Moody's Inc.'s (MCO) third quarter 2010 earnings beat the Zacks Consensus Estimate by a huge 11 cents per share based on higher revenues that also exceeded expectations. The results reflect a strong activity in corporate and financial institution debt markets, largely driven by a high-yield bond and higher debt issuance.
Excluding restructuring charges, quarterly earnings stood at 58 cents per share, up 34.9% from 43 cents reported in the year-ago quarter. Earnings surpassed the Zacks Consensus Estimate of 45 cents per share.
Operating income, excluding restructuring charges and legacy tax matters, came in at $189.3 million in the third quarter, up 7.4% year over year. On a dollar basis, operating expenses increased 17.6% from the year-ago quarter, primarily due to an increased headcount and incentive compensation and higher spending related to legal and regulatory requirements. As a result of higher expenses and an increase in revenues, operating margin decreased to 36.9% from 39.0% in the year-ago quarter.
Moody's effective tax rate was 24.4% in the quarter, compared with 37.5% in the prior-year quarter.
Revenues in the reported quarter totaled $513.3 million, up 13.6% from $451.8 million in the year-ago quarter. Revenues were well above the Zacks Consensus Estimate of $473.0 million.
Excluding the unfavorable impact of foreign currency translation, revenues grew 16.0% year over year. The revenue growth was driven by increases in both the Moody's Business Analytics (NYSE:MA) and Moody's Investor Services (MIS) segments.
U.S.(54.2% of total revenue) and international revenues (45.8%) increased 21.2% and 5.8%, respectively, to $278.3 million and $235.0 million. Excluding the impact of foreign currency translation, international revenues were up 10.0% compared with the year-ago quarter.
Segment wise, revenues at MIS climbed 17.0% year over year to $358.2 million. MIS revenues in the U.S. rose 26.0% while revenues outside the U.S. grew 7.0% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues shot up 51.0% year over year in the U.S., mainly attributable to the strength in high-yield bank loan and bond origination for refinancing and increased merger and acquisition activity. Outside the U.S., revenues were up 29.0% year over year, primarily attributable to the strength of issuance activity in Asia and Latin America and increased high-yield bond issuance in Europe. Overall, Global Corporate Finance revenues escalated 43.0% year over year.
This was partially offset by a 11.0% year-over-year decrease in Global Structured Finance revenues. The decrease was mainly due to a decline of 8.0% in U.S. Structured Finance revenues, given the increased issuance activity from commercial real-estate financing, which was more than offset by reduced activity in derivatives.
Non-U.S. Structured Finance revenues fell 15.0% year over year, mainly due to European covered bond issuance activity, which was fully offset by a lower European derivatives and securitization issuance.
Global Financial Institutions' revenues soared 17.0%, compared with the year-ago quarter. U.S. and international financial institution revenues increased 14.0% and 19.0%, respectively, primarily due to issuance increase in the U.S. insurance sector and a greater activity in the banking sector.
Global public, project and infrastructure finance revenues increased 13.0%, compared with the year-ago quarter. The U.S. increased 24.0% year over year, thanks to stronger public finance and infrastructure sectors. However, International revenues dropped 7.0%, primarily due to a reduced issuance for European infrastructure finance.
Moody's Analytics revenues grew 6.0% year over year to $155.1 million, given an increase in revenues for research, data and analytics (up 3.0%) and risk management software (up 16.0%). Professional services segment remained flat year over year. In the U.S., MA revenues increased 10.0% while outside the U.S., revenues rose 3.0%, primarily driven by the delivery of risk management software projects.
Moody's exited the quarter with $804.5 million in cash and cash equivalents and short-term investments, compared with $486.0 million in the previous quarter. During the quarter, the company repurchased 0.8 million shares at a total cost of $19.7 million. At September end, the company had $1.3 billion share repurchase activity remaining under its current authorization program.
At quarter-end, Moody’s had $1.3 billion of outstanding debt and $985 million of additional debt capacity available under its revolving credit facility. Moody’s completed a public offering of $500 million of ten-year senior unsecured notes with a 5.5% coupon in the quarter.
Moody’s board of directors declared a quarterly dividend of 10.5 cents per share, payable on December 10, 2010, to stockholders of record at the close of business on November 20, 2010.
Given better-than-expected third quarter results, the company raised its 2010 guidance.
Earnings per share are expected to be in the $1.90 to $1.96 range, up from previous $1.75 – $1.85 range. The Zacks Consensus Estimate is currently $1.86 per share at the time the company reported results. Share repurchase is expected to resume at modest levels in 2010.
Full year 2010 revenues are expected to increase in the high single-digit to low-double-digit percentage range versus the previous expectation of an increase in the mid single-digit percentage range.
Expenses are also expected to increase in the low double-digit percentage range, versus the previous expectation of an increase in the mid to high single-digit percentage range. Management expects incremental compliance costs related to new regulation to be approximately $15 million in 2010 and $15 million to $25 million in 2011.
Operating margin is projected in the high 30% range, consistent with the previous expectation. The effective tax rate is expected to be in the range of 33% to 34% versus previous expectation of 34% to 35%.
Segment wise, for the global MIS business, Moody's expects revenues to increase in the low double-digit percentage range for 2010. Moody's Analytics revenue growth is expected to increase in the mid single-digit percentage range.
Given the company’s robust results for the third quarter and better-than-expected guidance for the full year 2010, we believe that estimates will most likely go up in the coming days. Currently, Moody’s has a Zacks #2 Rank, which implies a Buy rating on a short-term basis (1-3 months).