穆迪 (MCO) 2003 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Moody's Corporation third quarter earnings release conference call.

At this time I would like to inform you that this conference is being recorded, and that all participants are on 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 conference over to Michael Courtian, Vice President Investor Relations and Corporate Finance.

Please go ahead sir.

Thank you and good morning everyone.

Thanks for joining us on this teleconference to discuss Moody's results for the third quarter of 2003.

This is Michael Courtian, Vice President of Investor Relations and Corporate Finance.

Moody's released its results for the third quarter of 2003 after the market closed yesterday, and the earnings release is available on our Website at ir.moodys.com.

As required, by the Securities & Exchange Commission regulations, we have furnished a Form 8-K to the S.E.C. containing our earnings release.

The earnings release contains disclosures of certain nonGAAP measures, and we may discuss our results in terms of these measures during this conference call.

Information reconciling our nonGAAP financial measures to our reported GAAP results is presented in the earnings release and we encourage you to refer to that information in connection with our discussions on this teleconference.

John Rutherfurd, Jr., Chairman and Chief Executive Officer of Moody's Corporation, will be leading this morning's conference call.

Also on the call this morning are Ray McDaniel, President of Moody's Investor Service, and Jeanne Dering, Chief Financial Officer of Moody's Corporation.

They will both be available to answer your questions following John's remarks.

Before we get started, I'd like to call your attention to the cautionary language set out at the end of our earnings release.

Certain statements my colleagues an I make today may be forward-looking in the spirit of the Private Securities Litigation Reform Act of 1995.

This act provides the safe harbor for such forward-looking statements.

I'd like to direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31st, 2002, and in other filings made by the company from time to time with the S.E.C.

I'd also like to point out the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 contained in our press release issued yesterday evening.

These set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I should point out that some members of the media might be on the call this morning in a listen-only mode, and at this point I'm pleased to turn the call over to John Rutherfurd.

Thank you, Michael, and thank you all for joining us on today's call.

Moody's reported strong results again in the third quarter of 2003.

Revenue rose to $305 million, an increase of 23% from the third quarter of 2002.

Moody's reported revenue growth in 2003 continues to benefit from the favorable impact of currency translation, which contributed approximately 175 basis points to revenue growth for the quarter.

Diluted earnings per share for the quarter grew to 56 cents, an increase of 30% from the third quarter of 2002.

Earnings per share for the quarter included a 1 cent impact related to the company's previously announced decision to begin expensing stock options and other stock-based compensation plans.

EPS also reflects a 3 cent impact from increases in our income tax provision to reflect recent tax law changes in New York state.

Overall, Moody's results for the quarter reflects our strong revenue diversification.

Our Corporate Finance business produced particularly strong growth this quarter, whereas other segments of our business contributed most of the growth in other recent quarters.

The interest rate environment that has helped our results, while still very low by historical measures, rose in the third quarter from the historically low second quarter levels.

We're focusing on developing new products to continue our growth, as interest rates are forecast to continue rising in 2004.

Let me take a few minutes to review some additional highlights for the quarter.

Moody's revenue in the United States totaled $192.4 million for the quarter, a 16% year-over-year increase.

International revenue was $112 million in the third quarter of 2003, 35% higher than in the third quarter last year on a reported basis, and 30% higher excluding currency translation effects.

International revenues accounted for 37% of Moody's total in the quarter, compared with 33% for the prior-year period.

Within the U.S. ratings business, structured finance revenue grew over 20%, with good performance over most asset classes.

Residential and commercial mortgage backed securities achieved particularly strong growth.

What we call residential mortgage revenue has remained above last year's level so far in 2003.

Mortgage refinancings have begun to decline as rates have risen, and as we've noted before, we expect a significant slow down in this sector, starting in late 2003 and continuing into 2004.

I should also point out that Moody's reports home equity securitizations revenue as part of what we call residential mortgage, and home equity revenue has remained very strong.

Revenue growth in our U.S.

Corporate Finance business was over 30% in the quarter.

High-yield issuance remained strong and we also saw strong year-on-year pickup in investment grade issuance in the third quarter, as corporate issuers continue to take advantage of low interest rates and narrowing spreads in the U.S. to refinance existing issues.

I should point out however that issuance was low in the corresponding quarter of 2002, affected by negative investment sentiment due to large credit defaults.

Also, despite an apparent improvement in economic indicators, we have not yet seen any notable increase in business investment that would drive borrowing needs beyond refinancing.

Revenue in the financial institutions sector in the United States declined slightly year-to-year against strong comparisons.

In public finance year-to-year revenue growth slowed to 4% in the quarter versus double digit growth in the first half of the year.

Although continued weakness of municipal tax receipts led to an increase in new money issuance, refinancings declined both year-to-year and sequentially, as municipal borrowing costs rose.

Moody's Global Research revenue grew to $31.6 million in the quarter, rising more than 30% from the prior-year period.

Sales growth was attributable largely to the expansion of research services, for existing customers who were broadening their credit exposure, and require coverage of additional asset classes.

There has also been strong customer demand for our new default analysis and online ratings products.

Licensing of bulk ratings and credit data to third party distributors has also contributed to growth.

Lastly, our research business has a significant presence outside the United States, and our revenue benefited from favorable currency transaction.

Turning now to Moody's KMV, revenue for the quarter totaled $27.7 million, an increase of 19% from the third quarter of 2002.

During the quarter, MKMV saw growth in revenue to subscriptions to quantitative risk assessment products, and from sales of credit decisioning software.

While this performance is still below our original growth targets for the business, we continue to believe that MKMV can, on average, grow faster than Moody's core rating and research business for a number of years.

As previously noted, we expect to communicate new long term financial targets for the MKMV business in early 2004.

As I stated earlier, in a rising interest rate environment, Moody's Investor Service is concentrating on new product development to sustain growth.

Our most important new product effort is our Enhanced Analytic Initiative, which extends the scope of Moody’s credit analysis and public research, to include financial reporting assessments and corporate governance assessments, and deepens our analysis of risk transfer techniques.

As discussed before, we have added accounting, corporate governance and risk transfer professionals who will support our credit analysis in their analytic and research efforts.

We will be publishing our first group of financial reporting industry studies later this year.

Feedback on the financial reporting assessments from both issuers and investors has been broadly positive.

And in 2004, we plan to expand the coverage to our industry studies and to publish financial reporting assessments, on approximately 250 United States issuers.

We began publishing corporate governance assessments in September.

We expect to publish almost 100 by year end, and over 300 additional assessments next year.

We also plan to extend the Enhanced Analytic Initiative to Europe.

Continued investment for the remainder of 2003 and 2004 is expected to include additional specialist professionals, as well as additional credit analysts to integrate these areas of expertise and allocate more time per name to the largest and most important public debt issuers.

We're also in the process of expanding our range of data and analytic services in Structured Finance, including a credit derivative CDO analytic service currently in beta testing, designed for originators, traders and investors in the CDO market.

Next I'd like to moment on Moody's expenses and margin for the quarter.

Expenses for the quarter totaled $143.8 million-- 19% higher than in the prior-year period.

Third quarter 2003 expenses included $3 million related to stock-based compensation plans, which we started expensing this year.

Moody's operating margin for the quarter was 53%, up from 51% in the third quarter of 2002.

This reflects Moody's expense leverage.

In periods where revenue is stronger than expected, Moody's operating income benefits because we do not need to add proportionately to expense in the short term.

As you read in our earnings press release, Moody's effective tax rate was 44.4% in the quarter, up from 41.5% in the second quarter, and 44.2% a year ago.

The increase compared with the previous quarter principally reflected the impact of new tax legislation enacted by New York State in October, which disallows the deduction of certain royalty payments between affiliated companies, retroactive to January 1st, 2003.

More information about our tax rate is included in the earnings release.

Now, I'd like to ask Ray McDaniel to talk about our international business, and the status of the regulatory review of credit agencies taking place in the United States and overseas.

Thank you John.

Moody's again achieved good revenue growth in international markets during the third quarter of 2003.

Moody's International revenue rose to $112.6 million in the quarter, and increased to 35% from the prior-year period.

International growth, though consistently in the double digit percent range on a year-over-year basis has varied quarter to quarter in 2003.

The primary reason has been material variations in quarterly corporate and financial institutions issuance activity, in line with shifting issuer sentiment about the business environment and fluctuating credit spreads.

And as John mentioned earlier, currency had a favorable impact on the quarter's international revenue growth.

Within the research business International revenue growth rose more than 30% year over year.

The strongest growth segment of the international business were financial institutions which generated revenue growth of over 50%, and corporate finance where revenue growth increased over 40%.

International structured finance grew more slowly this quarter than in prior periods due largely to weakness in the European and Japanese credit derivative sectors.

In the European market tighter spreads in the assets which go into derivative transactions reduced the profit opportunity for deal sponsors.

Also there was reduced investor demand for the Super Senior product.

In addition, the lower volume of private credit derivative issuance had an important impact on ore revenue.

In Japan grew more slowly as banks reduced the rate at which they transferred assets off their balance sheets shrinking the supply to be pack and into credit derivatives.

Despite these developments we remain confident of the long term prospect for the International credit derivatives and structured finance more broadly, given the stock of financial assets that remain in the banking system, and the demand for increasingly flexible and financial tools in managing and trading credit risk.

We observed, however, that over the shorter term business cycle, tightening credit spreads may continue to ice issuance and growth in international corporate and financial institution sectors, in part at the expense of credit derivatives.

Overall we continue to believe that our International business can grow at nearly 20% rate though the contribution by sector to that growth will inevitably vary.

I would also like to make a few comments about the ongoing examination of the credit rating agencies taking place in the is U.S. and overseas.

The S.E.C. and other regulatory bodies are focusing on important issues relating to rating agencies, such as independence, transparency of ratings and decisions, safeguarding confident information and retention of documents.

Moody's believes these are important elements of best practices at all credit rating agencies.

We continue to cooperate with the S.E.C., as well as international regulatory bodies as they develop their recommendations in these areas.

In the U.S. we expect that the S.E.C. may issue a proposed rule or other decision concerning credit rating agencies by the end of 2003 or early in 2004.

Outside the U.S., an important development was the September release by the International Organization of Securities Commissions, or IOSCO, of its statement of principles regarding the activities of credit rating agencies.

The statement of principles is an attempt to offer a common multinational perspective from securities authorities about proper rating agency activities.

Similar to the S.E.C.'s views, key enumerated principles include independence from political or economic pressures, managing conflicts of interest, disclosure and transparency in ratings, and protection of nonpublic information.

In general, Moody's finds the principles set out in the document both fair and appropriate.

One concept spanning all of these regulatory reviews is that on the whole the credit rating agencies continue to do a good job and an important job.

At Moody's we think the current regulatory reviews can help ensure the continued integrity and success of the ratings industry and we will continue to assist regulators all around the world in their work.

Some of the new requirements being proposed will result in additional costs for us but overall Moody's does not expect there will be any important negative impact on our business.

Now I'd like to turn the call back to John.

Thank you, Ray.

Let me give you an update open our share repurchase program.

Moody's repurchased 1.2 million shares during the third quarter of 2003, at a total cost of $64 million, to offset shares issued under employee stock plans.

Since Moody's became a public company in 2000, and through the end of the third quarter, we have repurchased 22 million shares at a total cost of about $824 million.

This includes 8.5 million shares repurchased to offset stock issuance under employee stock plans.

At the end of the third quarter, Moody's had approximately $226 million remaining under the $450 million share repurchase plan that the board of directors authorized in 2000.

Moody's takes an opportunistic approach to share repurchase.

We use a discounted cash flow model and conservative assumptions to determine a fair value for the shares.

As a result, our share repurchase activity will vary from quarter to quarter.

At the end of the third quarter, Moody's had approximately $180 million of cash on its balance sheet.

We are willing to accumulate cash until we believe that we can repurchase our shares at prices that benefit our long-term shareholders, as well as those that are selling.

I'd like to conclude this morning by commenting on our outlook for 2003.

Moody's results for the third quarter exceeded the expectations that we had at the end of the second quarter.

As a result, we have increased our revenue and earnings outlook for the full year.

The earnings press release that we issued yesterday contains a detailed discussion of our expectations for the remainder of 2003 by line of business, [and] important uncertainty about Moody's forecast of future results.

Without reviewing the entire outlook section of the press release, I would like to review a few highlights.

Overall for 2003, Moody's expects that revenue growth will be in the mid-teens percent on a pro forma basis, as if KMV had been acquired at the beginning of 2002, with the impact of a full year of KMV revenue in 2003, adding over 100 basis points to the growth rate.

Moody's expenses for 2003 will likely reflect continued investment spending on enhanced rating practices, technology initiatives and product development, and continued hiring to support growth areas of the business.

We also plan to make a contribution to the Moody's Foundation.

Based on better than expected revenue growth thus far in 2003, Moody's now expects the full year 2003 operating margin to increase about 50 basis points, compared to 2002, before the impact of expensing stock-based compensation plans.

On an as-reported basis, the margin will likely be about 50 basis points lower in 2003 than 2002.

Overall Moody's now expects full year 2003 diluted earnings per share in the range of $2.28 to $2.32, before the previously reported first quarter gain on an insurance recovery, and before the impact of expensing stock-based compensation plans, but including the higher effective tax rate, which I've previously discussed.

On a reported basis, including the 5 cent per share insurance gain, and 4 cents in expense relating to expensing stock-based compensation plans, diluted earnings per share is expected to be in the range of $2.29 to $2.33.

The estimated 4 cent per share impact of expensing stock based compensation plans will result in a reduction of projected year-to-year earnings per share growth of approximately 2% in 2003.

As previously reported, Moody's has adopted expensing of stock based compensation plans prospectively.

Effective for all options issued on or after January 1st, 2003.

Accordingly, such expense will increase each year over the option vesting period, which is currently four years, with a growing negative impact on growth in earnings per share.

Moody's current long term target for 15% annual growth in earnings per share is on a pro forma base before considering this transition.

It would trailer be reduced to the range of 12% to 13% during the transition period.

As has been f the case in the past, we expect that our actual results will exceed our target in some years, and fall below the target in others.

That completes our prepared remarks.

My colleagues and I will be happy to take any questions you may have.

Thank you sir. (Operator’s instructions) Our first question comes from Douglas Arthur of Morgan Stanley.

Please pose your question.

Two questions.

John, what's your assessment of the amount of commercial paper out there, at 1% and 2%, that if there is more of a [race year] than there's been so far, that treasurers will start to say we better fix in.

So I'm just wondering what your assessment is of that potential, however short-lived?

And then on corporate finance, obviously very strong.

What percent of that is international?

Thanks.

Sure, thank you, Doug.

Talking about the commercial paper question, commercial paper outstanding has declined very, very substantially from its high, I would say probably in 2001.

What we usually look at when we look at commercial paper outstanding is nonfinancial commercial paper outstanding, which really represents the short-term unsecured obligations.

Total commercial paper outstanding as recorded by the Federal Reserve includes asset backed commercial paper outstanding.

What we've really been seeing recently is that there's been a fairly large increase in the issuance of medium-term notes, which has to do with people getting out of the commercial paper market and using probably 3 to 5-year paper as an alternative to either commercial paper or long-term debt outstanding.

Compared to, certainly what it was in 2001, there's an awful lot less commercial paper to the refinanced than there had been at that time.

On the other hand, the medium-term note market is relatively short, so we won't see those obligations coming back to be refinanced.

I don't know whether that really responds to your question.

So if you have a follow-up, I'll take it before turning to the issue of corporate finance.

I'll follow up offline, thanks.

Okay.

On the question about corporate finance, it was how much of our corporate finance revenues are international, and the answer is, about a third of them are.

Great, thank you.

Our next question comes from Geoffrey Dunn of Keefe, Bruyette & Woods.

Please pose your question.

Good morning, I had two questions.

First on the corporate finance line, can you give us an idea of how much of that business was due to refinance activity?

And second, can you give us a little bit more color on the investment spending you're going to be doing in the new revenue opportunities?

I thought it was going to be a little bit higher so I was hoping you could give us a little bit more guidance.

I don't think we have a broad estimate of -- that is prepared by our economist, John Lonsky, as to how various bond issues are being used for a period of time.

These numbers add to more than 100%, because there are multiple uses of proceeds specified in the prospectuses.

But for the third quarter of 2003, 26% of the prospectuses mentioned M&A as a use of proceeds, 58% mentioned short-term debt reduction as a use of proceeds, 48% mentioned long-term debt refinancing, and only 5% mentioned capital expenditures.

So I hope that responds to the question.

Yeah, that's perfect.

And on the investment spending?

Ray, do you want to comment on investment spending for the new products?

Yes.

As John mentioned earlier in his prepared remarks, the investment spending is largely oriented towards our enhanced analysis initiative.

And that is largely oriented towards increasing the professional staff that we have working with our analysts.

Really broadly, the two components are the accounting and other specialist staff that we will be continuing to add -- that we've been adding through this year -- as well as the additional credit analysts, who will be spending more time with the large issuers.

We've added about 25 special is this year, I expect that we are going to add something approaching a like number this year.

And I expect that our additional staffing for the generalists who are going to be spending more time with these companies is going to be in line with our hiring in previous years.

I don't expect that's going to change.

I would also comment that we do have some systems initiatives that are getting underway, so that we have a library of consistent models for the companies that we follow.

However, the investment spending on that initiative had not yet gotten started in the third quarter, and so it didn't really affect the numbers.

Okay, thank you very much.

Our next question comes from Peter Appert of Goldman Sachs.

Please pose your question.

John, two questions.

One, I was hoping you would give us more granularity on your 2003 expectations on terms of how the pipeline is playing out here at year end.

I specifically ask because if I'm reading this correctly you say revenue up in the low double digits and I think that would imply very modest fourth quarter growth.

So the question, one, am I interpreting this correctly, or do you see something in the pipeline that gets you to that conclusion?

Well, I think that what we were -- what we were thinking about is that there is normally a small increase in structured activity at the end of the year, as corporations clean up their balanced sheets using structured finance.

That was somewhat offset in our thinking by what might be happening in the market for residential mortgage securitizations.

So broadly, I think you are correctly reading our forecast, in that perhaps contrary to the previous pattern, we are not expecting a significantly stronger fourth quarter in structured finance than existed in the third quarter.

Okay.

Yeah, this is Ray McDaniel.

I would just add that, to emphasize John's point, a lot of that really depends on the timing of the anticipated slow down in residential mortgage securitization.

If that timing comes later, or into 2004, in terms of the reduction, we would see a stronger fourth quarter, because we do expect the other lines to perform as they typically do in the fourth quarter.

Okay, fine.

Secondly, I believe last quarter, you mentioned that the incentive compensation was coming in this year in the range of 20% of total comp.

I'm wondering in the context of the very strong third quarter results, if you've had to bump that up?

And if there's any catch-up expenditures perhaps in the fourth quarter associated with incentive comp we should anticipate?

Jeanne, can you comment on that?

Sure.

Peter, first of all, in the -- for the full year, we're still anticipating that incentive comp expense will be in that 20% range, certainly a little bit higher than we, in terms of the -- maybe the top end of the range than we had anticipated last quarter.

When we accrue our compensation expense, we true-up on a quarter-to-quarter basis, so that to the extent that compensation is based on Moody's performance versus the prior year, then in a quarter when we have very strong growth, our compensation accrual will be higher.

And in the fourth quarter, if we had lower growth, it would be lower.

So we wouldn't expect to have any kind of a true-up in the fourth quarter, an out of period adjustment for incentive compensation, we maintain that accrual currently every quarter.

Okay, great, thank you.

Our next question comes from Kevin Gruneich of Bear Stearns.

Please pose your question.

I was wondering, Jeanne, if you could follow up on that and average FTEs in we, and how that compared?

If you would just remind me what it was in Q2 and year ago Q3.

And also with Clifford Alexander's departure, was there any one-time cost they involved in that?

Sure, Kevin.

First, on the staffing, at the end of the quarter – and this staffing doesn’t include the joint ventures in Korea and Argentina, as we've been reporting them.

I think as we reported in the past, the staffing was about 2140 which compares to a little under 2100 in the second quarter.

So we added about 40 people quarter to quarter, and most of that was in the Moody's Investor Service business, the specialist teams and continued hiring outside the U.S.

Compared with the prior year, the third quarter of 2003, we had about 1950 people, so we've added about 9% or so to headcount on a year-to-year basis.

And in terms of your second question, director compensation is something that we report once a year in the proxy statement.

And in connection with our next proxy filing, we would have all of the information on director compensation.

All right.

If I could follow up, could you just discuss the nonoperating line, which seemed like it popped a bit in the quarter?

Yeah, the nonoperating line includes essentially four elements.

One is interest expense, which is fairly level quarter to quarter.

Second is interest income on our invested cash.

Third is minority interest in joint ventures.

And the fourth is foreign exchange impacts that get recorded through the income statement.

And it's the minority interest and the foreign exchange impacts that vary the most quarter to quarter.

The main reason that the other expense is higher in the third quarter versus the second quarter is the foreign exchange line.

In the second quarter, we had a gain on -- and it's essentially on various nonU.S. dollar denominated assets and liabilities.

In the fourth quarter, that was a loss.

So quarter to quarter, we had a shift in that line.

How about year over year?

Year over year, I think that it's two main explanations.

First is the minority interest--a higher charge year over year for the minority interest in the joint ventures.

Secondly was our interest income.

I think was a little bit higher in the third quarter of 2002, essentially because rates were a bit higher.

And thirdly, the foreign exchange loss that was recorded in the third quarter of 2003 was a bit higher than it was in the prior year.

All roughly the same magnitude of change year over year?

Yeah, I think year over year, it's roughly the same magnitude for those three items.

Thank you.

Our next question comes from Frederick Searby from J.P. Morgan.

Please pose your question.

Hi everyone it is Frederick Searby.

If you could talk a little bit about, you mentioned there would be costs related to the regulatory review.

And it might be too early to forecast, but, are they material, or is it something that won't really impact the numbers and do you expect those to kick in sometime in 2004?

And then, just can you give us some sense also of credit derivatives in Japan, how -- what that is as a percent of revenues.

Okay, well, let me comment on the first question, and I'll ask Ray to comment on the second question.

We do not really know, at this point in time, what additional cost we will have.

Because we don't know what the S.E.C. will propose.

Probably the area of largest increase cost has to do with record-keeping.

As many of you know, we do file every year, an investment advisor's registration statement.

And under the Investment Advisor's Act generally requires fairly extensive record-keeping, but the record-keeping that it requires is not particularly applicable to us, because our ratings are not investment recommendations.

And because we do not have customer accounts or customer balances or customer securities transactions.

So it is reasonable to expect that in some manner, rating agencies that bear the NRSRO designation from the S.E.C. will be required to keep books and records that the S.E.C. considers to be appropriate, and we would have expenses for that sort of activity.

There could be other things, but they would be much more speculative.

I will comment that recently France has enacted a law that required record-keeping for activities associated with ratings.

Our crystal ball is not very good on this one, but I guess that's about where we think it might be.

If you don't have any follow-up questions there I'll ask Ray to comment on the Japanese structure.

Sure.

The credit derivatives component of our Japan structured business-- It's helpful to think of it two ways.

It is a large part of the volume of transactions that we rate in Japan--about two-thirds of the volume.

But it's a much smaller percentage of the number of deals or transactions that are rated, more in the 20% to 25% range.

And so what you see from that is that there are large deal sizes.

And those tend to cap.

So even though it's the majority, about two-thirds of the volume that we rate, it is a bit less than a majority of the revenue that we get out of Japan.

That's on average.

It will vary, obviously from quarter to quarter.

Can you just refresh my memory what Japan represents, what percent of International revenue or overall revenue?

Yeah.

Japan is about 8% of our overall revenue.

No, I'm sorry it's about 8% of our international revenue, and about 3% of our overall revenue.

Okay, thank you.

Our next question comes from Joseph LaManna of William Blair.

First I wanted to follow up on the discussion on the guidance on the structured finance for the fourth quarter.

I guess I'm trying to figure out whether you're already seeing the substantial slow down in the mortgage-backed market including the home equity loans, or you're saying that if you see a substantial slow down in the balance of the quarter, because you really have to have a pretty dramatic fall-off as the prior question was asked to get to a low single-digit growth for the full year in that category.

We have begun to see a slow down in the pipeline that we have of deals coming that we expect to come to market.

That slow down is not yet dramatic.

And so we're looking at, I think, late in the quarter, if there is going to be a dramatic slow down, it would be into December.

Okay.

It is slowing, not yet dramatically.

But you'd have to see a more dramatic slow down to get to the single digit, is that a correct way to interpret that?

Again, just looking from the pipeline, it has not yet begun to experience significant deterioration.

But that pipeline, you know, as you might imagine, can change fairly quickly.

Right.

Next question on the guidance, on the tax rate, really appreciate the guidance for the fourth quarter.

In terms of the tax rate.

But wondering from there, should we assume that the tax rate for '04 that you -- you previously were showing year-over-year improvement lowering the tax rate.

Is that still reasonable to assume from that 42.4% level?

Or should we assume it's more like the fourth quarter next year?

Joe, this is Jeanne Dering.

I think that first of all, we have been provided any specific guidance on our 2004 tax rate.

But our overall objective is to reduce our tax rate to a number that is somewhere in the range of 40%.

And certainly, this may imply that the ultimate place for the tax rate is a little bit higher than 40%.

At this point, we don't have specific guidance on 2004.

But certainly the change in New York tax law is something that is permanent, and that goes into 2004.

So you should think about the 42.4% or thereabouts as being the starting point for thinking about the 2004 tax rate.

And we'll certainly provide further guidance on that when we talk about 2004 more generally.

Okay, thank you.

Our next question comes from John Neff of William Blair.

Please pose your question.

Hi, thank you.

Couple of quick questions here.

I was wondering if you could provide a little bit more color on the annual fee caps that the financials and sovereign ratings revenue ran into, in terms of like when are those triggered and any other color you could provide on those.

John, this is Ray McDaniel.

The annual fee caps, as I think we've described before, we have base fees, and then activity fees.

And the activity fees are related to issuance and have caps associated with them.

Because of the strong activity we've seen in the financial institutions market year to date, we have more of the large financial institutions capping.

That is not the case in the corporate, where issuance has not been as strong earlier in the year and fewer institutions are hitting caps in the third quarters and fewer institutions will hit caps in the fourth quarter as well.

Is that sufficiently explanatory?

Sure.

The only -- I guess the only reason I got a little confused is I thought there was an annual retainer and then a reduced per-issue fee.

But what I guess I didn't understand is that the entire amount paid is subject to a cap.

That is correct.

The issuers who are under these programs may still hit aggregate caps, even with the reduced issuance fees.

Okay.

And that's a cap on terms of annual spending on the part of an issuer?

Yes.

Okay.

And then my other question was, if you could talk a little bit about in terms of the research revenues what the licensing revenue is as a percent of the research revenue, and how rapidly that is growing.

Broadly speaking, you know, we have benefited from both changes in technology, which have made it easier for people to store our information in-house, and use it for a lot of purposes, and also it advances in how databases are considered and protected under the legal system.

So the revenues from the licensing of our data have gotten up into the area of around $20 million of annual revenue.

And in a sense we think of that as a very good new product introduction, similar to what we were able to do in the loan area.

Obviously, it's a little bit less than 20% of the revenues in that segment for the year but we're very proud is of the growth in that area.

Great, thank you.

Next question comes from Brandon Dobell from Credit Suisse First Boston.

I just wanted to drill down a little bit more on the issue of the fee cap from two perspectives.

One, if you could talk about broadly among the issuers, (inaudible) how those contracts tend to be structured if there are caps with those issuers, or just more of a one-off basis with the particular issues?

And second, kind of related question would be, how are those contracts renegotiated, is there a typical renegotiation season or the start of the year everything is reset and what have been the trends in terms of where those caps have been set and what issuers are asking for?

Thanks.

Sure, Brandon, this is Ray.

On the structured finance side, the vast, vast majority of our billings are on a transaction basis.

And as such, the, what we would call frequent issuer or relationship-based pricing is really not very evolved on that side of the business.

There are a small number of issuers, very large issuers, frequent issuers, who do receive volume discounting based on their annual activity.

But that's really a few number of issuers, and it's as close as we would get to what you might consider relationship-based pricing in structured.

Our next question comes from Lauren Fine of Merrill Lynch.

This is actually Stacy Fleck (ph) for Lauren.

Is there any way to break out how much of the growth in structured finance was a result of the refinancing of existing securities versus new issuance?

Let me -- let me answer your first question.

The international why derivatives market and other portions of the international structured finance markets are private markets.

And so it is difficult for us to measure comparative coverage or market share with other rating agencies.

We do have public-source data that we are able to look at, but that's really more helpful in measuring the publicly reported coverage year on year of one agency versus another, rather than the coverage in the private markets, which is anecdotal.

And with respect to your second question, I'd have to be honest and tell you I don't have that number at hand.

Okay, thanks.

Our next question comes from Justin Voysaw (ph) of Gates Capital.

Quick question on the balance sheet, cash at $179 million.

I wonder if you could give us the balance of your debt right now?

Yes, this is Jeanne Dering.

I'll answer that question.

At the end of the third quarter the only debt that we had outstanding was the $300 million private placement that we took on when we separated from Dunn & Bradstreet.

Could you give us the capex for the quarter [too] please?

I'm not sure we have all the details available at this point, since the more detailed items in our financial statements get published with our 10-Q.

Thanks very much. ) Operator: Our next question comes from Jim Baker of Nuberger Berman (ph).

I had a couple of questions.

I wanted to understand were the shares repurchased in the third quarter repurchased relatively late into the third quarter, so the benefit would carry over into the fourth quarter ?

Second one, I don't know whether you have this Jeanne, whether you have the cash flow from operations through nine months.

You mentioned you might not have that but if you do we'd appreciate that.

And then the more interesting question is, on the finance institutions and sovereign, I wanted to understand if you could break out sovereign versus institutions, in terms of which each constitutes, what are the growth rate behind each of these distinct areas.

You seem to have had trouble forecasting this particular class this year, and it's been you know significantly exceeded your expectations.

So if you could explain why it's been so much better I'd appreciate that.

Thank you.

Okay.

I'll address your first two questions and then John Rutherfurd will address the third.

Cash flow from operations quill be publishing the full cash flow statement with our 10-Q, and we'd rather wail until that's published.

Secondly, in terms of timing of share repurchase, our share repurchase wasn't necessarily weighted towards the latter half of the quarter.

As John mentioned before, we repurchase opportunistically so we don't tend to have any quarterly or weekly pattern and it was more spread out during the quarter as we saw opportunities to buy back shares.

On the financial institutions and sovereigns, virtually all the revenues are financial institutions.

I would say of Moody's total revenue, less than half a percent is sovereigns.

So I think you can essentially [neglect] the sovereign part of this.

The reason why financial institution issuance was higher this year than previous years, I think partially depends on greater investor acceptance of that paper relative to corporate.

That is, despite everything that has been in the news, the financial institutions balance sheets, cash flow, improvement in risk management practices, greater percentage of consumer loans have all created, especially in the U.S., but also around the world, stronger financial systems in the more developed economies.

And that, coupled with low rates, resulted in quite a bit more issuance than we had expected at the beginning of the year.

This is Ray, just to add on to John's comments.

Much of the growth that we saw in the third quarter was coming out of the European financial Institutions sector and many of that was coming from the German banks.

Some of which were issuing ahead of possible changes in state guarantees for those banks that would be coming in the next 12 to 18 months.

And so they -- perception would be that they were exercising a window of opportunity for issuance.

Thank you very much.

Our next question comes from Douglas Arthur of Morgan Stanley.

Please pose your question.

It's Lisa Monaco.

Jeanne, if you could just elaborate a little bit on the expenses and give us a little color on what noncompensation expense was up in the quarter.

Thanks.

Okay, Lisa.

The expenses in the quarter first of all as we mentioned in the earnings release, part of the expense growth quarter to quarter was due to the impact of foreign exchange.

And a part of the expense growth quarter to quarter is due to the fact that we now are including option expense in our reported numbers.

So if we look at the reported expense growth, and we exclude those two impacts, then the underlying sort of apples to apples expense growth in the business was roughly 15%.

And most of that came in the compensation line due mainly to the increase in staffing.

The noncompensation line grew at a slightly lower rate than compensation, and most of that growth would be in areas such as travel expense, where with the increase in revenue volume, we're clearly going to incur more of that expense.

And then some of the cost to support new product development such as the CDO product that John talked about earlier, and investments that we're making in administrative systems within the company.

If there are no further questions I will now turn the conference back to John Rutherfurd.

Well, thank you all for joining us for the third quarter analyst call.

And we look forward to talking with you after the end of the year.

Have a good day.

Ladies and gentlemen, this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.