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Moody's Corporation (NYSE:MCO)

Q3 2009 Earnings Call

October 29, 2009 11:30 AM ET


Liz Zale - Vice President, Investor Relations

Raymond W. McDaniel Jr. - Chairman and Chief Executive Officer

Linda S. Huber - Executive Vice President and Chief Financial Officer


Peter Appert - Piper Jaffray

Michael Meltz - JP Morgan

John Neff - William Blair & Co.

Edward Atorino - The Benchmark Company


Please standby. We're about to begin. Good day and welcome ladies and gentlemen to the Moody's Corporation Third Quarter 2009 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 the conference at the questions and answers following in the presentation.

I will now turn the conference over to Liz Zale, Vice President, Investor Relations. Please go ahead.

Liz Zale

Thank you. Good morning everyone and thanks to joining us on this teleconference to discuss Moody's results for the third quarter of 2009. I am Liz Zale Vice President of Investor Relation.

Moody's released it's result for the third quarter of 2009 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moody'

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation.

Before we begin I call your attention to the Safe Harbor language which can 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, 2008. And another SEC fillings made by the company which are available on our website and on our Securities and Exchange Commission website.

This together with the Safe Harbor statements set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statement. I should point out that members of the media may be on the call this morning in a listen-only mode.

I'll now turn the call over to Ray McDaniel.

Raymond W. McDaniel Jr.

Thank you, Liz. Good morning and thank you everyone for joining today's call. I'll begin by summarizing Moody's third quarter and year-to-date 2009 results and update our guidance for the year.

Linda will follow with additional financial detail and operating highlights and I will then speak to recent developments in the legislative and regulatory area and finish with further comments on Moody's outlook for 2009. After our prepared remarks we'll be happy to respond to your questions.

Moody's results in the third quarter reflected continuing strength in corporate debt issuance as well as growth from Moody's analytics. Total revenue was $452 million up 4% year-over-year. Excluding the unfavorable impact of foreign currency translation, revenue increased 6%.

Operating income for the third quarter was a $173 million, a decline of 9% year-over-year due to acquisition related and other expenses. There was negligible impact to operating income from foreign currency translation.

Diluted earnings per share for the quarter were $0.42 including a $0.01 charge associated with previously announced restructuring activities. This was 9% below the prior year period. Excluding restructuring adjustments from both periods, and the benefit related to legacy tax matters in the prior year period diluted EPS for the quarter of $0.43 were down 4% year-over-year.

Turning to year-to-date performance, revenue for the first nine month of 2009 totaled $1.3 billion, a 3% decrease from the same period in 2008. Operating income of $509 million was 18% lower than the prior year period.

Year-to-date diluted earnings per share of a $1.26 included a net charge of $0.02 per share reflecting cost related to previously announced restructuring plans partially offset by a benefit from certain legacy tax matters.

Excluding these items in both periods diluted earnings per share declined by 11% to a $1.28 from a $1.44 in the first nine months of 2008. We're raising our full year 2009 EPS guidance to a range of a $1.60 to $1.68 from the prior range of a $1.45 to a $1.55, primarily reflecting the strength of corporate debt issuance in the third quarter. And our expectation before the bond activity will remain strong to the year end.

I will now turn the call over Linda to provide further commentary on results and other updates.

Linda S. Huber

Thanks Ray. I'll begin with revenue at the corporate level. As Ray mentioned, Moody's total revenue increased 4% in the third quarter over the prior year period. Excluding the unfavorable impact of foreign currency translation revenue grew 6%. US revenue was up 5% to $230 million while revenue outside the US rose by 3% to $222 million and represented 49% of the total.

The current revenue of $285 million represented 63% of total revenue, compared to 64% in the prior year period. Looking at each of our businesses, Moody's investor service revenue for the quarter was $305 million, a 3% year-over-year increase. Excluding the unfavorable impact of foreign currency translation MIS revenue grew 5%.

US revenue with up 8% over the prior year period. Outside of the US revenue declined 2% in the prior year and represented 46% of total ratings revenue. Global corporate finance revenue in the third quarter increased 32% from a year grow to $100 modern million. Revenue grew 35%in US primarily due to high yield and investment grade bond issuance as spreads continued to narrow. Outside the US, revenue increased 27% driven by investment grade and high yield activity in Europe as well as increased cross border issuance from Latin America.

Global structure finance revenue from third quarter with $79 million, 17% below the prior-year period. US revenue decreased 8% with new issuance limited primarily to tariff related securitization. Outside the US structured finance revenue was down 24%, driven by revenue declines in derivative and asset-backed securities.

Global financial institution's revenue of $63 million decreased 2% from the same quarter of 2008. Year-over-year revenue declined to 4% in US and 1% outside the US reflected ongoing weakness in banking sector issuance. Global revenue for the public project and infrastructure finance business increased 4% year-over-year to $62 million. Revenue decreased 2% in the US due to lower issuance in the municipal sector. Non-US revenue grew 14% with strong issuance in European infrastructure finance.

Turing now to Moody's analytics; global revenue of $147 million was up 7% in third quarter of 2008. Excluding the unfavorable impact of foreign currency translation, revenue increased 10%. US revenue of $65 million remained about flat with the third quarter of 2008. Non-US revenue grew 14%, primarily due to the impact of acquisitions made in 2008 and represented 56% of total analytics revenue. Globally subscription revenues stayed about flat with $119 million, with new sales offsetting higher customer attrition resulting from market disruptions in late 2008.

Software revenue grew 82% year-over-year reflecting the impact of the Fermat acquisition, while professional services revenue increased 9%.

Turning now to the expenses, Moody's third quarter expenses were $279 million, 15% above the prior year period. Excluding restructuring adjustments from both periods, expenses increased by 12%. The increase was primarily driven by incremental expenses from businesses acquired in the fourth quarter of 2008 and higher accruals for incentive compensation reflecting a stronger full year outlook. Without the favorable impact of foreign currency translation, reported expense increased 18%.

Operating margin for the quarter was 38.2% or 39%, excluding the restructuring charge. Our effective tax rate for the quarter with 37.5% compared with 38.4% for the prior year period. The decrease resulted primarily from a higher proportion of taxable income generated internationally and lower tax jurisdiction.

I'd like to turn now to an update on capital allocation and stock buyback. At quarter end we had 1.4 billion share repurchase authority remaining under the current program. We remained commitment to returning capital to shareholders in a manner that is consistent with maintaining sufficient liquidity. As we discussed previously in the near term, we are maintaining our current dividend and curtailing systematic repurchase. However we will continue to evaluate opportunistic share repurchases as market conditions want.

During the third quarter of 2009 Moody's did not repurchase shares and issued 200,000 under employee stock-based compensation plan. Outstanding shares as of September 30, 2009 totaled 236.5 million, a 1% decrease from a year earlier. At quarter end, Moody's had 1.3 billion of outstanding debt and approximately 450 million of additional debt capacity available under our revolving credit facility. During the quarter, we used a portion of our cash flow to reduce short term debt by approximately $50 million.

In total we reduced short term debt by $187 million for the first nine months of 2009 and expect to continue debt repayment in the fourth quarter. The combination of debt repayment and growth in our cash position to $423 million has reduced our net debt by $364 million since year end 2008.

And with that, I'll turn the call back over to Ray.

Raymond W. McDaniel Jr.

Thanks Linda. I'll start now with a brief update on legislative and regulatory development. We continue to communicate our over state authorities at national, regional and global levels and expect increased level of regulatory activity in the near term.

In the US, yesterday the House Financial Services Committee approved a bill to enhance over side of nationally recognized rating organizations or NRSROs. The bill addresses topics such as increase in transparency and accountability, strengthening the management and disclosure of conflicts of interests further empowering the SEC's oversight of NRSROs, the bill will be subject to further congressional debate as a component of the broader initiative for financial system reform.

In mid September the SEC adopted rules requiring additional disclosure of information including rating histories and removing certain references to NRSRO ratings from regulation. They also voted to propose or re-propose additional rules on topics concluding the disclosure of additional information, strengthening the compliance function and removing references to ratings and other regulations.

Finally the commission voted to issue a concept release seeking public comment about what would be liability standards when a rating is used in connection with a registered offering. We remained focused on playing a constructive part in the discussion of these issues with Congress, the SEC and other regulatory authorities and market participants.

In Europe, following the European parliamentary vote in favor of new rating agency regulation, we continue to consult with national authorities and the committee of European Securities Regulators or CESR on the specifics of implementation. We expect the EU regulation will be effect by the second half of 2010.

As we have discussed earlier, compliance efforts in Europe, the US and elsewhere will entail investment and additional costs. We currently expect to incur incremental expense in the range of 15 to $25 million in 2010, as we respond to multiple legislative and regulatory initiatives. The timing and amount of initial and on going costs remains uncertain however, as it depends on the various effective dates and final form of regulation in the US and abroad.

Finally, as regulatory reviews take place in other jurisdictions, we will continue to advocate for globally consistent approaches that align with the G-20 statements and the international organization of securities commissions or OSCO framework.

I would also like to comment briefly on recent allegations made by a couple of former Moody's employees. First, an external investigation conducted by an independent law firm into various claims about CDOs raised by a former employee has now been completed. The investigators found that the allegations were not supported by the facts and were without merit. In fact the investigators specifically concluded that in every instance Moody's employees acted according to established policies and procedures. These findings are consistent with Moody's previous internal compliance reviews.

Recent criticism by another former employee regarding Moody's process for monitoring our municipal securities ratings was equally unfounded. We're confident in our monitoring process which incorporates both qualitative analysis and quantitative tools. Performance of Moody's municipal ratings have been outstanding throughout the credit crisis and our ratings continue to be well positioned.

I'll conclude this morning's prepared remarks by discussing our full year guidance. Moody's outlook for 2009 was based on assumptions about many macro economic and capital market factors. Corporate and consumer borrowings, securitization and the nature and impact of government sponsored economic stabilization and stimulus initiatives. There is an important degree of uncertainty surrounding these assumptions and if actual conditions differ Moody's results for the year might differ materially from our current outlook.

As mentioned earlier, we're revising our EPS guidance upward for the full year 2009 to a range of a $1.60 to $1.68 due primarily to the continued recovery in corporate debt markets globally. This outlook assumes foreign currency translations for the reminder of 2009 at exchange rates as of the end of the third quarter. The company now projects full year 2009 revenue to remain about flat with full year 2008.

Expectations for certain areas of change based on conditions specific to those sectors and geographies. We expect recurring revenue to remain stable. Full year 2009 expenses are now expected to increase in the high single digit percent range. We now project full year 2009 operating margin in the high 30s percent range and an effective tax rate in the 37 to 38% range.

Our guidance assumes a seasonal increase in expenses related to the sales cycle for Moody's analytic continued hiring in strategic areas of the business and investments in technology and administrative processes in order to create a robust platform for future growth, and to meet prospective over-site requirements.

For the global MIS business, we now expect 2009 revenue to decline in the low single digit percent range. In the US revenue is now expected to be about flat to full year 2008. While non-US revenue is still projected to decrease in the mid single digit percent range. We now anticipate full year 2009 growth in corporate finance revenue in the low 30s percent range, reflecting our expectations of further improvement in speculative grade issuance and continued investment grade activity.

Our revenue outlook for structured finance and financial institutions remains unchanged. We projected decreases in the mid 20s and mid single digit percent ranges respectively. We now expect revenue in the public project and in infrastructure finance sector to increase in the low single digit percent range for full year 2009.

For Moody's analytics we still anticipate full year 2009 revenue growth in the low single digit percent range. We now project the subscription revenue will be flat compared with full year 2008, while we continue to expect strong growth in software revenue, largely as a result of the Fermat acquisition. Revenue in smaller professional services segment is expected to decline in the mid single digit percent range. We still project low single digit percent range decline within the US and a high single digit percent range growth outside the US, for Moody's analytics revenue.

That concludes our prepared remarks, joining us for the question and answer session are Michel Madelain, the Chief Operating Officer of Moody's Investor Service and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.

Question-and-Answer Session


Thank you, (Operator Instructions) we will first go to Peter Appert at Piper Jaffray.

Peter Appert - Piper Jaffray

Thanks Ray, two questions for you one it seems like there might be some preliminary, very preliminary signs of life in the structured finance market in terms of some mortgage deals getting done. So could you just comment on what you're seeing in the structured finance markets, specifically and related to that too just sort of pipeline going into the fourth quarter. I know it's captured I guess in your guidance. But is there anything interesting in terms of the pipeline you're seeing that you can share with us?

Raymond McDaniel Jr.

With respect to structured finance specifically most of what we are seeing continues to be TALF related. We -- and we've seeing about $10 billion a month in TALF related securitization our revenue coming from that area in the third quarter was about the same as it was in the second quarter. You're correct there has been a couple of securitizations that have moved forward outside of TALF. This I think has been very much spread driven and, it's encouraging to see. But I don't think that we're seeing enough activity at this point that I would call it any kind of a strong trend in the return of securitization.

I really wouldn't expect to see that until later in 2010, after we have gotten through what will be we hope and anticipate the peak in unemployment and stress on consumers for the as effect (ph) security sectors and peak in corporate defaults for the example the collateralized loan obligation sector.

Peter Appert - Piper Jaffray

And Ray there is a commentary in the press today about a variety of issues coming out unrated. Can you just comment on that and what you're seeing in terms of any trend in that regard?

Raymond McDaniel Jr.

Sure to go to the bottom line first, our coverage globally remains consistent with what it has been historically. We have not seen any erosion in coverage or growth in unrated issuance as a percent of total issuance. That being said, we have to be very attentive to whether we're providing good value and service to investors through the ratings and research that we offer, so that it doesn't become a trend.

With respect to some of the names that I think we identified in the media those names are not names that have moved from the rated to the unrated universe. There are a hand full of names globally that have never sought ratings and those names that we identified I think fall into those categories.

Peter Appert - Piper Jaffray

Okay great thank you. And then just one other thing. The my understating is that there might have been some catch-up on this accruable expense in the third quarter, can you quantify how much that might have been?

Linda Huber

Sure Peter you're correct, on the back of -- about 10% stronger guidance for the full year and a view that revenue will be about flat for last year as opposed to where it had been and that it would be down somewhat. We did do a catch-up in the third quarter. Incentive compensation for the third quarter is 14% of total compensation and it's $25 million for this third quarter, which is up about $10 million from what we put up in the second quarter.

Peter Appert - Piper Jaffray

Thank you.


Next we'll move to Michael Meltz with JP Morgan.

Michael Meltz - JP Morgan

Thank you. On the regulatory side I appreciate you quantifying the expected incremental step up. Just talk a little bit about of what is that or what does that represent and is that -- I know cash out the door is cash out the door. But is it likely some of that is going to be capitalized in terms of systems you need or is it mostly kind of people and consultants?

Raymond McDaniel Jr.

Sure Michael. You're correct, that it is a combination of people and systems and the human resource we need is going to end up I'm sure being a combination of both compliance personnel and ratings personnel who are going to be working at least in some jurisdictions on a rotational basis in the future. And so we'll have to do some additional hiring in that area.

On top of that more systems and technology enhancements that has to be made in various jurisdictions I'm sure some of that will be capitalizable but I don't have a break out of that for you. And I should underline my comment before that, this range continues to be a speculative. Because we just aren't sure about what the final form of new regulation is going to look like in all jurisdictions over the pace at which it's going to have to be implemented. So you're getting our best guess, but that's subject to change.

Linda Huber

Michael it's Linda. I would add that we're building into this. You see expenses were up in the third quarter and we do expect some of that to continue in the fourth quarter. We had talked about the fact that we needed to increase some of our system capabilities to deal with some of these regulatory things. So we've have also been building into this as well as expecting more expense to occur in 2010. But as Ray said timing is uncertain and we can't tell you which quarters it will hit in because we don't have the final rules yet.

Michael Meltz - JP Morgan

Okay, and then just another one, sorry to waste a question on this but Linda you're -- can you give us the percent of each product line in that transaction for the quarter please?

Linda Huber

Sure. It is not a waste of a question, no problem. We'll go through structured finance first. Transaction revenue for the third quarter 2009 was 43% of the total and 57% with relationship. For the corporate finance group because of the very heavy issuance activity, 63% transactional and 37% relational relationship, excuse me.

For financial institutions group 27% transaction and 73% relationship. For PPIF 57% transaction and 43% relationship. So the total for Moody's investor service, 49% transaction, 51% relationship. Of course with Moody's analytics we see a much heavier skew towards relationship and subscription revenues, so we have 12% transaction and 88% relationship, and for the company as a whole third quarter 2009 we have 37% transaction driven revenues and 63% relation driven revenues. It's pretty close to where we were in the second quarter of 2009 which for the company is 38% transaction and 62% relationship. So relatively steady there.

Michael Meltz - JP Morgan

Sure. Thank you. And then my last question. On the buyback side can you just talk a little bit more about -- I understand the vernacular you'll be opportunistic but you're focused on debt pay down. What point given the bounce back in transaction volumes and you have been able to keep margins pretty steady. What is going to be the inflection point to make you start think more aggressively about repurchase especially at current level?

Linda Huber

As we said, we're goanna look at market conditions and see what happens going forward Michael. Obviously, we would hope to buy back the stock at the right time and I think that would be driven by if we see a significant market dislocation, if we see a what we view as an incorrect interpretation of circumstances, then some conditions like that might cause us to get back into the market.

Raymond McDaniel Jr.

And I think more broadly also, in thinking not only about the opportunistic but systematic share repurchase, that is going to importantly include the degree of improvement in overall credit market conditions, access to credit, the amount of liquidity that we feel is prudent to have on hand is subject to the environment in which we are operating. So, I don't think we could put a specific number on it but those are the variables that we are looking at.

Michael Meltz - JP Morgan

Okay thanks for your time.

Raymond McDaniel Jr.

Thank you.


(Operator Instructions) We'll go next to John Neff with William Blair & Co.

John Neff - William Blair & Co.

Quick question, just sort of the legal history. Has Moody's ever lost or settled a lawsuit? And is it a situation where -- what's your view on Moody's ability to afford, let alone lose even a single lawsuit. Is it something that you could do and carry on with the business or would it kind of set off some sort of domino affect?

Raymond McDaniel Jr.

So, to answer the first part of your question, no we have had never lost a ratings related lawsuit. We have never settled a ratings related lawsuit. With respect to litigation obviously we'd rather see less of it than more of it. We feel very comfortable and confident about our legal position on the merits and we're not concerned that we're going to have a litigation loss, but there are obviously costs too for litigation and those are an increasing part of our expense basis as we have had an increase in litigation this year. So we've got to get to a point where some of these cases are dismissed and that's going to pull the litigation cost back in.

John Neff - William Blair & Co.

Is there any expectation that you had some favorable I thought rulings in regards to the Abu Dhabi lawsuit. Any sense of I realize the legal system but any sense of timing when you might get some preliminary rulings or movement in some of the other suits?

Raymond McDaniel Jr.

I'm told repeatedly by our legal counsel that it can be very unpredictable. They point out correctly that we are subject to the court's calendar and how quickly the court wants to move forward in any of these litigations. So unfortunately, I can't give you an estimate that I think would be anything more than just a plain guess.

John Neff - William Blair & Co.

In relation to the litigation risk, any surprises out of the House of Finance Committee bill that was passed? They seem to be taking the stance so far that increased legal liability, -- defining by regulation might be advisable?

Raymond McDaniel Jr.

I think the debate in Congress is looking at -- rather than looking at liability. I think it's starting from the premise of how do we make sure there is proper -- there are proper levels of accountability for the industry. And then they look -- the process looks for ways to identify accountability and to assign that to the industry.

Liability is one potential part of that. There are obviously reasons why we believe that an enhanced liability standard for this industry would not contribute to investor protection or to the independence and stability of our ratings. So we continue to make those points and we -- I'm confident that we're going to end up with a standard that is workable and that we are going to have proper levels of accountability.

John Neff - William Blair & Co.

And Linda may be two quick questions more. Could you give us the employee headcount at the end of the quarter number one, and also can you -- is there any incremental CapEx that you're thinking of for compliance under the new regulatory regime?

Linda Huber

Take a note; the first question for total headcount at the end of Q3 was about 3900 people which is just about flat from where we were at the end of the second quarter, we had a bit of a pop up at the end of last year because we acquired little bit less than 300 people with the Fermat acquisition. So, we're about flat on headcount naturally, we expect to end the year.

The capital expenses more relate to some of the IT systems that we're building, some of which have overlapped with compliance John and some of which are just being used to improve the efficiency of our system for the analysts and our ability to track our processes going all the way from ratings through billing. So I'm not sure we did identify any particular CapEx further, but I think it's fair to say as you have seen that our CapEx has moved a little bit and that will continue. But again we're not a heavy CapEx sort of company and we will not be in the future.

John Neff - William Blair & Co.

Thanks very much.


Next we go to Ed Atorino at Benchmark.

Edward Atorino - The Benchmark Company

Hi good afternoon yeah its good afternoon. Three questions; one, if you took out the 15 or 20 million of the new expenses I guess, what would be sort of the underlying cost inflation for Moody's in 2010, number one.

Number two, with the surge in corporate finance, this year is do you think it might borrowed a little quote-unquote from the 2010, which leads to my final question -- I might have missed this because I got on late. Could you sort of give us your view from our high in 2010, in terms of issuance, excluding structured finance which nobody knows what's going on.

Raymond McDaniel Jr.

Sure let me answer your -- the second part of your question Ed, and then maybe I can ask Linda to help out with your -- the first question you raised.

In terms of 2010 market outlook I can tell you what we are looking at I think better than I can tell you what those conditions are going to be at this point in time and I think we are looking at a reduced level of corporate default in 2010 versus 2009. That should be beneficial towards bringing credit spreads in further which would be beneficial for issuance.

I do think that there has probably been some pull forward of 2010 refinancing into 2009. That's clear. But I also think there is an opportunity to bring forward 2011 refinancing into 2010. And I think the pre-financing opportunities if conditions are conducive to issuing at attractive rates are going to be there. There is plenty of debt in the pipeline to be refinanced and there are questions about timing and when those windows of opportunity will exist. But the stock of outstanding debt that needs to be refinanced and pre-financed is large.

That's both in the corporate sector and in the financial institutions sector. I don't think we can expect investment grade issuance in 2010 to outpace what we've seen in 2009. But I think the growth in the corporate sector would probably be more reliant on high yield activity in 2010, and again there is a significant amount of refinancing that can occur.

We have also seen some activity in the mergers and acquisitions area which we were not seeing earlier this year. If that continues in 2010 that would be beneficial. You've heard my remarks outside of the corporate and banking area before on securitization, and I think those remarks would remain as they had been.

At best I think we're looking out into mid-year to see any real return in parts of the structured finance market. It would probably be after a peaking of unemployment and stress on consumers associated with unemployment. And increased confidence about the securities that are backed by either consumer loans or corporate loans and in the CLO area. And I think there are some areas of structured finance that are going to continue to struggle but those would be the first areas, I think we would look for any kind of meaningful recovery; and I think its still little ways off. Let me turn to Linda on the other matter.

Linda Huber

I think the number that Ray quoted and that we have in the script for the potential regulatory increases, it's actually 15 to 25.

Edward Atorino - The Benchmark Company

Oh, okay well...

Linda Huber

So you're close. I think we would say we haven't given guidance yet on 2010 and we won't do that until February. But I think directionally you probably look at a little bit of expense growth. For example if the business continues to do better and we're encouraged by what we have seen, we might hope to restore our bonus funding back to a full 100%. At this point the best we can get is that may be a 20 to $25 million step up given that we've seen improvement at the end of this year, things are looking better so that number is not as far as it was as we had commented on in the second quarter. So also we would expect, we will continue to invest appropriately to support a business which is still growing nicely and so we would expect maybe some growth, but we're pretty modest about expense increases around here.

Edward Atorino - The Benchmark Company

Two more quickies. Are the emerging markets big enough now to start moving the top line and second, do you think you can see a 40% margin in the future fairly soon?

Raymond McDaniel Jr.

Well the emerging markets collectively yes, are certainly large enough to I think, be interesting to shareholders and we have obviously activities in the emerging markets, not only on the rating agency side of the business but on the Moody's analytical side of the business and that's an important component of Moody's analytics.

The domestic emerging markets are generally captured or in many cases are captured by ratings activity and research that is produced by affiliates of Moody's. We don't have a majority ownership in all cases or 100% ownership in all cases. So, that is something of a mitigant to emerging market growth. But nonetheless we are in those markets through affiliates and that is beneficial to the firm overall. The 40% margin, yes if we have some normalization of credit market activity, I think that is achievable.

Linda Huber

Ed the numbers, specifically it's third quarter on a pro forma basis we're at 39 for the third quarter and year-to-date we're running 40.2. So we're there.

Edward Atorino - The Benchmark Company

Okay, thank you.


And it does conclude our question and session. At this time I'll like to turn the conference back over to Ray McDaniel for any closing remarks.

Raymond McDaniel Jr.

I just want to thank everyone for joining us this morning and we look forward to speaking to you again after the next quarter. Thank you.


And this concludes Moody's third quarter earnings call. As a reminder a replay of this call will be available after 4:00 PM Eastern Time on Moody's website. Thank you.

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