Moody's Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 2, 2022

There are 14 speakers on the call.

Operator

Good day, everyone, and welcome to the Moody's Corporation First Quarter 2022 Earnings Conference Call. At this time, I would like to inform you that this call 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 questions and answers following the presentation. I will now turn the call over to Shivani Kok, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning. Thank you all for joining us to discuss Moody's Q1 2022 results and our revised outlook for full year 2022. I'm Shivani Karp, Head of Investor Relations. This morning, Moody's released its results for the Q1 of 2022 as well as our revised outlook for full year 2022. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.

Speaker 1

Movies.com. Rob Falber, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mark Jay, Moody's Chief Financial Officer. During this call, we will also be presenting non GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call and GAAP.

Speaker 1

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 Discussion and Analysis section and the risk factors discussed in our Annual Report on Form 10 ks for the year ended December 31, 2021, 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.

Speaker 1

I will now turn the call over

Speaker 2

to Rob Souda. Thanks, Shivani. Good morning, and thanks, everybody, for joining today's call. I'll begin by providing a general update on the business, including our Q1 2022 results. And following my commentary, Mark Kaye will provide some further details on our Q1 2022 performance as well as our revised 2022 outlook.

Speaker 2

And after our prepared remarks, as always, Mark and I will be happy to take questions. So against A backdrop of geopolitical turbulence in volatile markets. Moody's first quarter revenue was $1,500,000,000 and that's down 5% from the prior year period. With the decline in issuance in the Q1 and our expectation for continued subdued levels of opportunistic issuance for the balance of the year, We've updated our full year 2022 guidance and we now project Moody's revenue to be approximately flat relative to the prior year. We've also lowered our adjusted diluted EPS guidance to be in the range of $10.75 to $11.25 It may continue to be a strong source of consistent growth, while market disruptions impacted issuance activity.

Speaker 2

As investments to meet customer demand for our mission critical suite of tools and solutions drove revenue growth of 23%. Recurring revenue is core to this growth, which is why we're introducing a new reporting metric, annualized recurring revenue or ARR. We expect this new metric to provide greater transparency into the growth trajectory of MA's recurring revenue. The temporary impact of market uncertainty on our financial performance does not change our expectations for the medium term. And Time and time again in periods of uncertainty like these, markets and organizations look to Moody's for expertise and insights, increasing the demand for our integrated risk assessment offerings.

Speaker 2

And so we remain confident in the fundamental drivers of our growth. Moody's revenue was down just 5% from a year ago, reflecting the diversity and resilience of our business portfolio. And while MIS revenue decreased 20%, MA revenue was up 23% or 9% on an organic basis, driven by strong customer demand for our solutions. Adjusted operating income fell 20 percent to $734,000,000 Adjusted diluted EPS was $2.89 a decrease of 29% year on year. And Mark will provide some additional details on our financials shortly.

Speaker 2

Now turning to MIS. The issuance factors we highlighted during our 4th quarter earnings call really remain unchanged as elevated inflation and of additional interest rate increases, combined with the impact of the Ukraine conflict are contributing to uncertainty and volatility, and these factors have adversely affected debt capital markets activity, including opportunistic refinancing and M and A transactions, particularly in the leveraged finance markets. And as we've said over the years, periods of market disruption need to be put into historical context. And I would argue that this period is no different. And this chart illustrates our rated issuance over the last decade with the gray bars representing periods of market volatility.

Speaker 2

And it shows that activity typically rebounds after periods of market disruption and has grown steadily over time. And though there's uncertainty as to how long the current disruption will last, we believe that the market will eventually reset amidst higher interest rates and will eventually resume issuance growth supported by economic expansion and substantial and Finance and Maturity Laws. The medium term drivers of debt issuance and our business remain strong. And as we said in the past, Issuance is a function of several macroeconomic factors, the most significant of which is economic expansion. Looking ahead, We do expect global GDP growth for the remainder of the year, albeit at a modest pace.

Speaker 2

The underpinnings of the economy remain sound And consumer and corporate balance sheets remain healthy and U. S. Unemployment remains at near historical lows. While several rounds of interest rate increases are This year as the Fed addresses inflation, rates will remain low by historical standards. Volatility in the credit markets has been reflected in spread fluctuations, Those spreads also remain well below the 10 year average.

Speaker 2

And taken as a whole, the cost of borrowing remains historically low. In addition to these factors, there's a healthy stock of debt, which needs to be refinanced, more than $4,000,000,000,000 over the next 4 years. And we expect the continued build up in our first time mandates will drive growth in our recurring revenue as demonstrated over the last 2 years. Now turning to Rooted Analytics. We're driving robust growth across the breadth of our products and solutions.

Speaker 2

In the Q1, revenue was up 23%, supported by organic revenue growth of 9% and a 96% customer retention rate. We're now including annualized recurring revenue, or ARR, in our reporting to give an indication of our revenue expectations for the future. Organic ARR was up 9% for the Q1, demonstrating the strength of our recurring revenue across the business. Again, Mark will provide some additional details on ARR shortly. I'd like to take a moment to share a story that illustrates how Offerings across our 3 reporting lines and then they come together to provide value for our customers.

Speaker 2

As a result The acquisition of Bureau Van Dijk in 2017, we had a modest relationship with a large multinational insurance underwriter that was using our Orbis database to support sales and marketing activities. Following the acquisition, we had a series of discussions with this and other customers about ways to address a wider range of their needs, which in this case included their process for underwriting trade credit insurance. We were able to package our Orbis data, our credit research and credit scorecards, combined with our AI enabled spreading offering to provide a set of integrated solutions that transformed their workflow, helping them to eliminate 70% of their manual tasks in their trade credit underwriting process and increasing their efficiency and enhancing their effectiveness. This upsell results 3 100 percent increase in annual customer revenue. And today, we're having discussions with them about further expanding our relationship to serve additional use cases and solutions, including integrating ESG into their underwriting processes.

Speaker 2

And I think it's just a great example of our ability to expand our customer relationships by bringing together the full capabilities across Moody's Analytics. As you know, helping the market make sense of the risks and opportunities posed by ESG and climate change is a priority for us. And we're increasingly delivering solutions that help companies incorporate these critical factors into their decision making. And that's an important reason for our acquisition of RMS last year. In addition to building a business serving the insurance industry, RMS brings scaled world class weather and climate data and analytics, which we're bringing to a much broader customer OEMs.

Speaker 2

Inclusive of revenue from RMS' climate related offerings, Our combined revenue for our ESG and Climate Solutions was approximately $170,000,000 in 2021. We expect this revenue to grow in the low double digit percent range this year. We also expect our climate revenues, which today are predominantly from our mouse, to accelerate as we continue to integrate its best in class models to meet our customers' growing needs. And going forward, We'll update you on this revenue number as it provides, I think, a good sense of our scale and impact in this area. Our growth is supported by a number of key innovations and award Last month, we launched ESG 360, which is a powerful platform that delivers decision relevant ESG data and insights to portfolio managers.

Speaker 2

We're also launching new climate change models in the U. S. And Asia that will help address the growing need for climate change analytics, including supporting increasing regulatory demands. We're proud to have received recognition from customers for our ESG and climate related products and services, including being named ESG opinion provider of the year by the International Financing Review. I'm excited about the opportunities ahead as we continue to play a meaningful role in helping companies decode risk and unlock opportunity.

Speaker 2

And speaking of decoding risk, Our customers turn to us even more in times of stress and uncertainty, and we saw that during the throes of the pandemic. And as you can see on this slide, The relevance of our offerings has probably never been higher with significant leadership of our research and usage of our solutions. Our research reports have been read over 200,000 times, while KYC screenings are up 70% year over year as our customers have a critical need to better understand and monitor their own customers and suppliers amidst geopolitical conflict and sanctions. With that, I will now turn the call over to Mark to provide further details on Moody's Q1 results as well as an update to our outlook for 2022.

Speaker 3

Thank you, Rob. In the Q1, MIS revenue declined 20% from last year's record level as geopolitical concerns, rising yields and elevated economic uncertainty contributed to a 25% increase in rated issuance. Corporate Finance, Financial Institutions and Public Project and Infrastructure revenue declined 31%, 19% 14%, respectively, with many issuers remaining on the sidelines due to unfavorable market conditions and existing levels of balance sheet liquidity. Structured Finance revenue increased 24%, supported by 10% growth in issuance, primarily from commercial and residential mortgage percent. Revenue was adversely impacted by the noted absence of opportunistic issuance in the quarter, while operating expenses, excluding those related to the Russia Ukraine conflict, remained relatively flat.

Speaker 3

Moving to MA. 1st quarter revenue grew 23%, delivering the 5th consecutive quarter of double digit growth. Excluding the impact of recent acquisitions, Revenue and recurring revenue were up 9% and 11%, respectively. In Decision Solutions, revenue increased 48% or 14% on an organic basis. This is driven by robust demand for KYC Banking as well as Insurance and Asset Management Solutions.

Speaker 3

Research and Insights revenue rose 7%, reflecting strong demand for our credit research, analytics and models, underpinned by 97% customer retention rate. For data and information, revenue grew 6% driven by new sales of the company's data and ratings fees. MA's adjusted operating margin expanded by approximately 3 50 basis points From incremental operating leverage, net of ongoing organic investment, this is offset by approximately 4,000,000,000 basis points of margin contraction due to acquisitions completed within the last 12 months. Over the past few years, we have successfully transitioned The MA business to a predominantly subscription based model with strong recurring revenue, which now accounts for 94% of total MA revenue. This quarter, we are pleased to introduce a new forward looking performance metric for our MA business.

Speaker 3

This new metric, Annualized recurring revenue or ARR is the annualized run rate of recurring revenue for active contracts at a point in time. Renewable contracts include subscription, term licenses and software maintenance. The AUR metric provides insight into the trajectory of AMA's recurring revenue with visibility specifically into the growth of the subscription business from both our acquisition of new customers and the expansion of existing relationships. As of March 31, 2020, KMA's ARR of $2,600,000,000 reflected 25% growth from the prior year period or 9% on an organic basis. In addition, we are guiding to low double digit organic ARR growth for year end 2022, reflecting our expectation for accelerated renewable sales through the remainder of the year.

Speaker 3

Turning now to our revised guidance. Moody's updated outlook for full year 2022 as of May 2 reflects assumptions about numerous factors. These include, but are not limited to, The effective interest rates, inflation, foreign currency exchange rates, capital market liquidity and activity in different sectors of the debt markets. The outlook also reflects assumptions about general economic conditions, global GDP growth, the scale and duration of the crisis in Ukraine and the impact of COVID-nineteen as well as the company's own operations and personnel. Our updated full year 2022 guidance incorporates the following specific macroeconomic assumptions.

Speaker 3

2022 U. S. And euro area GDP to expand by approximately 3.5% to 4.5% and 2.5% to 3.5%, respectively, and global benchmark rates to increase from historic lows With U. S. High yield spread moving slightly above the historic average of approximately 500 basis points and inflation rates remain elevated and above Central Bank Targets in Many Countries.

Speaker 3

By year end, the U. S. Unemployment rate is expected to remain low at approximately 3.5% and the global high yield default rate will initially decline before gradually rising to approximately 2.7%. Our guidance also assumes foreign currency translation and for the remainder of 2022, reflects exchange rates for the British pound of $1.32 1 $0.11 for the euro. We are updating our full year 2022 guidance across several metrics to reflect both 1st quarter results and our revised expectation for the remainder of the year.

Speaker 3

We now forecast Moody's revenue to remain approximately flat to the prior year and for operating expenses to increase in the high single digit percent range, down from our prior guidance as we prudently manage and prioritize investment activity through the cycle. Consequently, we now project Moody's adjusted operating margin to be approximately 47% and have lowered the diluted and adjusted diluted EPS guidance ranges to $9.85 to $10.35 and $10.75 to $11.25 respectively. We decreased our free cash flow forecast to be between $1,800,000,000 $2,000,000,000 and maintain our expectation for full year share repurchases of at least $1,500,000,000 subject to available cash, market conditions, M and A opportunities and other ongoing capital allocation decisions. Please refer to Table 13 of our earnings release for a full list of our guidance. Turning now to our issuance outlook, which we have updated in light of market disruptions in the Q1 and the expectation that opportunistic activity will likely remain constrained heading into the Q2 of the year.

Speaker 3

We forecast global weighted issuance to decline in the mid teens percent range and investment grade activity to decrease by approximately 10%. Leverage finance issuance has been acutely By market uncertainty, with over 20 days of no high yield activity during the quarter, we now project full year 2022 High yield and leverage loan issuance to decline by approximately 40% 30%, respectively. Finally, we forecast a 10% decrease in Financial Institutions activity and a 5% decline in Public Project Infrastructure Finance activity. In structured finance, we expect wider spreads and a weaker future leverage loan supply to impact the Financing and creation for new CLOs for the balance of the year. We are therefore revising our outlook for structured finance issuance to decline by approximately 10%.

Speaker 3

And finally, we are reducing our full year guidance for new mandates to a range of 850 to 950 despite a strong new mandate result of almost 240 in the Q1. Due to our revised rating issuance outlook, We now forecast MIS revenue to decrease in the low double digit percent range. We have proportionately lowered MIS's adjusted operating margin guidance to approximately 59%. This outlook remains above the pre pandemic levels of 2018 2019, reflecting prudent spending on strategic investments and employee recognition, carefully balanced with ongoing cost efficiency initiatives. For NMA, we are reaffirming our guidance for high teens revenue growth, supported by tailwinds from recent acquisitions, Strong customer retention rates and ARR outlook as well as robust demand for our subscription based products as we successfully execute on our integrated risk assessment strategy.

Speaker 3

We are maintaining MA's adjusted operating margin guidance of approximately 29% as we organically invest in the business to further accelerate top line growth. I would like to provide additional insight into our disciplined approach to expense allocation and management, which we believe is critically important to ensure long term sustainable growth As we move through the current short term cyclical volatility impacting the MIS business. In the Q1, Operating expenses rose 16% over the prior year period. Approximately 13 percentage points of this growth were attributable to operational and integration related Costs associated with acquisitions completed in the prior 12 months. Operating growth, including organic investments and annual compensation increases Net of ongoing efficiency initiatives contributed approximately 6 percentage points.

Speaker 3

Lower incentive compensation accruals a strengthening U. S. Dollar offset expense growth by approximately 1% and 2 percentage points, respectively. For the full year, we expect expense growth to be more than $100,000,000 lower than our previous forecast, an increase now in the high single digit percent range. This includes approximately 9 percentage points of growth attributable to acquisitions completed within the last 12 months.

Speaker 3

We remain committed to invest in incremental $50,000,000 $150,000,000 in 2022 to attract and retain world class talent as well as to enhance our product capabilities and expand distribution to capture these new opportunities, respectively. We anticipate that these investments will be partially offset through our ongoing cost efficiency programs and lower incentive compensation accruals. Last, we strongly believe that the market volatility in the first half of the year is cyclical in nature and that the business fundamentals, both MIS and MA remain firmly intact. Therefore, it is especially important that we prudently manage our expenses and continue investing through the cycle in order to realize our near term growth prospects. Before turning the call back over to Rob, I would like to highlight a few key takeaways.

Speaker 3

First, Despite the challenging market environment, we delivered over $1,500,000,000 in revenue and an adjusted diluted EPS result of $2.89 2nd, while short term volatility and market cyclicality are affecting issuance levels, our business funding yields remain strong. 3rd, EMA's robust recurring revenue growth and high customer retention rates reflect the strong demand for integrated risk assessment solutions and provide balance to Moody's overall results. 4, our new ARR metric provides further insight into our momentum towards achieving our near term targets. And finally, we remain focused on investing through the cycle to build market leading products and capabilities in key strategic growth areas and balancing disciplined expense management with the return of stockholder capital. And with that, let me turn the call back over to Rob.

Speaker 2

Yes. Thanks, Mark. I want to close by recognizing the efforts of our people Their continued dedication and hard work remain key to driving growth and resilience and delivering on our strategy as an integrated global risk assessment firm. And that's an additional reason despite the turbulent times in the issuance markets that I remain confident and optimistic about Moody's growth fundamentals. Our mission is even more critical as our customers rely on us to provide trusted insights and standards that help them make decisions with confidence in this environment.

Speaker 2

So that concludes our prepared remarks and Mark and I will be pleased to take your questions. Operator?

Operator

Thank We'll first hear from Manav Patnaik of Barclays.

Speaker 4

Thank you. Good morning. I was just hoping on the issuance forecast, if you could give us some color on kind of the Seasonality that you assumed, I guess, is this current quarter going to be similar to the Q1 and then improve to the back half? Just any color there would be helpful.

Speaker 2

Yes, sure, Manav. Maybe the way to think about this is kind of what's going on year to date and how do we think about what's going to happen year to go, what's implied in our outlook. Obviously, we're projecting full year issuance to be down mid teens for 2022. Issuance was down 25% in Q1. So that implies a deceleration of issuance decline Through the rest of the year, meaning that our year to go issuance will be down in the call it kind of low teens versus 2021 a year to go.

Speaker 2

And I would say Manav, in arriving at that outlook, Most of the downward adjustment relative to our prior outlook is in Q2 and Q3 and Q4 Represent, I'd say, much more modest increases versus our original outlook.

Speaker 3

And then if I carry forward those remarks and thinking about The lower MIS revenue results in the 1st 3 months of 2022 impacted the adjusted diluted EPS by Approximately $0.80 versus the prior year period. And our latest full year 2022 Our guidance for the year, the dollars at the midpoint implies an average quarterly diluted EPS result of $2.17 for the remainder of the year and that includes An additional approximately $0.70 assumed adverse impact from issuance to the EPS result in the 2nd quarter.

Speaker 4

Okay, got it. That's very helpful. And then I was just hoping you could give us a little bit more color on your new ESG and Climate revenue breakouts. How much is the climate piece that's coming from RMS? And I would have thought low double Sounds conservative, but just curious maybe just a matter of putting the offerings together?

Speaker 2

Yes, Manav, it's Rob. I'm going to start and then I might see if Mark wants to build on this. But if you think about just climate for a moment, There are really 2 core components, I think, to how we're thinking about commercializing around climate. The first is helping customers understand the physical risk relating to climate change. And there we have some very substantial capabilities with RMS.

Speaker 2

And then 2nd is around understanding carbon transition and understanding how companies are going to get To net 0. Obviously, we've got an ESG component in this as well. And just to touch on just briefly in terms of the growth rate, and then I'll hand it to Mark. With RMS being a big part of this, obviously, we just acquired RMS recently. So we're just in the process of extending the product Beyond our core insurance customer base.

Speaker 2

So I think you'll see an acceleration of growth over time.

Speaker 3

Yes. And Manav, we also looked And brought through several considerations in determining what was the appropriate classification of climate source revenue. And that includes utilizing the guidance provided by the SEC and their proposed rules for climate related disclosures, which really reflects the impact of severe weather events, direct and indirect greenhouse gas emissions And some of the climate related targets and transition plans. And we also did leveraging of the industry standard publications on the TCFD, etcetera. And so when you think about the combined ESG and climate, we really only capture the revenues associated with climate related perils like floods, hurricanes, typhoons, wild And as we mentioned in the prepared remarks, in April, we did launch our new platform, Moody's ESG 360.

Speaker 3

And that will enhance the way investors and asset managers across our ESG and Climate portfolio are able to get insight. That's really through a very user friendly platform that delivers sort of that comprehensive and decision useful data scores and assessments.

Speaker 2

Yes. And the last thing I'd say, I mentioned it on the prepared remarks, but we want to break this up because we want The investor community, I have a sense of the scale that we've got across, not just ESG, but Climate. Climate is a very, very important part Of the Yi and ESG. And as you heard Mark described, we have a real product suite there that we're going to continue To build on, so we wanted to give some visibility to investors in that regard.

Operator

And next we'll hear from Alex Krum of UBS.

Speaker 5

Yes, hey, good morning. Just coming back to the issuance And outlook, of course. In your prepared remarks, it sounded like you pretty confident that all the medium term indicators are still intact. And it almost sounds like you feel like the second half of the year should almost normalize again. So just wondering What the risk is that you're being a little bit too optimistic here?

Speaker 5

When you meet with or when your analysts meet with corporates, are you hearing, for example, More appetite for deleveraging and would that be something where that $4,000,000,000,000 in refinancing wall at some point becomes irrelevant because we're So any color of what you're hearing that there may be a little bit more of a structural change and

Speaker 2

Yes, Alex, good to have you on the call. So as I said in Kind of a year to go. We have adjusted the forecast for each of Q2, Q3 and Q4 off of our original outlook. It's just that there's a more significant downward adjustment in Q2. And so we think that conditions will therefore improve through the balance Of the year.

Speaker 2

But maybe what would be helpful, Alex, is there's a question obviously from many on the call, are we being too aggressive or are we being too conservative, right? And so Maybe to help you answer that, let me give you a little bit of our thinking in terms of what could provide some upside here and what could provide So downside and I think it's the quickest resolution to some of this market volatility would be A resolution of what's going on in Ukraine. And obviously, that's significantly impacted the European markets. And we've seen the high yield market in Europe shut down for a long length of time and just recently opened. And that would allow these infrequent issuers who have been sitting on the sidelines To potentially come back to market.

Speaker 2

And Alex, an interesting stat, in the U. S, issuance from infrequent issuers was Down almost 50% in the Q1 of 2022 versus the prior year. That's a big number. So a lot of Companies were sitting out the volatility and as you said, their balance sheets are in good shape. They're the impacts of interest rate hikes.

Speaker 2

And of course, we've got the maturity wall that you mentioned. And our real question is, are we going to start to see some pull forward As issuers realize that rates are increasing and we really haven't seen that to any material extent in the Q1 because I think the market Volatility kind of overwhelmed those that wanted to potentially get into the market and pull forward. Our leverage loan expectation, You heard still down pretty significantly off of a record year. But we do have a healthy first time mandate pipeline. And so actually the Q1 of this year is our 2nd strongest first quarter for first time mandates that we've had.

Speaker 2

But a lot of those issuers just haven't come to market, again, because of the volatility. So we've got I would say there's kind of Our backlog and of course we also haircut our M and A driven issuance assumptions as well. So those are the kinds of things that I think could provide a little bit in terms of headwinds, one thing that's on everybody's minds is depending on what the Fed does, Could we see the economy move into recession? We don't see that from where we sit right now, but that's a question mark. Chuck, and I've talked about this in the call is another risk is just the market understanding the actions of various Central Banks.

Speaker 2

And obviously, there's been an enormous amount of stimulus put into the markets over the last several years. And so it's when the market is surprised or doesn't understand That you see real volatility in the markets. And we saw that with the temper tantrum. You've seen a little bit of that in the Q1. And That then creates these open and close windows of issuance.

Speaker 2

I would also say that Just in thinking about kind of the bigger picture, of course, we've talked about a stagflation scenario would be something that would be negative Where we've got an increase in interest rates, but it's not because of economic growth. And so Again, we don't see that from where we sit today, but that's something that we're keeping an eye on.

Speaker 5

Okay. Helpful. Thank you. I'll make my follow-up, a quick follow-up On the recurring revenues MIS, any outlook you can be a little bit specific on? I mean, We've had a lot of issuance over the last couple of years.

Speaker 5

I would expect recurring revenues in that segment still to benefit from that. But just wondering With your new adjusted outlook here, are is it an implication as recurring revenues may start to come off a little bit in MIS2 or how should those trends? Thanks.

Speaker 3

Alex, this is Mark. Just answering your question with respect to MIS, then I'll give a little bit of an EMEA, I wasn't sure which segment you're referencing. Then on the MIS side, we are looking for an increase In recurring revenue from, obviously, 2021 mix to 2022, you could think about it almost as twothree, onethree embedded within our outlook for the full year. On the MA side, you'll see remarkable consistency really from the Q1 of 2022 Turning to the full year guidance that we're giving in terms of that mix between recurring and transaction based revenue, again, as we develop those SaaS based solutions, which we can discuss later on.

Speaker 5

Yes, it was on MIS, but I appreciate it. Thank you.

Operator

Next, we'll hear from Toni Kaplan of Morgan Stanley.

Speaker 6

Thank you. You lowered the MIS margin guide and you gave a good bridge of how that compares to 'twenty one. Just in terms of the quarter itself, were there specific areas that we're seeing cost pressure outside of the revenue flow through? And then Just thinking about the rest of the year, obviously incentive comp will be helpful to offset as issuance is a little bit weaker this year, but any other additional areas where you can maybe find some efficiencies to help the margin?

Speaker 3

Sure, Toni. So in the Q1, the MIM suggested operating margin was 58.6 percent and that was in line with what we saw in the pre pandemic margin levels, if you think about 2018 or 2019 of around 58%. The contraction from the record prior year period was primarily driven by decline in revenue attributable to volatility in the Capital Markets, which is really resulting from that heightened uncertainty given sort of the quarter's geopolitical events. If we exclude some of the onetime expenses Related to the Russia Ukraine conflict in the quarter, which reflected personnel related costs and provision for bad debts, In my second question, we're actually doing flat year over year, and that's inclusive of the financial cost of Attracting, retaining best in class analytical talent across the MIS lines of business, as well as strengthening or taking actions to strengthen our relevance and support future growth. Certainly, the incentive compensation does act as a natural ballast or offset to that, But we do continue to look for additional opportunities for operating efficiency in the business such that we can then reinvest Back into our ratings processes.

Speaker 6

Great. And then, it looked like you increased the CapEx guidance for the year. Obviously, just wondering what kind of initiatives that you're ramping up there. Is it related to just growth opportunities or is it more related to acquisition or just anything else? Thanks.

Speaker 3

Tony, absolutely. The answer is a little bit of both, but maybe let me broaden out your question a little bit and then I'll get directly onto the CapEx That's part of the answer. So Moody has a very strong track record of free cash flow generation. Cumulatively between 2019 2021, our weighted average free cash flow to U. S.

Speaker 3

GAAP net income conversion was over 100%. And this conversion rate Holds based on our revised full year 2022 free cash flow guidance range, which at the midpoint $1,900,000,000 implies approximately 100% conversion ratio. We have also revised our full year 2022 CapEx guidance to be within the range of $250,000,000 to $300,000,000 And that's really to reflect a combination of a number of factors. And those include sort of the ongoing investment, especially around SaaS based product development for both new and upgraded customer solutions, R and S integration activity, office enhancements related to our Workplace of the Future program And then really corporate IC asset purchases, as we refresh our PC hardware and some of the associated peripherals. Maybe one last comment here.

Speaker 3

Our guidance for EPS and for cash flow at the midpoint does imply sort of a little bit of a disconnect. And you're able to resolve that by considering really the following two Really free cash flow is expected to outpace the adjusted diluted EPS. When you correct for The tax payments in 2021 associated with the potential U. S. Corporate tax rate changes, which ultimately did not occur as well as and some of the changes associated with the non U.

Speaker 3

S. Tax settlement in the Q4 of last year.

Speaker 6

Super helpful. Thanks, Marc.

Operator

Next, we'll hear from George Tong of Goldman Sachs.

Speaker 7

Hi, thanks. Good morning. Just wanted to dive into margins a little bit. You're seeing obviously higher input costs, wage inflation. How do you balance the higher input costs with investments over the next year?

Speaker 7

Where would you see puts and takes on either side of the equation?

Speaker 3

George, we Continue to carefully evaluate opportunities to invest for sustainable revenue growth While balancing those investments against cost efficiency initiatives, that really buttress will further expand our adjusted operating margin. And this is especially important in volatile market conditions. Given that we do view today's prevailing market dynamics as cyclical Rather than structural in nature, we plan to invest through the cycle to support our medium term growth ambition. And these investments are going to be focused on customer enhancements, New products, go to market activities and really growth in our sales force. And collectively, they ensure execution Of our strategic roadmaps in the high priority markets like KYC and compliance, ESG and Climate Banking, insurance, for example, our Incentive compensation accruals, as you mentioned, once again, will flex based on actual performance as compared to the financial targets that we set at the start of the year.

Speaker 3

So they do act as a natural expense leader. And we've also learned since the beginning of the pandemic that many business activities can be successfully performed remotely. And while travel maintain the cost will rise compared to the prior years, we will prioritize some of the customer facing travel when needed. And then lastly, I'd like to add, We will look to continue to create incremental cost efficiencies through the utilization of lower cost locations and vendor management strategies As well as further rationalization of our real estate footprint.

Speaker 7

Got it. That's helpful. And to the extent that you are Potentially adjusting your investments to lower them a bit In the context of rising input costs, which areas would you potentially invest less in as you look to adapt to the current changing input cost environment?

Speaker 3

We remain on track to spend approximately $150,000,000 on our organic Strategic investments in 2022, which like 2021 will be weighted towards the second half of the year. And those investments are really going to be focused on again increasing our sales force, our go to market initiatives, etcetera. We also, as mentioned in the script, Maintain our expectation for an additional $50,000,000 of investment in our employees to attract and retain the best talent In order to achieve our growth aspirations, so that will not change. Our guidance for expenses over the full year assumes an increase in spending from the 1st to the 4th quarter in the range of about $70,000,000 to $90,000,000 And that's because we anticipate Steadily increasing organic investment at 30 through the cycle and that will be weighted towards the second half of the year. And within that ramp, You should expect the growth from the 1st to the 2nd quarter to be in the range of $30,000,000 to $40,000,000 and that's going to be driven in part by the timing of our annual merit and promotional increases which took place in April.

Operator

Next, we'll hear from Andrew Steinerman of JPMorgan.

Speaker 8

Hi, it's Andrew. Two questions. On the current rated issuance forecast of down mid teens for the year, are you assuming that issuance is down each Of the quarters of 2022? That's my first question. My second question is, I wanted to know how RMS revenues grew like for like in the first I assume RMS revenues in the quarter were $77,000,000 I get that by just looking at the M and A contribution for the Decision Solutions Our sub segment for Q1.

Speaker 2

Andrew, it's Rob. So to answer the first question, yes. And again, in line with some of the earlier commentary, we would expect most of that to be in the 2nd quarter, Most of that kind of downward adjustment. Your question your second question was about RMS growth. And I guess I would say, just at a high level, we have expected RMS growth to accelerate through the balance of the year.

Speaker 2

And in fact, Sales are performing as or even slightly better than we have expected. So from our perspective, RMS is performing kind of exactly as we have planned. And I guess I would point out a couple of important things that are going on there. Obviously, we've got the corporate integration, but we've really been focused on aligning the sales teams. And I mentioned in the past, we've had some very good dialogue with some of our mutual customers about things that we can do together.

Speaker 2

So we're seeing a lot of excitement from our customers. And we've started now on some of the joint product development. And one interesting example maybe to highlight is around commercial mortgage backed securities. We have mapped every property that's got an outstanding loan in a CMBS security with RMS data. And that allows us to help our customers better understand the physical risk associated with their portfolios.

Speaker 2

And really, we're now leveraging that in both our ratings and research in a way that I think is very differentiated. That's taking That RMS capability and then being able to bring that to both our issuers and our investor customers. So again, We believe that we are on track. We're feeling good about it. The integration and product development and sales execution Is going apace.

Speaker 5

Great. Thanks, Rob.

Operator

Ashish Sabadra of RBC Capital Markets.

Speaker 4

Thanks for taking my question. So maybe just drilling down further on the MIS transaction revenues. Historically, the revenues grow faster than issuance You have the pricing tailwind. But here given that some of the higher revenue yield like high yield and level loans are under pressure, how should we think about the dynamic of Transaction revenue growth versus issuance growth for this year? Thanks.

Speaker 4

Any color?

Speaker 2

Yes, Ashish. So we frequently talk about on this call the impact of mix as it relates to issuance. And this is one of those quarters where mix worked against us from a revenue growth standpoint. In this case, our transaction revenues were a little bit lower The decline was a little higher than the decline in issuance activity. Obviously, in turn, our 20% down benefited from recurring revenue growth.

Speaker 2

But really what was going on here, Ashish, is The leveraged finance markets were pretty anemic in the Q1 and you heard me talk about the dearth of infrequent issuers. All of that stuff contributes then to an unfavorable mix for us in the Q1.

Speaker 4

That's very helpful. And then maybe as we think about maybe Rob, as we think about the midterm guidance, right, Given that 2022 is going to be worse compared to what your prior expectations were, how should we think about that as a base for the midterm guidance? Does that help you get a better base for out years? Or do you think this headwinds and muted growth continues over the mid term? So any color on that lowtomidsingledigit MIS revenue growth guidance over the midterm?

Speaker 4

Thanks.

Speaker 2

Yes. Ashish, Mark and I were having a conversation about this and it's interesting if you step back and compare Our revised 2022 guidance to the last pre pandemic year of 2019. And I think we all understand 2020 2021 were pretty unusual years. But if you compare our 2022 guidance So 2019, the issuance will be up double digits and MIS revenues will be up in the 18% range over 2019. Now if you annualize that, so I turn that into a CAGR, That's something like low single digit growth for issuance and mid single digit growth for revenues.

Speaker 2

And that's remarkably similar to both The periods before the pandemic, I look back at kind of 2012 to 2016, we had a Revenue CAGR in the mid single digit range, but it's also very similar to our medium term guidance. And I talked about the things that we believe are still intact to support the medium term guidance. And on the last call, we talked about, hey, look, in the 1st year or 2 of this medium term Horizon, we expected the growth to be more muted. And in fact, I think we're certainly seeing that. But for the reasons I described, We still feel good about the medium term growth outlook for MIS.

Speaker 4

That's very helpful. Thank you very much.

Operator

Andrew Nicholas, William Blair.

Speaker 9

Hi, good morning. Thank you for taking my questions. The first one I had was just on some comments you made In the prepared remarks and in the press release about your risk management offerings providing increased value during Uncertain times.

Speaker 5

I was just wondering if

Speaker 9

you could maybe expand a bit more on that and maybe how you would expect that to kind Plus its way through in terms of financial performance or growth. Is that leading to more productive pricing conversations? Are new clients Coming to you with that in mind in a choppier market to have new product or upsell conversations that you might not have otherwise had. Just trying to figure out What that could mean in terms of performance for the business?

Speaker 2

Yes. Great question. And the answer is Absolutely. You think about it from our customers' perspective, we've talked about this. They're just dealing with a wider range of more interconnected risks and having to figure out how to deal with all that.

Speaker 2

And so increasingly, our customers are wanting to be able to kind of connect the dots. And so I think that the expansion of our capabilities and thinking about it from this concept of providing Integrated perspectives on risk is allowing us to do 2 things. It's allowing us to add new logos, So new customer segments, customer types as well as deepen our relationships with existing customers. So I'll give you an example. We have been expanding into now serving social media companies that have e commerce platforms We want to better understand who's transacting on the platform.

Speaker 2

We've been now extending into sort of even crypto and digital asset companies, Same thing. We so there's a great example of new customer segments that we're able to serve, But also we take our core customer base. So I'm thinking of we had an Asian bank that we serve And we helped them around stress testing and they came to us and said, hey, can you help us measure and manage ESG and climate risk because we're going to have to comply with Regulatory stress tests that incorporate these factors. And the answer is absolutely, we can help you with that. And so That's a great example of them being able to broaden and deepen the relationship with that customer.

Speaker 2

So Like I said, I think you're going to see it 2 ways, new customer segments and expanding our relationship with existing customers.

Speaker 9

Got it. Thank you. And then,

Speaker 8

for my follow-up, just curious,

Speaker 9

I know you're confident This is more of a cyclical headwind in the near term to issuance than secular. Does that Change your appetite for M and A in the near term or at least until MIS revenue or issuance trends stabilize or is Pretty much business as usual on that front. Thank you.

Speaker 2

Yes. I guess I would say Kind of our M and A program is not really kind of dictated by what's going on in the issuance markets. We're very much focused The product roadmaps that we've got in terms of what our customers want and need. In fact, we've actually seen us make an investment in the MIS business in the Q1 with our acquisition of GCR in Africa. And that is A very long term play for us.

Speaker 2

So we're going to keep investing in that franchise. It's a great business. And on the MA side, we'll be guided That customer needs and product roadmaps.

Operator

Frank Huber, Huber Research Partners. Great. Thank you. My first question, Rob or Mark, curious what sort of macro environment are you expecting here, say, by year end For the U. S.

Operator

Treasury rate, where do you think and also the Fed rate at year end, what sort of embedded in your mind when you put out this global debt issuance I'll look at down mid teens, that's my first question.

Speaker 3

Craig, as we think through to The outlook for the year and then a little bit beyond, our Centro case does model continued GDP expansion In part over the year, but also part of the medium term at a slightly higher level than what prevailed prior to the COVID-nineteen pandemic. And that's really based on the GDP, full cost that we use internally from Moody's Analytics. So you could think about Between 'twenty one and 'twenty six, an average annual real GDP growth in the range of around 2.5% as we look out. On your question around interest rates, we again apply sort of the insights from Moody's Analytics Data Buffet And we model out an increase in the 10 year rate from approximately 2% to 3% this year To around 4% by 2027, to answer your question.

Operator

What about the Fed interest rate by year end? What's sort of embedded there in your macro outlook here?

Speaker 3

We are assuming approximately 6 interest Great increases during the course of the year and that would be consistent, I think, with consensus in the market. We're not looking to model anything different or

Operator

Jeff Silber, BMO Capital Markets.

Speaker 9

Thanks. That's close enough. I know it's late. I'll ask one question. You mentioned some of the spending you're doing with retention staff recruiting.

Speaker 9

Can we talk about the environment? Has it changed over the past few weeks or months given what's going on in the overall economy? Thanks.

Speaker 2

Yes, I'd say just at a very high level, I mean it's still a competitive job market. So yes, there's been some form of Correction in the equity markets. But we're very focused on, I'd say, kind of broadly our employee value proposition. And Compensation is a very important part of that. And Mark talked about the investments that we're making to make sure we have competitive compensation in the market.

Speaker 2

There are a number of other things that go into it as well. And we're finding that workplace flexibility is really important. And we have leaned into flexibility. We've done a great job over the last 2 years. And so we're going to continue to do that and we think that that's going to be a competitive advantage for us in terms of

Operator

Owen Lau of Oppenheimer.

Speaker 10

Good afternoon and thank you for taking my question. I want to go back to MA, your organic ARR was 9% for the quarter, and I think you introduced the target of low double digit Growth this year. Maybe could you please talk about the driver of this acceleration for the rest of this year? Is it more driven by Like KYC and compliance, Rob, if you talk about ESG and Climate or any other products, if you can Quantify for us, that would be great. Thank you.

Speaker 2

Yes, Owen, good to hear from you. So we had very strong Performance in M and A really across the board. And maybe I would highlight just a few things. And this hopefully will give you a sense for the momentum that we have in the business. But the growth in Decision Solutions, There we had 20 percent organic constant dollar recurring revenue growth.

Speaker 2

So that's when you think about Organic recurring revenue growth, ex the impact of FX, and we're just seeing very strong demand for KYC and compliance Solutions ongoing. And there, if you think about what's happening with our customers, there's an intense demand right now for Tools that help with not only sanctions compliance, but just better understanding the risk of Who are you doing business with? So customers, of course, but also thinking about supply chain. And so we're really leaning into that. You heard that the usage Stats are up significantly.

Speaker 2

That's a very good kind of leading indicator, Owen, of when you see heavy usage, you can That's that you're deepening the value proposition. Your customers are realizing the value proposition of your solutions that ultimately can lead into supporting pricing. It can support Cross sell and up sell at customers. Our sales activity is picking up. We had a neat program where we were doing actually screening our So that they can get a sense of what they might be missing in their own streaming processes.

Speaker 2

So and on top of that, We made several investments last year. As you know, we made several acquisitions, but also we've been investing heavily in internal product development. And With the Passport workflow platform that we acquired, we've now been really working on integrating our content sets into that, Working on rolling out some new products where our customers continue to need help in terms of efficiency and effectiveness And not only around KYC, but also around suppliers. So I could probably go on across the portfolio, but it gives you a sense, Owen, of Very good performance in the quarter, but very good momentum as well.

Speaker 10

Got it. That's very helpful. And then go back to the buyback, dollars 1,500,000,000 You maintained that guidance. I know, Rob, you answered the question around M and A criteria, but the valuation of many That has come down. So at this point, how do you think about the pace of share buyback versus M and A, which can also drive a long term value of the company.

Speaker 10

Thank you.

Speaker 2

Owen, just one thing. Ran the M and A department for a bunch of years here and you're right, the value of public assets has come down. But I will say that a lot of assets in our space, If you've got companies that don't have leverage capital structures, they're in no hurry to sell, right? It doesn't always mean that it's a more conducive M and A market when you See kind of a downturn in public market valuations.

Speaker 3

And Colin, we do remain focused as a management team on Purdent capital planning allocation, and I was talking about this several times. But just to reinforce, we do try to identify opportunities for organic Inorganic investments in the high growth markets first and then to the extent there are additional investment dollars, we will seek to return that capital To our stockholders for share repurchases and dividends. And our M and A framework, as Rob mentioned earlier, is really structured in a manner such that we pursue the right investments to enhance the services we deliver to our customers and return capital to our stockholders. And then our approach incorporates business and strategic plan development, among other factors such as market attractiveness, which you mentioned, as well as the competitive review. And that only enables us or allows us to pursue new deals, whether it's a Clear set of transaction core elements, among first, supporting and advancing our global integrated risk assessment strategy second, reinforcement of the development of our standards based business.

Speaker 3

And then 3rd is sort of leveraging our brand distribution and analytical capabilities to create more as a whole rather than distinct and separate elements.

Speaker 10

That's very helpful. Thank you very much.

Operator

And our next question comes from Simon Klinch of Atlantic Equities.

Speaker 11

Hi, everyone. Thanks for taking my question. I wanted to jump back just to the guide for issuance and for MIS revenue. I was just wondering if you could talk a little bit The levels of visibility you have in building your guidance for those two outlooks And just give us a sense of how much is based on just looking historically and seeing how things have trended in the past to actually what you can actually see ahead of you?

Speaker 2

Hey, Sondin. It's Rob. So maybe just to give you a sense of Some of the data points and color that goes into how we thought about the outlook, maybe that'll be helpful for you. And I could also Maybe even touch on a little bit just kind of current market conditions. Obviously, we don't have great visibility into the full year, but we do have some visibility into the current market.

Speaker 2

But first of all, just from investment grade, obviously, we've got that down for the year. We've got it down 10% for the year versus down mid-20s for Q1. But there we think we'll see some increased issuance to support opportunistic refi and M and A. So you had some of those issues were just sitting on the sidelines. When you think about high yield and leverage loans, there the decreases that we've seen for the year Are substantially greater.

Speaker 2

And even though we think there'll be a little bit of improvement through the balance of the year, The broader market conditions, including the equity market volatility, wider spreads, continued uncertainty around Resolution of Russia and Ukraine, all that impacts the leveraged finance markets more than investment grade. When you see a lot of equity market volatility, That's typically very challenging for leveraged finance markets. When we look at the kind of Public and Infrastructure area, where we expect that to be down Yes, something like mid single digits, but year to go roughly flat. So some modest improvement baked in. There again, I think kind of like what we expect with the investment grade issuers, we expect that those infrastructure issuers are going to return From sitting on the sidelines in the Q1.

Speaker 2

I think we will see lower supply from sovereigns. We've done a lot of kind of pre funding over the last Couple of years combined with some rising funding costs. Let me just touch on structured for a second here because there We had a very strong Q1 obviously. Our revenues were up 24% in structured finance, But you heard that we're actually looking for issuance to be down for the year. So what's going on there?

Speaker 2

Well, one, you had some spread widening in some of these And concerns about rate increases. So there we did we do think we saw some pull forward of issuance that supported that really strong Q1. CMBS, very strong and we expect that to continue for the year. But CLOs, when you think about what's going on in CLOs, frequently tied to what's going on in the leverage loan market. So with leverage loans down Meaningfully, there's less not only less leverage loan creation for new CLO formation, but with spreads widening, That will put a little bit of damper on refinancing activity.

Speaker 2

So that's generally how we're thinking about the outlook. And then in terms of Just the best visibility we've got is just kind of what the current market looks like. And I would say that The markets are open for business. We would expect an investment grade, I would expect May to pick up off of April. April was a Real mixed bag.

Speaker 2

There was more financial issuance than there was corporate. We had some blackouts and some of the corporates continued to sit out the volatility. There's a lot of dry powder for M and A, but again, volatility will dictate how much of that comes to the market. High yield is pretty sluggish. As I mentioned earlier, the European high yield market has finally reopened after 11 weeks of no issuance.

Speaker 2

So we may see some M and A backlog there come to market. Leveraged loans are certainly stronger than high yield, but off of a torrid pace. I mentioned we've got a good FTM Backlog, first time mandate backlog. So hopefully, some of that will come to market. And the last thing I would say, Simon, is just looking at funds flows, We've seen 5 consecutive weeks of fund inflows in leverage loans, while we've seen Fund outflows for high yield almost through the balance of the year.

Speaker 2

So hopefully that gives you a sense of The data points that we're looking at and kind of building to our forecast.

Speaker 11

Thanks. Well, that's really, really helpful actually. Thank you. I just and as just a quick follow-up, I was wondering if you could just give us a sense as well, I mean, with all this Impressive strong momentum you're getting in Moody's Analytics. How should we think about the economic sensitivity of those recurring revenues If we were to contemplate a recessionary scenario, for example, is this revenue stream actually going to be much more resilient than people Ben, Paul, what are the

Speaker 2

sensitivities you need to answer that? Yes. Simon, it's interesting. If you look all the way back to the global financial crisis, MA's revenues You know proved to be pretty durable and resilient and I think that would be the case here if we have an economic downturn. You know when we talk about this stuff about It's in times of uncertainty when customers need us most.

Speaker 2

That really is that's true. You see that with MA and You're not going to see banks turning off their KYC vendors and running risk of regulatory non compliance because they're trying to cut costs. So I don't want to be glib about it, but I would just say that the fundamental value proposition We will remain intact during times of stress and uncertainty. I do believe that would be true.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel.

Speaker 12

Factors that you have going into the guidance, particularly with the U. S. GDP of 3.5% to 4.5%. And what are you seeing that has you put that Out there as part of the assumption, we had a negative 1.4% for the Q1. So what are kind of And then afterwards I have one follow-up.

Speaker 2

Yes, Shlomo, it's Rob. So the first quarter GDP trend was a quarter over quarter trend. So that was growth relative to the Q4 of 2021. And obviously, in the Q4 of 2021, you had very strong GDP growth. It was almost 7%.

Speaker 2

And so I think We had expected some pullback in the Q1, which happened. If you look at it on a year over year basis for the quarter, you actually had positive GDP growth. I think in the kind of 3.5 percentage range, which is kind of still within the range that we're looking at For the balance of the year, there were some technical factors to that. But in general, I would say that the key variable for us in terms of GDP growth is thinking about the geopolitical Dynamics, policy response to it and there's still a lot of uncertainty around it. But in general, we think our forecasts are in line With a number of other prognosticators.

Speaker 2

Okay, great.

Speaker 12

Thank you for that clarification. And then In terms of what we're seeing in the rate environment, it seems that there's likely to be less of what we've seen a lot in the Few years of pull forwards in terms of opportunistic refi. Can you talk a little bit about how that assumption has changed in the last quarter? In other words, you typically have seen as rates gone down some more kind of opportunistic refi. And can you maybe give a little bit more color about How that impacted the level of MIS kind of takedown that you assume now for this year?

Speaker 2

Yes. So in a rising rate environment like we've got here, we would expect to see CFOs and treasurers Start to look at pulling forward issuance to get ahead of those rate increases. I mentioned earlier that we didn't see much of that in the Q1 And that's because I think the market volatility kind of overwhelmed the desire to kind of pull forward and be in the market. It was just a very difficult market to access if you didn't need to. So we have not built Substantial pull forward into our forecast, which is why I mentioned it earlier as a possible upside.

Speaker 2

You could imagine if the market volatility Calm down a bit, we could see some of

Speaker 3

this pull forward activity. And Sharma, part of the drivers there could really be the elevated cash balances that would temporarily constrain issuance. In the Q1, just put a couple of numbers around that. In terms of investment grade, we saw globally around 11% The eligible investment grade issue has actually come to the market in the Q1. And that's meaningfully below what we've seen over the last 2 years.

Speaker 3

But interestingly enough, Of that 11% that came to the market, 2 thirds of those had issued last year. So not so much opportunistic issuance, but more for regular ongoing financing. Conversely on the high yield fund, just 2% of eligible issuers issued in the Q1 and that's meaningfully probably 2 or 3 standard deviations below what we've seen in other first quarters, but a third of those were repeat issuers from 2021, Sort of emphasizing a point around opportunistic issuance that Robert is making.

Speaker 2

Okay, great.

Operator

Our next question comes from Kevin McVeigh of Credit Suisse.

Speaker 13

Great. Thanks so much. Hey, it seems like the margins are behaving a lot better, particularly given The meaningful downward revisions and a little bit of that is the mix of MA versus MIS. So maybe talk To that a little bit and if you can give us a sense of where the margins sit within MA more specifically, if there's a range to think about, Mark? I wanted to kind of start there, if we could.

Speaker 3

Kevin, thanks for the question. So maybe if I just spend a minute Some of the financial characteristics of some of the new MA LOBs first, and then I'll get on to that specific question sort of about margin by LOB. Data and Information revenue for the Q1 was 100% reoccurring And that was up from approximately 99% recurring as of the year end 2021, and that's with the customer retention rate of 95%. Research and Insights in the Q1, which is 100% organic, had revenues of up 7% and a Recurring revenue rate is 99% and that was consistent with 2021 and had increased customer retention at a rate of 97%, This is a 100% from the year before. Decision Solutions recurring revenue was 87% of the total with a 96% customer retention rate.

Speaker 3

And both recurring revenue and retention rates were up from 84% 93%, respectively, compared to 2021. It's a very strong sample set. If you Look at the MALOB now from an operating leverage perspective, given that both data and information and

Speaker 2

research and insights of businesses with very high recurring

Speaker 3

revenue, Our businesses with very high recurring revenue, you could naturally expect those 2 LOBs to have a stronger margin profile than MA overall. Decision Solutions, which includes R and S, intuitively must then have a lower margin profile, And that really results from the higher proportion of existing on prem solutions and transaction based services as well as the relatively Outsized incurrence of investment dollars in that LOB as we develop software and workflow tools to meet robust customer demand. And then over time, as we execute on our plan to achieve MA's medium term Adjusted operating margin target of mid-30s, you could expect the majority of that margin expansion to really result from improving Operating leverage in Decision Solutions, while the margin profiles of data and information and research and insights should be relatively stable.

Speaker 13

Very helpful. And then I guess either Mark or Rob, I know you Tweed the GDP, but it's still pretty strong GDP relative to other cycles. So as you think about the issuance, is it more The macro uncertainty in terms of where we are as opposed to the base GDP and that kind of factors into some of the recovery in the back half of the year because It seems like you're coming up against tougher comps and you're still seeing some inflection. So is there just any more puts and takes? I know people spend a lot of time on that, Is that a fair way to think about it?

Speaker 3

Maybe the way I'll approach it, Kevin, is we alluded to this a little bit during Investor Day, but Given the uncertainty around the duration and severity of the Russia Ukraine conflict, As well as what we know to be ongoing Central Bank actions to address inflationary concerns, our central case assumption is really that the shortfall in 1st quarter revenue, which has resulted from the lower than expected issuance, which we've discussed, it's unlikely to be recovered as the year progresses. And yes, we think this is a short term cyclical headwind. And as we translate that into MIS transaction revenue, we expect that to be balanced Really between the first half and the second half of twenty twenty two. Historically, and I think this is the point that you're getting at, on average, The second half has only contributed, let's call it, 46 ish percent of the year's aggregate revenues. That's sort of the big driver of the differential.

Speaker 3

And that's driven by several assumptions, some of which we've spoken about in the call, including monetary policy, fiscal policy, where we think energy prices are going up. We've got to really Make sure that we are observing sort of oil prices where they may stabilize and the implications therefore in the recessionary conditions in the second half of the year.

Operator

Our next question comes from Faiza Alwy of Deutsche Bank.

Speaker 1

Yes. Hi. Thank you so much. We've covered a lot of topics. I just wanted to ask a quick Question around margins on the analytics business.

Speaker 1

We did see pretty significant Sequential acceleration and your guide assumes some deceleration. I believe it might be all investments, Mark, That you talked about earlier on the call, but if you could give us any more color around dynamics around investments, inflation, pricing, Maybe any mix as it relates to the new LOBs that you've talked about, that would be really helpful.

Speaker 2

Hey, Faiza, it's Rob. Welcome to the call. It's great to have you on, but I'm going

Speaker 3

to let Mark take this one. For the full year 2022, we are reaffirming our EMEA adjusted operating margin guidance of approximately 29% and that includes Around 150 basis points to 200 basis points of margin compression from recent acquisitions, primarily RMS, as well as foreign exchange translation. Our guidance implies that the margin on average for the remainder of the year will be 28%. And that reflects the impact of our annual promotion and merit Increased cycle, which commenced in April, as well as continued targeted organic investment to expand our Best in class sales force and to focus on cross selling opportunities across multiple product lines. Similar to 2021 seasonality, We'd expect MA's organic investments to steadily increase throughout the year, and that's going to be commensurate with our ongoing revenue growth.

Speaker 3

And those investments to be primarily weighted towards the second half of the year. We have demonstrated, I think, our ability to grow MA's organic Constant currency recurring revenue over the past year from 9% to 10%. We're still projecting sort of that low double digit growth in 2022. And it's these ongoing multiyear investments that we're making that will support the achievement of our targets. And finally, just to sort of close out this one, I'll pass to our medium term in a margin target of mid-30s.

Speaker 3

It's not expected to be linear, especially as we continue to make opportunistic investments as time goes on.

Speaker 1

Great. Thank you so much. Very helpful.

Operator

And our next question comes from Patrick O'Shaughnessy of Raymond James.

Speaker 3

Hey, good afternoon. Just one question from me. So you guys lowered your operating cash flow projection. You left your share repurchase guidance unchanged and you boosted your CapEx outlook. Does that imply incremental debt issuance relative to your prior forecast?

Speaker 3

It does not. If I think about sort of debt outstanding, you've got cash, Cash equivalents and short term investments on the balance sheet as of the end of March were approximately $1,900,000,000 The carrying value of debt As of the same date, it's around $7,800,000,000 And if you take the net debt, which is $5,900,000,000 divided by sort of the trailing 12 months adjusted operating income of about $2,900,000,000 We get a net debt to adjusted operating income ratio of about 2.0. We feel very comfortable with that ratio. It's not anywhere near sort of that BBB plus threshold that That fits your S&P uses to evaluate Moody's Corporation. So hopefully that sort of helps address your question.

Operator

That does conclude the question and answer session for today. At this time, I'd like to turn the call back over to our presenters for any additional or closing comments.

Speaker 10

Well, I just want

Speaker 2

to thank everyone for joining us today and we look forward to speaking with you next

Operator

This concludes Moody's Q1 2022 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 p. M. Eastern Time on Moody's IR website.

Operator

Thank you.

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