穆迪 (MCO) 2006 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Moody's Corporation first quarter 2006 earnings conference call.

At this time I would like to inform everyone that today's conference is being recorded and that all participants are in a listen-only mode.

At the request of the Company, we will open the conference up for questions and answers following the presentation.

I will now turn the conference over to Mr. Michael Courtian, Vice President of Investor Relations and Corporate Finance.

Please go ahead sir.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2006.

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

Moody's released its results for the first quarter of 2006 this morning and the earnings release is available on our Website at IR.Moody's.com.

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

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 the Safe Harbor for such forward-looking statements.

I'd like to direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2005, and in other filings made by the Company from time to time with the SEC.

I'd also like to point out the Safe Harbor statement in the Private Securities Litigation Reform Act of 1995 contained in our press release 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 for joining us on today's call.

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

Linda and I 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 regulatory area, and finish with Moody's outlook for 2006.

After that we will be happy to respond your questions.

Moody's reported solid results for the first quarter of 2006.

Revenue rose to 440 million and was 13% higher than in the first quarter of 2005.

We had good growth in a number of businesses in which issuance was strong or where revenue was less volume-sensitive, including from annual fees from issuers and subscription fees for (technical difficulty) and related products.

As expected, revenue declined or grew slowly in several segments of our business that are sensitive to lower securities issuance volumes.

Operating income for the first quarter was $238 million and grew 12% year-over-year.

Foreign currency translation negatively impacted revenue and operating income growth, reducing each by just under 2%.

Diluted earnings per share of $0.49 for the first quarter grew 26% year-over-year.

Results for the first quarter of 2006 included $0.03 of expense related to stock-based compensation.

EPS for the prior year period also reflected $0.03 of stock compensation expense, including $0.02 related to the accelerating expensing of equity grants for employees at or approaching retirement eligibility.

Results for the first quarter of 2005 also included charges of $2.7 million, equivalent to $0.01 per diluted share, related to legacy income tax exposures that Moody's (technical difficulty) 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 for our legacy tax matters and stock compensation expense for our 2005 and 2006 results.

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

Thanks, Ray, and good morning, everyone.

I'll provide details for the quarter, starting with our U.S. businesses.

Moody's U.S. revenue was 279 million in the first quarter, up 15% year-over-year.

At Moody's Investors Service, U.S. ratings revenue rose 15% year-over-year.

U.S. structured finance was once again the largest contributor to growth on both a dollar and percentage basis, with revenue increasing 28 million, or 29% compared to the prior year period.

U.S. structured finance benefited from broad-based growth, particularly from rating commercial mortgage-backed securities and credit derivatives, and the continuation of strong growth from residential mortgage-backed securities.

U.S. corporate finance revenue increased 6% compared with the prior year period.

This reflected very strong growth in ratings fees related to investment-grade securities, primarily from merger and acquisition and refinancing activity.

These were largely offset by declines in high-yield bond and bank loan revenue, where increases in volume were attributable to larger transactions, accompanied by more fee capping, rather than growth in the number of transactions.

U.S. financial institutions ratings revenue rose 17% compared with the prior year period, excluding the impact of a revenue deferral, which we described in a bit more detailed in our earnings release.

We saw good growth in all sectors of the business, and particularly robust growth from the insurance and real estate sectors.

U.S. public finance revenue declined 16% compared with the first quarter of 2005, reflecting an expected decrease in refundings and a modest decline in new money issuance.

Finally, U.S. research revenue rose at a healthy pace, increasing 24% from the prior year period.

Turning now to our international operations, Moody's generated high single-digit revenue growth outside the U.S., after accounting for the effect of unfavorable foreign currency translation, which reduced growth by approximately 4.5%.

Total international revenue of 161 million in the first quarter was 9% higher than in the prior year period.

International revenue accounted for 37% of Moody's total in the quarter, compared with 38% in the year ago period.

Focusing on Moody's Investors Service, international revenue increased 8% year-over-year.

International structured finance ratings revenue was 21% higher than in the prior year period, and benefited from exceptional growth in the commercial mortgage-backed securities segment and strong growth in the credit derivatives business.

International financial institutions revenue declined by 6%, but would have risen 4% before the revenue deferral I mentioned a moment ago.

Performance in Europe was also affected by a decline in issuance from insurers.

International corporate finance revenue rose 7%, reflecting strong revenue from investment-grade issuance in Europe, which was partially offset, as in the U.S., by weaker performance in speculative-grade bonds due to a decline in transaction volumes.

Moody's KMV on a global basis generated 32 million of revenue, up 6% compared to the first quarter of 2005.

Revenue from risk product subscriptions was essentially flat year-over-year, while revenue from licensing credit processing software and related software maintenance fees increased 28%, and revenue from professional services rose 18%.

Over the last few quarters we have discussed our focus on improving profitability at Moody's KMV, and we are pleased with this quarter's results.

Excluding the onetime effects of some offsetting items, operating profit was up just over 20% from the prior year period.

The operating margin, at 10%, was up nicely from 8% a year ago.

Moving on to operating expenses, Moody's operating expenses for the quarter totaled $202 million, which was 13% higher than in the prior year period.

The quarter's operating margin was 54%, essentially unchanged from the same period last year.

The quarter's stock-based compensation expense was $13.9 million, compared with the 16.9 million in the 2005 period, the latter of which included 9.1 million related to the accelerated expensing of equity grants for employees either at or approaching retirement eligibility.

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

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

During the first quarter of 2006, Moody's repurchased 3.1 million shares at a total cost of $202 million and issued 3.7 million shares under employee stock compensation plans.

We observed some seasonality at option exercises, noting that for both 2005 and 2004 the heaviest activity came in the first quarter of each of those years as well.

Finally, since our last conference call, Moody's has made or committed to several investments I'd like to mention briefly.

In mid April, we signed a definitive agreement to acquire 49% of China Cheng Xin International Credit Rating Company Ltd., known as CCXI.

CCXI was established in 1992 as the first nationwide domestic credit rating agency created with the approval of the People's Bank of China.

It is headquartered in Beijing, has a staff of more than 40 professionals, and specializes in providing ratings opinions on corporate bonds, convertible bonds, financial institutions, structured finance and short-term financing paper.

This transaction is not material to Moody's financial results, but we view it as an important long-term step into China.

The deal is subject to regulatory approval by Chinese regulatory authorities, and we will keep you posted as we progress toward closing this transaction.

During the quarter we also closed the previously announced acquisition of CRA Ratings Agency in the Czech Republic.

Now known as Moody's Central Europe, the entity is the Czech Republic's sole domestic credit rating agency.

Moody's Central Europe 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 Rating Agency's affiliation with the Bulgarian rating agency known as MCRA.

Finally, earlier this week we announced our intention to establish an office in Dubai.

Middle Eastern market participants are increasingly turning to the global capital markets to serve their financing needs, and Moody's new Dubai office will further enable us to grow -- to address the growing demand for in-depth, globally comparable credit rating analysis, as well as to ensure high-quality service to our Middle Eastern issuers and investors.

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

Thanks, Linda.

I'd like to briefly summarize a few regulatory items.

Yesterday, Chairman Cox of the SEC testified before the Senate Banking Committee on a number of topics, including oversight of rating agencies.

He discussed guiding principles that the Commission has applied (technical difficulty) oversight of Nationally Recognized Statistical Rating Organizations, or NRSROs, including avoiding new barriers to entry, ensuring a transparent recognition process that allows for new business models, and assuring that rating agencies manage potential conflicts of interest and do not misuse material nonpublic information.

The Chairman also indicated that the SEC will continue to work with the NRSROs to develop a voluntary oversight framework.

We believe that the principles cited by Chairman Cox are sound, and we will continue to work with the SEC to complete the voluntary framework.

We also continue to have constructive conversations with members of Congress as they consider issues related to rating agency oversight.

Two weeks ago, Moody's published its first annual report on the implementation of the Moody's Investors Service, or MIS, code of professional conduct, which we put in place last June.

The MIS code of professional conduct sets forth the overall policies through which Moody's seeks to protect the integrity, objectivity and transparency of our credit rating process.

The MIS code follows the principles set out in the code of conduct fundamentals for credit rating agencies created by the International Organization of Securities Commissions, known as IOSCO.

Among other things, the IOSCO code provides a global framework of principles for credit rating agency behavior and for transparent disclosure of rating procedures, analytical methodologies, and rating performance metrics.

Moody's endorses the principles expressed in the IOSCO code, and our report on our own code reflects our commitment to implementing these principles.

The Moody's Investors Service code of professional conduct and our report on its implementation can be found on the regulatory affairs page of our Website at www.Moody's.com.

I'd like to conclude this morning's prepared comments by discussing Moody's assumptions and outlook for the remainder of 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, and overall securitization levels.

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 from our current outlook.

For Moody's overall, we continue to project revenue growth in the high single-digit to double-digit percent range for the full year 2006.

This assumes a modest negative impact from foreign currency translation, which, at rates currently prevailing between the U.S. dollar and other major currencies, would result in a smaller reduction in the revenue growth rate for the full year 2006 than for the quarter.

We expect the operating margin before 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 analytical processes, pursue ratings transparency and compliance initiatives, introduce new products, and improve our technology infrastructure.

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

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

This year represents the final year of phasing in of expense related to stock-based compensation, which we began in 2003.

The impact of expensing stock-based compensation is expected to be in the range of $0.13 to $0.15 per diluted share in 2006, compared to $0.10 per diluted share in 2005.

In the U.S. we continue to forecast mid single-digit percent revenue growth for the Moody's Investors Service ratings and research business for 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 continue to project a high-teens year-over-year percent decline in revenue from residential mortgage-backed securities, including home equity securitization, and we note a divergence in market views about the 2006 outlook for this business.

Offsetting this expected decline, we look for double-digit year-over-year revenue growth in most other asset classes, including modestly higher expectations than at the beginning of the year for revenue from credit derivatives and commercial mortgage-backed securities ratings.

In the U.S. corporate finance business, we now expect revenue growth in the high single-digit percent range for the year, down from our previous expectation of low double-digit percent growth, largely due to lower expected transaction volume in the speculative-grade bond (technical difficulty).

In the U.S. financial institution sector, we now expect revenue growth in the high single to low double-digit percent range for the year, as new ratings mandates and fee increases partly related to our Enhanced Analysis Initiative should more than offset the impact of lower revenue related to issuance volumes.

For the U.S. public finance sector, we continue to forecast revenue for 2006 declining in the mid single-digit percent range, as rising interest rates should continue to slow refinancing activity.

We continue to expect strong growth in the U.S. research business at about 20%.

Outside the U.S., we still expect ratings revenue to grow in the low-teens percent range.

This forecast assumes that foreign currency translation rates will reduce international revenue growth by approximately 160 basis points for the year.

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

For the financial institutions business, we expect to see mid to high single-digit percent revenue growth in Europe and low double-digit percent growth in Asia.

We look for low-teens percentage growth in international structured finance, 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 assessment 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 and profitability.

Before I open this call for questions I'd like to mention that Moody's will be hosting an investor day on June 6 in New York City.

Those of you who received an [e-mail stating] the date notice will be getting invitations soon.

If you did not receive an e-mail from us and would like to attend, please contact Michael Courtian and we will add you to the invitation list.

You can find Michael's phone number and his e-mail address at the top of our earnings release.

The event will be Webcast for anyone who cannot attend but would like to listen in.

This will be an opportunity to hear a range of Moody's senior managers discuss their businesses and to ask them questions.

The day will also include presentations about Moody's overall strategy and goals, our financial performance and capital management philosophy, and our approach to regulatory affairs and compliance.

We will be providing information that will be valuable to newcomers to the stock, as well as to current investors.

That concludes our prepared remarks for today, and if the operator would please open the call for questions, we'd be happy to take them.

(OPERATOR INSTRUCTIONS).

Lisa Monaco, Morgan Stanley.

Could you just give us a little bit more color on the expense side?

Expenses came in a little bit higher than we would have expected, particularly this early on in the year.

And secondly, could you just talk about the reasons behind your nudging up your guidance on the credit derivatives side?

Thanks.

Sure, Lisa.

With respect to expense, I think probably the most important part of that story is that we do have some core initiatives going on around in particular the technology and compliance areas that are longer-term initiatives.

And for our long-range planning, we think it's smarter for us to continue those initiatives rather than to start and stop them, which in the long run would ultimately be more expensive for us and delay some of the implementation of this technology and compliance infrastructure that we're building out.

We've also continued our hiring.

And we think that that, again, makes long-term sense, because we do feel we have attractive opportunities where we are matching hiring with expected growth, particularly in the structured finance area, both in the United States and outside the U.S.

There is also hiring going on associated with the projects that I talked about, so we are hiring for some of the staff areas having to do with technology and compliance.

With respect to our modestly upgraded forecast for the credit derivatives area, that really is the result of looking at our current pipeline and what we think is feeding that pipeline.

We are in particular seeing broader use of credit derivatives, including credit derivatives for a range of other asset securitization pools, including commercial mortgage-backed securities.

So, part of our commercial mortgage-backed securities growth is attributable to CDOs or credit derivatives of commercial mortgage-backed securities.

And we're seeing some interesting growth in the area of hybrid credit derivatives, which combine both the cash flow transactions and the synthetic transactions.

So, it's a widening of the use of the derivatives vehicle for the credit instruments that we rate.

Just quickly, can you give us some color on early trends in 2Q and how they compare versus 1Q?

Looking at the structured finance side of the business, where we saw good growth in the first quarter, we continue to see a good pipeline of activity, as I just mentioned, for the credit derivatives area; also for the commercial mortgage-backed securities area.

The residential mortgage securities area, which also had good growth in the first quarter, continues to have a pretty good pipeline.

It is not at the high watermark that we saw in the later stages of 2005, but it has not fallen off as dramatically as we might have feared at our earnings call at the beginning of the year.

I would note, with respect to the residential mortgage side of the business, that we -- if we're looking for early warning signs in that business, there are a couple of offsetting trends we're seeing.

First of all, we are seeing some smaller transaction sizes, which may imply that the stock of assets available for securitization is being worked through.

And we are also seeing some traditionally prime mortgage lenders securitizing more assets that are coming from the sub-prime sector.

And at least by historical measures, the move down into more sub-prime activity would indicate that we are in the later stages of the most active part of the residential mortgage securitization market.

Offsetting that, I would simply note that we continue to see new product going into the residential mortgage area, affordability products, and we're actually at this point entertaining several proposals for what you might refer to as synthetic home equity loan securitization.

So, to the extent that the financial engineering techniques that are being considered in the residential mortgage area are going to encourage additional issuance and the use of assets that might not otherwise be securitized, that would be a bit of an offset to some of the early, more unfavorable conditions that we would be looking at for this market.

Just real quickly, just on the other revenue trends, other revenue streams, what the trends are in early 2Q.

I don't think I have a lot I can add on the company rating side of the business beyond what we have included in our earnings release.

We have seen a very good market for investment-grade securities on the company side, and lower transaction volume coming out of the spec-grade sector.

It's the transaction volume that had exerted the downward pressure on us in Q1, and I expect that that will continue, because the volume was stronger than the transactions.

In other words, we saw fewer but larger deals, and those are more subject to fee capping.

I don't think we see anything right now that would indicate a change in that trend.

Karl Choi, Merrill Lynch.

I wonder if you can give a little bit more color on the percentage changes in the structured finance areas by asset classes, residential mortgage-backed securities, commercial mortgage backed, so on and so forth.

And related to that, given the strong growth in the first quarter, I think you're still expecting a pretty modest growth -- I think, modest growth for structured finance in the U.S. for the whole year.

Aside from residential mortgage-backed securities, do you expect other categories within structured finance to (indiscernible) meaningfully in the second half, given your guidance?

With respect to the structured finance area, in the U.S. we saw good -- at least good, and in some cases very good, double-digit percentage growth in almost all of the asset classes.

The only asset class that had single-digit percent growth was the asset-backed commercial paper market.

Everything else -- long-term asset-backed securities, residential mortgages, commercial and derivatives -- all had very good double-digit growth.

We are not forecasting the growth on a percentage basis to be as strong year-on-year.

But except for residential mortgages, we do continue to anticipate double-digit growth for these asset classes for the full year.

So, term ABS, commercial mortgage-backed securities and derivatives we all still expect to have double-digit growth for the year.

And within corporate finance, can you talk a little bit about what's your exposure to the high-yield securities area versus investment-grade?

Let me see if we've got that information for you.

I don't have it in front of me right now, but I'll ask one of the people in the room here to do a quick check.

And I'll try and answer that as we go to some of the other calls, if that's all right.

Last question.

Related to the financial institutions category, you mentioned there is $6 million of revenues deferred due to frequent issuers contracts.

Could you just give a little bit more color?

Because, obviously, you have had those contracts in the past.

Is there any difference with this particular item this time, or is [this just similar to before]?

The revenue deferral that we talked about in the earnings release for the first quarter really was the result of our ability to do some more in-depth and time-based analysis of the frequent issuers who have annual contracts with Moody's.

And what we've been able to determine is that there are a group of issuers who have very consistently capped out, in terms of their annual fees to Moody's, over the last several years.

And so, with this refinement in our analysis, with enough data for us to identify the consistency of capping among this group of issuers, we felt that it was appropriate to more evenly allocate the revenues over the issuers' annual contractual programs.

Now, this is just a subset of the frequent issuers that we have, but it's a subset that has very consistently capped over the past few years.

Fred Searby, JP Morgan.

A couple of questions.

One has kind of been asked.

Can you give us in the U.S. structured finance exactly what percent in the quarter was represented by home equity loans, residential mortgage-backed?

Was housing related?

And then my second question is just -- corporates had been a little stronger; we'd expected the fall-off in high yield, but my understanding is there's been some pull forward in financing from corporate.

So, it's been a little stronger than expected, yet you took down guidance, it looked like, for corporate, which surprised me.

Can you talk about what you're seeing there, and is that because you think there has been a substantial pull forward in financing to lock in lower rates?

Thank you.

Let me start with the corporate side.

As you identify, we did see strong issuance from the investment-grade corporate sector in the first quarter.

And that is continuing into the second quarter.

That is -- our revenue growth is less sensitive to that, though, because more of our investment-grade corporate issuers are frequent issuers who are subject to frequent issuer pricing, and as a result, discounted fees for individual securities issuance.

Where we are more sensitive to revenue growth or revenue decline is in the high-yield sector, where more of the issuers are what we would call per-issue pricing issuers, or transaction-based price issuers.

And as I mentioned to -- in response to one of the other questions, what has affected the growth in that area in the first quarter is that we -- while volumes -- dollar volumes were reasonably good, the number of transactions declined.

And this was true in both the U.S. and in Europe.

And so, the yield that we are getting, the revenue yield that we are getting from those larger transactions that are subject to capping, is lower than for a larger number of smaller transactions.

On the residential mortgage securities side, in the first quarter, [RMBS] was about 16% of Moody's Investors Service revenue, and about 15% of overall Moody's corporate revenue, which is a bit higher than it has been in some recent years, but not dramatically so.

If you'd like we can go back to the high yield question that Karl had a moment ago, and I can give some detail on Q1, and then perhaps Ray might comment on the outlook.

I think Karl had asked as a percentage of global corporate finance revenues for the first quarter where was high yield.

The answer to that was that it was 15% of the global corporate finance revenues.

That's off from 17% that we saw last year, and the most recent high watermark that I see was back in 2004 at 23%.

So, off a bit.

And perhaps Ray can talk to the prospect there.

As we commented, while a large part of our corporate finance revenue is not volume-sensitive, because it's represented by annual fees or by monitoring and surveillance fees, that portion which is volume sensitive is more sensitive on the high-yield side.

And the comments that I made in respect to Fred Searby's question, I think, would relate to that.

Brandon Dobell, Credit Suisse.

Ray, if you could talk a little bit about, or give some color on what the mix of kind of frequent issuers versus non frequent issuers would look like in CDO, CMDS categories, and maybe if there's a difference international versus U.S.

And I guess kind of within that, within those categories, you mentioned people bumping up against caps and the larger transaction sizes -- maybe if you could touch on some of the same dynamics in CMDS and CDOs, that would be great.

That's a good question.

The frequent issuer pricing programs that we have really relate to the company rating side of the business.

And so, the annual fee capping that we see from frequent issuers you should attribute largely to the financial institutions sector, and to a lesser degree to the corporate finance sector.

The commercial mortgage-backed and credit derivatives area are really transaction-based sectors for the business, and so we are not subject to the same kinds of annual fee caps.

However, there are fee caps related to individual transactions.

Those will differ by asset category and by the type of security.

But what we will see -- not see is annual fee caps being applied to issuers in those sectors.

But if they are issuing individually very large transactions, those would be subject to individual transaction caps.

Now, that being said, at least in -- and this does not relate specifically to your question -- but at least in the residential mortgage area, we're seeing the trend go somewhat the other direction, with more smaller deals rather than larger deals.

So, they would not be as subject to pricing caps.

And a follow-on.

Within those three categories, have you noticed (indiscernible) more smaller transactions in RMBS, I guess, (indiscernible) CMDS and CDO, have you noticed that financial services consolidation or broker consolidation, or reconsolidation or whoever might -- are they driving average transaction or issue size up, or is it too varied to have a good look into that?

No, I don't think we are seeing consolidation increasing the issue size.

So, that is not something that was an important influence in revenue in the first quarter, and I would not expect it to be for the rest of the year.

Steven Barlow, Prudential Equity Group.

Could you talk about your confidence in your international revenue growth, call it 13, 14% for the year, based on the 8.7% that you saw in the first quarter?

Sure.

First of all, I guess what I would point you to is the size of the unfavorable foreign currency translation that we experienced in the first quarter.

That was responsible for about 4.1% of our -- or slowed growth by about 4.5%, I guess, is the right way to say.

We do expect that to have less of a negative impact over the remainder of the year, and that is by looking at our prevailing rates and the effect of those prevailing rates on particularly the U.S. to Euro exchange rate on the business.

In addition, we had -- while we had good growth in the structured finance business internationally, we did have more modest growth for the financial institutions business and for the corporate finance business.

Corporate finance, as in the U.S., it was the effect of a fall-off in high-yield transaction volume.

And to the extent that that recovers somewhat, that will help our European corporate business.

And the financial institutions business in Europe was affected first of all by some difficult comps compared to 2005, but also was affected by the revenue deferral that we talked about earlier.

And the effect of that revenue deferral will be mitigated to some extent over the remainder of the year.

Was there any particular region internationally that slowed down?

Yes.

We had -- internationally we saw negative growth for the financial institutions business in Europe, before excluding the revenue deferral that we talked about before.

And we saw single-digit growth, both in Europe and in the other international regions, for the corporate finance sector.

So, internationally overall we had a decline in -- or a decline in the growth for financial institutions and single-digit growth for corporate finance, with about a little over 20% growth in structured finance, and low double-digit growth for our investor services research sales.

The last thing.

Any comment on the subpoenas?

For the subpoenas that we were disclosing in 2005 related to the New York Attorney General matter, we would guide you to our 10-K filing.

And you will note that those disclosures are no longer being made.

We no longer think it's necessary to include disclosure on the New York Attorney General subpoenas that were included in our Qs from 2005.

Peter Appert, Goldman Sachs.

Linda, do you have the staffing levels at tend of quarter and the year-to-year comps?

Yes, we do.

We will dig those out.

Specifically, I guess, related to that, I was wondering -- the guidance is fairly precise in terms of decline of up to 100 basis points in margin for the year.

I'm just wondering how you think about the flexibility in rolling out staffing, particularly given that I think the message you gave here for the first quarter is that you've been pretty aggressive in adding staff in the first quarter.

Starting at the top of your question, we had 18% year-over-year headcount growth end of quarter '06 versus '05.

But excluding Economy.com, that was 14% headcount growth.

And as Ray has said, we look very carefully to match headcount growth to those areas where revenue is increasing, particularly at an accelerating pace.

So, we match very carefully where we're going with headcount additions to the specific needs.

So, I think we feel comfortable with our plans right now.

But in general we would, of course, see that headcount growth would lag revenue growth for the rest of the year.

So, the staffing additions for '06 are essentially done at this point?

No.

I wouldn't say that they're done, although they -- we added staff probably at a bit higher rate than we had done in some previous years in the first quarter.

We still have, frankly, quite a bit of flexibility on staffing for the remainder of the year.

And depending on how we see growth in the business, we are going to react to that in terms of the pace at which we're adding people and the total number of people we're adding.

And we're also going to include a view of not just the short cycle that we may be in, but how we are preparing ourselves for the longer term, and whether we think it is more prudent to slow that hiring down if we are in a short cycle soft period versus a long cycle soft period.

And we, obviously, will be very attentive to that in our staffing plans.

To follow up a bit more on what Ray said, usually the question we also get is the degree of compensation flexibility for the rest of the year, and we do have more than $20 million of compensation flexibility on the bonus line.

And of course we accrue our compensation in line with the numbers that we put up.

So again, we do have good room there.

Linda, do you have any visibility on possible timing of the resolution of these tax issues that you have to talk about each quarter?

Our legacy tax issues are a matter which seems to continue on for the foreseeable future, and not one that make us happy about that.

A couple of things happened this quarter.

Quarter-to-quarter we do have resolution of various audits, and some of those do break our way.

And in fact, we were quite fortunate this quarter that several of those did turn out in our favor and took our tax rate down to about 39.5%.

We would caution that we can't predict that every one of those is going to move our way, and I think we've got it to a 41% tax rate for the year.

And I think we would continue to be very comfortable there.

No visibility on how long this can go?

No.

We wish we had better visibility, but unfortunately we don't.

And as you know, we're not the only party involved in these legacy tax matters.

We do work very hard to get to the quickest possible resolution on them, but they're long [lived] issues.

I would just add on that, amplifying Linda's comment, that not only are we not the only party among these legacy tax matters; in most cases we're not the primary party responsible for negotiating these tax matters.

So, while we have a very active interest and communicate with the other parties, that is not by any means completely under our control.

Michael Meltz, Bear Stearns.

Ray, a quick -- one follow-up on international.

Understanding that currency was a drag in the quarter, does the recent trend give you any change in terms of secular growth there?

It sounds like the corporate environment hasn't been favorable there for a while for you.

Just wondering what you're thinking there.

My second question is -- what is bank loans, in terms of the corporate line?

And then I had one follow-up.

Let me start with the European corporate side.

I think it is fair to say that we have not seen growth in the corporate sector in Europe that we would have anticipated several years ago.

I would point to a couple of factors that are driving that, not all of them negative.

One, though, is there has been slow growth in GDP and business investment spending, business investment confidence in Europe for a number of years.

And that is creating some caution on borrowing by European corporate borrowers.

Secondly, we also haven't seen as much consolidation in the European banking sector as I, at least, would have anticipated some years ago.

And so, there is a great deal of competition for the bond market from the bank loan market, and less of the European bank loan market is rated than the European bond market.

The other factor, which, as I said, this is not all negative news, is that the use of structured finance and synthetics in the European market have shifted where we would see the revenue coming in to some degree away from straight corporate issuance and into credit derivatives and synthetics, and has supported the structured finance line.

And all things being equal, I think, from a financial perspective, we would rather see that, because the more complex securities that are represented by structured finance and the synthetics market have been areas where our value added can be higher, and there may be some higher transaction pricing that is available to us.

So, it's a mixed picture.

But you're very much right that the corporate finance sector has not had the kind of growth that we would have expected.

I can give you a little amplification on your question on the bank line piece.

Looking at it globally, the rating of bank loans is 16% of the global corporate finance revenue line.

So, on 86.1 million, it's about 13.5.

The U.S. piece of that is just over $12 million.

Kind of a general question.

Given the stock movement today, what's the current thinking on repurchase?

As you saw, in the first quarter we spent $202 million.

We have remaining authorized capacity to buy back our shares of $654 million.

So, that's what we're looking at for the rest of the year.

In addition, we have more than $500 million of cash, and we have $300 million of loans of -- I'm sorry -- a borrowing facility that we could use if we decide to move in an opportunistic manner to buy back the stock.

And of course, we will take a look at that and consider our alternatives.

John Neff, William Blair.

Most of my questions have been answered.

One question on the option granted in the first quarter.

My understanding was that that usually took place in April.

Was I -- am I incorrect in that, or was it a moved up somehow, or is it still to come in the second quarter, some additional grants?

It has been first quarter activity, so 2006 is consistent with what we have done in previous years.

And you will not see anything in the second quarter.

Great.

Ray, I think, just a housekeeping question.

I think you had said residential mortgage-backed securities ratings -- did you say they were 16% of MIS revenue?

Did you say 15% of total in the first quarter?

U.S.

Residential mortgages were 16% of U.S.

Moody's Investors Service revenue in the first quarter, and 15% of overall U.S.

Moody's Corporation revenue.

William Bird, Citigroup.

I was wondering what the incentive comp accrual in the quarter was as a percent of comp expense.

Also, I was wondering if you could just talk about overseas, and if there are any new asset classes being rated.

And then finally, thoughts on how you'll manage discretionary investment spending this year.

Thank you.

I can take the first part of that.

Comp expense as a percentage of total expense was 70% for the first quarter, and then incentive compensation as a percent of total comp expense was 13% for the first quarter.

On the overseas asset classes, I don't think that we're seeing -- I don't think the story is that we're seeing asset classes that we have not already seen in the U.S., but rather the exportation of securitization of U.S. asset classes into the international market.

Probably the most visible example of this has been in the commercial mortgage-backed securities area, which has grown very rapidly in both Europe and in Asia;

Asia being a much smaller base, but it still had very good percentage growth.

And to some extent, the adoption of cash flow CDOs in the European market, which was so heavily a synthetic-based market a couple of years ago.

The final question was just thoughts on how you will manage discretionary investment spending this year (multiple speakers) front to back-end loaded.

Sure.

I think the broad message would be that we are going to treat discretionary investment spending in a similar way that we would treat the hiring and staffing levels.

We certainly have budgeted discretionary investment spending.

By its nature of being discretionary, we are going to pay quite a bit of attention to how our overall growth and financial performance looks in terms of both the timing and the execution around that.

So, again, it is going to receive -- has and will continue to receive our attention, because we don't want to get ahead of ourselves in terms of spending on investments or in staffing if the topline performance is not what we're looking for.

(OPERATOR INSTRUCTIONS). [Jim Baker], Neuberger Berman.

I believe McGraw-Hill might have said yesterday that the international ratings revenue started out very slowly in January and early February, and sort of picked up as the quarter went on.

I'm wondering if you noted a similar pattern.

We did.

Certainly the strongest month for us in the first quarter was March.

And that is not terribly unusual.

We have seen that in prior years as well.

And so I would concur with that comment.

Okay.

But I was referring not so much to the absolute dollar revenues, more the year-over-year comparisons for January, February, March.

Did those improve as the quarter went on?

I think that's specifically what I meant.

Well, to be honest with you I don't have that information in front of me, so I can't amplify on my previous answer.

I apologize; we'll try and get that for you, if you like.

That would be great if you could.

Ray, I think also -- I just want to be clear on this.

The operating margin on the first quarter on a pre stock option expense basis, I think, fell about 145 basis points or so.

So, you're suggesting there would be no more than 100 for the full year.

So, you're really saying the margin is going to be higher for the next nine months than for the nine months of '05, the last nine months of '05, slightly higher perhaps?

As you well have seen, we did hold to our guidance with respect to margin contraction of being no more than 100 basis points.

I would have to go back and look at the absolute dollar amount of spending in Q1 versus Q2 through 4 to give you an accurate answer to your specific question.

But we are holding to the guidance of contraction of no more than 100 basis points.

I just -- the last one I had is just on the share repurchase.

I think Linda indicated that we'll go back and buy -- obviously, this looks like an opportunity, unless you guys conclude that revenue is about to slow a lot more than you thought.

Do you find it's fairly likely that the Board will consider this topic again, in terms of new authorizations, sometime this year?

I think where we would be on that, Jim, is when the time comes in the year, and it's later in the year in the fourth quarter, we would discuss that topic again.

I think we're relatively comfortable with our plans, given our opportunistic capability as we had discussed before.

I think the place where we're going to look a little harder is our cash balance now, which is over $500 million.

And I think we're looking at whether all of that should be held in cash.

So, you may see a little bit of activity coming out of that line.

But I think in terms of repurchase authority, for right now we're okay.

On that last point, are you referring to the possibility of a dividend, a larger dividend?

Or what exactly (multiple speakers)

No, absolutely not.

We are looking at our cash balance and the optimal amount of cash to hold on our balance sheet.

And we consider that very closely.

So, you deploy it into share repurchase if you decide that a lesser amount is optimal.

It could be.

For example, in the first quarter, given the exercise of stock options, it takes our cash balance back up with the exercise of those.

So, we have a bit of offsetting room.

So, we are pleased about that.

Neil Godsey, Friedman Billings Ramsey.

It looks like he has disconnected. (OPERATOR INSTRUCTIONS).

Having no further questions, I'd like to turn the conference back to Mr. McDaniel for any closing comments.

Thank you very much, and thank you all for joining us on the call.

We do look forward to speaking to you again with our second-quarter results.

Thank you again for your participation on today's call.

You may disconnect at this time.