Good day, everyone, and welcome to the Moody's Corporation First Quarter 2024 Earnings Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter 2024 as well as our revised outlook for select metrics for full year 2024. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call in U.S. GAAP. 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 & Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2023, 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 Rob.

Thanks, Shivani. Good morning, and thanks, everybody, for joining today's call. Before I touch on a few key takeaways from our first quarter results, I'm going to start by saying how excited I am to be joined today by Noémie Heuland, who officially joined Moody's on April 1. And as I mentioned on our last earnings call, Noémie brings almost 25 years of global financial and accounting leadership experience at some very large public companies with a real depth of experience in technology and software as a service. And we're really fortunate to have her as our Chief Financial Officer, and I look forward to all of you getting to know her in the coming weeks and months. So with that, let me turn to our first quarter results. We delivered an impressive 21% revenue growth, capitalizing on a strong issuance environment and continued demand for our leading risk assessment solutions. We delivered strong top line performance and margin expansion in both businesses, and that translated to adjusted diluted EPS of $3.37 for the quarter. Now starting with MIS. Obviously, a great quarter. And over the last several years, you all have heard me talk about the investments that we've been making in analytical talent and technology enablement to ensure that we are the agency of choice for inventors and issuers, and in turn, position us to capitalize on more robust issuance periods. And in the first quarter, we did exactly that, and we showed the tremendous operating leverage in our business with the second highest quarterly revenue on record, up 35% year-over-year and an adjusted operating margin of 64.6%. Meanwhile, MA reported another quarter of 10% ARR growth, growing across all lines of business, including double-digit ARR growth in both Decision Solutions and Data & Information. And during the…

Thank you, Rob. Let me start by saying that in my previous role as a CFO of a public company, which was also an issuer, I've been in the building a few times over the years, but being here as Moody's CFO is both an honor and a thrill. As we get to know each other, I thought I'd share -- take this opportunity to share with you my Moody's thesis that drove my decision to join. Throughout the process, everyone I met has consistently told me what an exciting time it is to join the firm. Moody's has been a trusted source of financial insights through various economic cycles, and every actor in the global capital markets benefits from the value of Moody's products and services. Coming from the enterprise software ecosystem, I can tell you that this network effect, if you will, is one of the hardest competitive advantages to disrupt. Also in my previous CFO role, I got the chance to interact with Moody's analysts and research teams frequently, and each time I left more impressed by the depth and rigor of their thinking. Moody's Ratings is a powerful franchise with sustainable growth prospects, unparalleled reputation and an impressive industry knowledge and expertise. Now in addition to that, Moody's built a great set of assets based on proprietary data that goes back over 100 years. The value of that historical data is unmatched. And it is my strong belief that Moody's is well positioned to leverage GenAI capabilities as a result, whether it's credit, KYC, climate or many other use cases, Moody's has integrated and innovated with our customers' needs at the core. In truth, I spent the last 15-plus years talking to my peers about having the right data and analytics tools to make smart decisions…

[Operator Instructions] We'll take our first question from Heather Balsky at Bank of America.

I was hoping you could dig in a little bit more on what you saw in MA during the quarter, particularly in terms of some of your customers where you said you saw pressure and how you're thinking about that and how you think that trends for the rest of the year. Is it 1Q specific? Is it assuming that a continued part of the reason you reduced the guide there?

Yes. Heather, maybe let me start with the Q1 revenue performance and what we're seeing for the rest of the year, and I'll pass it to Rob to provide some color on pipeline and sales. In the first quarter, we delivered revenue growth of 8% and ARR growth of 10%. We had strong demand for our data solutions and KYC. Those are the 2 that grew, respectively, 13% and 24%. As I said in my prepared remarks, Research & Insights was a little unusual this quarter. We had revenue growth of 3%. That was affected by some of the mix between a lower share of on-premise transaction and a shift into more SaaS subscription. But if you look at the ARR growth, we haven't changed our outlook for the full year. We still expect ARR growth to be in the high single-digit growth and then -- low double-digit growth, sorry. And then we have just adjusted the revenue outlook to account for lower euro and GBP against the dollar. That's primarily what we're doing. There's a little bit of seasonality in sales as well, more towards the back half of the year, which drives a bit of the revenue upside -- updated outlook as well. But our retention rate remains very strong at 94%. And our ARR, again, which is an indicator of the strength of our underlying business, remains strong as well. Rob, anything you want to add?

Yes. Heather, just to double-click a little bit, I mean you asked about retention. I'd say we're seeing, obviously, at the MA portfolio level, very strong overall retention. I'd say we do see a little bit of pressure from banks and asset managers. We saw a little bit of an uptick. Noémie just mentioned it in the research business, but some improved retention in other areas. I would say, kind of more broadly, you asked about the kind of sales pipeline. I'd say the sales pipeline is quite healthy at this point. We haven't seen any elongation of sales cycles. We continue to see some strong underlying drivers for our products around digitization and automation. And certainly, GenAI has opened a whole new front in that regulation, 360-degree view of risk. So the sales pipeline, again, healthy and supports our comfort with the overall ARR guide for the year.

We'll move next to Manav Patnaik at Barclays.

I just wanted to follow up a little bit on that in terms of if you could help us with some of your end market exposures maybe in MA in terms of the client pressures. We're seeing a lot of the other financial information services companies obviously call out pressure from both the buy-side and the sell-side. So just if you could help us out there going forward, if we should be keeping an eye out on anything.

Yes. Manav, let me take that. I guess I would kind of come back and say, while certainly, there are cost pressures at financial institutions, corporates, like the one on the phone at the moment, everybody's focused on having discipline around expenses. I'm sure we can all understand that. There are also some really important drivers of demand. And I'm going to double-click on what I just talked about there. So you've got financial institutions, in particular, that are focused on these -- on the digitization and automation across the entire enterprise. And institutions have gone from these transformation programs over the last, call it, decade and now they're looking at GenAI as a way to really accelerate, and in some ways, derisk those transformation journeys. And so we're having some wonderful conversations around that. And I think the opportunity -- look at the value proposition of some of the solutions that we provide, Manav. When you start to think about labor substitution and the time and efficiency that can be gained from our solutions, that is a very important tool for our financial institutions customers to really address those cost pressures. So I think while the adoption of GenAI technologies is going to take a little bit longer at regulated financial institutions, I think it's a very significant opportunity. And then the other thing I would go to, Manav, is -- because this is a discussion I have with literally every single customer I talk to, which is this desire to have a 360-degree view of who they're doing business with. I mean this is everyone that we talk to. And you want to understand it, so to think about optimizing your sales and marketing efforts, you want to understand what customers you want to take on. You want to monitor those customers. You need to understand much more about your supplier network. So institutions are really investing in that. And there are some regulatory drivers that are forcing them to invest in that. When I talk to the big banks, they all tell me that the regulators are very focused on the resilience of their suppliers. So again, that's a place that with our data and analytics, we can actually help them and help them in a very cost-effective way. So again, I feel quite comfortable, Manav. Despite the fact that we've got to face off with procurement departments from time to time, the value prop around our solutions, I think, is pretty compelling given what our customers are focused on.

We'll go next to Toni Kaplan at Morgan Stanley.

Very strong 1Q issuance quarter. Obviously, that was expected. And you raised FIG and structured marginally, but kept corporate sort of the same. And you're calling out sort of improved M&A activity and you're seeing the guide being towards the high end of the range. I guess what gives you sort of reservation not to fully raise the MIS guide? I know you talk about sort of election uncertainty and rate uncertainty later in the year and the comps get harder. But just talk through the factors because I feel like 1Q would have given a little bit of room for having cushion in doing that.

Yes. Toni, thanks for the question. And I think part of this just comes back to it's 1Q. So let me talk to you maybe, Toni, about kind of what we see in the year in terms of both what I think could be tailwinds for issuance, so where there could be some upside as well as where we maybe have a little bit of uncertainty or caution. And first of all, I would just say that there has been a significant amount of pull forward. And there's 2 kinds of pull forward, right? There's pull forward of the issuance that issuers were planning to do in a calendar year, and we are certainly seeing that. In fact, when we engage with the banks, the banks are telling their clients that they should bring forward the issuance that they were anticipating doing in the second half of the year, and they should bring that forward into the first half of the year while the market is open. Spreads are tight, so we're seeing that. The second kind of pull forward is really the pull forward of -- from maturity walls and refinancing. And we are seeing some of that as well. And in general, as we kind of step back, Toni, I guess, as I think about where could there be upside and you heard that we are kind of centering around the higher end of the guide at this point. So I think there is a bias to the upside. But stronger economic growth without inflation increasing, that's going to be very positive, in particular for the leveraged finance markets. They're the ones most exposed to fluctuations and changes in economic growth. But a real place that I think we're looking at is around the M&A environment. And a…

We'll go next to Ashish Sabadra at RBC Capital Markets.

I just wanted to follow up on the pull forward comment. As we understand the second half pull forward in the first half, but I also wanted to better understand the pull forward from '25-'26. How does the refi wall look now for '25 and '26, even with the pull forward? Is there still a much bigger refi wall in '25-'26 compared to what we are seeing in '24? And then as we think about the M&A, where are we trending? Or what's the assumption for M&A as a percentage of overall issuance this year? And how does that compare to an average year?

Yes. Ashish, we'll have a little bit better insight later in the year when we publish our updated maturity refinancing study, as we always do. But I would say that, certainly, you've seen issuers who are addressing upcoming maturities, particularly in loans. And there's still some maturities for 2024 that have got to get done, not a lot, as you'd expect. It's possible that we start to see some additional pull forward from 2025 perhaps and beyond in the second half of this year if markets remain supportive. So we're going to be looking after that. But it's interesting. I think -- if you think about -- I mean take leverage loans for just a moment, maybe just zero in on that for a second. There was a massive amount of pandemic era issuance in leveraged loans, and that really does provide a very solid underpinning for future issuance. And when you kind of zero in on leveraged loans, there was something like $1.15 trillion of '20 and '21 maturities, and almost 70% of that matures in '27 and beyond. And what that's telling me is that, that money -- that financing was done at very tight spreads and low rates. So I think that those are not great candidates to be pulled forward, right? Where you may see the pull forward is there was something like $1 trillion that was issued in 2022 and 2023. So some of that may be candidates, depending on what happens again a little bit later in the year. So we're keeping an eye on that. But in general, I would say that I see the -- just given the absolute amount of debt that's been issued over the last several years, as a net positive. So I'm not concerned that all of this -- all of future years are being pulled into this year because when we think about debt velocity, which is issuance and I'm looking at the corporate markets issuance over total debt outstanding, debt velocity as a percent versus kind of the 15-year average, quite -- is still well under that 15-year average. So I think there's still a good bit of issuance. On M&A, we have not changed our outlook. But as I said, there are some green shoots. We've seen some strategic deals. We've seen some sponsor-backed deals. So all that is encouraging. I talked about why sponsor-backed M&A is so important. So we're expecting, I would say, a modest recovery in 2024. That's what's built in. But this really is, I think, a wild card. The one other thing I would say is that our rating assessment service, which gives us some visibility into the M&A pipeline because that then comes into issuance, that we have seen a pickup -- a very nice pickup in our rating assessment service. So that does give us some confidence that the M&A market will continue to improve for the balance of the year.

We'll move next to Andrew Nicholas at William Blair.

I wanted to ask about the AI frameworks that you outlined in the presentation on the webcast deck. And I think, Rob, you made mention of there being kind of different monetization strategies across each one of those buckets. So I was hoping you could expand on that comment and maybe on progress in terms of monetization or even a better understanding of the type of impact that could have, whether it's in '24 or in the out-years.

Yes. So the first thing we wanted to do is make sure we had a framework. We have a lot of innovation going on, and we wanted to make sure that we're able to be thoughtful about how we go to market with that innovation for our customers. And I think you're going to see us deploy in a -- across a spectrum with our customers. Because our customers, we're either going to deliver GenAI-enabled workflow software, right? So those are our customers who are using our software, and that's where we'll have GenAI enablement and our skills and our assistants on that. We will have our navigators to help our customers get the most out of those offerings. Some of our customers are going to want to integrate either our GenAI APIs or our RAG APIs into their own internal workflow or just raw data feeds and other content with additional rights to be able to use in their own AI platform. So there will be different ways that we are going to be delivering our AI-enabled solutions. And of course, there's also third-party platforms. We're working to build out an even larger ecosystem of partners so that our customers can also access our content in systems where they're making decisions. So I think as I talk about kind of navigators and skills and assistants, maybe one -- a high-level way to think about this: the navigators, again, I talked about that as probably being table stakes. This is making our solutions much easier to use. And I think that will be -- that will support the value proposition, and ultimately, the pricing...

And retention.

But also the retention, exactly. I think that's where that's going to -- and again, I think we're going to see that will be table stakes. Everybody is going to have -- use chatbots and other things to make their solutions easier to use. It's the skills where we're taking the proprietary Moody's content and then delivering that into the workflow for our customers and then aggregating those skills and prompt engineering into an assistant for people in banking, for people in insurance, for people in compliance. And I think you'll see us -- we're thinking about how we're going to price for that, whether it's going to be -- I think we'll have different models. But you can imagine, in some cases, it will be an increase to the overall subscription. In some cases, you can imagine an element of a consumption model based on how much you are consuming across these skills and our various data and content sets. So it's still a little early. And I know everybody wants to get some visibility on that, but hopefully, that gives you a little insight. Noémie, anything to add there?

Yes. The other thing I would add, reflecting on the conversations we're having with customers, they want to partner with firms that can be trusted when it comes to data integrity that have a strong reputation for robust analytics and modeling skills. They're still assessing their own framework when it comes to dealing with vendors on GenAI-enabled solutions. And that's why I think we differentiate ourselves given our reputation, our history and all the work we've done to build that framework. So I just want to add that.

That's helpful. And welcome, Noémie.

Thank you.

Our next question comes from Scott Wurtzel at Wolfe Research.

I just wanted to go on to margins. And just given the outperformance in the first quarter and in the context of you sort of reiterating and holding the total company operating margins for the year, I was just wondering if there was any element of reinvestment plans from the upside that you saw in the first quarter that's sort of keeping that operating margin stable. Or is it really just more about kind of the implied deceleration in MIS revenue as we move throughout the year?

Thanks. I can maybe take that. We've increased the MIS adjusted operating margin by 50 bps for the full year. We've maintained our MA adjusted operating margin unchanged despite a bit of revenue headwind. That's because we are very mindful in our spend. We're investing strategically, but we're also building efficiencies into the system. So all in all, the outlook in terms of the consolidated level hasn't really changed. We've moved a little bit up in our range, but we remain within the 44% to 46% range that we've communicated before.

Yes. And I guess the only -- the double-click on that is given what we've seen in the first quarter, we have not upsized our investment program.

We'll go next to Faiza Alwy at Deutsche Bank.

I wanted to go back to MA and the change in the revenue guide. Just want to clarify, like is the change entirely FX? Or is there something else to keep in mind as it relates to just to converting ARR to revenues? And I'm curious if you can talk about how much FX impacted MA this quarter.

Yes. I'll take that. On the first quarter, we didn't see any material impact on FX. It's really for the remainder of the year as we saw some strengthening of the U.S. dollar. The update in the outlook for MA revenue, it's primarily FX driven. There's also a little bit of sales linearity that's more geared towards the back half of the year than what we initially thought in February. But what -- as Rob talked about, our pipeline is very strong. We have -- can you hear me? Yes. We have a strong pipeline. Our meetings -- sales meetings are very -- going very well. So it's primarily FX with a little bit of sales seasonality as well.

Okay. So just to be clear, sorry, just to -- there's no change. You're not sort of lowering the -- within the low double-digit range per ARR. ARR is still pretty much in line with how you...

Yes, that's correct. We -- the ARR is a forward-looking measure of the health of our recurring revenue business, and the underlying health of that business hasn't changed from what we said before.

Our next question comes from Jeff Silber at BMO Capital Markets.

Wanted to continue the discussion on MA, focus a little bit more on Research & Insights. You talked a little bit about the slowness in the quarter. I think you said there was some timing and there were some other things. But if I can just clarify that. And then also, why do you expect growth to accelerate specifically in Research & Insights in the back half of the year?

Yes. So over the past year or so, we have seen a little bit of deceleration in ARR growth in Research & Insights. And obviously, fixed income research is a pretty mature market. And that's really one reason that we focused on these 2 new enhancements to CreditView that we have talked about over the last quarter or 2. That's the Research Assistant and the unrated coverage expansion. It is going to take a little time for us to see the benefits of that in ARR growth. We have seen some modest retention pressures with CreditView. Some of that has come from the recent banking consolidation. We had expected that, frankly. And we expect ARR to pick back up in the second half of the year and accelerate towards high single digits, again, for a couple of reasons. One, the CreditView coverage expansion. And we have a good sales pipeline there and have actually seen some particular interest in Europe and also from those in the private credit market. And then second, Research Assistant. So we've seen sales really start to pick up in the quarter. We're now at 37 sales. We expect that to -- we have a very nice pipeline. And what I mentioned earlier, the earlier adopters of Research Assistant tend to be smaller companies where there's less of a kind of a regulatory risk and control environment that they have to contend with. So we're having some really encouraging discussions with some very large institutions, but those take a little bit more time. And so we've also seen a very nice uptick in user requests and also engagement. And those are really very good leading indicators for us in terms of the market's interest. And so when we've got people that we're turning on to Research Assistant and we see very strong upticks in usage, that gives us a lot of confidence. And so I think together, these things, we think, are going to help us pull that ARR growth back up in the back end of the year.

Next, we'll go to George Tong at Goldman Sachs.

You mentioned seeing some pull forward in refinancing issuance, some from the second half of 2024 and some from beyond 2024. Can you talk about how much opportunistic issuance may have been pulled forward into the quarter and what that could mean for non-refinancing-related issuance in the back half of this year and beyond?

I guess George, maybe the best way I could quantify it is still the meaningful majority of issuance in the quarter was refinancing. So the new money, there was a combination of -- I do think there was some pull forward of new money transactions, but a lot of what was getting done was refinancing activity. Does that give you some -- does that help?

Yes. Yes, that helps. And I guess, what's the view on new money over the next several quarters in the back half of the year?

Yes. George, so that's where I come back to. If -- for us to really have confidence that the first quarter is not kind of a one-trick pony of pull forward of issuance, either in new opportunistic issuance from the second half of the year or a pull forward of maturity walls, what we really want to see is the mix of refi to new money start to pick up. And that's why I go back to that M&A. I think that's going to be an important driver because there is a mountain of money at these private equity firms that has got to get deployed. So there's actually two things going on. The private equity players have got to exit, and the last couple of years have been very difficult for sponsor exits because of a very soft IPO market and obviously a quiet M&A environment. So the sponsors are looking to exit, and you've also got sponsors with a huge amount of dry powder that has got to get deployed. And so we have started to see some of that in -- towards the end of the first quarter. We started to see some of these multibillion-dollar, sponsor-backed transactions in the public markets. That's the kind of thing we're going to look for. If that continues into the second half of the year, that's going to give upside, I think, to our current issuance outlook.

We'll go next to Craig Huber at Huber Research.

Noémie, I'm curious, you're new CFO here. You're following roughly 20 years, very strong, the prior 2 CFOs, your company there and stuff. What are you thinking you can improve upon at the company that you're willing to talk about publicly here?

Thanks for the question. I think the -- if I think about stepping back a bit about the company's priorities and where we're headed, I think my priorities are very much aligned with where the company is going and what we're focused on to accomplish our medium-term targets and beyond. The first thing I'd say is continuing to focus on a very thoughtful capital allocation, balancing the investment spend to drive future growth and really move from a legacy onetime revenue into full recurring, which will then in turn expand the margin. I think that's very important. I have worked with companies before who evolved their business model from on-premise, lower margin into SaaS recurring and scaled businesses. And I think that's an area that really excites me. What I've seen so far really resonates with me, and that's really what I want to focus on. And then obviously, continuing to drive efficiencies both internally as well as for our customers and talking to a lot of our customers. The other thing I want to do as well, spend some time with you all to understand what are the things you're looking at, what things you think we're doing well, things where you'd like us to see do differently, and I'm really much looking forward to that as well.

Yes. And Craig, I will add. I think Noémie is also going to bring a wonderful perspective and I think help communicate to the market the real value of this business and using the perspective that she's had from software and SaaS businesses in the past. So we're really excited about it.

We'll take our next question from Jeff Meuler at Baird.

So great to hear the progress on RMS. On the revenue acceleration, does the revenue lift come as the upgraded -- as they do the platform upgrade? Or is it that the platform upgrade enables follow-on sales? Just trying to understand the sequencing. And then on the synergies bit, it sounds like, correct me if I'm wrong, but mostly two-way cross-sell synergies between heritage RMS and Moody's products. Where are you on, I guess, net new product synergies that combine the capabilities from each of the firms?

Yes. Jeff, great question. RMS is really turning into a nice story for us. And I guess I would -- maybe I'll call it core RMS ARR, that is now growing in line with MA ARR. And that is a far cry from the quite low single-digit percent growth when we acquired the business. And part -- there's a couple of things going on there just with the core business, excluding the synergies. One is, in fact, an acceleration of the migration of customers from on-prem to the Intelligent Risk Platform. And those of you who know the history of RMS know that we -- RMS struggled with a prior SaaS rollout. The Intelligent Risk Platform is the real deal, its industrial strength, and we're really seeing some very nice migration. And to your question, there are -- there's two things. So one, there are commercial benefits as we move customers over; and two, exactly as you said, Jeff, once you're there, it's much easier to adopt additional solutions because now you've got all the data in one spot, you can integrate your own models, third-party models. So there are a lot of benefits driving customers to migrate to the SaaS platform and to continue to grow their relationship with RMS. The second thing is just good old-fashioned sales blocking and tackling. We moved our -- one of our most experienced sales managers in to be the Head of Sales and really have even more discipline around the RMS sales program, and that has also paid dividends. And then the nature of the synergies, I mean, you're exactly right. So I'll give you one very exciting example of what I would call kind of outbound synergies. So this is RMS IP to other Moody's customers. We just signed one of the world's largest banks as a customer of the cat model. So this isn't even kind of our Climate On Demand for banks. This is literally the full cat models. So this is a bank who wanted to have a very sophisticated view of the impact on -- of climate and extreme weather events on their portfolio and to be able to do stress testing and all sorts of things. So that's really exciting. And we're seeing more and more demand from banks and asset managers and corporates around supply chain who want to do exactly that, the physical risk relating to climate and extreme weather. And then the other is the inbound cross-sell. Again, a very nice story. And a lot of that is around the KYC, know your third party, leveraging our master data in our data solutions team. So we have a very nice momentum there. So all in all, I feel quite good about what's going on at RMS.

We'll go next to Andrew Steinerman at JPMorgan.

I just wanted to get with the current guide for credit issuance. Are you assuming that issuance on a transactional basis will be down in the fourth quarter this year? And also, I just wanted to check your pulse on if you thought we were in the midst of a multiyear issuance recovery following the pullback in '22?

Andrew, great questions. So thinking about, I guess, year to go. Obviously, we've held the issuance forecast range. I mentioned that we expect to be in the higher end of that range. And so obviously, that invites questions about, okay, given the strong first quarter, what does that imply then about the second half? And it does, in fact, imply a, I'd say, for year to go, so that's 3 quarters a, call it, mid-single-digit decline in issuance for the balance of the year. And to your point, Andrew, I would say, more focused on the fourth quarter, where we would think the issuance would be down more in the mid-teens range. And part of that again is because of some of the uncertainties I talk about and one of those being elections. And so we just assume that people are going to pull out of the fourth quarter where they can. So for the most part, I'd say our forecast represents really just a change in the calendarization of issuance. But I talked earlier about some of the drivers that we're going to be looking for. And then maybe, Andrew, to your second point about are we in the midst of a multiyear, I can't remember the term you used, issuance?

Issuance recovery given the pullback in '22.

Yes. I do think we are. And I think that's consistent with -- we obviously updated our medium-term targets for MIS, and I think that's part of that. And I will go back to that point, Andrew, around what -- one of the things I -- that leads me to that conclusion is -- and while we may have -- again, we may have a little volatility in the quarters here in the year, but I think the trend line is up. And again, I go back to that debt velocity. Just to give you a number, at least the numbers we work with, when you go back to, like, okay, let's say, 2009, so just post-global financial crisis, corporate issuance over total corporate outstanding was all the way back to then of something like 14%. And we're well below that still. So that tells me we've got some room just, again, given the huge amount of issuance over the last few years. The one other thing I would say, Andrew, is I get asked -- we've gotten asked a lot on these calls about private credit and is this disintermediating the public markets. I actually have started to think of it almost as another form of maturity wall because look what went on in the quarter. We had 45 deals that got slipped from private markets to public markets. So I had mentioned that I thought of this as a deferral of issuance, not a cannibalization of issuance. In some cases, of course, there could be some cannibalization, but we're seeing there's a lot of just deferral because the private credit players are rational financial actors. And if they can get cheaper financing in public markets, they're going to do it, and they are doing it. So that I actually think is supported -- I actually started to think private credit is actually a tailwind for us that will be supportive of this, as you say, recovery in issuance.

We'll go next to Russell Quelch at Redburn.

Wanted to ask a balance sheet-related question. I see that your gross leverage is now down at around 2.2, which is the lowest level we've seen from you guys in years. And you also slowed the pace of the buyback in Q1. Perhaps that cash on the balance sheet went up by about $300 million in the quarter. That actually was quite stable through 2023, so that's a break in trend there. Is there a change in how you're thinking about capital allocation or the cash you need to hold on the balance sheet? And are you perhaps making room for acquisitions here? Can you just give a bit of color there?

Yes. On capital allocation, we are maintaining our approach, and it's my intent to continue that. We -- on the share buyback, which I think is where you're going, we -- it's just been 1 quarter of execution. The pace isn't out of line with our planned cadence. We expect to catch up in the second quarter and the second half to hit our targets, so I wouldn't read anything into that. And then last year, we focused on deleveraging because we had ticked up in 2022.

We'll move next to Owen Lau at Oppenheimer.

So I have two housekeeping questions for modeling purpose. The first one is I want to go back to the margin. Would you be able to provide more color on the seasonality for the margins of MIS and MA for the rest of this year? And then the second one is on the migration to cloud revenue. My understanding is it will impact your upfront revenue growth, but you'll be better off longer term. Should we expect your MA revenue growth to run below your ARR growth until you completed your migration in like RMS and also research?

Owen, this is Rob. I'm going to take the first one. No, I don't think so. I don't think you're going to see us kind of have what I would call kind of a big valley as we're moving from customers from on-prem to SaaS. So that's not something I would anticipate. And your first question was around the calendarization of MIS margins, I believe.

Yes. MIS margin, we saw a -- the top line, we expect this to be growing low single digit in the remainder of the year. For the margin for MIS, we're forecasting the expenses to decline slightly in the second quarter in the low single digit sequentially from the first quarter. Our first quarter MIS adjusted operating margin of 64.6%, and expanded full year expectation implies an adjusted operating margin in the range of 53% to 56% on average for the remainder of the year. Especially for the second quarter, if you want to use that for modeling purposes, we expect that to be slightly higher than the upper end of our fiscal year guidance before then decreasing sequentially each quarter through the end of the year, which is pretty much in line with the MIS revenue cadence as well, which is expected to decline in -- throughout the year. For MA, we -- again, we expect the margin to evolve in the same pattern as the revenue with an uptick in the 30% to 31% in the back half of the year.

And we'll take a follow-up from Craig Huber at Huber Research.

You sort of touched on this, but can you just talk a little further about your expectations for the whole company for your cost ramp for the remaining 3 quarters in light of your guidance for cost here? That's my first housekeeping question. The other thing I want to ask you, in the past, you guys have given us your incentive compensation that you booked in the quarter. What's your outlook for the year there?

Yes. On incentive comp, first of all, we recorded $105 million for the first quarter. We expect, on average, $100 million for the second and third quarter and slightly up in the fourth quarter. So that's for the incentive comp. And on the expense cadence, we expect the second quarter expense to be flat sequentially in the second quarter versus Q1, and then gradually increasing by about $20 million to $30 million between Q2 and Q3 and then by $15 million to $25 million in the fourth quarter. That reflects our strategic investments, some merit increase as well as some other variable costs, which are in line with the business growth.

And I have one more quick thing. Your private credit as a percentage of revenues and ratings right now, Rob or Noémie, where is that sitting at right now? How small is that?

Craig, it's -- that's an interesting question because I think we could get into a bit of a battle of definitions here. As I kind of step back and think about serving the alternative asset managers, these are the Blackstones, the Apollos, they're both in the public markets and the private markets. And we have, as you'd expect, very significant relationships with a broad range of players in that market. In fact, when you -- going back to the FIG revenues for the quarter, part of that opportunistic issuance was coming from our funds and asset management segment -- subsegment in FIG. And part of that was actually coming from BDCs and other folks who you would think of as being in the private credit market. So I guess, Craig, it's a little bit of a tough question for me to answer because I think of serving the Apollos and the Blackstones, and I think of that as public and private. And that's quite significant. We -- as you know, we did roll out a dedicated private credit team. We do have an expanded offering for specifically [ 4 things ] that you would think of as private credit. So we've got credit estimates for BDCs. We've got a number of different kinds of offerings to support fund finance. In fact, we just rolled out a subscription line methodology, and we have a very nice pipeline. And that I would think of as primarily private credit related. All of that stuff is growing quite significantly. So I would say, maybe to cap it off, our relationship with the big -- with the alternative asset management community in -- and I'm saying just in MIS for the moment, is quite significant. As it relates to specifically private credit, yes, for now, considerably smaller but growing quite quickly. I hope that gives you some sense.

Yes. You went a couple of different ways I didn't think you were going to go, but yes, that's helpful.

And we'll go next to Shlomo Rosenbaum with Stifel.

Rob, can you talk a little bit about the KYC growth? It was 18% in 3Q; 20% 4Q; 23% in -- now this last quarter. You're kind of accelerating on a larger revenue base. If you can give us some idea as to what's driving that. And then also, at the same time, you're seeing the revenue growth, but you're seeing the ARR kind of still around the 18% -- 17%, 18%. And maybe you could talk about that in the context of the revenue growth.

Shlomo, thanks for the question. Yes, this is a powerful growth engine here. And it's -- they're just -- there's a number of demand drivers. You probably heard me talk about on the call before that I've gotten to a point where I think KYC is not doing this justice in terms of the name because it talks about know your customer. And you heard me earlier on the call say, a theme with literally every customer I talk to is know your -- who you're doing business with and being able to connect the dots. So that is a big opportunity for us. And KYC is right in the middle of it. And we are broadening out our solution set, leveraging all of the content that supports KYC. So that's the massive company database that we call Orbis. It's all of the people and PEPs information. It's the AI-curated news. That supports what you would think of as traditional KYC. And then people want to understand, okay, well, I need to have that information about my suppliers plus other information. And so the demand for what you would think of as the KYC solutions just continues to broaden out, and we're selling into that. And that's one of the areas of investment for us, Shlomo. We talked about really wanting to serve corporates because historically, this has been serving financial institutions. But this theme of know who you're doing business with is a big theme with large corporations, and we have some fantastic customer wins that really validate our right to win in that space. The other thing, I may have mentioned this on some prior calls is, especially in the back half of last year, we had a lot of product innovation going on in that space. You may have even seen like some articles about Moody's and the number of shell companies that we had identified around the world that got a lot of press. Well, that shell company indicators is one of the products we created. We also have something called an entity verification API that pulls together a bunch of our different datasets and allows our customers to do real-time checks. So product innovation, broadening of demand, all of that together, Shlomo, is continuing to drive some very strong growth, I think, for the foreseeable future.

Should we see the ARR kind of ticking up a little bit? Where we're seeing the revenue ticking up, should we see ARR ticking up as well? I know it's pretty healthy as it is, but revenue is moving ahead of that.

Yes. I mean we don't guide on that, but I think...

I'd really look at the ARR as the best indicator of the underlying trends in that business, as with every other line, by the way. I think that's the best way to look at it.

I'd say, Shlomo, we've got some positive momentum there in the ARR, I believe.

And that does conclude the Q&A session. I'll turn the conference back over to Rob for any closing remarks.

All right. Well, thank you, everybody, for your questions. And I appreciate you joining the call, and we'll talk to you next quarter. Have a great day.

Thank you.

And this concludes Moody's Corporation First Quarter 2024 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you.