room such with all those moving pieces together, buybacks, debt pay down, et cetera. So just wanted to get your updated thoughts.
Our thinking there really hasn't changed, Connor. We have been very upfront really since we announced the Bureau van Dijk acquisition that our near term priority would be deleveraging from the debt that we took on to finance that acquisition. But we haven't come off of that, as you know we took our share repurchase target for 2017 to 200 million, 2018 the same amount and that's enough to offset dilution from employee shares issuance. So we are still marching along those same times. To the extent that we are able to reach our leverage targets sooner than we expected, I'd say at this point we are a bit ahead of pace than we had initially thought, then we will [fortunately] to reevaluate over the months there. But right now near term it is actually prepaying debt.
And I'll take our next question from Toni Kaplan with Morgan Stanley.
You had a good quarter in corporate finance, revenue up basically 7% globally and really difficult comp in that business. So I think I was just a little bit surprised that the revenue guide for the year, you lowered it and so can you just talk about -- I guess you just talked about like what's going on in the markets but I'm just not totally sure as to what to think for the rest of the year given [indiscernible] guide but okay first quarter.
Yes, Rob may want to provide some additional color but the high level answer is we do have a moderation of issuance expectations for U.S. high-yield and many investment grade bonds. And you add to that what we anticipate will be an adverse shift in foreign currency translation and that's really contributing to the modest reset in our guidance.
And then for Moody's Analytics, we noticed that the margins were -- it was about 20 basis points -- were up about 200 basis points but they are down sequentially from -- for the second half of '17. And so we are just wondering if you have to sort of look at the legacy business margin expansion as opposed to just BVD been included. How should we think about the legacy margin expansion if you exclude that?
Mark you want to try and address that.
Yes, Toni we did have what we thought was good year-on-year margin expansion and moreover, we have got another quarter of margin expansion on a trailing 12 months basis. So I think that's five consecutive quarters now that on a trailing 12 months basis the margin is expanding. And that's really the number that we focused on because you can get some weird things going on with the numbers if you look at anyone discreet quarter. But the margin expansion is coming from both the legacy business as well as from Bureau van Dijk. Both pieces are contributing to expansion and that's in spite of the hair cut on the Bureau van Dijk revenue associated with the accounting and also the extra overhead allocation that Moody's Analytics is now attracting because of the growth in the scale of the business relative to MIS with the addition of Bureau van Dijk.
So we are -- actually we are quite pleased with the way the margin is expanding and we feel like where we really are delivering on what we talked about with respect to delivering consistent gradual progress in expanding the margin and again focusing very heavily on the trailing 12 months performance rather than the discreet quarters.
And I will just comment to you Toni on the differed revenue hair cut that Mark just mentioned. We experienced 10 million of it this quarter, so we are most of the way through it. We got of 5 and some change left, 5 should likely hit next quarter and then [indiscernible] will be largely done and after that it goes way. So that will be a nice uplift for us.
Our next question comes from Alex Kramm with UBS.
Staying on I guess BVD Analytics for a minute here. I think a lot of people were surprised this morning by the revenue performance and RD&A and in particular on BVD. So maybe you can talk about it a little bit more why maybe some of us got that wrong in terms of the seasonality and how does it all ramp all throughout the year? But maybe most importantly I think the adjusted number for BVD was flat quarter-over-quarter so I guess I would have expected some growth in particular given that FX was helpful? So maybe a little bit more color would be great.
Sure. Mark?
Alex taking the your second point first, the Bureau van Dijk numbers if you add back the haircut to what we reported you are right that it's flat from the fourth quarter to first quarter. What you are missing there is that we did take a hit to the top line in the first quarter because of the transition to the new accounting standard ASC 606. That did hurt us on the top line. We also had some timing delays in closing some of our renewal contracts that really relates to operational matters as opposed to commercial matters. We don't have issues with the customers or with the business but we just didn't get some of those contracts booked in the first quarter as expected. But we expect to get them shortly and we will see an acceleration like a catch up on the revenue recognition once we get those booked. So that's what going on there.
The underlying business is performing well. As Ray said it's very much in line with if not better than the historical standalone performance of the business. So we feel very good about what's happening there. And then on the other point, I think that what you're seeing is that we do expect RD&A's growth rate to accelerate, particularly in the second half of the year. You need to keep in mind that what's happening here is that as we get into the third quarter, Bureau van Dijk numbers will start to roll into our organic calculations, because we will have them in the half of the third quarter and the full fourth quarter of '17. And as Steve just pointed out that deferred revenue haircut will go away. So we're willing to see very healthy growth in the organic RD&A figures as we get into the second half of the year.
And then I guess just one other point I'd make Alex, you made a comment about expecting a nice lift from FX. The average rate on the Euro really wasn't materially different in Q4 versus Q1. Obviously the Euro strengthened pretty meaningfully last year, but most of that's in place sort of really to midyear. So it was relatively flat quarter on quarter.
Okay. And since then I thought it was up 4% or 5%, but it's okay. I will double check, anyways. And then secondly just quickly, I think when you gave the update on the issuance outlook, leverage loans was still cited as an area of strength and I think you colleagues said this yesterday too with flows to bond funds and demand for variable paper. But LIBOR has certainly been coming up a lot, so while spreads are tight in this demand, like what about the corporate side? Is there a point where some of these high yield issuers are seeing the variable rates just too high or do you think we are still pretty far away from that? And any color would be helpful.
This is Ray, just the [ebbs in] borrowing costs are still attractive and I think there is room even in a rising rate environment for borrowing conditions to remain attractive. We may see later in the year some rebalancing between the relative attractiveness of floating versus fixed rate paper, it really depends on both policy and market reactions to policy on interest rate. So we'll see but we do see a broadly positive environment for borrowing continuing.
And we will take our next question from Manav Patnaik with Barclays.
I guess you answered my question I had on BVD but maybe if you do the rest of the Moody's Analytics business I think the organic growth is 9% you called out. I believe that includes FX benefits. So if I assume it's about 4% to 5% growth, I guess can you just help understand it feels a little slower than we would have expected? Any moving pieces maybe timing in the other pieces of RD&A, ERS and so forth?
There is a little bit of timing there and like I said we do expect acceleration in the growth rate as we get into the second half of the year. But bear in mind we guided to low double-digit growth for MA organically. And we came in at 9% in Q1. Of course our guidance includes our expectations about FX. So I think things are running substantially as we expected. We don't see a big deviation from where our guidance is and where we see the business performing.
That's fair. But I guess if I do a true organic constant currency number that 9 is probably 4 or 5. And I was just -- we have always thoughts that it should be more high single digit growth. So is there some -- so if that timing explain why that is in higher I suppose, was I was trying to get at?
Well RD&A organically constant currency is up 7% in the first quarter. So again it feels pretty solid.
And then just a follow-up, maybe just on the back drop. It sounds like you guys still remains constructive on the issuance backdrop as you were at Investor Day. Maybe just on the structured side like how much do you think -- it was pretty strong obviously in the quarter. Like how much of that do you think was pull forward and you see weakness and so forth? I know pull forwards a word we've been using for many years now but just some thoughts there would be helpful?
As we talked about a little earlier in the year our expectations for robust issuance environment were relying more on a global GDP growth economic momentum, mergers and acquisition activity as opposed to refinancing that was going to be needed because of maturing debt in 2018. That being said you are correct we've had a continuing pull forward narrative and dialog and so as interest rates increase in 2018 we have to look out to 2019 and 2020 and see what corporations are thinking about the utility of refinancing in 2018 with rates where they are now versus their expectations for rates in 2019 and 2020 and we will have to watch and see where those decisions get made.
Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald.
I was wondering if you could be a little bit more specific on what caused the renewal delays or timing in RD&A and how you rectified it?
It's really -- it's pretty simple and frankly we've seen this before with some -- when we've acquired subscription businesses. The practices at Bureau van Dijk have not historically been as rigorous as we do think in Moody's Analytics and we haven't quiet gotten the discipline around getting our renewal contracts signed in book on a timely basis. But as we're making progress in getting them with the program and getting that work done the way we get it done across Moody's Analytics but we haven't quite gotten them to the level that we'd like. So that's really what I was referring to. It's not a massive amount of business but it does affect our numbers a little bit in the first quarter. But as I said we fully expect to get those sorted out in short order and will have the revenue catch up once they get booked. I should note that attrition in the business is holding very steady at kind of their historical experience, so we don't see any problems with the underlying business. It's really just an operational matter.
And just to go back to guidance, why not raise the guidance at least on the margins and the earnings side of things? Is there a change you are expecting to the cost structure or was that due to the lower revenue outlook you mentioned a little bit earlier?
It's -- I hope we are being cautious on the top line outlook but we have some robust comps that we are going to be lapping in for the rest of the year. And we are in an environment where rates are moving up at least modestly, spreads have widened out a bit. So we're taking a I think a prudent but you might say cautious approach to what the top line opportunity is for the rest of the year.
And Joe I'd just add, just to give an update to help you with your modeling on the expense ramp we are expecting it still to increase between $60 million and $70 million from Q1 to Q4, so the starting point is obviously not 636 which is actually right in line with what we have talked about in the last call. So we are still expecting growth as we move through the year. So that's part of why we are being thoughtful about our guidance on the margins.
And our next question comes from Peter Appert with Piper Jaffray.
Mark I want to make sure I fully understand the impact of deferred revenue of BVD on the profitability. Is it correct to say that your deferring revenue with all costs have to recognized as incurred, and therefore you are perhaps understating the margins currently and we might anticipate some fairly meaningful spike in margin in the third and fourth quarter? Hope it's right.
Yes, you understand that perfectly Peter. I think the only tweak I might make to what you said is just the -- I forget now what exactly what words used but you maybe said it with a bit more bigger than I would have in terms of the amount of additional margin we will see when we stop hair cutting the top line with these accounting adjustments. But yes, absolutely, we are absorbing and we are recording all of the expense but we are not recording all of that revenue on the P&L.
Is it possible to quantify that a bit more then Mark in terms of -- for example in the first quarter you deferred 10 million of revenue. Would that imply if this is a 40% margin business, the operating income would have otherwise been formally and higher?
You did the math right, yes.
Okay.
Peter just to clarify, the differed revenue haircut would have added $10 million to the top line and there would be taxes on that, but otherwise there's no additional expense associated with it. We are recognizing all of the expenses.
And also just a reminder to everyone to how that works. The majority that we have taken in Q3 and Q4 last year. So it was roughly 50 all in, about 39 of that was taken, a little north of 39 that was taken in '17 in Q3 and Q4 so the remainder of the '16 is left in 2018. And again, we recognized the 10 this quarter projecting 5 next quarter and then this is very [indiscernible].
And we will take our next question from Jeffrey Silber with BMO Capital Markets.
I was wondering if we can get an update on the CFO search.
Sure, it's ongoing, we've seen some excellent candidates. We have good candidates both inside Moody's and we are conducting an external search as well. I hope to be able to close out the search in the near future but it's still in process.
Okay. And when you are saying you are searching, can you remind me if you put a time expectation on that beforehand?
Well I'd like to have it done today but I want to make sure that we get the best possible candidate. So I'm not going to put a deadline on it, I'm just going to keep working at it.
I understand. I appreciate that. And just one quick numbers question. I know the tax rate was lower this quarter, you highlighted some of the items. What would we be using going forward for the tax rate for our models?
It was quite a bit lower and we commented on the last call to expect exactly that. We have estimates of excess tax benefit related to the stock comp accounting of roughly 40 million for the year and we said that it was obviously [weighted] towards the first quarter. In fact it was about 35%, 30 million was taken in the first quarter, there's 10 or so remaining of it fairly evenly spread out. So that was one piece that was impacting the tax rate. Another item that you really wouldn't have visibility into but there was an alternate benefit that we received in the first quarter from the statute limitations expiration on certain of that tax to uncertain tax positions that we have a reserve for. So we reversed those out, so that further brought down the ETR. So going forward Jeff, obviously 14.6% in Q1 we haven't changed our guidance of 22% to 23% so the math would indicate that it's going to likely have to be slightly higher than that 22% to 23% for the remaining quarters in order to average out to the 22 to 23 guidance.
And we will take our next question Craig Huber with Huber Research Partners.
Ray, would you willing just talking further about your outlook here for bank loan issuance and for the rest of the year here? I know you talked at the investment bank side, I think it would be down -- flat to down 5% in the U.S. What is your thoughts for the year on how that will play out here in this environment?
As you saw for bank loans we had a good first quarter. There was a lot of strength in our European bank loan business and I will let Rob provide a little more color on that. But overall we are looking at flat to slightly up revenue expectations for bank loans for the full-year which would be a little bit better than what we're expecting in terms of the direction of issuance line which should be slightly down. So we think that we have opportunities to increase our coverage in bank loans and again I would point to the strength in Europe that we've seen. And Rob I don't know if there is anything you wanted to add on that.
That's right Ray and I think we we're seeing a very active bank loan market. I think we have to keep in mind when we are talking about the issuance outlook for the full-year we're coming off a year where global issuance last year was just something north of 30% growth I believe. The bank loan market has been a bit more active than the high yield market. We're seeing a lot of first time issuers come through the bank loan market. We're also seeing a lot of issuers that are rated very low in the credit spectrum.
As Ray just said, in Europe, we saw some nice revenue growth in bank loans on generally flattish issuance this quarter. The issuance mix worked in our favor there. Leverage loan volumes in Europe, while again kind of flattish are at a record chase. And there is very good M&A activity supporting the loan volumes there compared to the prior year quarter where we saw a bit more refi activity. And also in Europe, we have got institutional investors and CLO originators that have got very strong bids for these loans. So that's driving down the funding costs and keeping spreads tight for issuers there.
And then one thing I'd add on to Rob's comment is with some of these bank loan borrowers profiling as a high credit risk low rated entities. There is some potential volatility that could enter the equation if the default rates don't continue to decline. We believe they will through the year but if there is an increase in default rate that makes those deep speculative grade names less attractive and they may not have market access.
Then also I'd like to just quickly ask two quick ones if I could. For BDV what was the underlying growth rate to put aside the revenue adjustment for accounting purposes? And then also up 7.7% ratings to revenue growth the whole division, how much of that would you tie into being directly from the new mandate? Was it half of it coming from there, roughly how much please?
I think it's going to be less than that Craig. I don't have a number for you right away but we can check on that. But it's not going to be the majority, no.
On Bureau van Dijk, Craig we're not disclosing the precise numbers for Bureau van Dijk on a standalone basis but suffice to say its performing at a rate that is very consistent with what we would've showed you when we announced the acquisition in terms of its historical growth rate.
Mark how historical was what 9%, 10% so its roughly…
It was lying in the high single-digits around 9%.
So you suggest you are pretty close to that then?
Yes, absolutely.
And our next question comes from Bill Warmington with Wells Fargo.
So the first question for you on the structured finance segment. You highlighted the CLO and the CMBS demand being particularly strong, but also look at the demand was really pretty broad. I wanted to ask about what was driving that? And then also to ask if there was any pull forward there to highlight?
Rob?
Yes, let me take that. And I think you are right. Generally we saw broadly higher securitization volumes and you're right. We called out U.S. CLOs but we have seen -- experienced some robust activity across a number of other sectors. Just to touch on CLOs because it was such a big driver for the quarter, we have seen very strong refi activity on tighter spreads. We also saw higher proportion of new CLO formation as a percent of total deals in the first quarter higher than any quarter that we had in 2017 and that's helped in part by using our risk retention.
The U.S. is obviously a bigger market for structured credit, but a similar story in Europe with European CLO volumes supported by refi and as I've said earlier also a very hot leverage loan market. We saw an uptick in CMBS deals and very robust ABS volume on very strong investor demand. In Europe we saw RMBS volumes up particularly in the UK, in the Netherlands and the UK really benefiting -- volumes were benefitting from the conclusion of the Bank of England's term funding scheme in February which was a chief source of funding for banks.
I would also note that Q1 '17 was a little bit of an easier comp for structured. If you think all the way back to Q4 of 2016, we did see some pull forward because of the implementation of risk retention in the beginning of 2017, so it's a little bit of an easier comp as well.
And also I would just add on to that after this call we will post on the IR website as we always do after our earnings calls the breakdown of the components to the lines of business of revenue for the rating agency and you'll see CLO quarter-over-quarter Q1 '17 and Q1 '18 structure credit line is up 58%, ABS up 24%, RMBS up 90%. So broad based strength across pretty much all the asset classes.
And then for my follow-up question, I wanted to ask about the war for IT talent, well it seems to be intensifying as you see tech services companies across verticals looking to leverage artificial intelligence and machine learning. And I wanted to ask whether you find that you are able to get the talent you need and whether there are any changes that you are thinking about making to ensure that you continue to get the talent you need?
Well I think broadly speaking, we do feel that we are able to attract very talented IT professionals whether it's in our centralized IT function or embedded in the businesses. A lot of this is how attractive the opportunity is, in terms of what we would have people working on, whether it's robotic process automation or product development, it is an attractive offering. You're correct that there is a lot of competition for the best people. So we've got to stay on top of that. We will adjust to make sure that we continue to retain our best people and recruit the best people and those adjustments they maybe financial, they maybe in terms of job content. But we're paying attention to it like almost any organization today would. Mark do you want to add to that.
Yes, I would just add that, what we are also seeing is that there is a lot of talent available in many different locations around the world. Certainly it's quite challenging if you are recruiting in San Francisco and New York City and some other major centers. But we've got operations in many different place around the world. We've got a big operation in Omaha for example and we find there to be a terrific source of talent. And in many of our other operational centers around the world we are able to attract the kind of talent we want. So I think having the broad based footprint that we have really helps us in that respect.
And we will take our next question from Tim McHugh with William Blair & Company.
One numbers one, can you just update us on incentive comp, how much you accrued in the quarter and I guess any change to that outlook versus what you are expecting for the full year now?
Yes, sure Tim, happy to provide that. So for the first quarter, incentive comp was 45 million, that was down 13% from first quarter of last year and 37% sequentially. As you know we had to take that up pretty significantly in the back half of '17 as we raised guidance given the performance of the business. Going forward I would say sort of a 50ish number is probably the best way to think about. But as you know that will likely change depending on how the business performs, depending on what we do with guidance, but that I think is probably the starting point.
And then ERS product sales on the trailing 12 month basis was actually a little slower. I get like services sale is something you have been deemphasizing, but I guess I was a little surprised about the pace of product sales growth. Was there anything happening there that you can elaborate on?
I think Tim, its performing pretty much as we expected. I mean I think we have got a number of new product launches that we put in to the market recently that have been very well received. Our new loan origination product is doing quite well. The product that we have in the market to help our customers comply with the new seasonal accounting standard is being very well received. We have a very nice pipeline building there. And so we are -- if you drill that a little bit more into these numbers you will see that we've got continued double-digit sales growth for renewable products, which is really where we are putting our emphasis.
I think we have got at least five or six quarters now of double-digit growth in renewable product sales. So I think things are going very much in line with our expectations there as we have told you. We expect 2018 to be a fairly soft year for ERS as we work through this transition. But we feel very good about some things that are happening in the business and that should play out very nicely for us over a longer period of time.
And our next question comes from Vincent Hung with Autonomous.
How much of the non-transaction revenue comes from rating assessment services? And if you can't give us that what was it up year-over-year? Because I think S&P said it was at 40%.
Our revenue from rating assessment services is not very significant to tell you the truth. I don't have the year-on-year growth rate in front of me. But again, it's not a material number.
On RD&A as we think about the core RD&A excluding BVD, should we be looking at 12% organic as the right run rate for the rest of the year?
12 well, again, our guidance RD&A organic is mid teens for this year. And we did 12% in the first quarter. We expect that to accelerate as I've said because we will be layering in Bureau van Dijk it's going to help. So I guess you are asking me will -- am I expecting 12% growth from RD&A on an organic basis excluding Bureau van Dijk, is that the question?
Yes exactly.
Again, I don't really have I don't think we can give you guidance at that granular level. But I would expect that the RD&A business organically would continue to perform at a level similar to what we did in the first quarter if you were to pull out the Bureau van Dijk business. I don't see it -- let's put it this way, I wouldn't expect that business to be -- the growth rate to be slow.
Our next question comes from Shlomo Rosenbaum with Stifel.
First just a regular numbers question. What was the organic constant currency growth for the whole company? If you just kind of strip out both Bureau van Dijk and then the positive impact from FX some of which went into Bureau van Dijk.
Sure Shlomo. That should be -- so we have said that 60% top line for Moody's Corporation half of that was due to the contribution from Bureau van Dijk and the FX impact on all that revenue was 4%, so if you strip that out they get you down to 4.
The thing is that data took in MIS at 5 and then there seems to be kind of 9 when you take out BVD, it implies a little bit higher than that. That's what I'm trying to get out the number it seems to be little bit higher?
That's the math at least for the first quarter.
Can you comment a little bit on the economy and the performance for between the U.S. and outside the U.S. for ERS and Professional Services?
I'll let mark start with this and I may add a couple of comments on to it.
Yes I think a couple of things going on there. First we had some pretty significant FX benefit which is obviously impacting the business outside the U.S. Also we had some very strong sales growth outside the U.S. in -- particularly in ERS last year related to work that we were doing associated with our customer's adoption of the IFRS 9 accounting standard. So that gave us some very good sales growth outside the U.S. last year relative to the U.S. which I think is now showing up in the U.S. -- non-U.S. revenue results.
And Professional Services?
Again a similar story but in our two businesses within Professional Services they both tend to be a little bit more heavily oriented for customers outside of the U.S. than in the U.S. So I think it's just the nature of those businesses is such that we've just got a bigger base of customers and a bigger base of business to work with outside of the U.S. and to the extent that those businesses are performing better we're seeing most of the improved growth outside the U.S.
And we will take our next question from Patrick O'Shaughnessy with Raymond James.
What's been the impact of tax reform on synthetic repatriation bond issuance thus far in 2018? And I was reading the other day that the 10 largest holders of overseas cash haven't tapped U.S. bond market so far this year after issuing roughly I think it is 80 billion or so last couple of years. But obviously that doesn't seem to be weighing on your Corporate Finance revenues so far?
This follows up on a brief comment that Rob had made earlier, that it is providing at least a modest headwind, but it is very concentrated in terms of the number of firms that have large cash hordes overseas and may not feel they want to tap the debt markets given their repatriated cash. So the numbers -- if you look at the dollars you might think it provides more of a headwind to our business than in fact it is. And I would just add that with so much of our business being in the spec grade sector those are not companies that typically have a lot of overseas cash to bring back. So again it's a headwind not a serious one at this point.
And we will take our next question from Alex Kramm with UBS.
I actually had a follow-up on the tax rate but that got answered already. But a couple of things while I'm here I guess. One, I know you don't really give near term guidance but would be interested with the commentary you have said in terms of the updated outlook how you think about more near term? I mean the first quarter has -- I mean on the MIS side, had a little bit of volatility, some of the this volatility has persisted. But typically the second quarter gets a little bit of a seasonal bump from the 1Q. So I'm just wondering if you feel like seasonally the second quarter should be stronger than 1Q just given seasonality, maybe some things were delayed and they are coming in the second quarter or is it just too uncertain of an environment? I guess I'd say you probably see the pipeline developing pretty real time. So any color will be great.
Let me try that Alex. So I'm going to talk a little bit about kind of the pipeline in market terms and kind of what we are seeing and what's happening. I think in general I'd say the pipelines look healthy. I'd note that we have worked through a good bit of the big M&A backlog that we had earlier in the year but we are also seeing M&A deals in kind of preliminary stages and we are seeing that through our rating assessment service. We have also got a very good pipeline of first time mandates. So that gives us some visibility.
We have talked about in spec rate market, spreads remain very tight and as I said we are seeing a lot of low rated issues tapping the market, a very strong CLO bid for that kind of paper. I'd also note just in terms of fund flows, so on the high yield side after we saw a lot of outflows earlier in the year we are starting to see some inflows back in the high yield funds. We saw 3 billion inflows last week. That was the largest week since mid-December 2016. And on the loan side inflows continue to be strong. We have had now nine consecutive weeks of inflows. So I think we expect on the investment grade side we are coming out of blackouts, we are seeing good activity and I think we expect steady issuance here in the second quarter.
And then maybe just lastly, Ray, I think M&A hasn't really come up as a topic. I know you are pretty busy integrating BVD still but just curious about appetite right now as you look at the world and maybe also what the environment is like for deals in areas that you are interested in? I mean is there a good bid ask or I think just to [expense the voice] there's not really anything out there that you are taking a look at?
Well things are always to expense, so they are a very good starting point. We have an active corporate development function at Moody's, M&A function. We look at a lot. As you know, we don't pull the trigger very often. So there are things that we are looking at that are of interest to us but it would be the same thing I would answer in any other quarter. There is nothing unusual going on in the M&A environment that is causing us to either step back and say it's too rich for us or to say we've got to act right now. This is the moment in time to pull a trigger. So we're being disciplined. We are looking and we will see if something attractive is offered at a fair price.
And it appears there are no further questions at this time. Mr. Ray McDaniel, I'd like to turn the conference back to you for any additional or closing remarks.
Okay. I Just want to thank everyone for joining today's call and we look forward to speaking with you again in the summer. Thanks.
This concludes Moody's first quarter 2018 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the First Quarter 2018 Earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 PM Eastern Time on Moody's IR website. Thank you.