穆迪 (MCO) 2004 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Moody's Corporation first-quarter results 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 ever to Michael Courtian, Vice President, Investor Relations and Corporate Finance.

Thank you, and good morning, everyone.

Thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2004.

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

Moody's released its results for the first quarter of 2004 before the market opened this morning, and the earnings release is available on our Website at IR.Moodys.com.

John Rutherford, Jr., Chairman and Chief Executive Officer of Moody's Corporation, is leading this morning's conference call.

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

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

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

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

This act provides a Safe Harbor for such forward-looking statements.

I would 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 31, 2003, and other filings made by the Company from time to time with the SEC.

I would like to point out that the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995 contained in our press release issued this morning.

These (ph) 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 Rutherford.

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

On this call, I will provide the highlights of Moody's first-quarter results, and Ray will discuss our operations.

Following Ray's comments, I will give you an update on the regulatory environment and our share repurchase program.

I will conclude by discussing Moody's outlook for 2004.

After the prepared comments, my colleagues and I will respond to questions.

Moody's reported robust results for the first quarter of 2004.

Revenues rose to $331 million in the first quarter, 19 percent higher than in the same period of 2003.

Operating income was 183 million, and increased 23 percent from the prior-year period.

Foreign currency exchange contributed about 180 basis points to revenue, and had a negligible impact on operating income.

Diluted earnings per share for the quarter were 68 cents, an increase of 11 percent over the first quarter of last year.

EPS for the first quarter of last year included the impact of a $14 million nonrecurring gain on an insurance recovery.

Excluding this gain, diluted EPS for the first quarter of 2003 was 55 cents, and EPS growth in the first quarter of 2004 was 24 percent.

In addition, diluted earnings per share for the first quarter this year included a 2 cent impact related to our decision in 2003 to start expensing stock-based compensation, compared to a 1 cent impact in the first quarter last year.

Now, Ray will discuss our operations.

Thanks, John. (technical difficulty) for the first quarter, starting with the U.S. business.

We had strong growth in Moody's Investors Service ratings and research businesses in the U.S., with ratings revenue increasing 16 percent compared with the first quarter of 2003.

All U.S. business segments achieved double-digit percent revenue growth, except public finance ratings, which grew at a low single-digit percent rate.

The largest contributor to growth was the corporate finance ratings business, where revenue grew 30 percent year over year.

Issuance remains near the prior quarter's record volume in the high-yield market segment, and produced more than twice the revenue generated in the first quarter of 2003.

Despite the favorable rate environment, issuance in the U.S. investment-grade market was somewhat weak in the first quarter.

Refinancing activity is slowing after two years of low rates, and borrowing to fund business investment remains weak.

In the U.S. structured finance market, the residential mortgage, commercial mortgage and credit derivatives segments of our business all generated robust year-over-year revenue growth.

We also saw good growth in our U.S. financial institutions ratings business, reflecting strong refinancing-driven issuance in the real estate and insurance sectors.

And our research businesses once again generated very strong year-on-year growth of over 30 percent.

In total, Moody's United States revenue, including Moody's KMV, was $212 million for the first quarter, and grew 18 percent year over year.

Moody's revenue continued to grow faster in international markets than in the U.S.

International revenue of $119 million in the first quarter was 21 percent higher than in the prior-year period, and rose slightly to 36 percent of Moody's total in the quarter.

Moody's international revenue growth continued to benefit from the favorable impact of currency translation.

For the Moody's Investors Service business, international revenue grew 23 percent over the prior-year period, and all business segments achieved double-digit growth in revenue.

International structured finance, which posted a 25 percent increase in ratings revenue, was the largest contributor to the quarter's international revenue growth.

In Europe, the residential mortgage, commercial mortgage and asset-back segments of the market all posted robust double-digit growth, offsetting a decline in European credit derivatives revenue, where tighter spreads on assets underlying these transactions reduced the arbitrage opportunities for deal sponsors.

Asian structured finance revenue increased over 35 percent, due primarily to strong issuance in commercial and residential mortgage-backed securities, combined with gains in Moody's market share for these sectors.

And Moody's research business continued its exceptional international performance, with revenue rising more than 50 percent year over year.

On a global basis, our Moody's KMV business had good results for the quarter.

Revenue reached $29 million, increasing 16 percent from the first quarter of 2003.

We continue to see robust growth in revenue from subscriptions to MKMV's quantitative credit risk assessment products.

Our success in this part of the business is particularly valuable, because it represents recurring customer relationships with the most important global financial institutions.

We are continuing to develop new products to support future growth.

We also saw good growth in the quarter from fees related to training and software maintenance.

Moody's operating margin for the first quarter was 55 percent, up from 54 percent a year ago.

The first-quarter margin was notably above the full-year margin guidance we gave on our last conference call, for a few reasons.

As we have mentioned in the past, we take a conservative approach early in the year to spending for discretionary investment projects.

As the year progresses and we see how revenue shaping up, we then decide which projects we should fund.

In addition, revenue for the quarter was better than we had expected, which helped boost the margins.

As John will discuss when he reviews our outlook for the year, we don't think the revenue growth rate we enjoyed in the first quarter will continue for the rest of the year, and we don't believe the margin we achieved this quarter is representative of what Moody's will report for the full year.

Expenses for the quarter were 15 percent higher than in the prior-year period on a reported basis, and 11 percent higher excluding currency impacts.

The largest contributor to expense growth was increases in staff and related expenses.

I should also note that the quarter's expenses included approximately $5 million related to stock-based compensation plans, compared with approximately $2 million in the prior-year period.

This year-over-year increase reflects both the phasing in of expense related to stock-based compensation as annual equity grants are made, and the effect of a higher share price on the value of our 2004 equity grants.

At this point, I will turn the call back to John.

Thank you, Ray.

I would like to make a few comments on the ongoing regulatory review of the credit rating agency industry in the United States and abroad.

In the United States, the SEC has not provided any public updates about the progress of its review of the roll-in function of credit rating agencies.

So we have no news to report since our last conference call in early February.

We continue to work with the commission to assist the process in any way we can.

As a reminder, the SEC has not announced a specific timetable for completing its work.

The SEC is taking a careful approach in its review, and whatever the outcome, we expect that there will be ample time for comment from all interested market participants to any proposed rules or regulations.

Outside the United States, we are also continuing to speak with authorities who are studying credit rating agencies.

These authorities include national regulators and lawmakers, and international regional organizations such as the International Organization of Securities Commissions, which is called IOSCO, the financial stability forum, the European Commission and the European Parliament.

IOSCO recently announced a project to develop a code of conduct for credit rating agencies.

We understand that a draft code of conduct will be reviewed by an IOSCO committee which meets this week.

We think that the IOSCO code of conduct will focus on practices at rating agencies that can further enhance market efficiency, transparency and investor protection, and that IOSCO will consider recommendations from various market participants, including issuers and investors and existing best practices within the rating agency industry.

We expect that the IOSCO principles will be constructive, and merit our support.

Let me now give you an update on our share repurchase program.

Moody's is committed to returning its excess cash to shareholders via share repurchase.

We take an opportunistic approach to buybacks, and we use the discounted cash flow model, with conservative assumptions, to determine a fair value for the shares.

Our goal is to return capital to shareholders in a way that serves their long-term interests.

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

During the first quarter of 2004, Moody's repurchased approximately 0.5 million shares at a total cost of $31 million.

These shares partially offset 1.6 million shares issued under employee stock plans.

Since becoming a public company in September of 2000, and through the end of March 2004, the Company has repurchased 23.5 million shares at a total cost of $911.6 million, including 9.8 million shares to offset shares issued under employee stock plans.

At the end of the first quarter, Moody's had approximately $368 million of cash on its balance sheet.

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

At quarter end, we had $138 million of authorization remaining in our current $450 million stock repurchase program.

I would like to conclude my comments this morning by discussing our outlook for 2004.

Moody's outlook for 2004 is based on assumptions about many macroeconomic and capital market factors, including interest rates, consumer spending, corporate profitability and business investment and capital market issuance activity.

There is an important degree of uncertainty surrounding these assumptions, and if actual conditions differ from these assumptions, Moody's results for the year may differ significantly from this outlook.

In the United States, a number of key interest rates, including the benchmark 30-year residential mortgage rate and 10-year treasury rates, are now above their averages for the first quarter of this year.

We we expect U.S. interest rates will continue to increase for the remainder of 2004.

We believe that higher rates will discourage the use of debt in any recovery in business investment spending, and will result in lower issuance in the investment-grade segment of the U.S. corporate bond market for 2004 compared to 2003.

We now anticipate modest growth, rather than a decline in high-yield issuance for the year, despite exceptionally strong issuance in the first quarter.

For 2004, we expect corporate finance and financial institutions rating revenue to grow modestly versus 2003, with the benefits of new products, particularly our enhanced analysis initiatives, and stronger-than-anticipated high-yield issuance partially offsetting the impact of lower investment-grade issuance.

In the United States structured finance market, we think higher mortgage rates will result in a decline in revenue from rating residential mortgage-backed securities in 2004.

This decline may be less than we had originally forecast, as a result of the first quarter's robust activity and continuing strength in the housing market entering the second quarter.

We expect good growth in the commercial mortgage-backed securities and credit derivative segment of the U.S. rating business after strong starts to the year.

In public finance, we expect a year-to-year revenue decline in the mid-teens percent, as higher interest rates should slow the pace of refinancings and new money issuance.

We continue to expect strong growth in the research business, and these expectations should produce low single-digit U.S. ratings and research revenue growth for the year.

Outside the United States, we continue to expect low double-digit percent revenue growth in the corporate and financial institutions rating business.

We are also projecting good year-over-year revenue growth for international structured finance ratings, with strong growth in the non-CDO European asset classes and in Asian structured finance, offsetting slower growth in European credit derivatives, due to tighter spreads.

We also expect the strong growth in research revenues in the first quarter to continue.

These expectations should produce approximately 20 percent international ratings and research revenue growth in 2004.

Finally, we continue to expect mid- to high-teens percent revenue growth at Moody's KMV on a global basis.

Moody's expenses for 2004 will likely reflects continued investment spending to improve and increase the transparency of our rating practices, for technology initiatives and product development, and for continued hiring to support growth areas of the business.

We will continue to invest in the enhanced analysis initiative.

Moody's expects the operating margin, before the impact of expensing stock-based compensation, to be flat to 100 basis points lower in 2004 compared with 2003.

This reflects the investments we are making, and the faster growth of the lower-margin MKMV business for the rest of the year.

Overall, for 2004, Moody's expects that year-over-year growth in revenue and diluted earnings per share will be in the high single-digit percent range.

We are providing this guidance whether or not we have substantial share repurchase for the rest of the year, since there are a variety of revenue expense and shares outstanding scenarios that could produce these results.

The expected growth in earnings per share excludes the impacts of the insurance gain and the legacy tax reserve increase in 2003, and the impact of expensing stock-based compensation in both years.

The impact of stock-based compensation expense is expected to be approximately 10 to 11 cents per share in 2004, compared with 4 cents per share in 2003.

This concludes our prepared remarks, and we are happy to take questions from those attending the conference.

(OPERATOR INSTRUCTIONS).

Peter Appert, Goldman Sachs.

Two questions, if I could.

Number one, could you just give us some flavor in terms of what you're seeing early on here in the second quarter in terms of the pace of activity?

And then, secondly, maybe a harder question, I guess.

I am trying to better understand your ability to control costs in the context of the expected deceleration in revenue growth -- particularly, John, given some of the costs you have baked in for the various initiatives.

So is there any way you could help us understand better your ability to control costs and the variability of costs if revenue growth were to, perhaps, come in less than anticipated?

Surely.

Ray, do you want to comment on the pace of activity at this point?

Sure.

Peter, broadly speaking, what we're seeing in April is reflective of what we saw in the first quarter.

The high-yield segment of the marketplace continues to be very strong.

The investment-grade segment continues to be relatively weak.

In structured finance, there is a strong pipeline of residential mortgage and home equity loan assets for securitization, based on the strength in the mortgage market from the end of last quarter -- from the end of the fourth quarter and early in the first quarter, which feeds the pipeline.

We also expect to see the CDO business in the U.S., which was strong in the first quarter, continue to be strong based on the pipeline of potential transactions that we have, and the non-CDO business outside the United States to continue to be strong.

We had, outside the U.S. in structured finance, the month of March was the strongest month we had in the first quarter.

And so we have some momentum going into the second quarter for international structured finance.

And finally, in terms of the major business segments, the research business, again, I think is going to sustain its momentum probably throughout the year.

Peter, in terms of the ability to control costs, I think there are three major elements of variability.

The first is the normal variability of compensation expense, and there, at least with regard to variability in revenues that we would expect, it is probably limited to the compensation expense for our managing directors and above, since we would expect that we would be pretty much on 100 percent for our professional staff in that spending this year.

The second element of variability is pacing or timing of spending on various investment projects.

As I mentioned before, we tend to pace projects that we believe will both produce future revenues and enhance our infrastructure, depending on how revenues are going during the year.

And we do have some spending of that sort where we can determine the pacing.

And finally, of course, we do have plans for incremental hiring in various areas.

And if revenue growth were significantly below our expectations, there is the possibility of postponing those hiring and other types of discretionary expenses such as travel and conferences.

I hope that gives you a flavor of the sorts of things that we can do.

Sure.

Maybe just one last try at this.

In the context of the forecast of flat to down 100 basis point margin, that's obviously built around the revenue assumptions you have given us.

If the revenues were to come in a couple hundred basis points lower, is there sufficient flexibility in these three items you have mentioned to maintain that margin forecast?

That would be growth of -- what are you thinking, Peter?

You said -- well, just looking in aggregate, right, we are talking about mid to high single-digit revenue growth.

Right?

Right.

That's the official forecast.

So if we said low to mid single digits instead, so down a couple hundred basis points -- I'm just trying to get a sense of the (multiple speakers) --

Sure.

-- margin to the revenue variability, because the model really has not been tested.

Absolutely.

Let me respond in this way.

If one put a number of 25 million less revenues, I would say that it may be tough -- but it might not be, also -- to maintain that guidance.

Douglas Arthur, Morgan Stanley.

Two questions.

You are fairly dour on the outlook for high-yield, yet it seems to be continuing at a pretty good pace through April.

I guess my question is when do the tough comps begin, and when do you expect it to slow down?

And obviously, it's based on assumptions of interest rates.

And then the second question -- I am wondering if you could flesh out the weakness in asset-backed securities in the U.S. in Q1, and kind of break down where the weakness is.

And I think McGraw-Hill stated that they are seeing a pickup there going into Q2 -- if you are seeing the same thing?

On the high-yield question, I think there are really two drivers for our relatively modest forecast.

First of all, as we have said, a higher interest rate environment, we think, may have a dampening effect on debt issuance generally.

But with respect to the high-yield sector in particular, the first quarter was notable for the decline in the credit quality of the issuers.

And so lower creditworthy issuers were tapping the market.

Historically, that has been consistent with the end of growth in high-yield issuance, as activity moves from the high-jump sector to the low-jump sector.

And so we clearly saw that in the first quarter.

That, combined with the anticipated higher rates, is causing us to not believe that the high-yield issuance that we saw in the first quarter is going to be sustained in the second half of the year.

The second quarter is probably going to be a pretty good quarter, at least based on what we are seeing as far as April activity.

With respect to the ABS market, certainly the credit card and vehicle securitization sectors were the weaker ones.

The student loan sector was up.

That was strong, and the home equity sector and residential mortgage sector were strong as well.

In the vehicle sector, some of the large securitizers were out of the market, or reduced their activity compared to the first quarter of last year.

And I am talking about Ford, GM, the big securitizers.

They were accessing some alternative means of funding, rather than term asset-backed securities, and that caused a decline.

And in the credit card sector, I think it was a combination of a number of factors, probably including consolidation of some of the large credit card sponsors -- for example, BankOne.

And that reduction, coming from that consolidation, was material to the decline in the first quarter.

We do expect to see more activity in the second quarter in the credit card sector.

In the vehicle sector, based on our pipeline, I am not sure that it's going to be a lot stronger than we saw in the first quarter.

But that may pick up again later in the year, as well.

Just as a follow-up, if there is a continued pickup in M&A activity in the next couple of quarters, how does that affect your outlook for various rating areas, including high-yield?

And then can you be a little more specific in terms of, for instance, credit card derivative growth year over year in the quarters?

In other words, drill down exactly what the growth rates were in various asset-backed areas.

Well, Doug, obviously, if there is stronger M&A activity, we do believe that that is likely to be an upside to our forecast on the investment-grade area.

In terms of your second question, Ray, is there any information you have there?

The information that I have in front of me, which I think is probably of the most interest to Doug, is on a consolidated basis for our asset-backed sector.

And that was -- in terms of the revenue we got from that sector in the U.S., it was down about 17 percent year on year from the first quarter of 2003.

Doug, I don't have the breakdown of that by the individual asset classes for the year-on-year comparison that I think you're trying to get at.

Stacey Fleck (ph), Merrill Lynch.

Just two questions.

I was wondering if you could detail the strength in the research revenues.

And also, as a second question, are the new products adding anything to revenue growth at this point, or are they still just in kind of in a ramp-up mode, showing up in the expense line?

In the research sector, we have had good growth from a number of different areas, including both our traditional company research and then data and analytic products.

The data products have been very successful for us in the area of what we call content licensing, or the packaging of Moody's ratings data for sale through other market conduits, and that has been a good growth area for us, and continues to be.

In the analytic products, we have seen good growth, particularly in the sale of data analytic products related to the structured finance business.

Now, that is relatively small compared to our overall research business, but it does fall into the new product category, and it has enjoyed strong growth.

And finally, we are selling, as part of our subscription service, the research related to our enhanced analysis initiative -- financial reporting assessments, corporate governance assessments -- and that is part of the subscription package that we made available to investors.

We are also seeing very good growth outside the U.S. in research sales, and that is much more reliant on attracting new customers and penetrating new customer segments, whereas in the U.S., there is more of a reliance on new products to the existing institutional (inaudible).

And I guess, just as a quick follow-up, do you know how much high-yield represented the corporate finance revenue stream?

Jeanne, can you comment on that?

We look at high-yield revenue in the first quarter compared with total corporate finance revenue -- it's in the range of 15 percent or a little bit higher.

It should be basically noted that most of the high-yield issuers are per-issue rather than relationship-based pricing, as they don't tend to have programs such as commercial paper programs.

And that is why revenue may appear relatively low to you in that segment.

Kevin Gruneich, Bear Stearns.

A few questions.

I was wondering, first of all, if Jeanne, could you give us FTEs and how that compared to a year ago?

And also, incentive comp to total comp for the quarter?

Sure, Kevin.

In terms of the FTEs, compared with last year's first quarter we have added about 200 people.

So we are up to about 2260.

And that does not include the FTEs related to the Korean and Argentinian joint ventures, which would add about another 100 people.

So our headcount increased about 9 percent year over year.

In terms of incentive compensation expense, and this includes the bonus plans that John talked about, as well as the bonus -- what we call the EPS match, the payment based on earnings per share growth as a part of our 401(k) plan.

And the aggregate of those expenses was about 17 percent of total comp expense for the quarter.

And also, I think Ray talked about these discretionary expenses that tend to get staged a bit, reflecting revenue outlook.

I was wondering, is it possible to isolate that pot of discretionary expenses, what it was in the quarter and what it could be for the full year as you see the year play out?

Well, I think it's a little bit difficult to isolate all of the expenses, but I think it's fair to say that our spending in the first quarter on discretionary projects was relatively modest.

And over the course of the year, we have a -- certainly, we're investing today in many important projects such as new products, but over the course of the year, we will decide how much to invest in the other projects, as we get a better feel for revenue, so that the level of investment will to some extent depend on revenue variability.

I know that is not a very precise answer.

Geoffrey Dunn, KBW.

With the -- it's looking like a lot of the growth is going to be supported more internationally.

Could you just give us a quick review of the international versus domestic mix in your various line segments?

And how dramatically do you think that can shift over the next 18 to 24 months?

I'll at least give you an overview, and then we can go from there.

In terms of the domestic versus international revenue mix, the mix has not changed dramatically by business unit.

Structured finance and corporate finance generally are about two-thirds U.S. and one-third international.

In the first quarter, the corporate finance revenue was a bit more heavily weighted toward the U.S. because of the strength of high-yield.

The financial institution sector is generally about half U.S. and half international, and that was the case for the first quarter, as well.

Public finance is 100 percent U.S.

The research business is closer to 50/50, with a little bit more revenue in the U.S.

International has been growing faster than the U.S. in the research business for the last several years.

And then, MKMV is pretty well evenly split between the two.

If our international revenue grows at our target rate of about 20 percent a year versus the target rate for U.S. revenue of about 10 percent a year, we would expect those proportions to shift modestly each year towards international.

Fred Searby, JP Morgan.

I had a question.

If you could help us understand, on your international business your outlook appears to be one of rising rates in the second half of the year.

How interest-rate-sensitive -- I know I drilled down somewhat -- some components of the business are to international business to U.S. rates increasing, and where do you think you actually will see a coincident decline or that drive a decline in international issuance, and where do you think it's pretty resilient?

So can you give us just, I guess, your outlook on international rates and the interest rate sensitivity there to the U.S. rates?

And finally, if you could drill down a little bit on Asia and Japan as a percent of revenues, and Latin America, and the international revenue side?

Let me at least get this started.

We have seen the corporate finance financial institutions issuance in Europe supported by the same sort of refinancing activity that we have seen in the U.S., although we believe that the refinancing has been less extreme.

As a result, I think if we have a rising rate environment in Europe, we're going to see a decline in issuance among the investment-grade companies, although perhaps not as dramatically as we have seen in the U.S. in terms of a falloff.

But you have taken the view that you're going to have a rising rate environment in the U.S.

Is that your view for Europe, as well?

Less so (ph).

Yes.

I think we may see some modest increase in rates, but we would not anticipate it to be as much as we would see in the U.S.

Importantly, though, a rising rate environment in Europe may have an impact on the credit derivatives business, which has been very sensitive to corporate spreads.

And if we see a modest increase in rates in Europe, and that is associated with strengthening economic activity, we may see a decline in corporate spreads in Europe, which could provide some additional support for the credit derivatives portion of our business.

The research portion of our business, I don't think is going to be sensitive to any change in rates.

That's the other major part of our European business.

Outside of Europe, in terms of the Asian component of our business -- let me see if I can get a couple of numbers here together for you.

Yes, Japan is about 3.5 percent of total Moody's Investors Service revenue, Latin America is a little less than half of that, and Asia overall is a little over 7 percent of our revenue.

So Asia/Latin America together is about 9 percent of the Moody's Investors Service revenue, and Japan is 3.5 percent of that number, a little over a third of that number.

John Neff, William Blair.

I was wondering if you could, Jeanne, quickly -- the outstanding debt, I am assuming, is still the 300 million in notes payable?

Right, John.

And in terms of the revenue contribution from the enhanced analytics products, am I correct in interpreting your answer as meaning that currently, that is solely in the research revenue line at this point?

It's not being built into the ratings revenue?

I'm sorry; can you repeat that?

I think, John, that -- or we have two sources of revenue from the advanced analytics initiative.

The first and more important of that comes from our frequent issuer customers in the United States at the moment who are paying increased relationship-based fees for the additional work that we're doing in our advanced analytics initiative.

That is by far the most important component of the revenue.

There is a small component from selling the research service or selling this as part of the research service.

I would add, just to be clear, we are not selling this as a separate set of services to our research customers.

It is included in our packages of research subscription packages, and supports the value proposition that we're trying to sell to existing and new customers.

Joe LaManna, William Blair.

I saw that the Board just declared the regular dividend yesterday.

I was wondering whether, John, you can provide any additional color whether the Board considered at all substantially raising the dividend, given your substantial cash position?

Management did not make, and the Board did not consider, raising the dividend at this meeting.

We are certainly aware that we have a relatively low cash payout ratio, and that our -- we have not been able to do substantial share repurchase over the last couple of quarters.

Because we have an outlook that suggests that our growth rates towards the latter part of the year will be less than the growth rate which we displayed in the first quarter, we are certainly going to keep a watch on this, and we may come to recommend a different policy to the Board towards the end of the year, but at this point, we don't think that we have enough information to change the policy that we are currently following.

Brandon Dobell, CSFB.

A couple of quick ones.

If you look at the difference between the mortgage refi business and the origination business, if new home sales remain relatively strong, or at a consistent pace, or if they fall off dramatically or rise dramatically, how much of an impact does that have on the U.S. structured finance business?

I also wanted to get a sense for, as you look at Q1 and kind of maybe going forward a couple of quarters, how much of the business now is kind of subscription versus transaction pricing?

Is there a target you guys have for this year, or is this more of a natural evolution to a certain level that makes sense?

I think, on your first question, in round numbers, about 70 percent of the business is refi, and 30 percent of the business is new.

In terms of the transaction versus relationship, we do not have targets for that.

Generally, what we do is we look at how that is evolving, and whether we need to make changes to that, but we don't set any targets at the beginning of the year.

Jeanne, are you willing to comment on providing more information on that mix at the moment?

Sure, John.

Brandon, if you think about this in the way that we present it in our normal presentation, the pie chart, the transaction part of the business for the first quarter was roughly 56 percent of revenue, relationship was 23 percent, research was 12 percent, and then KMV was 9 percent.

So the relative proportions are fairly consistent with 2003, and the transaction part of the business has been a bit higher of late, because of the strength of the high-yield business in the U.S., which is a transaction-based business.

And I should note that our research has crept up to 12 percent versus the 10 percent we saw last year, because of the differential growth in that business in the first quarter.

(OPERATOR INSTRUCTIONS).

Edward Atorino, Fulcrum Global Partners.

Can you talk about the tax rate and where that is sort of headed?

I'll take a shot at that for you.

The tax rate in the first quarter, as you saw, was slightly lower than what we think of as our normalized tax rate for 2003 -- the normalized rate, excluding the reserves that we provided for the legacy tax matters last year.

So we were at a rate in the first quarter of 41.8 percent versus 42.1 percent for 2003, and we think that for the full year, the rate will be in that range, and obviously that's thinking about a normalized rate.

If there were to be any additional provisions related to legacy tax matters, they would not be considered in that rate.

Douglas Arthur, Morgan Stanley.

Hi, it's Lisa Monaco.

If you could just speak to, John, your thoughts on the share repurchase program.

I think you said you have about 140 million left under the current program?

And at one point, I believe the expectation was to complete the program by mid-'04.

If you could just give us your thoughts?

Well, as we have already announced, we have not been very successful in the share repurchase, thanks to excellent reception in part from the market to what we have done.

I think the way we very broadly think about it is there is one school that reflects extreme patience that says at some point in time, you will know when your shares are underpriced, and you should wait for that.

And when that happens, you should go for it.

I think we also recognize that many of our investors are not as patient as that camp, and that we want to have a big tent where we have as many investors as possible in our tent, and not only the extremely patient ones.

So we are trying to balance that.

We also, as I mentioned to Joe LaManna, we recognize that our payout is relatively low.

And if we are not able to do share repurchase, that is a payout which may not be sufficient to get all the investors we would like into our tent.

However, we are still in the process of awaiting, as we have mentioned, somewhat lower quarterly growth rates than we have seen for the last few quarters.

And we would like to get some experience from that before changing the policy that we have been following for the last few years.

So I hope that is a somewhat different way of stating what I mentioned to Joe, and I hope it gives you enough feeling for what we're thinking about at the moment.

And just, Ray, a follow-up.

Can you provide us with the year-over-year growth in U.S. credit derivatives in the quarter?

Sure.

Give me one second.

U.S. credit derivatives were up about 21 percent year on year.

Jim Baker (ph), Neuberger Berman.

Actually, I have two quick questions.

One is on KMV.

Could you comment whether you saw much margin improvement there in the first quarter, and would you anticipate the margin before amortization for the full year might be significantly greater than last year's 13 percent?

And the second question, on the 300 million of debt, are there any options in terms of prepayment -- I know it's due in about a year and a half.

Are there any options in terms of prepayment that you were thinking of exercising there?

Jeanne, do you want to comment on the margin situation at KMV?

Sure.

At KMV for the first quarter, operating income on an as-reported basis was essentially breakeven.

If we strip out the amortization of the purchase accounting, and also strip out the expense for stock-based compensation, since it's not comparable year to year, we wind up with operating income of a little under $3 million, which is roughly a 10 percent margin for the first quarter.

Last year, MKMV had a margin on on the same basis for the first quarter that was, I believe, 3 or 4 percent.

For the full year, we would not expect the magnitude of the margin change for the first quarter to flow through.

You're (ph) looking for a more modest improvement in the margin for the full year, so that if it were 13 percent last year, it might be up to maybe 100 basis points or a little less improvement year to year in the margin.

And our business policy here is to go more for revenue growth than margin improvement.

We believe that this is a market where there are a number of financial institutions, both banks and asset managers, that are going to be adopting this technology.

And we would prefer to have them, at this point in time, adopt our technology and get our technology placed, rather than focus on margin improvement.

Okay.

That makes sense.

So in other words, whatever integration of the two, the former risk management business, that is pretty much all finished, as far as your -- the headcount reduction that might have been associated with that?

Well, I think it is finished from the cost side.

We still think that there are very substantial opportunities to sell the KMV risk products into the base of around 1,000 customers that employed the Moody's decision support system for commercial lending.

And then, on the 300 million of debt?

We believe that the repayment options are not attractive.

If there no further questions, I will turn the conference back to Mr. Rutherford.

Well, thank you all for joining us, and we appreciate your support and we look forward to continuing to talk with you at conferences and on our next quarter conference call.

Thank you very much.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating, and have a nice day.

All parties may now disconnect.