Rob Fauber
President and Chief Executive Officer at Moody's
Thanks, Shivani. Good morning and thanks to everybody for joining today's call. We're here from a snowy New York City. I'm going to start with some highlights from 2023 and then discuss our expectations for 2024. And after my prepared remarks Stephen Tulenko who's the president of Moody's analytics, and Mike West, the president of Moody's investor service, will be joining me along with Caroline Sullivan, our interim CFO for the Q&A portion of the call. And before we get into it, I have some very exciting news.
As you may have seen this morning we announced the appointment of Noemie Heuland as our new chief financial officer, and she's reporting directly to me. And Noemie brings a wealth of knowledge to Moody's after nearly 25 years in senior roles at global public companies, including most recently as CFO of Dayforce, formerly Ceridian, and over a decade with global enterprise application software provider SAP, during which it transitioned to a global software as a service business model. So as CFO, she's going to lead the global finance organization that includes accounting and controllership, financial planning and analysis, financial systems, investor relations, strategic sourcing and procurement, and tax and treasury.
And her firsthand experience in scaling high growth category leading public software companies, along with her extensive global experience, I think really make her the ideal CFO for Moody's as we invest in and grow our subscription based analytics businesses and continue to expand our ratings business around the world. So it's an exciting time for Moody's and I look forward to Noemie jumping in beginning April 1 and of course she's going to be a regular fixture on this call going forward.
Before we get into the results, I also want to thank Caroline Sullivan, who is here with me for her immense contributions and support over the last few months as Moody's interim CFO. And Caroline will remain as our chief accounting officer and corporate controller. So with that, moving on to our results. 2023 really was a defining year for us here at Moody's. We delivered 8% revenue growth, we grew adjusted diluted EPS by 16% and we were an early mover in gen-AI adoption and innovation, launching our first-ever gen-AI enabled product in December. And I have to say that the energy and excitement across the organization really was palpable throughout the year, as we launched new products, we entered into strategic partnerships with some of the world's leading tech companies and we increased the gap in our Chartis RiskTech100 number one ranking.
And as we grew, we also increased our margin by over 100 basis points for the year, all while investing across the firm, in technology, in products, and in people. And amidst what was a pretty challenging operating environment for our financial services customers MA delivered ARR growth of 10% with retention rates in the mid 90s and looking at the three reporting lines of business in MA that's decision solutions, data and information, and research and insights and delivered ARR growth of 11%, 10% and 7%, respectively. And as we have upped the pace of product development to meet the strong market demand for tools to better manage risk and to digitize and transform workflows for 2024, we expect MA revenue to grow at approximately 10%, with ARR growth in the low double digit percent range.
MIS, meanwhile, delivered 19% growth in the quarter and 6% for the full year. Corporate finance, financial institutions, and public project and infrastructure finance all achieved double digit revenue growth compared to 2022 on gradually improving market conditions and I think I used the phrase fragile when describing the markets back on our third quarter earnings call. And this turned out to be true for the fourth quarter, where, despite a very active November, December, issuance was more muted than we had expected. And we've seen a very constructive start to the year and consequently, our revenue expectations for 2024 are in the high single to low double-digit percent range for MIS. And I'll touch on this a bit more on the call, as well as, I'm sure some asset specific issuance guidance.
So looking out over 2024 and beyond, we're really excited about the great momentum in the business and the tremendous growth potential that we've got in front of us. And to capitalize on these opportunities, we're accelerating and increasing the level of organic investment this year in three critical areas. That's Gen AI, new product development, and platforming and technology. And this is a deliberate investment program to fully capture the power of AI across our business to expand the reach and connectedness of MA solutions and accelerate the technology enablement of the ratings agency, all to deliver on our ambitious medium term targets.
Now, our capital allocation priorities remain unchanged. First, invest in our business whenever we see great opportunities, and we are in fact doing that and second, return capital to stockholders and this year we expect to nearly double the amount of capital we return to our stockholders through dividends and share repurchases. That brings me to our EPS guidance. We're anticipating adjusted diluted EPS to be in the range of $10.25 to $11 for 2024.
This incorporates a little bit wider range at the beginning of the year to capture some of the uncertainty around issuance and we would expect this to narrow during the course of the year. And of note, as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16.9%. And for 2024, we're expecting the rate to be in the range of 22% to 24%. And if you look through the 2023 benefit at the midpoint of our 2024 range. Our 2024 adjusted EPS represents 24% growth rate since 2022 and that's in line with the low double digit percentage growth that we've targeted over the medium term.
Now, looking at 2023, I want to take a moment to touch on a few data points that highlight what a powerful franchise we have and also put our 2023 accomplishments into some perspective amidst, as I said, what was a very challenging operating environment for many of our customers last year and despite relatively modest MIS rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company and today we have a base of recurring revenue of over $4 billion while our more transactional oriented revenue model across a $74 trillion universe of rated debt gives us upside as debt velocity improves and together this underpins our confidence in accelerating our revenue growth to the high single to low double-digit percent range in 2024.
Over the years, we have really built a customer base that's almost like no other company, with 97% of the Fortune, 187% of the Forbes 1000 being a Moody's customer today and the world's leading companies turn to us. They trust our market leading solutions and that gives us a tremendous base to sell into. This shows up in the many external accolades and awards that we've received. We had over 150 last year alone and I want to give a special shout out to our MIS team as we were awarded best credit rating agency for the 12th year in a row by institutional investor, that is great stuff.
I think we all understand our market leading position in ratings, but we've also built a market leading position with our MA business and for the second year in a row we were ranked number one in the Chartis RiskTech100 and that was supported by category wins in strategy, banking, and insurance and a number of solutions categories ranging from climate risk to credit risk to financial crime data and a number more. And understanding the critical importance of attracting and retaining the best talent in this environment. We continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world's great challenges.
So to sustain our growth, you frequently hear about the investments that we make in our solutions to help our customers make better, more informed decisions about risk and we achieved a number of important milestones in 2023 to many to get into on this call, but I am going to focus on just a few of the highlights. In ratings, we continue to expand the markets we serve through Moody's local. We also develop dedicated teams in digital finance and private credit so that we're at the forefront of opportunities in the global debt markets. In private credit specifically, we're coordinating across our ratings franchise so that we have the engagement, the methodologies, and the analytical and commercial resources to be the agency of choice for players in this market, ranging from BDCs to alternative asset managers, insurance companies and debt funds.
To further address the private credit opportunity, we added more than 12,000 unrated entities to our credit view research service in November. That triples the breadth of our coverage and provides a new runway for growth for our research business. Another growth opportunity in our research and insights business that many of you have heard about is our research assistant product. That's our first Gen AI enabled product that we launched commercially on December 1, and it's the first of a number of Gen AI enabled tools that we're developing and we're excited about the initial customer feedback and early traction with this product and I'm sure we're going to touch on this a bit more in the Q and A.
We also continue to enhance and expand our massive company database in important ways to create valuable early warning signals for our customers and address the increasing demand for third party risk management. And there were really three elements to that in 2023 that I'll call out. First was integrating our predictive analytic tools and credit scores on over 450 million companies into Orbis. The second was expanding our coverage of over a million AI-curated and scored news stories a day that are available in companies in Orbis and third, leveraging our investment in BitSight over the course of 2023, we integrated over 6 million cyber scores into Orbis, and that number continues to grow.
Across decision solutions we developed new solutions and integrated more data sets to expand the utility of our offerings. And in KYC, our new entity verification tool combines real-time registry content with our Orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk. With the launch of our most recent sanctions 360 tool, we're the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches.
In banking, we integrated climate analytics into a broad range of workflow solutions, from loan origination to portfolio management to stress testing and in insurance in just a year, we more than doubled the number of customers using our cloud-based intelligent risk platform. That's a versatile cloud-based risk analytics platform that enables customers to analyze hundreds of millions of commercial and residential locations. It's not just being used by insurers. We're attracting a diverse set of customers who have a tangible and growing need for our more sophisticated climate data and analytics. I have to say I'm proud to report that at the end of January we signed one of the world's largest banks as a new customer of our climate and catastrophe modeling solutions to support the in depth climate analysis for required regulatory disclosures and stress testing and underpinning all of this is our ongoing foundational investments in the business, and these investments will enhance our ability to integrate our data state across all of our customer use cases more efficiently and more effectively.
So I hope as you get a sense, there are a lot of exciting things that are happening here at Moody's. And as I take a step back to consider the many opportunities for growth ahead, I really am energized by all that's in front of us. And there are three things that we are doing to really drive future growth. That is land new customers, expand customer relationships and then innovate continuously to deliver more value. And I just touched on the breadth and quality of our existing customer relationships. We've got a fantastic customer base, especially in financial services, where we've been developing relationships for literally decades, landing new customers, expanding relationships, and innovating with a proven track record of growth.
And in recent years we've been successful in growing these relationships further and diversifying into new areas like KYC and supplier risk management. In fact, our net expansion rate in the financial services sector stands at a healthy 109% and I think that's a pretty clear indication of our ability to deepen relationships and deliver value. And now leveraging Gen AI and our broader content sets and capabilities, expanding and deepening these relationships will continue to be a significant opportunity for us. Building on these successes, we've got a great opportunity to expand in new customer segments supporting new use cases. While financial institutions account for about 70% of ARR and MA, there's been very good demand coming from newer relationships beyond the financial services segment, 14% new sales compound annual growth rate over the last two years in these sectors.
That's the corporate and public sector. And over that period, we've established significant relationships with major companies in the United States and Europe who are leveraging our expertise for customer and supplier risk assessment. Our ratings business also has some opportunities to serve existing and new customers. I think of those as kind of the markets of tomorrow. We've expanded our footprint in domestic and emerging debt markets where the growth is faster than it is in more developed debt markets and interesting data point, the Moody's local initiative in Latin America, which you've heard me talk about, it's a great example of doing that where organic revenue grew 22% in 2023. So these land and expand opportunities are supported by major secular trends that are driving demand for our offerings, and I would cite a few of those.
We're poised to capitalize on the content unlock opportunity from Gen AI enablement and innovation, the widespread digitization and transformation programs across banks and insurers, the growing demand for third party risk management solutions and the ongoing growth of the private credit sector, and with our wide ranging capabilities that we've put together to deliver this holistic view of risk, I think we are uniquely well positioned at the intersection of these trends.
So I can assure you that we reflected a lot on these opportunities as we entered our annual operating plan cycle this fall, and not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives. On the efficiency side, we expect to generate savings from resource redeployment, alternative staffing models, automation and Gen AI enablement and geolocation strategies. And we're prioritizing investment spending on areas that are enabling us to deliver at our current growth rates, including SaaS based product development, sales deployment, operational resiliency, and ratings workflows.
And these initiatives are really funded within our what we think of as our regular pace of operating margin expansion. But as we exited the initial sprint around Gen AI innovation last year, we reflected on the opportunities ahead of us. We considered the deep customer relationships that I've just touched on, our unique data assets that you hear us talk about, the market trends that I just mentioned together with our growth strategy, and we proactively upped the organic investments that we started in the summer of last year.
We are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas. First, and I'm sure this isn't particularly surprising, is Gen AI. We're increasing product-related investments across MA that will continue to build on our early mover momentum from 2023, and investments across the company and initiatives to accelerate employee adoption and improve productivity. On the product side, we have a few really interesting things that are moving ahead fairly quickly. So CreditLens, which is our flagship banking origination solution, will be the next to launch a Gen-AI enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities that is stored natively in our software.
And we're going to be saving loan officers and credit professionals countless hours compiling information and generating the first draft of the documents that are produced with virtually every commercial loan. We've got our first beta customer already, and we are currently in preview with a number of other customers. I'm also very encouraged by our new Gen AI enabled commercial real estate early warning system that we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors. And I actually just sat through a demo of this in the last week or two and the early warning system integrates a wide range of our data sets. It enables the evaluation of news event in real time, running scenarios and calculations that link together market forecasts, listings and property data, tenant data, and valuation and credit models.
And again, the early feedback has been very positive and we're already looking to extend these capabilities beyond just commercial real estate. Now, from an internal perspective, we've rolled out DataHub copilot and some other Gen AI tools to more than 1500 engineering professionals across the company. And as a result of our experience last year, we've specifically planned for efficiency gains in our engineering budgets in 2024. We're also rolling out our next generation of AI-enabled tools for our sales teams across the company over the next several months. That's the first area.
The second area is product development. And as part of our land and expand strategy in MA, we are building on the success and momentum of our KYC business, which has grown to over 300 million of ARR in just a few years. And I think those of you who've been on this call for a while, you've heard me mention before, that know your customer is probably too limiting of a term for this business as it continues to expand. So this year we're increasing investments to develop solutions focused on the growing market demand, really for solutions to serve the customer and supplier risk needs. And we're especially encouraged by recent wins with a number of large government and Fortune 100 customers.
So this year we're going to make investments in product, technology, and data and go to market capabilities to be able to scale in these customer segments. The ratings ecosystem also continues to evolve. In early January, we were just provided with the very first -- we just had the very first rating on a tokenized bond fund. And while digitized -- sorry, digital finance is still nascent, we're going to be ready to help our customers delivering our ratings on the platforms wherever they are going to issue. So that's second and then third is around technology platforming. So we're building on the platforming work that we highlighted in our innovation open house event back in September. And as we explained then, this work is critical to strengthening the interoperability of all of our data estate and improving the synergies across our solutions.
By investing in our platforming and engineering capabilities, we're going to accelerate our time to market, enhance the customer experience, better enable cross sell and upsell, and deliver engineering efficiencies. The faster this work gets done the sooner we will realize the revenue and efficiency benefits so we have decided to hit the accelerator. The same is true in ratings, where more tech enabled workflow is really key to the quality, speed, efficiency, and compliance. And we've been on a journey to modernize, digitize and automate our systems. We've made some good headway, but there is still more work to be done.
Optimizing our data estate and moving more of our workflow into cloud-based applications really has never been more important, given the promise of AI and the digitization of financial markets. So here too, we've decided to accelerate our efforts and this will be critical in achieving our medium term margin targets. So now let me turn to our issuance outlook very briefly. We're expecting more constructive market conditions in 2024 and I'm sure as you have all seen, it was a very busy start to the year. Over 150 billion in investment grade issuance in January alone, underpinning our MIS revenue growth outlook of high single to low double digits is an increase in MIS rated issuance in the mid to high single digit percent range.
For corporates we expect that leveraged finance will grow faster than investment grade issuance, which should be favorable to revenue mix and our outlook is built on the macroeconomic assumptions that are detailed on page 20 of our webcast deck, notably incorporating a soft landing here in the US and rate cuts starting in the second quarter of this year. And I imagine we'll dive deeper into both our issuance and macroeconomic assumptions in the Q&A session.
Before moving off of MIS I do want to highlight that early last year we committed to reviewing our medium term guidance for MIS revenue growth once we saw sustainable improvement in the debt markets. And I'm happy to share that following 6% revenue growth in 2023 and the expectation of at least high single digit growth in 2024, we have updated our medium term growth target for MIS revenue growth target for MIS to be in the mid to high single digit percent growth range.
Now, moving back to our 2024 annual guidance, Moody's revenue is expected to grow in the high single to low double digit percent range. The Moody's adjusted operating margin is projected to be in the range of 44% to 46%. That's about 100 basis points of margin improvement at the midpoint. And the Moody's revenue and adjusted operating margin guidance ranges incorporate the variability of that MIS transaction based revenue and then balanced against the subscription base in MA, where nearly 95% of our revenues are recurring.
In regards to MA, we're guiding to a tighter range of approximately 10% growth, revenue growth, and low double digit growth in ARR. Now, MAs adjusted operating margin is expected to be in the range of 30% to 31% this year. That's absorbing the impact of the incremental organic investments that I just talked about. In the medium term, we expect MAs adjusted operating margin to be in the mid 30s percent range and as I have discussed with a number of you, the path to that target is not exactly linear. For 2024, MIS's adjusted operating margin is expected to be in the range of 55.5% to 57.5% that is a 200 basis point improvement versus 2023 at the midpoint, and that is solidly on track towards the medium term target of low 60s percent.
Our expenses overall expected to grow in the mid to high single digit percent range. A couple of factors worth noting. First, we closed out our 2022- '23 geolocation restructuring program at the end of 2023. Caroline can talk more about that. Second, we're expecting depreciation and amortization expenses of approximately $450 million in 2024. That's an increase of approximately 20% as compared to 2023 and that growth is largely related to the cumulative effect of our shift towards developing exclusively SaaS-based solutions starting back in 2021 and coupled with the increased capital expenditures associated with the three primary areas of incremental organic investment that I just talked about.
We're expecting free cash flow of between $1.9 and $2.1 billion and adjusted EPS to be in the range, as I said earlier, of $10.25 to $11. Again, a 24% increase at the midpoint versus 2022 looking through those tax benefits that I touched on. So I'll wrap up by just saying it was a really great year for us here in 2023. I'm expecting an even more exciting one ahead. I'm energized by our strategy. We've got fantastic engagement across the company, and we believe that now is the time to invest in the opportunity that's in front of us, to fully embrace the power of AI across our business, to accelerate the build out of our technology platform, and to bring together our content to build new solutions with unique value propositions that will accelerate growth. So with that, I welcome Caroline, Steve, and Mike to join me for Q&A and operator, please open the call up to questions.
