Good day, everyone, welcome to the Moody's Corporation First Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for Q&A following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead. Thank you. Good afternoon, 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 of 2023, as well as our revised outlook for select metrics for full year 2023. 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 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 and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2022, 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. Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results, key business highlights and outlook. After which, he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. I will now turn the call over to Rob. Thanks, Shivani, and good afternoon, and thanks to everybody for joining today's call. As we typically do, I'm gonna touch on a few takeaways from our first quarter results, and provide some insights into what's supporting our growth outlook. This quarter I'm also gonna drill down a little bit on our Decision Solutions line of business in MA, as that's a very important growth area for us. Then, of course, Mark and I will be happy to take your questions. While the first quarter experienced some market turbulence from the stress in the U.S. banking sector, and as is frequently the case, this heightened market uncertainty drove some strong demand for both our insights and our risk assessment offerings, and we saw some very strong upticks in usage this quarter. We're also continuing to unlock the potential of MA and its great assets and businesses. Those include one of the world's premier credit and economics research businesses, a Data and Information business that includes one of the world's largest databases on companies, and our award-winning Decision Solutions businesses serving KYC, banking, and insurance workflows. Together, MA delivered 10% ARR growth as we continue to enhance and extend our mission-critical data analytics and workflow solutions. Now, while MIS revenue declined 11% from a pretty robust first quarter of 2022, as we talked about on prior earnings calls, the anticipated rate of revenue decline did indeed moderate from what we experienced in the third and fourth quarters of last year, as MIS really capitalized on strong investment-grade issuance in the first quarter. Improvement in issuance activity, combined with our decisive expense actions that we took last quarter, together enabled us to deliver more operating leverage, as reflected by the meaningful increase in MIS's operating margin to almost 57%. Notably, the adjusted operating margin for the first quarter is up about 500 basis points over the margin for full year 2022. At the same time, we're maintaining financial flexibility while funding strategic investments in things like product development, sales and go-to-market initiatives, modern cloud-based workflow platforms, data interoperability and accessibility, and AI innovation, all to position us for the future. Now let me move on to some of the results, and there are a few key things I wanna highlight amongst the performance numbers that you see on the screen. First, MA revenue grew at 6% or 9% on a constant currency basis. ARR grew 10%, we had solid growth across the board in Data and Information, Research and Insights, and Decision Solutions. I'm gonna touch on that in a little bit more detail in a few minutes. As I'd mentioned just a couple minutes ago, MIS revenue was down versus a challenging Q1 2022 comparable before issuance volumes really decelerated through the balance of last year. Corporate finance accounted for most of the decline this quarter, particularly in bank loans, and that was followed by structured finance as we saw some deals delayed amidst the market volatility in the quarter. Despite overall revenues down 3% in the quarter, our overall adjusted operating margin was 44.6%. That was up approximately 200 basis points versus our full year 2022 margin, again, reflecting the benefit of those cost efficiency initiatives. Adjusted diluted earnings per share was $2.99, and that includes $0.75 of aggregate benefits from the resolution of several outstanding tax matters. I mentioned earlier the upticks in usage that we experienced across several products in the first quarter. On the screen, I think you can get a sense for that. During the recent stress in the banking sector, traffic to our flagship website, moodys.com, was up approximately 20% from the prior year period. That's important for a few reasons. First, as you've heard me say before, we've got the most experienced analytical teams in the industry, and that is why we have been recognized as the best credit rating agency by Institutional Investor Magazine 11 times in a row. That experience allows us to be the industry's thought leader, which is even more important in times of stress and uncertainty like we experienced in the first quarter. That thought leadership also drives increased demand for our insights, for our research, and for access to our analysts. Together, that all supports our value proposition and our growth opportunity for both ratings and research. Now, demand for our solutions during times of stress and uncertainty goes beyond ratings and research, and you can see it across a range of M&A offerings. During the peak period of banking stress last month, usage of our cloud-based asset liability management solution, which enables banks to model and manage their maturity, interest rate, and liquidity risk, rose nearly 50%. As we were witnessing unprecedented deposit flows moving across banks, the use of our screening and risk monitoring KYC solutions grew by almost 30%. We've also more than doubled the number of in-person customer sales meetings over the last year, and that's been supported by investments to expand the size of our sales team by almost 20% since the beginning of 2022, and you've heard us talk about that on these calls. Together, the increased usage and the sales engagement give us confidence in our full year low double-digit ARR growth outlook for MA. This past quarter, MA delivered 10% ARR growth, which as I mentioned, was consistent and strong across all lines of business. I'll start with Data and Information. That includes Orbis, one of the world's largest databases on companies, plus our ratings and news feeds and 300 million ESG scores. That grew ARR at almost at around 9%. In addition to the very strong standalone demand for private company data in Orbis, it's the integration of this data across MA's offerings that's helping to drive growth in other lines of business. This includes the integration of Orbis company data into our CreditLens lending solution for banks and the integration of our ESG scores into insurance and banking underwriting and portfolio solutions. Now moving to Research and Insights, which includes our leading credit and economic research business and a growing suite of predictive analytics, also grew ARR by 9% this quarter. We're seeing some strong and sustained demand for our economic data research and models, particularly amidst the stress in, and I guess I would say around the banking sector. This includes our new EDF-X platform, which combines our award-winning risk models with Orbis to analyze credit risk for any company in the world. We recently completed the integration of EDF-X alongside CreditView into the moodys.com gateway, which provides direct access to a growing suite of Moody's products and enhances our customers' experience and enables further cross-selling opportunities. Finally, Decision Solutions, which includes our businesses serving KYC, insurance, and banking workflows, grew ARR by 11%. Given this is our fastest-growing segment, I want to provide just a little bit more visibility into these offerings and what is driving growth. These are really three great businesses because they support mission-critical workflows across financial institutions. The virtuous cycle of data network effects and the high switching costs translate into industry-leading retention rates, which are typically in the low to mid 90s. We've discussed our KYC business on earnings calls before. This business supports customer onboarding, perpetual KYC monitoring, and sanction screening on customer suppliers and other third parties. The strong growth in this area has been driven by our ability to cover really all aspects of KYC and anti-money laundering activity, bringing together our vast datasets on companies and people, plus AI-enabled risk intelligence and cloud-based workflow orchestration that's delivered through our new PassFort Lifecycle platform. Moving on to insurance, the addition of RMS has now given us a considerable business serving underwriting, risk and capital management, and regulatory reporting workflows at insurers and reinsurers. Like banks, insurance companies are moving towards greater automation and digitization, as well as the integration of more third-party data and analytics to enhance their risk management processes. The RMS Intelligent Risk Platform is really a cutting-edge cloud-based platform that supports a growing range of workflow and data and modeling capabilities for insurers. The latest product launch from this platform is our new Climate on Demand solution. That integrates RMS's climate and physical risk models with our extensive Orbis and commercial property datasets to provide a sophisticated on-demand financial quantification of physical risk. That enables a holistic view into a company's exposure to extreme weather events and climate change through its customers, suppliers, and properties. Not only will this be useful for insurance underwriting, but we're seeing robust demand for this beyond the insurance sector, including with banks, corporates, governmental entities, and professional services, as we expected when we announced the deal, almost two years ago. Third is our business-serving banking workflows, which are quite similar actually to those served in insurance. They include lending, risk management, incorporating, credit, portfolio, and asset liability management risk, and finance and planning, which includes things like impairment accounting and regulatory capital reporting. Our most significant recent product launch in this space, and one that is contributing to our double-digit ARR growth in banking, was CreditLens for Commercial Real Estate, which you've heard me talk about on prior calls. That integrates our market forecasts, our commercial property data with our SaaS lending solution, CreditLens, and it really significantly extends our ability to serve the Commercial Real Estate lending market. Stepping back, what sets our offerings apart from many of our competitors is that it's not simply software, but instead we deliver integration of our proprietary data and analytics through modern cloud-based architecture. This is further enabled by the use of sophisticated machine learning and artificial intelligence across many of our solutions, including our automated financial spreading platform and our KYC AI review, which help customers be even more effective and more efficient. It's that combination of data analytics, cloud-based tech, and innovation that powered us to the number one ranking in Chartis RiskTech 100 back in November. Let me talk just briefly about how this translates to a typical customer relationship. In this case, it's a top 50 regional bank in the United States. As I mentioned, our workflow solutions combining data analytics and cloud-based software help banks really throughout their value chain, interconnecting what are often siloed use cases across departments from lending to risk management to finance and planning. It's common for us to start by serving one of those use cases and then to expand the relationship over time as the bank looks to connect its various functions, leveraging our interconnected data, models, and solutions. Our customer with this particular, excuse me, our relationship with this particular customer started back in 2019 when they began to use our models, and that includes the EDF model that I just talked about, as foundational capabilities to really create a common language of risk in the institution. In this case, they deployed our models to support a new internal risk rating program that enabled quantitative, unbiased, and consistent internal practices for credit assessment across the bank. Over the next two years, we deepened that relationship by providing the bank with a workflow solution that leveraged these models and combined economic data and business analytics models with our ImpairmentStudio software to upgrade their current expected credit loss, or you've heard us say CECL on these calls, to upgrade those processes. In 2022, again, leveraging some of the same data and analytics capabilities, we broadened the relationship further to support their lending needs through a combination of our AI-enabled spreading tool and our CreditLens loan origination software that includes credit score. We did the same to support their forecasting and stress testing needs, bringing together another five Moody's products and drawing on some of the data and analytics the bank was using elsewhere. This resulted in expanded licensing of several existing products, but also subscriptions for new products. In just three, four years, we've grown the ARR from this relationship five-fold. As you can see on the far right, this ARR shows up in different MA lines of businesses with 65% Decision Solutions and 35% in Research and Insights. Really all for the same customer for a set of lending, risk and capital management, and finance and planning use cases. There's still further potential, and we're in active discussions with this bank about supporting their KYC needs. This is really just one of really hundreds of instances of how we've expanded relationships with our banking customers in recent years and accelerated growth by offering comprehensive solutions that leverage capabilities across all three MA lines of business and really more broadly across all of Moody's. That is our integrated risk strategy at work. That is what makes our solutions so valuable and so sticky. Let me move to MIS for a moment. Issuance was stronger in the first quarter of 2023 compared with the fourth quarter of 2022. While volatility and uncertainty constrained the structured and bank loan markets, we did see robust activity in the investment-grade sector. In the first quarter, issuance represented almost 30% of our full-year outlook, which is a pretty typical historical seasonality pattern. As you can see, growth was higher for investment-grade and lower for leveraged finance. As we said on our last earnings call, we would expect markets to open up with higher quality credits before those further down the credit rating spectrum, such as high yield and bank loan issuers, and that is in fact what we saw in the first quarter. If markets continue to improve, we'd expect to see leveraged finance issuance pick up. The degree to which that happens is going to be based on a number of factors, and that includes macroeconomic risks and policy actions, market sentiment and credit spreads, and economic growth and private equity activity, among other things. Staying on MIS just for a moment. Over the course of the last several months, we've gotten a number of questions about MIS's growth drivers, especially over the longer term. Mark and I thought it would be helpful to talk about how we think about the building blocks to MIS revenue growth over the long term. While the short to medium term outlook can be impacted by cyclical factors, the long-term growth algorithm, as we like to think of it, for MIS revenue, we believe remains firmly intact. First and foremost, debt issuance growth over the longer term is driven by global GDP growth as issuers invest and grow their businesses. We expect global GDP growth in the 2%-3% range over the long term, and that's in line with historical average over several decades. Second, the value proposition for ratings remains firmly intact, particularly for MIS ratings, and that supports an annual pricing opportunity consistent with the broader opportunity across all of Moody's in the 3%-4% range. Third, there are long-term tailwinds from the ongoing development of capital markets around the world. This includes slow and steady levels of disintermediation in developed markets like Europe, as well as higher rates of growth in smaller capital markets in developing countries. Together, this gives a sense for what we believe is the long-term growth profile of this business. While I acknowledge over shorter time horizons, the growth rate may be above, below, or within this band, depending on the nature of the headwinds and tailwinds that we're showing at the bottom of the page. I hope that gives you a sense of how we're thinking about growth and how that may triangulate with our medium-term outlook. As we look toward the rest of the year, we're confident in the prospects for our business that's supported by strong demand for our solutions and our expertise and a robust product development pipeline. We're reaffirming the majority of our guidance with select updates to expenses as well as our diluted and adjusted diluted EPS metrics. GAAP diluted EPS and adjusted diluted EPS are now expected to be between $8.45 and $8.95, and $9.50 and $10.00, respectively. To close, I want to acknowledge that our growth and resilience as a firm rests on the shoulders of our people across the company, and I want to thank them for their continued commitment and efforts and dedication to serving our customers, to supporting each other, and to delivering for our shareholders. This concludes my prepared remarks, and Mark and I would be happy to take your questions. Over to you, operator. Thank you. If you would like to ask a question, please dial star one on your telephone keypad. If you are on a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We will ask you that you please limit yourself to one question. You will have a chance to rejoin the queue for a follow-up. Again, that is star one to ask a question. Our first question comes from the line of Owen Lau with Oppenheimer. Please go ahead. Good afternoon. Thank you for taking my question. Last quarter, Mark, you provided the seasonality of the P&L in detail. We appreciate your help, and it was very helpful. Could you please do the same and give us an update this quarter? Thank you. Owen, good afternoon and very happy to do that. Our central case assumption is that the near term capital market activity is gonna continue to be impacted by some of the recent stresses we've seen in the banking sector, as well as sort of those ongoing inflationary and recessionary concerns before improving as we progress into the latter half of the year. You know, while we have to acknowledge that there's been strong sequential improvement in issuance volumes from the fourth quarter to the first quarter, we remain cautiously optimistic and are thus maintaining our full year MIS revenue guidance of low to mid-single digit percent growth. Based on the strong first quarter investment grade and infrequent financial institution issue activity, we have slightly de-risked our year-to-go forecast. We now expect first half MIS revenue to decline in the mid-to-high single-digit percent range, second half MIS revenue growth in the mid-to-high teens percent range. That's again based on our expectation for market volatility to partially abate in the latter half of 2023. It's also worth noting that this outlook is now more in line with the historical seasonality, where the proportion of transaction revenue tends to be greater in the first half versus the second half of the year. We're also pleased to reaffirm our expectation for full year 2023 MA revenue to increase by approximately 10%. It's too early to assess if there are any near term headwinds related to, you know, the disruption resulting from or in the banking sector. As you heard from Rob, you know, we are experiencing increased product utilization, customer engagement of our risk solutions during this period of financial market uncertainty. Given that, you know, MA revenue is highly recurring, approximately 94%, we still expect absolute dollar MA revenue to progressively increase over the course of the year, with second half revenue growth anticipated to be slightly stronger vis-à-vis the first half. That means we're forecasting MA's second quarter adjusted operating margin to be flattish to our actual Q1 results before improving in the second half of the year, and as we fully realize the benefits of our restructuring program and additional cost saving initiatives. Total Moody's operating expenses, the guide here is for an increase in the lower end of the mid-single digit percent range. It's revised just slightly upwards on the expanded restructuring related charges, as well as our expectation for sort of a modest FX headwind. Finally, you know, we don't anticipate the future resolution of uncertain tax positions to sort of reoccur to the same extent in future quarters. Got it. Thank you very much. Really, really helpful. Thanks. Your next question comes from the line of Andrew Nicholas with William Blair. Please go ahead. Hi. Good morning. Or I guess good afternoon. Thanks for taking my question. I wanted to ask a little bit more specifically on the impact from SCB and kind of the broader banking sector turmoil on the sales pipeline in MA. I think, Mark, you just said that it was a little bit too early to tell, but if there any color you could provide on, you know, anything outside of usage increases, it seems like that would bring in, you know, additional sales opportunities, but also understanding that some of these end markets or these clients would have other things that they're focused on spending money on in the near term. Any additional color on how you're thinking about that would be great. Andrew, it's Rob. I'm actually gonna take a crack at this, and I'm gonna kinda zoom out just for a moment, 'cause, you know, we were kinda thinking about what went on in March with the banking sector across, you know, kind of three, you know, three dimensions. The first, you know, it was a very active period for our rating teams, as you'd imagine. Just to give you a sense, we rate about 800 banks globally, and that includes about 65 regional banks in the United States. There was a pretty intense period of credit work and market engagement, as you'd expect, and you saw kinda the uptick in usage for our research. We also thought about what could that mean in regards to MIS issuance. You know, January and February were stronger issuance months than March. You know, we did see a bit of a slowdown in the markets for sure in the month of March, and we tried to think about, you know, how do we extrapolate that out for the balance of the year. Ultimately, we decided not to change the issuance outlook for the year. Third, you know, kinda zooming in on your question around MA. You know, again, just to give you a sense, we've got relationships with over 2,500 banks or so globally. I would say we have not yet seen any meaningful slowdown in sales cycles, but I think we're mindful of this, right? As you'd expect, you know, banks are, you know, evaluating, you know, what kinds of investments they want to make and when they want to make them. We're also keeping an eye on bank consolidation. You know, I've gotten questions before about the impact in the financial crisis, and that was one of the things that we cited was it's consolidation of banks that can lead to some attrition events for us or some downgrades. That's something we are keeping an eye on. Obviously, we had a little bit of idiosyncratic attrition here with a few of these bank failures. I think over the, you know, kind of over the medium term, our view is that there's gonna be heightened demand for bank risk management. There will be new regulation that is going to stimulate further demands for our products and services. While we're keeping an eye on things at the moment, I would say over the medium term, we feel like this will actually be a supportive factor for growth. Your next question will come from the line of Kevin McVeigh with Credit Suisse. Please go ahead. Great. Thanks so much, congratulations on the results. I don't know if this is for Mark, just could we go back to the margins? I mean, just a ton of operating leverage and maybe. I know some of it's a restructuring, just give a sense of, you know, what's driving the outcome on the leverage over the course of the year. Maybe just a little bit deeper on Moody's and kind of the MA and MIS, if you could, Mark. Kevin, good afternoon. I'll talk at the Moody's level for margin, I'll give some insight into how the full year is progressing, and certainly happy to take other questions on MA margin later on in the call. As a management team, you know, we're committed to improving Moody's margin and accelerating the top line growth here. Our guide into the full year is for an adjusted operating margin in the range of 44%-45%. That implies around 200 basis points of margin expansion at the midpoint. That reflects our view that the cyclical market disruption we experienced last year, as well as some of the concerns in the banking sector, they're likely to abate over the coming months. In addition, you know, over the past several months, to the point you made, we have taken prudent yet aggressive actions firm-wide to streamline our expense base. We've done that while concurrently ensuring sufficient investment and resources to maintain the high ratings quality within MIS, as well as to support innovation and organic investment in MA as we execute on our strategic roadmaps. If I translated that into numbers, using our actual Q1 results as a baseline, for the full year 2023, you could expect Approximately 100 to 150 basis points related to increased operating leverage from both MA and MIS, and that's net of ongoing hiring activities and strategic investments. Approximately 350 to 400 basis points related to the expense benefits from some of those actions we've taken to lower and control costs associated with either real estate rationalization, reduction in staff or other efficiency initiatives. With the partial offset there of approximately 300 basis points from incremental costs associated with the annual salary and promotional increases, as well as a reset of our incentive compensation. Thank you. Your next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Hey, thanks so much. Wanted to ask the ARR question a little bit differently. Wanted to understand the sort of sustainability of double-digit ARR growth, how you see that playing out. Great usage numbers that you gave. That was really helpful. Is there a component of price that is linked to usage, or is it more that in your negotiations on price, you sort of point to usage and try to drive price that way? Then also just, you know, how you see the sustainability of the growth continuing, just if you do see budget tightening or cutting back, how has that sort of been in the past, during challenging times for your customers? Thanks. Hey, Toni. It's Rob. I'll take that one. Two parts to it, sustainability and then you know, how does that also kind of translate and supported by price. Let me start with just some key secular trends that are driving growth across our business. These are what we call kind of selling themes and how we engage with our customers. The first of those. They're really four. The first of them is digital transformation. You know, many of our customers are going through a digital transformation in all parts of their institution. We play an important role in helping institutions do that. As you've heard me say before, you heard me say on this call, it's about becoming more effective and more efficient. The second is really kind of a company 360 degree view of risk. Gosh, I've had a lot of these discussions with our customers recently where they say, "We're just trying to get a better understanding of the various dimensions of any given counterparty that we're doing business with," whether it's a customer, a supplier, someone they're making a loan to, someone they're investing in. We've got a great opportunity to help them with that company 360 degree view of risk. Third is around regulation. You know, when you serve. You know, obviously financial service is a big part of the customers that we serve. You know, there are constantly new rules and regulations that are being imposed on the industry. They're evolving in many different ways, and our customers are looking to us to help them with regulatory compliance, and a lot of our solutions do that. The fourth is, we're having more and more conversations around how to think about integrating climate and ESG into various different kinds of workflows. I would say in climate in particular, where there's a real need and desire to really understand the financial quantification of exposure to weather and climate change. You heard me mention that on the call. The great thing is we're having these conversations with our customers. You heard me give that example of that bank on my opening remarks. We're bringing together products and solutions that help our customers address a range of these kinds of challenges. We, we feel good about our positioning and the medium-term growth drivers that are underpinned by this. As it relates specifically to pricing, you know, we talk about in MA, you know, an approach to value-based pricing. We want our customers to drive a lot of value out of our products. We have customer success teams that support the usage and utility that our customers get out of those solutions. That in turn both translates into supporting ongoing pricing increases as well as upgrades across the institution. That's generally how we think about it. Toni, this may have been implicit in the question you were asking, but part of the reason we introduced ARR in the first quarter of last year is that it's a fabulous leading indicator of performance, because by design it provides that 12-month forward-looking view into our growth trajectory and thus also progress towards achieving our medium-term targets. Thank you. Your next question comes from the line of Alex Kramm with UBS. Please go ahead. Yeah. Hey. Hello, everyone. Just wanted to come back to the regional bank discussion from earlier. Heard your comments on MA, probably agree that could be an opportunity in the future. Would also ask that same question on MIS. Maybe it's not as simple of an answer, but, you know, if regional banks are having more stress, more regulations to them, coming to them, just wondering if you think there could be an opportunity actually that some of that bank lending actually goes into the capital markets like we've seen over many decades, and you cited it for Europe, but maybe even in the U.S. Now I understand their lending is a little bit more, you know, smaller ticket sizes, right? Mid-market, but wondering if there could be some opportunities there. Then also maybe even some opportunities in structured as some of these banks are trying to figure out how to deal with these new regulations coming down the pipe potentially. Any early looks will be great. Hey, Alex, it's Rob. I think that's a reasonable thesis. It's probably too early to tell. You know, like I said, we haven't adjusted the issuance outlook at this time either up or down in regards to that. That's certainly, you know, one of the things that we're considering is, you know, as banks, you know, the opportunity to turn to the capital markets as a funding source, particularly in the U.S., but also in Europe. You know, that may we may actually see an uptick in issuance. That may also drive further disintermediation, right? As not only as banks are turning to capital markets for funding sources, but as the borrowers themselves are turning to capital markets. You know, that's something I think, you know, we're gonna watch, Alex, but probably a little too early to call. Fair enough. We'll watch it. Your next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead. Thanks for taking my question. I just wanted to focus more on the banking vertical within MA. I was wondering if it's possible to quantify how big your exposure is, and particularly on the regional banking side. Then, obviously, you talked about the increased focus on risk management being positive and over the midterm, but I was just wondering how are your conversations or the sales conversations trending with those banks? Are we seeing increased focus of risk management even in the near term? Thanks. Ashish, good afternoon. This is Mark here. In terms of the overall quantification of the banking business last year for banking-related products that we sold were around $400 million. That would have been around 14% of MA. You could anticipate continuing to see ongoing growth of products that we sell to banks, which extend per the comments you heard from Rob this morning, not just banking-related products themselves. The focus that we have in the niche, especially in the banking space, really extends across those three primary segments, sort of the origination of that credit, the ability for asset liability management, and then finally to support finance and risk-related reporting. The idea that banks themselves can use that data and analytics not just within individual departments within those disciplines, but across the firm, really creates very high switching costs and allows our data to be embedded ultimately into the network that the banks have. Yeah. Now maybe I'll just add to that. You know, kind of in the immediate term, you know, obviously, you know, we highlighted the increased usage that we saw in our products, but, you know, we were literally doing kind of daily stand-ups where we were in touch with our banking customers and prospective customers around a few different themes. One, as you can imagine, you know, our banking customers were in a period, and still are, of enhanced, you know, kinda credit and counterparty monitoring. There we've got, you know, obviously a number of tools that can help. We have a, you know, a set of asset liability management solutions, I noted the significant increase in usage by our existing customers, but that also gave us an opportunity to engage in a number of new discussions. Third is around KYC. While it's, you know, hard for banks to deploy a new KYC solution, you know, kind of in the span of a week, just given what was going on, you know, we've seen an ability to have an increased conversation around KYC at a broader set of financial institutions. In general, you know, there are some immediate term, you know, opportunities and we see some medium term opportunities. That's great. Congrats on solid results. Thanks. Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead. Hi. Thanks. Good afternoon. It appears MIS outperformed your expectations in the first quarter. Your full year guide was reiterated. How much does this reflect conservatism versus a more moderate issuance outlook for the remainder of the year, perhaps to reflect aftershocks from the regional banking crisis at the end of the first quarter? Could you talk about some of the issuance trends you're seeing real time? Yeah. George, it's Rob. I'll start. You know, I mentioned and we showed in our webcast deck that the first quarter issuance through March was roughly 29% of our full year outlook. I mentioned also that's pretty consistent with the average that we've seen over roughly a 10-year period, excluding the pandemic and last year. You know, our expectations, you know, going into this year were probably somewhere closer to 25%. By not taking up our issuance outlook, I think, George, you could, you know, kinda think of that as de-risking our issuance outlook for the rest of the year a bit. That feels reasonable given just the seasonality patterns that I just talked about. I would also say, George, there are a couple pretty straightforward reasons that we didn't take up or adjust, let's say, the issuance guidance. One. You know, yes, there were some green shoots, but, you know, I think we, you know, we just decided it's just too early for us to change our full year issuance outlook. January and February were good months, March was choppy. You know, two. We've got plenty of headline risk with three quarters to go. We saw that in March. With the banking sector, we still got the debt ceiling to navigate. We just thought it's too early to make a change. I guess just, you know, kind of then thinking about, you know, what are we seeing, you know, at the moment, I'd say, you know, markets are pretty constructive. You know, we're gonna see how corporate earnings all, you know, shake out and what the appetite's gonna be for M&A. You know, the market feels more optimistic in late April than it did in March. You know, M&A has been sporadic. You've seen it more in defensive sectors. It does feel like there's some pent-up demand. We're hearing bankers talk about pipelines building for the second half of the year into, you know, 2024. Look, investment-grade issuance, while it started off quite strong, you know, it did slow down in mid-March given what was going on with the banks. We'll see. In early May, we've got, I think, a fair bit of economic data that's gonna come out and, you know, if that goes well, we may see a pickup in issuance from corporates. The last thing I would say, George, is, you know, there have been windows that have allowed the banks to start clearing some of the big LBO backlog that they had sitting on their balance sheets. That's important to kinda unsticking those markets. You know, again, constructive tone, but, you know, we'll see. Got it. Very helpful. Thank you. Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Thanks so much. Wanted to focus a little bit more about, you know, some of the uncertainty going on in the banking sector, but maybe take it to the next level. I know there's a lot of concern about the impact on the Commercial Real Estate sector. I know you've got exposure there in both lines of your businesses. Can we just talk about what's going on there? Yeah. Let me let me tackle this. Jeff, first of all, good to have you on the call. Let me tackle this maybe two ways. You know, one, just, you know, kind of how we're thinking about the U.S. banking system. Second, you know, I think there's a question about, you know, kind of what's going on with bank lending and just give you maybe a little bit of insight into that. On the first, MIS put some great research out on this and has been, I would steer you to that. You know, a few things that our teams are focused on. They're focused on ALM risks. They're focused on stability of deposit funding, profitability pressures, and as you mentioned, Jeff, Commercial Real Estate exposure. You know, when we think about what's going on with lending standards, I think it's fair to assume that bank lending standards are tightening. I think that was already going on to some extent before March. The banks are going to be the most cautious around, you know, property, land, development loans and Commercial Real Estate more broadly, in particular, I think the office sector. Just to put it in perspective, today U.S. banks hold about half of the U.S. Commercial Real Estate debt outstanding. I think smaller banks are more concentrated in Commercial Real Estate as a percent of total capital than the larger banks. I, you know, I think you are gonna see some caution there for sure. In terms of corporate credit, I would expect the tightening to be felt at the smaller end of businesses. You're seeing that with some of the survey data that's come out in March. You know, when you think about commercial loans, credit cards, auto and personal loans, those will probably be less impacted just because a lot of that lending is done outside the banking system. Same with mortgage lending. While it's impacted by interest rates, rising rates, I think it'll be less impacted by what's going on with bank lending standards given that a lot of it's been backstop. You know, you got a sense of our exposure to banks overall. We have a business, serving Commercial Real Estate, and I will say there's a lot of interest from banks to really get high quality data and analytics and insights to help them really understand what they need to do around that asset class. Okay. Thanks so much for the color. Your next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Great. Thank you. Can you please touch on your outlook for bank loans versus high yield here for the remainder of the year? What's embedded in your outlook for debt issuance? I want to ask you, your incentive compensation numbers for the quarter and also for all four quarters for last year, what was that, please? Thank you. Hey, Craig. You know, we haven't changed any of the outlook. For leveraged finance, you know, we're looking at high yield up 25% and leveraged loans still remaining roughly flat. I gave you a little bit of color on, you know, kinda what we're seeing in the market. Hopefully that gives you some sense. In the first quarter of 2023, our incentive comp was at $89 million compared to $76 million in the prior year period. I also just note, Craig, that we're now including commissions as part of our incentive compensation figures that we provide, you know, as sales-based commissions have actually grown alongside revenues relative to historical levels. Put it in context, for the full year of 2023, we expect incentive compensation to be between $340 million and $360 million, or approximately $85 million-$90 million per quarter for the remainder of the year. That is 15% higher at the midpoint than the total incentive compensation we accrued for in the comparable full year period in 2022. That's simply a result of resetting our incentive comp baseline for the year based on annual financial targets. Just 'cause I have the mic for a second, on the expense side, I wanted to get out the updated expense ramp of between $10 million and $30 million between the first and second quarter of this year, with expenses remaining relatively stable then through the rest of the year. Yeah. Craig, the one other thing I maybe I'll add just in thinking about, you know, our outlook, which is unchanged, is just, you know, maybe how could you think about, you know, puts and takes just around leverage finance. I think in general that, you know, leverage finance probably represents the potential for the most upside, you know, to our outlook. You know, just if these markets start, you know, functioning robustly again, you know, my sense is there's lots of dry powder and pent-up demand. We might see an uptick in sponsor-driven M&A activity. We don't have a particularly, you know, we don't have an aggressive forecast for M&A built into our outlook. If we see that, you know, pick up, we, you know, we could see some upside to how we're thinking about it. Mark, what were those incentive comp numbers for quarters for all of last year? Thanks, guys. Sure. No, no problem. incentive compensation for 2022 was as follows: approximately $76 million in the first quarter, $66 million second, $81 million third, and $82 million in the fourth quarter. Great. Thank you. Your next question comes from the line of Andrew Steinerman with J.P. Morgan. Please go ahead. Hi there, it's Andrew. I went to today's slide 12, and I added up the three growth drivers, and this is for kind of aggregate MIS long-term revenue growth, and I got 6%-9%. I was hoping that that was the right thing to do to add the three together. I was wondering for this 6%-9% long-term MIS growth. When you say long-term, what's your timeframe for long-term? Lastly, I wanna make sure that the medium-term numbers that you gave us in January, that's kind of five-year MIS revenue growth of low singles to mid-singles, is still in place. Good afternoon, Andrew. Our long-term MIS revenue growth algorithm doesn't have a set base year. We're not looking to define either the base year or the end period from which future performance could be extrapolated. Instead, the models focus much more on historically well-established trends that we believe will be relevant in the long term and contribute ultimately to revenue growth. On the medium side, we're really looking at that 3-5 year window, and we're really reflecting the MIS revenue projection over that defined period of time. Lastly, we are not withdrawing medium-term MIS revenue guidance. that's true of all the medium-term numbers that were given in January, right? That is correct. That's right. Okay. Thank you very much. Your next question comes from the line of Faiza Alwy with Deutsche Bank. Please go ahead. Yes. Hi. Thank you. I wanted to follow up on the expenses ramp up, Mark, and apologies if I missed this. I noticed that you increased, your, you know, expense guide to up mid-single digits from low single digits. Can you give us a sense of like, what's driving that and which particular segment is that coming from? Cause you haven't changed the margin outlook for any of the segments. Good afternoon. Thank you for the question. We expect the full year 2023 operating expenses to increase at the lower end of the mid-single-digit range. You are absolutely right, that is above our prior forecast of low single-digit percent growth or the higher end of low single-digit percent growth. The primary driver for this, I call it slight revision, is really the expansion of our restructuring program and updates to foreign exchange rate assumptions. Given from an adjusted basis, which is what the margins are really computed off of, we would back out that restructuring piece. I also wanted to note the operating expense segment guidance would be along the lines of a low to mid-single-digit percent decline in MIS, and they're very consistent with what we said in January, and then a high single-digit percent growth in MA, also consistent with what we said in January. Your next question comes from the line of Jeffrey Meuler with Baird. Please go ahead. Thank you. On KYC, just as you think about the sustainability of the long-term growth, how do you think about TAM or market penetration? I guess 1,700 plus existing customers that you cite on the website, that seems awfully low to me, at least. Then in the near term, with PassFort Lifecycle, just help us understand how far along you are with clients upgrading to it and if the upgrade cycle's really significant to near-term revenue trends. Thank you. Speakers, you may be on mute. Oh, hey. Yeah, sorry. Indeed, we were. It was such a great answer, too. Sorry. Maybe a couple ways to think about that. One, I think there is an opportunity for us to continue to really drive penetration of the addressable market. You talked about PassFort, and that is really the front end, the workflow for us. Now we've got an opportunity like we do in banking and insurance. We've got a workflow platform that now allows us to integrate our data, our analytics, our models, all into a holistic solution. You know, that's a, that's a new opportunity for us, and we're seeing a, you know, a good bit of enthusiasm from our customers around this. As you think about the growth drivers within the market, I'd say there are a couple things. One, there's still a lot of KYC that's being done in-house at financial institutions and companies. There's just a, I think, a very big opportunity to automate KYC, you know, workflow within financial institutions. That still remains a significant opportunity. The other thing that's going on is this is broadening from know your customer to know your, yeah, counterparty. Eventually I'm gonna have to come up with a better name. You know, one of the trends we're seeing is around, I'd say, more broadly around third party risk management. This is I wanna do some form of diligence to better understand, you know, who I'm doing business with. We're certainly seeing that with supply chain where customers are coming to us and saying, "Hey, while we don't have all the pieces," we do give customers the ability to get a much better sense of supplier risk. you know, that's one thing that's I think kind of broadening this market and supporting, you know, supporting growth. In fact, we just did a survey about the, you know, something like 70% of firms that we surveyed were increasing their focus and spend, you know, in the space around supply chain. Thank you. Hopefully that gives you a sense. Yeah. Your next question comes from the line of Russell Quelch with Redburn. Please go ahead. Yeah, hi. Thanks for thanks for having me on. Wanted to start with a question on pricing and to what degree you expect that to be a driver of growth in 2023, particularly in MIS. I was wondering if that will be above the 3%-4% given as the long-term projection on slide 12. Yep. Russell, it's Rob. There is, really, you know, kind of no change to, I think, either, the pricing opportunity or our approach to pricing either in MIS or, MA, let me just, you know, kind of recap for just a second. You know, on some of our previous calls, I did mention in MIS, you know, as we do every year, you know, last year we conducted a detailed review of our pricing across sectors and regions. Again, that's what we always do. Based on that work, we anticipated that the rate of increase in list prices for 2023 would reflect a bit more of an increase. That said, our actual pricing realization as, really as it always does, then depends on issuance mix because we do not just apply a an increase kinda ratably across the entire customer base. You know, I can't really get into more detail than that. I'm sure you can appreciate that, but I am comfortable with our pricing opportunity for 2023, you know, within that broader 3%-4% opportunity across the firm. Okay. Okay, thanks. Yeah, this might be a silly one, but let's go for it. You spoke to ESG and climate integration as being kind of one of your four structural growth drivers for the business. We just heard from one of your peers that growth in this area is being negatively impacted by politics in the U.S. in the near term. I appreciate your business and solutions are servicing a slightly different user base for a slightly different use case. Are you seeing a similar near-term negative impact on new sales growth here? Yeah. Russell, I think, you know, this is why we're trying to be really clear about, you know, what do our ESG and climate solutions really measure? I almost feel like there's a little bit of a, an ESG 2.0 moment going on across the industry because that's what customers are asking. You know, what do your scores actually measure? Let me start with what we're doing in the rating agency. You've heard me talk about we've rolled out over 10,000, and the name is important, credit impact scores. We have met with all of our issuers and had a dialogue with them about how E, S, and G factors impact their credit profile. We've been very clear because that's something that investors wanted to understand. There's a very clear linkage between those scores and how we think about credit ratings. They're not new. We have always considered ESG factors in credit ratings. It's just we haven't made it as transparent as we are now doing. The second thing is, there is a desire to really integrate ESG and climate considerations into a broad range of processes, you know, all around the firm. One thing that we've heard from our customers is, "Hey, you know, I need to get a sense of my supply chain, but I've got, you know, 30,000 entities, you know, or customers." You know, tens of thousands of entities. You know, it's not just scores on public companies, but it's how do I get a better sense, a quick and dirty sense of the ESG profile of who I'm doing business with, of who my suppliers are. The third thing I would say, Russell, is, and this is in part why we made the significant investment in RMS, is because I think there is a lot of immediacy around understanding the impact of extreme weather and climate change on physical risk. There's two things our customers we hear a lot about. Please help us understand and quantify physical risk relating to weather and climate, and please help us understand the financial implications of carbon transition. Again, that is the positioning that we're taking, is really focusing on the financial quantification of those factors for our customers, and then integrating that into a broad range of the workflows that we support for our customers. Super. Thank you. Your next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead. Great. Hey, just one quick follow-up. Wonder if you could just refresh your thoughts on buyback, particularly given it seems like there's some incremental cash flow from some of the tax benefit you saw in the quarter, but just any thoughts around the buyback? Thanks, Kevin. Our capital planning and allocation strategy is unchanged. We are committed as a management team to anchoring our financial leverage around a BBB+ rating. As I've spoken about before, you know, we believe that's appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. However, given that our gross leverage as of quarter end is above that 2.5 times, we are continuing to be prudent in managing our leverage and liquidity levels and ensuring financial flexibility. Practically, that means we're maintaining, for now, our slightly more conservative approach to share repurchase guidance in 2023. We still plan to return approximately $800 million of global free cash flow or about 53% at the midpoint of our projected free cash flow guidance range to our stockholders. That, of course, is subject to available cash, market conditions, M&A opportunities, other ongoing capital allocation. If I broke that down into its subcomponents, that would be $250 million approximately in share repo, and that's inclusive of the $41 million we did in the first quarter, as well as to distribute approximately $550 million in dividends through a quarterly dividend of $0.77 per share, which is 10% higher than the first quarter 2022 quarterly dividend. One final but important point I just wanted to highlight is we still have approximately $800 million in total share repurchase authorization, remaining. That gives us, you know, some flexibility to evaluate our full year 2023 share repurchase guidance, while continuing to monitor the operating environment as it develops. Crystal clear. Thank you. Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead. Thank you. I just wanted to follow up on your earlier comments on RMS and ESG as well. Just on ESG, could you just remind us what your total ESG revenues were at the end of last year and this quarter and the growth rates? Something similar on RMS. I know you gave some qualitative color, but just, you know, as a, as a total RMS, like, you know, how is that growth rate doing versus when you first acquired it? Hey, Manav, let me start with RMS. I'll just kinda recap, 2022 and how we're thinking about 2023. In general, I would say, you know, we feel very good about our ongoing synergy and integration efforts. We are very excited about the value of the data, the analytics, and the expertise of the team. Last year, we achieved, you know, mid-single digit sales growth. That was what we were targeting this year, inclusive of synergies. Those are important. You know, we expect to get that sales growth to high single digit for the year. You know, I would also. You know, while we're on the topic of RMS, we've also invested to accelerate the build-out of that intelligent risk cloud-based platform that I mentioned. One of the reasons that's so important is, when we're rolling out something like Climate On Demand, where there's a lot of near-term customer demand for something like that, by having that cloud-based platform, it was very easy for us to roll that out and get that launched. We've also been able to launch our ESG for underwriting offering, and we're just in the process now. We just had our first customer win for a new net zero underwriting module. You know, you heard me talk about understanding physical risk, integrating ESG, understanding the impact of carbon transition. All three of those things are things that are supporting, both the you know, that we're doing in terms of product development and supporting sales growth at RMS. For the full year 2023, we're projecting ESG and climate-related revenues to also increase in that high single-digit percent range, and that would be off of the actual 2022 full year results of $189 million. Manav, one other thing I'll steer everybody to, in a couple weeks, we've got our annual conference called Exceedance. I think it's the second week of May. If you want to learn a little bit more about what RMS is doing, we're gonna have several important product launches and partnerships that we're gonna announce that week. That's a good opportunity for people to dial in and learn more. Got it. Thank you. Again, to ask a question, press star one. Your next question will come from the line of Simon Clinch with Atlantic Equities. Please go ahead. Hi. Hi, everyone. Thanks for taking my question. A lot of my questions have been answered, but I wanted to follow up on the question of cash flows and buybacks, 'cause obviously as issuance, if issuance were to recover with upside as some of us expect, I guess, there's gonna be high incremental cash flow coming from that. I was wondering if you could talk a little bit more about the priorities of that deployment of that incremental cash flow should it work, should it happen, and maybe the pipeline of M&A opportunities you see right now and how that's developing given the market environment we see. In terms of capital, planning and allocation, I would also make the point that that remains unchanged from prior philosophy. First we're gonna look for opportunities for both organic and inorganic investment, in some of the high-priority markets that we've spoken about on the call today that ultimately are gonna enrich that ecosystem of data, analytical solutions, and insights. After deploying any investment dollars, we're gonna look to return that capital to our stockholders through dividends, and through share repurchases. Just one other comment here. In the first quarter itself, on the free cash flow side, the result was higher compared to the prior period, that was really due to an improvement in working capital this quarter despite sort of the lower net income vis-a-vis the first quarter of 2022. That improvement in working capital was driven by higher 2021 related incentive compensation payments that came through in the first quarter of 2002. Yeah. Simon, it's Rob also. You know, just I think your question was in regards to Moody's M&A, right? Yeah. I thought so. You know, just on that topic, you know, As I've always said, you know, we have a great team. We have well-defined growth roadmaps, you know, that are informed by customer needs, market trends. You know, it's interesting because when you have a meaningful, you know, kind of dislocation like we had in the markets last year, oftentimes you'll see kind of a disconnect between buyer and seller expectations. It takes some time, you know, to kind of be able to bridge that gap. Unless you've got sellers who have, you know, a capital structure or, you know, some other trigger that is forcing them to sell, you know, oftentimes what we'll see in our space is, you know, folks will sit on the sidelines until valuations improve. It's interesting because we have seen kind of a bifurcation in valuations between, you know, high growth companies that are profitable, which are still commanding a premium, high growth companies that are unprofitable, less so, and lower growth companies. You know, it, you know, I think that kind of informs, you know, starts to inform buyer and seller expectations. All right. Thank you. Your next question comes from the line of Alex Kramm with UBS. Please go ahead. Yeah. Hey, guys. I know it's late in the call, just quick follow-up on the MA margin. I think you said something about flat in the second quarter, sorry if I missed this. I assume looking at your guidance that we should get some nice inflection then in the back half, maybe end at like 33% or so in the Q4. Is that a good run rate to think about next year? I know it's early, maybe just talk a little bit more about the MA margin if you haven't addressed it. Thanks. Alex, the MA margin, as we think through to the second quarter, is expected to be relatively flat-ish to the first quarter. Then we do expect it to progressively increase over the remainder of the year, sort of in line with both revenue growth and as the benefit from our expense actions begins to take place. It is a little bit too early for us to think about 2024 just yet. On the margin for the first quarter, just two minutes on this, there were two primary impacts in terms of why the margin in Q1 was a little bit lower than last year. First was we accelerated some of the opportunistic investment in the business, and this could be product development, technology, sales deployment, et cetera. Second, there is an element of timing related to both the MA revenue and expenses. On the revenue side, we had a favorable revenue recognition in the prior period. On the expense side, you'll recall, Alex, that the first quarter of 2022 had a relatively low level of investment because we had accelerated some of that work into the fourth quarter of 2021. Okay, thanks. Just maybe while I'm on here, on the ARR side, I think, again, maybe this is just the currency, et cetera, but like I think the dollar amount of ARR actually dropped quarter-over-quarter. Not sure if you addressed that, but maybe just flesh it out as well. Thanks for the question. Alex, your intuition as usual, is spot on here. We introduced, just as a reminder, ARR or annualized recurring revenue in the first quarter of last year. You know, we continue to emphasize it as a very meaningful growth metric for MA as it removes the impact of uneven revenue recognition from some of these multi-year arrangements, as well as sales mix. However, you know, since this is the first time we've rolled over the metric from one calendar year to another, it's probably just worth a second to do a quick refresh of definitions, right? ARR is a constant currency organic metric, and it utilizes a single set of FX rates for each calendar year. Our ARR table in the back of the quarter's earnings release translates both current period, which is the Q1 2023, and prior period Q1 2022 at the same rates. With the idea of expressing sort of this constant dollar growth rate. Sequential figures within the year are comparable, but those that are across years are not. If I adjust for the FX rates, what you'll find is that approximately $80 million in ARR in 2023 was not reported simply because of that FX movement. In other words, US dollar appreciation between last year and this year. If we add back that $80 million of revenue to the Q1 ARR to make it more comparable to the 2022 number, you'll see that growth come through in our reported figures. All right. Fantastic. Thanks for the clarification. We have no further questions at this time. Okay. Thanks, everybody. We appreciate you joining us on today's call, and we look forward to talking with you next quarter. Take care. This concludes Moody's first quarter 2023 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. A replay will be made available immediately after the call on the Moody's IR website. Thank you. You may now disconnect.