穆迪 (MCO) 2005 Q4 法說會逐字稿

Good morning and welcome to the Moody's Corporation fourth-quarter 2005 results conference call.

At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the Company, we will open up the conference up for question and answer 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, Jessica.

Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's results for the fourth quarter of 2005 and the full year.

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

Moody's released its results for the fourth quarter of 2005 and the full year this morning and the earnings release is available on our website at IR.Moodys.com.

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation, will be leading this morning's teleconference.

Also on the call this morning is Linda Huber, our Chief Financial Officer.

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 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, 2004 and in other filings made by the Company from time to time with the SEC.

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

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.

At this point, I am pleased to turn the call over to Ray McDaniel.

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

I will begin our prepared remarks this morning with a brief summary of Moody's fourth-quarter results.

Linda Huber will then take you through the quarter's operating highlights, provide some commentary on revenue and expenses, update you on our share repurchase program and discuss several investments we have made since our last earnings conference call.

I will then review developments in the legal and regulatory area and finish with Moody's outlook for 2006.

After that, we will be happy to respond to your questions.

Moody's reported record results for the fourth quarter and full year of 2005.

Revenue in the quarter rose to $473 million and was 21% higher than in the fourth quarter of 2004.

We generated good revenue growth in each of our major business lines, including two, U.S. structured finance and public finance where our outlook and consensus forecast at the start of the year suggested that market conditions would be notably weaker than they ultimately were.

Operating income in the fourth quarter was $242 million and grew 18% year-over-year.

As anticipated, operating income grew at a slower pace than revenue in the fourth quarter due in part to investment spending late in the year.

In addition, foreign currency translation negatively impacted revenue and operating income reducing growth in the quarter by approximately 160 and 100 basis points respectively.

Diluted earnings per share of $0.50 for the quarter were 25% higher than in the prior year period.

Results for the fourth quarters of 2005 and 2004 each included $0.02 of expense related to stock-based compensation.

Results for the fourth quarter of 2004 included charges of $1.6 million equivalent to $0.01 per diluted share related to legacy income tax exposures that Moody's assumed in connection with its separation from the Dun & Bradstreet Corporation in 2000 and which are described in Moody's annual and quarterly SEC filings.

Our earnings release includes tables showing the non-GAAP financial measures that are derived after excluding adjustments to our legacy tax reserves and stock compensation expense from our 2004 and 2005 results.

At this point, I'll turn the call over to Linda who will start with some detail on revenue and expenses.

Thanks, Ray and good morning, everyone.

First, I will provide some details for the quarter starting with our U.S. businesses.

Moody's U.S. revenue was $295 million in the fourth quarter, up 23% year-over-year.

At Moody's Investors Service, U.S. ratings revenue rose 24% year-over-year and U.S.

Research revenue grew 23%.

U.S.

Structured Finance was once again the largest contributor to growth both on a dollar and percentage basis with revenue increasing 43% compared with the prior year.

U.S.

Structured Finance benefited from strong growth in a number of ratings segments, including residential and commercial mortgage-backed securities, credit derivatives and asset-backed securities.

U.S.

Corporate Finance revenue increased slightly from the prior year period reflecting lower issuance of investment-grade and speculative-grade securities offset by higher fees from the enhanced analysis initiatives and bank loan ratings.

U.S.

Financial Institutions ratings revenue rose 17% compared with the prior year period driven by good growth and the issuance in the banking, finance and securities sectors as well as by new mandates for ratings from finance, securities and insurance companies.

U.S.

Public Finance revenue grew 3% compared with the fourth quarter of 2004 reflecting a modest increase in long-term issuance as issuers continue to take advantage of low, long-term interest rates and the narrow spread between long and short-term rates, which has been favorable for advanced refunding.

Finally, U.S.

Research revenue rose at a healthy pace, increasing 23% from the prior year period.

Turning now to our international operations, Moody's continued to generate strong growth outside the US.

Total international revenue of $179 million in the fourth quarter was 18% higher than in the prior year period with foreign currency translation reducing growth by approximately 400 basis points.

International revenue accounted for 38% of Moody's total in the quarter, approximately the same as in the year-ago period.

Focusing first on Moody's Investors Service, this segment reported 19% growth in international revenue.

International Structured Finance Ratings revenue was 24% higher than in the prior year period and benefited from strong growth in the residential and commercial mortgage-backed securities businesses.

International Financial Institutions revenue grew 21% year-over-year reflecting continued strong issuance in the banking sector in Europe and a pickup in issuance in Asia.

International Corporate Finance revenue rose 7% due in part to new ratings relationships in Europe partly offset by weak issuance in Asia-Pacific outside Japan.

Moody's Research business continued it strong international performance with revenue rising 24% year-over-year.

Turning now to Moody's KMV on a global basis, Moody's KMV generated 36 million of revenue, up 4% compared to the fourth quarter of 2004.

Revenue from risk product subscriptions rose 5% and revenue from licensing and credit processing software and related software maintenance fees increased by 29% from the prior year.

These increases were largely offset by a decline in revenue from professional services.

Next, I'll turn to operating expenses.

Moody's Corporation's operating expense for the quarter totaled $231 million, which was 24% higher than in the prior year period.

The quarter's operating margin was 51% compared with 53% for the same period last year.

Expenses this quarter included $12.3 million for stock-based compensation compared with $8.7 million in the fourth quarter of 2004.

The quarter's expenses also included a $6 million grant from the Moody's Foundation, which carries out philanthropic activities on behalf of Moody's Corporation compared with a $7 million grant in the prior year period.

I'd like to turn now to an update on capital allocation and stock buyback.

Two quarters ago, we made an important adjustment to Moody's share repurchase strategy adding a systematic component to our buyback activity.

We continue to be pleased with the results of this approach and we plan to maintain it.

Moody's also remains committed to using a strong cash flow to create value for shareholders by investing in growing areas of our business by making selective acquisitions in related businesses and by paying a modest dividend.

Specifically, during the fourth quarter of 2005, Moody's repurchased 6.7 million shares at a total cost of $363 million and we issued 1.6 million shares under employee stock compensation programs.

For the full year, we bought back 13.5 million shares at a total cost of $691.7 million and issued 6.1 million shares under employee stock compensation plans.

Since our last conference call, Moody's has also made several important investments I would like to mention briefly.

During the fourth quarter, we acquired Economy.com, a leading independent provider of economic, financial, country and industry research.

We paid $27 million, which we funded with cash on hand.

As we noted when we announced the acquisition, economy.com is a great fit with Moody's business because it will broaden our analytical capabilities to include areas of economic and demographic research, expand the range of products and services we offer to institutional customers and it will introduce new customers to Moody's.

Economy.com will benefit from access to Moody's extensive client base, deep product marketing capabilities and other resources needed to expand its business.

Immediately after closing the transaction, we rebranded the company, which is now named Moody's Economy.com.

It will continue to operate as a separate entity from its headquarters outside Philadelphia.

Revenue for Moody's Economy.com is included in Moody's research results.

Also during the quarter, we opened an office in Moscow, which will operate under the named Moody's Eastern Europe.

Those of you who have heard us speak on prior earnings conference calls or at investor conferences know that we see good long-term growth opportunities in a number of developing markets around the world, including Russia.

This new office will provide global scale ratings and more broadly will enable Moody's to better meet Russia's growing demand for credit ratings and analyses.

Moody's Eastern Europe will work hand in hand with our existing domestic market operation in Russia, Moody's Interfax rating agency, which will continue to provide domestic ratings in Russia.

We also increased our investment in Midroog Limited, an Israeli ratings agency to 40% from our initial 10% investment in 2003.

The Israeli domestic credit market has experienced strong growth in recent years as has the bottom of cross-border issuance.

By adding to our investment in Midroog, we expect to benefit from the continued development of this market.

And finally in early 2006, Moody's acquired CRA Rating Agency, the Czech Republic's sole domestic credit rating agency.

As with Russia, we believe that a number of the economies in central Europe present good long-term opportunities for Moody's.

Now operating as Moody's Central Europe, the rating agency will continue to provide national ratings for companies in the Czech Republic, Slovakia and Hungary.

As part of this transaction, Moody's also assumed CRA Ratings Agency's affiliation with the Bulgarian rating agency, NCRA.

With that, I'll turn the call back over to Ray.

Thanks, Linda.

I will now briefly summarize development in the legal and regulatory areas.

As we disclosed in our second-quarter 2005 conference call, Moody's received two subpoenas from the New York Attorney General's office.

Moody's 10-Q for the second quarter of 2005 included disclosure on these matters.

Since then, we have no further developments to report.

Moody's 10-K for 2005, which we expect to file early in March, will include a summary of what we have disclosed thus far regarding the subpoenas and we will provide an update if anything changes between now and then.

Turning to the regulatory environment, in early January, the European Commission set out its policy with regard to credit rating agencies.

Consistent with advice from the Committee of European Securities Regulators, known as CESR, the EC has decided not to introduce new legislation governing credit rating agencies at this time.

The EC believes that existing regulations combined with self-regulation based on compliance with a code of conduct adopted by the International Organization of Securities Commissions, known as IOSCO, should be sufficient.

The EC will monitor rating agency contact and performance and it left open the possibility of introducing new proposals in the future if it becomes apparent that compliance with EU rules and the IOSCO code are insufficient.

In the U.S., the SEC is continuing to consider oversight of rating agencies both in terms of commenting on a potential legislative framework and on a voluntary industry framework.

We have no significant developments to report in this area since our last earnings conference call.

Most recently, the Senate Banking Committee has announced that in the current legislative session it intends to consider competition, transparency and potential conflicts of interest in the ratings industry.

As we have said previously, Moody's supports healthy levels of competition, proper management of conflicts of interest and greater transparency as beneficial to the long-term role and function that rating agencies serve in the capital markets.

We continue to work constructively with members of Congress on these objectives as well as making improvements in the transparency of our own business.

I would like to conclude this morning's prepared comments by discussing Moody's outlook for 2006.

Moody's outlook for 2006 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer spending, residential mortgage borrowing and refinancing activity, securitization levels and capital markets issuance.

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

For Moody's overall, we project revenue growth in the high single digit to double-digit percent range for the full year 2006, including a small negative impact from foreign currency translation.

We expect the operating margin for the impact of expensing stock-based compensation to decline by up to 100 basis points in 2006 compared with 2005.

This reflects investments we are continuing to make to expand internationally, improve our analytic processes, pursue ratings transparency and compliance initiatives, introduce new products and improve our technology infrastructure.

For 2006, we project year-over-year growth in non-GAAP diluted earnings per share in the low double-digit percent range.

This expected growth excludes the impacts of reserve adjustments related to legacy tax matters in 2005 and the expensing of stock-based compensation in both 2005 and 2006.

Please note that the 2006 year represents the final year of phasing for our stock-based compensation, which we began in 2003.

The impact of expensing stock-based compensation is expected to be in the range of $0.12 to $0.14 per diluted share in 2006 compared to $0.10 per diluted share in 2005.

In the U.S., we're forecasting mid single digit percent revenue growth for the Moody's Investors Service Ratings and Research business or the full year 2006.

In the U.S.

Structured Finance business, we expect revenue for the year to rise modestly from the record level of 2005.

We are projecting a high teens percent decline from 2005 to 2006 in revenue from residential mortgage-backed securities, including home equity securitization, and we know the divergence in market views about the 2006 outlook for this business.

Offsetting this expected decline, we look for double-digit year-over-year growth in asset-backed securities, credit derivatives and commercial mortgage-backed securities.

In the U.S.

Corporate Finance business, we believe that modest growth in investment-grade issuance, gains in rated share of the syndicated bank loan market and incremental revenue from our enhanced analysis initiative in new products will more than offset expected flat issuance in the speculative grade bond sector.

Overall, we expect revenue in the U.S.

Corporate Finance business to grow in the low double digit percent range for the year.

In the U.S.

Financial Institution sector, we project issuance by banks to increase slightly in 2006 compared with 2005 and issuance by insurers and other financial institutions to be flat or down.

However, fee increases partly related to our enhanced analysis initiative as well as expected new ratings mandates should produce revenue growth for the year in the low double digit percent range.

For the U.S.

Public Finance sector, we believe that rising interest rates will slow refinancing activity and result in lower issuance in 2006 than in 2005.

We forecast revenue for 2006 declining in the mid single digit percent range from the prior year.

We forecast strong growth in the U.S.

Research business at about 20%.

Outside the U.S., we expect ratings revenue to grow in the low teens percent range with high single digit to mid teens percent growth in all major business lines.

This forecast assumes that foreign currency translation rates will have a modest negative impact on revenue growth for the year.

In addition, our outlook assumes low and mid teens percentage growth in corporate finance revenue in Europe and Asia respectively.

For the Financial Institutions business, we expect to see high single digit revenue growth in Europe after a year of very strong issuance in 2005 and low double digit percent growth in Asia.

We look for low teens percentage growth in the International Structured Finance business and about 20% growth in International Research revenue.

For Moody's KMV globally, we expect moderate growth in net sales and revenue from credit risk assessments subscription products, credit decision processing software and professional services.

This should result in mid to high single digit percent growth in revenue with greater growth in probability.

That concludes our prepared remarks and we would be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS).

Geoffrey Dunn, KBW.

On your '06 forecast as it pertains to the structured and corporate outlook, could you get more specific on your yield curve and credit spread assumptions that support that growth projection?

Sure, Geoffrey.

For the yield curve, we do expect rising rates.

The estimate is for rates to rise to about 5% by the end of the year.

We also expect that credit spreads will remain relatively tight and will not widen much from what we saw in 2005.

So while we have a rising rate environment, we expect to have a reasonably stable spread environment.

And that is true in both the U.S. and Europe.

And on the yield curve, you expect a relatively flat curve for the year?

We would because based on the consensus forecast if we get the long-term rates to 5%, that would maintain a relatively flat yield curve, yes.

And on another topic that has been discussed before on these calls, in terms of the share repurchase appetite, you have the systematic plan in place, but if you look at the average price that was implied by your activity in the quarter, it seems like most of the activity occurred October/November.

And with the stock trading at a fairly substantial multiple on the variety of EPS estimates out there and the risk free rate approaching 5%, does this start getting you to maybe reconsider the capital deployment option?

Geoffrey, it's Linda.

We, as we said, are pleased with having a systematic component to our share repurchase and we have been pleased with the results thus far.

We are pleased with the average price of which we have been able to buy back.

We periodically look at what we plan to do for the upcoming period and take into account a number of factors and we are continuing to do that at this point.

So we don't have any particular conclusions right now but we are pleased with how the program has been able to perform for us.

Douglas Arthur, Morgan Stanley.

Hi, it's Lisa Monaco.

Ray, could you just talk about corporate issuance in particular and there has been some numbers thrown out about a significant amount of debt that will come due in '06 and how that factors into your assumptions and secondly, regarding your guidance, can you just give us a sense for where you think you could -- the most risk to your guidance is?

Okay.

With respect to the corporate market, we are expecting an increase in issuance volume for the investment-grade sector.

We are expecting the speculative-grade sector however to remain essentially flat.

There is an important stock of maturing debt but if our expectations for a rising rate environment are correct, we will also have fewer opportunistic refinancing issues and so that is an offset.

With respect to the area where we see the most risk to the forecast, I will characterize it as where we see the most potential variance to the forecast.

And that is both upside and downside.

That is based on our historical forecasting abilities which have to be in the Structured Finance area.

We have been fairly consistent in our wrongness about that for a couple of years.

But as I mentioned in the prepared comments, we are assuming in particular for the U.S. residential mortgage securities market a high teens percent decline in revenue and there are significant differences of opinion in the market about what to expect in the residential mortgage area and that would have some collateral consequences over into, for example, ABS, CDOs.

So if we do not see that kind of a decline, obviously we would expect to have better performance for the year.

But there are also some forecasts that expect a greater decline than high teens.

So that is where the variance I think would focus.

John Neff, William Blair & Company.

A couple of questions.

First, there was a Reuters article that came out earlier in the week where the U.S.

Senate Finance Committee Chairman was quoted as saying they need to examine essentially the nature of the business model, which is getting paid by the debt issuers.

Is that a change in the scope of the regulatory scrutiny?

No, I don't think it is.

It actually is reflective to areas of interest going all the way back to 2002 when the SEC first put out its report on an examination of the role and function of rating agencies in the market.

So that is a very consistent area of interest and while we think we have very good controls around the conflicts of interest, I think a large part of our job is to make sure that policymakers and elected officials understand how we are managing those risks and why in fact the business model that we have is very useful for the operation of the financial markets.

Great.

And Linda, probably a question for you.

Could you elaborate a little bit more on -- just explain what it means that 2006 is the final year of options phasing in?

Sure.

We decided to expense options previously and we have been making those adjustments year-over-year, Jeff.

So the final year of that will be coming due in '06 and you saw, as Ray commented, about 12 basis points impact on that.

So we are seeing --

$0.12.

I'm sorry. $0.12.

We are seeing the final year of that phase in, which will take place next year.

What does that mean for 2007?

It would be more consistent expense or --.

Yes, the expense would just be fully caught up if you will for '07.

So there would be no impact for the adjustment.

Beginning in '07, what we and you would still be looking at are out utilization rates on stock compensation and on the share price.

Great.

And then a final question.

You cited that there were some new mandates for ratings from finance and securities firms.

I was wondering if you could just elaborate on that.

Yes.

I guess mandate is probably something of an elaborate word for new rating request.

And we have been seeing new rating requests coming out of the financial institution sector.

In the U.S., not so much from banking but from nonbanking financial institutions and then over on the European side, it has been from both banks and nonbank financial institutions.

What has changed about their business that they are requesting this?

Well in the U.S., I think it is just -- it is more modest and it simply reflects the -- with the growth of borrowers and their maturation into the public debt securities markets they are interested in receiving ratings as opposed to only accessing the loan market.

On the European side, the story I think relates really more to expansion of activity into Central and Eastern Europe and the participation of financial institutions from those regions in the Western European financial markets.

So we are seeing, in many cases, smaller banks that may not be thinking about capital markets issuance currently but are nonetheless thinking about their participation in the interbank market for example and wanting to have a benchmark in their credit profile in the form of a rating as they seek to engage in that banking market.

Steven Barlow, Prudential.

Two housekeeping things.

Linda can you give us the basic share count at the end of 2005?

Two, any guidance on the tax rate in 2006?

And then lastly, any seasonality to your guidance?

The housing market hasn't broken yet.

Are we more front-end loaded in how you look at some of your numbers?

Okay.

Let me see if I can get all those, Steve.

The actual share count at December 31, 2005 is 290.3 million shares.

On the tax front, as you saw, we benefited a bit from various programs that were available to us in 2005, namely the Jobs Act and research and experimentation credits.

So the dollar value of the change in the tax rate from those programs is about $5 million, which speaks to the reduction in the tax rate, which for Q4 of 2005 was around 38.5%.

We would see for the year next year that we would expect that we would trend back up probably in the 41% range.

It seems to be where we think we're going to go for next year.

And Steve, I think I omitted one of your questions regarding seasonality?

What was your question regarding that?

It really is a matter of the mortgage business for one is doing just fine as we're entering into '06.

Looking at your guidance, are you thinking any of the changes that you just made will still have a seasonality affect.

Better in the first half than the second or vice versa, any comments?

I will let Ray take a crack at that one.

Sure.

And Linda can correct if I say the wrong thing.

I think particularly in the mortgage securities market, we would expect to see a stronger first half than second half.

To maybe get ahead of a question that we are usually asked, we do still have a strong pipeline in that business but what we do have in the pipeline, at least anecdotally, is that more of the assets being contributed for securitization are assets not from new originations but from assets held on the balance sheet.

So to the extent that the pipeline is partly represented by working off the stock of the high-volume activity we saw in 2005, I think that would be another indication of why we might see some slowing in addition to just a rising rate environment.

Karl Choi, Merrill Lynch.

I just wanted to talk a little bit about KMV.

Can you give a little more color as to what drove your revenue decline in professional services in the quarter and do you expect to take any cost actions at that unit?

With respect to the professional services, that was largely a timing issue.

But I would note that it is a timing issue going two directions.

We were able to close some business at the end of the third quarter, which previously we had expected would close in the fourth quarter and also some of that business that we would've hoped to have closed in the fourth quarter has rolled over to the first quarter of this year.

So I think the story there is really timing more than a fundamental change in the professional services business at Moody's KMV.

And yes, we are working on increasing the profitability of that unit.

I think I had mentioned on the third-quarter earnings call that to the extent that we are not achieving the kind of top-line growth that we had originally estimated for this business, we're placing more emphasis on growing the profitability of the business.

And can you give us a little bit of a sense as to what you expect headcount to do in 2006?

What kind of an increase are you expecting at this point?

Sure.

I can take the headcount question, Karl.

It might be a little bit easier.

With the exclusion of our new acquisition, Economy.com, the firm's headcount increased 11% in 2005.

We stand right now at, with Economy.com, a total of 2861 people.

At this time last year we were at 2477 people.

So with the Economy.com acquisition, we are actually up 16% year-over-year.

For next year, we do plan to continue to add people, Karl, and we would expect that that increase might be in the low teens sort of level.

But of course we look at that very carefully regarding business conditions and obviously we will also pace our hiring according to our outlook for business conditions.

Great.

One last question.

Regarding your outlook for asset-backed securities issuance in the U.S., just wondering what kind of assumption are you making for consumer spending and how is that going to tie back to the issuance volume?

Our estimate for growth in consumer spending or consumer borrowing is a bit of above 5% nominal growth.

That is not a size what we saw in 2005 but it is pretty good by historical standards.

If you go way back in history, it would be reflective of what we saw in the mid-'90s and would support the outlook for this business.

Jim Baker, Neuberger Berman.

I have, as usual, a bunch of questions.

On some you may not be able to answer.

But for example, do you believe that Moody's may have gained share in the ratings business in 2005?

It seems like your total growth for the year in ratings about 21%.

We have seen a number of around 16 and change out of McGraw-Hill for their total financial services business.

I know they don't break that down between ratings and non-ratings.

But is your impression and I haven't seen the Fitch numbers, but is your impression that you might be the largest pure rating agency today?

I think in terms of the impact of our growth in 2005 versus that of our competitors, it is unlikely to change the marketshare numbers.

I obviously am pleased that we had a good year but our competitors also broadly had good years and so I would not expect to see the marketshare estimates that we include in our public communications to change or if they do, they will change very modestly rather than materially.

Second question I had was can you give us a breakout of the interest and other nonoperating income broken down by interest expense, interest income, foreign exchange gain or loss and other?

Sure, Jim.

For the fourth quarter of 2005, we had a $1 million loss on the FX line, interest income was $6.7 million, interest expense was $3.8 million and then we had other of $400,000.

So the total nonoperating income line was $1.5 million for the fourth quarter.

Do you happen to have those -- I guess the full year we can derive it -- if you have those handy, that would be useful.

Let me see if I can do this.

For the full year, we had loss on FX at $8.2 million, interest income of $26 million, interest expense of $21 million and some other things totaling a loss on that line of $4.9 million.

That's very helpful.

And then I also wanted to know if you could give us the breakdown of the operating profit between KMV and ratings and research or just maybe KMV, if you could give us that figure for the fourth quarter and the full year.

Sure.

I'm going to let Ray take the KMV question.

I have got the operating profit for the full year in front of me and this is excluding stock option expense.

I'm sorry -- I'm being told that it is including stock option expense and -- sorry.

For the full year, it was just shy of $8 million in operating income and that was a bit better than 20% growth in operating income compared to 2004.

Do you happen to have the quarter handy, Ray?

No, I don't have the quarter in front of me.

I apologize.

Okay.

And I understand that the stock option expense that was allocable to that should be something on the order of maybe 4.3, $4.4 million.

Does that sound about right to the segment?

For the quarter, we're looking about $1.1 million.

So roughly, yes, about $4.4 million for the year.

That's about right.

And sorry to just continue, do you happen to have a number for cash flow provided by operating activities for the full year?

We do.

Hang on just a second and we will get that for you.

Okay.

And just to continue for a second.

Have you reiterated approximately how much you intend to spend on share repurchases in '06?

Have you ever given any guidance on that or would you care to do so?

We would not care to do so other than to say that we have said that free cash flow less our dividend payments and any acquisitions, which we have stated before would be modest and close in acquisitions as well as our international activities would be used primarily for share repurchase.

As we said, we are pleased with the results of our systematic share repurchase, which we do evaluate from time to time.

We look very carefully at the free cash flow generated by our business.

We compare that to the needs for running the business obviously and we make a decision about how we will move forward on share repurchase.

But we have not provided any guidance on that and I don't think we will be doing that other than to say we're very seriously committed to returning value to shareholders and we are pleased with our increased activity along these lines.

You had asked about an operating cash flow number for the year and that is $707.9 million.

707.9.

And within that, how much was there of tax benefit from stock option exercises?

I usually just exclude that from that number.

That is about $70.2 million.

I assume the CapEx was still very modest for the year.

Is that correct?

Yes.

We're looking about $31.3 million for that.

And I think I only have one last one and that is -- I just wanted to clarify -- I think another caller asked about the options expense beyond 2006.

Is it reasonable to assume that that would be fairly level in sort of the '07-'08 time frame or would that still continue to trend upward very modestly because sort of your headcount goes up and all that sort of stuff?

I think we are interested in making sure that our levels of option-based compensation are appropriate and we are relatively happy with those percentage levels.

However, you're right, as both our headcount goes up and our share price goes up, I think it would be fair to say that there would be a modest upward trend.

But we are relatively happy with the rate of options issuance that we have at present.

Thank you very much for these great answers and great quarter.

Thank you.

Michael Meltz, Bear Stearns.

A couple of quick questions.

Can you give us the compensation as a percent of total expenses in the quarter as well as that incentive comp percentage and then also what was RMBS as a percentage of total company revenues in '05?

We have got the incentive comp numbers here at the ready.

We anticipated this one.

The compensation expense as a percent of total expense is 62% for the fourth quarter of '05 and the incentive compensation as a percent of total comp expense is 13%.

And I will turn over the other question here to Ray.

Linda, are those a bit lower than typical?

Yes, I believe that they are and for the same period last year, we were looking at the comp expense as a percentage of total expense as 65% and the incentive comp as a percentage of total comp expense of 15%.

So, yes, they have moved down a bit.

And if expenses were up 24%, what is the other -- what is the variance in there?

Sure.

The main component for the fourth quarter expense we moved up year-over-year from 185 million to $231 million.

It's about a $45 million increase.

About half of that was -- about $22.5 million is attributable to the people that we added over the course of the year and the compensation expense that is associated with adding those people.

The rest of it, as we said, is around some of the investments we're making in infrastructure, technology, compliance, the things we have discussed before and most of it could probably be considered a bit more of project-based expenses, which is why they are more loaded toward the fourth quarter.

If you look at our traditional expense pattern, we tend to be a little heavier on the expenses in the fourth quarter as we see how the year is coming in and we make our decisions about what we're going to do.

That RMBS number?

You are asking about our U.S.

RMBS to total company revenue?

Yes.

Just shy of 10% in 2005.

One follow-up here.

On regulatory issues, is there anything coming up?

Are there any hearings that we should be aware of?

And then I have one last follow-up.

I have not seen any hearings announced.

I would not be surprised if there were hearings in either the House or the Senate or both this spring but nothing has been announced to the best of my knowledge.

Then at MKMV, is there -- the revenue growth there has certainly slowed and I'm just wondering is anything -- I know you have talked before about adoption in Europe of the product but has anything changed competitively with Fitch or with somebody else that has maybe impacted your results?

I'm just trying to get a better sense of trends going forward?

Well the market is certainly more competitive now than it was a few years ago, including but not limited to offerings from traditional rating agency competitors but also quantitative models and tools being made available by a number of firms and that includes both specialty firms and some of the larger banks.

But I think the other important driver that dampened revenue growth in 2005 was consolidation in the banking sector and the 1 for 2 effect of consolidation on the subscriptions that we had outstanding.

So that was another driver.

Brian Shipman, UBS.

Just a question I guess on fee capping.

I guess revenues in the fourth quarter looked pretty strong sequentially versus the third quarter.

Can you just give us an update on the nature of your fee capping?

Do you expect fees again to be capped in the same fashion in '06 as they were in '05?

I guess with a little focus on the fourth quarter of '05, just why revenues spiked up again in the fourth quarter.

Thanks.

Sure.

I will not attempt to go through a detailed explanation of the fee schedules but let me talk about it at a higher level.

We will -- we have made some adjustments to our fee caps for 2006 over 2005 where we had raised some of the fee caps and we have increased those relatively modestly I think.

But I think it is also fair to say that we will continue to see many of the large issuers, particularly those who have entered into what we call frequent issuer pricing relationships with Moody's capping out and the pattern has been if there is heavy issuance activity in the year, they cap out earlier in the year.

If there is lighter issuance activity, they cap out later in the year or may not cap out.

So I don't expect to see any structural differences in fee capping.

What is important though and we focus on is the volume size of issues.

So if there is a change in the size of the transactions from small to large, we do have more individual transactions hitting fee caps and that would be for both frequent issuer pricing relationships and just the one off pricing.

Peter Appert, Goldman Sachs.

Linda, back to the (indiscernible) for a second because I want to make sure I fully understand the driver of cost growth in the fourth quarter.

Basically half employee costs, half other is how we should think about it?

Yes, Peter, I think that would be a fair way to think about it.

Okay.

So the question really is as we get into '06, you talk about a fairly aggressive increase in terms of staffing level.

We have the cycle through the increase as well in '05 and it might suggest some pretty significant cost pressure in '06.

How do you think about that?

Well, Peter, as we have said in the guidance, we are looking for 100 basis points diminution in margin for '06.

So that would be the first thing to realize.

But I think it's important to stress that we do have pretty effective tools to manage our margin line.

Mainly the first one would be the pace of hiring and obviously the numbers of people that we would hire.

We can look to adjust that if we see changes coming in business conditions.

I think it would be fair to say that Moody's has quite a reputation for being relatively conservative on the cost front.

So we would expect to continue that.

Also regarding our bonus compensation, we have about $25 million of flexibility regarding comp for 2006.

So we can watch all these things pretty closely.

In addition, we have a relatively heavy project slate for 2006 as we look to do some of the things we had mentioned before on the technology front, including a new billing system and some other things that we are looking to do.

However, if we run into some difficulty, we can look to dial some of those back, adjust the timing and we are pretty comfortable with how we will be able to manage through this process in 2006.

Of the staff you're expecting to add in '06, is there a particular SKU or can we think about in terms of average cost per head?

I don't really know the average cost per head.

Just directionally, we are looking to be a bit more aggressive on the international hiring front and perhaps just a little bit more modest on the U.S. hiring front and more modest of course on MKMV hiring front.

So we're looking to put appropriate people resources against our growth areas and that is the plan for '06.

But there is no general assumption that you're outsourcing analytical staff to the international markets to reduce compensation cost?

We are considering that, Peter.

That is not something that we are doing in any sort of a big way at this point.

And I would, on that front, I would just add that where we see most of the opportunity for using international staff rather than U.S. staff is in the analytical support areas.

The analysts that we have that we are putting in front of companies, in front of the investor community to conduct our analysis and explain our analysis I think really has to continue to be locally based in order for it to be effective.

Right.

Understand.

The last thing, Ray, you mentioned already the pipeline with regard to the mortgage-backed market.

Any other color in terms of how the first quarter is looking in other categories?

In Structured Finance?

Structured Finance even broadly.

Sure.

On the Structured Finance side, we still have a good pipeline in RMBS as I mentioned as well as in the CDO and CMVS areas.

So the strength that we saw in '05 is still reflected in the pipeline on a year-on-year comparison.

I think it is probably not as strong as it is in the fourth quarter, which is historically the highest quarter of activity for us in Structured.

I think on the consumer asset side, we have a pipeline that looks about like this time last year in the credit card area and is a little lighter in the auto receivables area.

With respect to at least the other area that I have got in my head on the Corporate Finance side, we have seen good activity in Corporate Finance in January, particularly in the bank loan sector but that is on the volume side and per my comments a few minutes ago, to the extent that there are some very large transactions that are causing important increases in volume, we have to look at that and the impact of caps.

So it is useful to look at both dollar volume and count and the count is not as high on the Corporate Finance side as the growth in volume.

Douglas Arthur, Morgan Stanley.

Just to follow up, Ray, on your growth outlook for '06 in International Structured Finance, you are projecting low double digit teens growth and you finished the year much stronger than that.

So it was my sense that International Structured Finance, particularly in Europe, was an area of sort of long-term acceleration.

Is that not the case or are you just being conservative?

Well I don't think we're being conservative but only time will tell.

We do expect to see good growth in the RMBS and CMVS areas internationally.

Interestingly on the CDO side, the volume count has been relatively flat the last few years and what we are seeing is an increase in average transaction size.

So again the phenomena of larger transactions and our response with fee caps and whether those caps are appropriate for what turns out to be actual transaction size is a variable in the outlook.

We do expect to see growth both in Europe and outside of Europe internationally in these areas.

So our expectations are that the growth will be pretty well diversified.

We still have an overweighting of the credit derivatives business outside the U.S. compared to what we have inside the U.S.

So the strength we are seeing in RMBS or expecting to see in RMBS and CMVS is not as much of an influence internationally as it would be in the U.S. because of the size of the CDO business.

(OPERATOR INSTRUCTIONS).

Fred Searby, JPMorgan.

This is Jason [Lowe] for Fred.

A question about auto securitization.

Roughly how much of that represents Structured Finance revenue?

I don't have the auto securitization breakout.

We roll that into our asset-backed securities line.

I'm sorry.

I just don't have that in front of me.

And I think you commented on ABS -- what was your comment on ABS trends in January?

For the credit card sector, it is about where it was this time last year and for the auto sector, it is a bit lighter and again RMBS continues to be strong.

Jim Baker, Neuberger Berman.

Two quick follow ups.

On the share repurchase -- I think Linda in answering my question before said we use the free cash flow ex acquisitions and ex dividends for that purpose and I guess I wanted to ask two questions relating to that.

One, would there be a -- if Congress went ahead and extended the dividend tax rate to 2010 and there is a lot of speculation they may do that very soon, do you believe that might cause you to pay a significantly higher dividend?

Secondly, you do have a cash balance of -- I think you showed here on $580 million as of the end of the year, which is really not much lower than what you had at the end of last year.

Would there be some plans to draw down some of that cash in addition to the actual free cash flow you generate for the share repurchase?

Jim, taking the first question first, we are not really particularly good at predicting what the federal government is going to do on the tax front.

Obviously if present dividend tax rates were extended, we might put that into our equation as to how we think about dividend yield and payout rates.

However, we do think Moody's has been pretty effective as a growth company and as such we think it's appropriate that we keep our dividend modest or nominal.

You see that we have increased it pretty consistently but we are comfortable with the dividend level that we have as (indiscernible) growth stock and we have moved considerably more aggressively on the stock repurchase front.

Now looking at our cash balance, you are right.

We are back down to a level which is more indicative as to where we were at the end of '04.

However, we did spike up above $1 billion in the middle of the year.

So what we were looking to do was to bring that level down to a more nominal level and I think we would say at this point, we are relatively more comfortable with our cash position given the market capitalization of the Company at this point.

And is there a strategic reason why it is really necessary to even have this much cash?

In other words, would 200 million be okay because you don't seem to have, aside from possible acquisitions, a lot of need for that much cash?

Right.

This is a subject that does provide some conversation here at the firm and I think it would be fair to say that we like to keep some cash on hand for opportunistic acquisitions that come up would be one thing and then secondly, should conditions change, we do like to have some cash on hand as well as our borrowing power should we want to move into the repurchase market on an opportunistic basis.

That would require that we have some more dramatic change in the price level of the stock though.

Let's hope we don't get that opportunity.

The only other thing is just on -- this is my last question I promise.

KMV -- very relatively weak profit in the fourth quarter.

It appears to me only around $800,000 versus about $4 million last year.

Not only -- we saw the weak revenue that you showed in the press release.

Is that because the professional services is exceptionally profitable or was there any kind of write-offs or unusual expenses there in the fourth quarter?

We did have some non-recurring expenses in the fourth quarter.

We have not detailed those out because they are not material in the larger picture but that was definitely part of the Q4 story.

Did you say that could be in the order of say 2 or $3 million at KMV, Ray?

It was a low seven figure number.

With no other questions holding, I will now turn the conference back to Mr. McDaniel for any closing remarks.

Please go ahead, sir.

I just want to thank everyone for joining us and we look forward to speaking with you again at the end of the first quarter.

Thank you.

Thank you, sir.

Ladies and gentlemen, that will conclude today's teleconference.

We do thank you for your participation and you may disconnect your phone line at this time.