Can Moody’s Continue Its Stellar Revenue Growth?
Moody’s Corporation (NYSE: MCO) is a credit ratings, research and analytics company servicing the financial markets. Its key customers include corporate debt issuers, trading communities and investment professionals. In 2017, the company reported nearly 17% growth in its total revenues (much higher than the approximately 4% figure for 2016) driven primarily by strong volumes in leveraged finance issuance as issuers took advantage of favorable market conditions to refinance obligations in 2017.
In August 2017, Moody’s completed its acquisition of Bureau Van Djik – an aggregator and distributor of private company datasets. This is Moody’s largest acquisition in its history (nearly $4 billion) and is likely to drive revenues going forward. For the first half of 2018 Moody’s reported a 17% growth in revenues, of which 8 percentage points was attributable to Bureau Van Djik.
In this note, we take a look at the company’s business segments and the key revenue drivers for each segment. Our interactive dashboard provides an overview of Moody’s Corporation’s revenue growth, including historical revenue details for its key segments and a base forecast for 2018 and 2019. You can modify any of these forecasts to arrive at your own estimates for the company’s future revenues.
Total Revenue Growth Likely To Taper Down In Future
We expect Moody’s revenue growth to be around 10% in the next two years (the company’s guidance for 2018 mentions high single-digit growth) as the operating segments that saw impressive growth in 2017 are unlikely to sustain these growth levels. Details of segment-wise growth estimates are given below:
High Growth Segments Unlikely To Sustain 2017 Growth Levels
Moody’s operates two key segments:
a. Moody’s Investor Services : This division provides ratings to debt issuers across corporate, public and structured finance sectors. The key growth drivers for this segment include debt market issuance driven by global GDP growth, continued disintermediation of fixed-income markets in both developed and emerging economies driving issuance and demand for new ratings products and services
With an increase in volumes of bank loans in the U.S. and Europe and high volumes of Asian bonds, along with new rating mandates, revenues of this segment grew by 17% in 2017, driven primarily by a strong growth in the corporate finance group. In addition to a strong economy and high volumes of debt issuance, global expansion is also driving the growth of this segment. In 2017, Moody’s Investor Services rated more than 250 Chinese cross-border entities, up 15% from 2016. With China announcing that foreign rating agencies will be allowed to assess the credit risk of its domestic debt, Moody’s is focused on increasing its participation in the region by aligning better with its local better.
For the first six months of 2018, this division registered a 9% increase in revenues. With a higher comparable base of revenues, we do not expect the corporate finance group to manage 24% growth in 2018 and expect this number to be in line with the growth in the first half of 2018 – around 8%.
We expect the strong activity in bank loan issuance and securitization markets to continue over the next two years, and Moody’s to benefit from its new rating mandates, driving revenue growth for the other segments in this division. You can modify the blue dots here to arrive at your own growth estimates.
b. Moody’s Analytics: This division develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. It includes three segments – 1) Research Data and Analytics : providing economic research, industry studies, business intelligence and commentary on credit related events; 2) Enterprise Risk Solutions : providing software solutions and risk management services; and 3) Professional Services: providing offshore research and analytics services.
With its recent acquisition of Bureau Van Djik, this division has been able to grow revenues exponentially. In Q2 2018, revenues of the Research Data and Analytics segment grew by 55% due to a significant contribution from the acquisition. The organic growth in this business was driven by higher fees due to enhanced content. With high inorganic growth in the first half of 2018, we expect revenues of this division to grow exponentially in 2018 and then moderate in 2019 (as the comparable base would already factor in the inorganic growth)
For the other two segments of this division, we expect them to grow revenues in line with 2017, as the company enhances its software offerings and grows its user base.
You can modify these estimates to arrive at your own forecast of Moody’s revenues. Interested in how these revenues would impact the company’s stock price? See our next dashboard in this series Estimating the Valuation of Moody’s Corporation.
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