穆迪 (MCO) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome, ladies and gentlemen, to the Moody's corporation fourth quarter and year end 2007 earnings 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 the conference up for questions and answers following the presentation.

I will now turn the conference over to Lisa Westlake, Vice President, Investor Relations. Please go ahead.

Thanks, Audra. Good morning, everyone, and thanks for joining us on today's teleconference to discuss Moody's for the fourth quarter and full year of 2007. This is Lisa Westlake, Vice President of Investor Relations. Moody's released it's results for the fourth quarter of 2007 and the full year this morning and the earnings release is available on our website at ir.moodys.com. In addition we have prepared a presentation to accompany this teleconference. The presentation is also available on our website. Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also on the call is Linda Huber, Chief Financial Officer of Moody's Corporation.

Before we get started I call your attention to the cautionary language set out at the end of our earnings release. Certain statement 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 direct your attention to the management's discussion and analysis section and the certain risk factors discussed in our annual report on Form 10K for the year ended December 31, 2006, 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 statements under 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 may differ materially from those contained in any such forward-looking statements. I should point out that members of the media might be on the call this morning in a listen-only mode. I'm now pleased to turn the call over to Ray McDaniel.

Thank you, Lisa, and thank you all for joining us on today's call. I'll begin our prepared remarks this is morning with a brief summary of Moody's fourth quarter and full year results. Linda will then take you through the fourth quarter and full year operating highlights, provide some commentary on revenue and expenses, update you on our share repurchase program and discuss several investments we've made since our last earnings call including real estate. I will then review developments in the regulatory area and finish with Moody's outlooks for 2008. After that we'll be happy to respond to your questions.

Moody's reported solid financial performance for full year 2007 based on very strong first half results partially offset by the unprecedented challenges effecting the ratings business in the second half. Looking first of the fourth quarter, revenue of $505 million was down 14% from the same period of 2006. Revenue declined in the ratings business resulting from unfavorable market conditions, but partially offset by growth in our research and Moody's KMV businesses. Operating income for the fourth quarter was $212 million and included a restructuring charge of $48 million. Foreign currency translation had a positive impact on operating results, increasing revenue and operating income growth by approximately 210 and 150 basis points respectively. Reported earnings per share for the quarter were $0.49, excluding our fourth quarter restructuring charge and a 2006 gain on building sale, nonGAAP diluted earnings per share for $0.60 for the quarter declined 6% versus $0.64 for 2006.

Turning briefly to full year 2007 results, revenue of approximately $2.3 billion was 11% higher than the full year of 2006. Operating income for 2007 was $1.1 billion, including restructuring charges of $50 million. Reported earnings per share of $2.58 included a $0.19 benefit from the resolution of certain legacy tax matters and an $0.11 per share charge related to restructuring actions. Excluding adjustments and the impact legacy tax matters in both years, full year 2007 earnings per share of $2.50 was 11% higher than the $2.25 in 2006. At this point I'm turn the call over to Linda who will provide further detail on revenue and expenses for the fourth quarter and full year 2007.

Thanks, Ray. I'll begin by providing details for the fourth quarter starting with our U.S. businesses. Moody's U.S. revenue was $277 million in the fourth quarter, down 23% year-over-year. At Moody's investor service we had revenue of $258 million, down 25% from a year-ago. U.S. ratings revenue declined 31% year-over-year, largely caused by a 53% reduction in structured finance revenue driven by significant declined an issuance across most asset financed categorize. Revenue from residential mortgage backed securities was down 81% while revenue from rating credit derivatives and commercial mortgaged backed securities declined 54% and 52% respectively. Asset backed securities revenue decreased 18% from a year ago. U.S. corporate finance revenue increased 2% from the prior year period with growth and revenue from investment grade bond ratings largely offset by double digit percent revenue declines from rating high yield bonds and bank loans. U.S. financial institutions rating revenue grew 5% driven mainly by favorable results in the insurance sector. U.S. [public announced] revenues decline 6% from the robust fourth quarter of 2006. Finally, U.S. research revenue showed a strong increase of 23% from the prior year period.

Turning now to our international operations, Moody's revenue growth was essential sly flat outside of the U.S. Total international revenue of $228 million in the fourth quarter was comparable to $229 million in the prior year period, with foreign currency translation contributing approximately 530 basis points of growth. International revenue accounted for 45% of Moody's total in the quarter compared with 39% in the year-ago period.

For Moody's investor service international revenue declined 2% year-over-year to $203 million, while revenue from international ratings was down 9% to $161 million. International structure finance ratings revenue was 17% lower than in the prior year period due to declines in ratings revenue across most asset classes. International corporate finance revenue was down 7% from 2006 primarily due to declines in revenue from rating investment grade and speculative grade securities mainly in Europe. International financial institutions revenue grew 6% year-over-year reflecting good performance in the banking sectors in both Europe and Asia. Moody's research business delivered robust international revenue growth of 39% year-over-year reflecting increased in each of Moody's research areas.

Turning to Moody's KMV. On a global basis it generated $44 million of revenue, up 11% compared to the fourth quarter of 2006. Revenue was filtered by strong growth from a licensing of crediting cost software and sales of risk product subscriptions. Moody's KMV produced $10 million in operating for the quarter compared to $5 million a year ago.

Next, I'll discuss operating expenses. Moody's total operating expenses for the quarter was $293 million excluding the 2007 restructuring charge and a gain on building sale in 2006, pro forma fourth quarter operating expense of $245 million was down 15% from the $287 million in the prior year period, reflecting the impact of cost savings initiatives and a reduction in incentive compensation expense, commensurate with the company's results. Excluding the restructuring charge, operating margin for the fourth quarter was 51%, equal to the margin for the same period in 2006. Before I move on to discuss our stock repurchase program, I would like to comment on our effective tax rate. For the full year 2007 the effective tax rate was 37.2% which included about 295 basis points of benefit from legacy tax matters. Looking to 2008, we expect a benefit from a higher proportion of income earned in lower tax jurisdiction and are estimating an effective tax rate in the range of 38.5% to 39.5%.

Now I'd like to turn to an update on capital allocation and stock buyback. Moody's remains committed to using its strong cash flow for shareholders by investing in growing areas of the business, making selective acquisitions in related businesses, repurchasing our own stock and paying a modest dividend. During the fourth quarter of 2007 Moody's repurchased 7.7 million shares at a total cost of $311 million. Partially offsetting these buybacks, we issued .8 million shares under stock-based compensation plan.

For the full year 2007, Moody's repurchased 31.3 million shares at a cost of $1.7 billion and issued 4.3 billion shares in stock-based compensation plans. The numbers of shares outstanding at the end of 2007 was reduced by 10% from the number at the end of 2006, resulting in accretion of $0.07 per share in 2007. Share repurchases during the year were funded using a combination of free cash flow and borrowing. At the year end Moody's had $1.2 billion of outstanding debt and an additional $400 million of debt available and roughly $2 billion of share repurchase authority remaining.. In 2008 we expect to fund share buybacks primarily from free cash flow. Moody's maintains the ability to increase its debt capacity should we determine that to be the most effective use of our capital.

Since our last conference call Moody's has also made several investments that I'd like to mention briefly. First, I'll discuss three transactions to grow our Moody's Analytics business followed by a recent investment within the ratings business. In December of 2007 we announced the acquisition of Mergent Pricing and Evaluation Services, a provider of corporate and municipal bond pricing information. In January 2008 we acquired BQuotes, a global provider of price discovery tools and end of day pricing services for a wide range of fixed income securities. The acquisition of Mergent's corporate and municipal bond pricing services expanded Moody's pricing initiatives to evaluating pricing. BQuotes further broadens Moody's offering to price discovery tools and observe pricing services, and positions the company to offer a complete range of fixed income valuation services.

Also in January 2008 we acquired Financial Projections Limited, a UK based provider of credit training services. Financial Projections will operate within Moody's Analytics as a part of Moody's credit training services enabling us to offer a wider range of training to our customers on a global basis. The terms of these transactions were not disclosed and the financial impact to Moody's is not expected to be material. Financial results from Mergent's Evaluation Services, BQuotes and Financial Projections will be reported within the Moody's Analytics segment and are included in our 2008 guidance. In January 2008, we announced an increase in our ownership stake of Midroog Limited, a leading Israeli ratings agency, from 40% to 51%. This investment will allow Moody's to capitalize on the continued strong growth in Israel's domestic debt market. The terms of the transaction were not disclosed, and the financial impact to Moody's will not be material. We will be consolidating Midroog's financial results within our international ratings business.

Now I'd like to provide a brief update on real estate. Yesterday Moody's signed a 17-year lease for office space in the Canary Wharf area of London. Moody's total commitment for the term of the lease will be approximately $471 million and includes rent and related costs, put outs and relocation expenses. The financial impact of this transaction will not be incurred until early 2009 and Moody's plans to relocate it's London operations to the new site in the second half of 2009. And with that, I'll turn the call back to Ray.

Thanks, Linda. I'll now briefly summarize developments in the regulatory area. We continue to have active communications with regulatory authorities in the U.S. and internationally. As discussed last quarter, the issues related to subprime residential mortgage and securitization have prompted significant focus by policy makers and regulators on the financial services sector, including specific attention to the role and performance of rating agencies. A broad agenda was set by the G7 finance ministers and central banking authorities in their October 2007 meeting with the G7 asset financial stability forum, or FSF, to provide updates and recommendations by April 2008 on four topics, including one about the role of credit agencies in evacuating structured finance products. The agenda has acted as a catalyst and encouraged global regulatory authorities and central banks to coordinate activities and time lines in order to provide their views to the FSF. These authorities include the BIS Committee on the Global Financial System and the International Organization of Securities Commissions, or IOSCO

The FSF in turn is expected to provide the G7 with an update and recommendations that have been informed by the views of the various international authorities. Many of you may have seen IOSCO's press release yesterday regarding its progress in addressing the subprime crisis. Moody's supports the efforts being undertaken by global and EU regulatory organizations and policy makers. We look forward to sharing our view and participating in IOSCO's request for comment process as it continues its study of the structured finance rating process. In addition, Moody's has been responding to questions and participating in various reviews as appropriate including providing our views on Moody's role in the structured finance market, ways to raise market awareness about the meaning of our ratings, steps that we're taking to demonstrate sound independent rating processes, as well as actions that the markets and regulators might consider in response to the credit market disruption. While we believe we're making good progress in communicating our messages and understanding the issues and concerns that various authorities may have, it's still premature to forecast the ultimate outcome.

I'd like to conclude this morning's prepared remarks by discussing Moody's outlook for 2008. Beginning January 1st, 2008, Moody's segments were changed to reflect the business reorganization announced in August 2007. As a result of the reorganization the rating agency remains in the Moody's investor service operating company and several ratings business lines have been realigned. All of Moody's other commercial activities including Moody's KMV and sales of Moody's investor service research are now combined under a new operating company known as Moody's Analytics. The reconciliation tables within today's press release provide further details. Moody's outlook for 2008 is based on assumptions about many macro-economic 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 overall capital markets issuance. There's 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 the current outlook.

For Moody's overall, full year 2008 revenues expected to decline in the low double digit percent range. This decline assumes foreign currency translation in 2008 at current exchange rates. We note that Moody's first half 2008 performance is likely to reflect usually weak market conditions as well as challenging year on year comparisons against Moody's record performance in the first half of 2007. We anticipate improvement in market liquidity and issuance conditions later in the year resulting in more favorable comparisons. We expect the full year 2008 operating margins to decline in the mid to high -- to the mid to high 40s% range due primarily to lower ratings revenue. Full year expenses are expected to be about flat to full year 2007, excluding a restructuring charge. As the annualized impact of new hires added in the first half of 2007 and investments we continue to make in the growing areas of our business are offset by savings from our restructuring actions. However first quarter 2008 expenses are expected to be approximately $20 million higher than the fourth quarter of 2007 excluding the restructuring charge due mainly to higher compensation expense. As a result of both weaker expected revenue and higher expenses, operating margin in the first half of 2008 is unlikely to exceed the low 40s% range.

Diluted earns per share for 2008 are expected to be between $2.17 and $2.25. With a global Moody's Investor Services business we expect revenue for the full year 2008 to decline in the mid to high teens percent range. And keeping with the new segment reporting note that 2008 revenue for Moody's Investor Services will no longer include research sales. Within the U.S. we project revenue for Moody's Investor Service to decrease in the mid 20s% range for the full year. In the structured finance business we expect revenue for the year to decline in the low to mid-40s% range due primarily to a very substantial revenue decrease in residential mortgage backed securities rating and also significant decreases for credit derivatives and commercial mortgage backed securities. We expect revenue from rating asset backed securities to decline in the high single digit percent range.

In the U.S. corporate finance business, we expect revenue for the year to decrease in the low teen percent range driven by declines across all asset classes. For financial institutions ratings we project U.S. revenue to grow in the low single-digit percent range for the year with insurance ratings as the primary driver of growth. In the newly formed business line of public project and infrastructure finance, we expect U.S. revenue growth in the low single-digit percent range due to stable revenue from public finance and low double digit percent growth in project and infrastructure finance. Outside the U.S. we expect investor service revenue to decrease in the low single-digit percent range with mid to high teens percent range projected decline in international structured finance revenue and a mid single-digit to low double digit percent growth for corporate financial institutions and public project infrastructure finance revenue.

Turning finally to Moody's Analytics we expect global revenue growth in the mid teens percent range with growth outside of the U.S. increasing at a modestly faster rate than in the U.S. Moody's Analytics will report results for three business lines, subscriptions, consulting and software. Growth in the subscription business segment is expected to be minute mid teens percent range, reflecting continued demand for credit and economic research, structured finance analytics and the impact of our newly-formed pricing evaluation business. We anticipate very strong growth in the consulting business, supported by a robust pipeline of professional service engagements and credit training projects. There is considerable demand for Moody's expertise in credit education, risk modeling, scorecard development as customers implement more sophisticated risk management processes and comply with regulatory requirements. In the software business, we expect revenue to be slightly lower than in 2007 as customers begin to migrate to new generation software platforms. That concludes our prepared remarks and we would be very pleased to take any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Michael Meltz at Bear Stearns.

I'm still digesting there, but I think I have two questions. On your -- Ray, give us a little bit more clarity as to your expectations, what is baked into your guidance in the full year in terms of expectation for the first half. You just mentioned expense guidance for the quarter. How weak are you anticipating the revenue line to look in the first half? And then, secondly, that comment about the lease expense or the new lease there, does any of the expense of your existing facility go away once you move in? And so what is the actual incremental burden, I guess, once you get into 2010?

Okay. Michael, it's Ray. I'll take the first question and ask Linda to take the second. We are not giving quarterly revenue guidance for the business, but we do expect that in addition to the weak market conditions, we will continue to see the seasonal patterns that we have seen in the past, so that the 1Q should have the lowest revenue generation for the year. I would not expect we're going to see the same peaks and valleys in revenue by quarter in 2008 simply because of the decline in the structured business which has always had strong seasonal variation by quarter. So that's about as much as I can give you on the early year outlook.

And Michael on your question on the lease, for the London lease, we are going to be putting out an 8K on that next week so we would urge you to look at further details on that. It doesn't have much impact on us on 2008 as we had noted. It's primarily coming on line on 2009. Regarding your question about the double rent expense here at Seven World Trade Center. You're correct. In the fourth quarter of 2007 we no longer had the double rent expense so the first three quarters of 2007 we carried a total of $9 million of double rent expense or $3 million a quarter, so that $3 million went away in the fourth quarter of 2007 and will not be present in 2008.

Actually Linda, that wasn't my question. It's -- you'rr moving facilities in Canary Wharf, what is the incremental hit?

Not until the end of 2009, though. So the 2008 impact, since we're not going anywhere in 2008 will be minimal but we'll have more information on the total financial commitment when when we put out the 8K.

Okay. So you cannot quantify -- I think you're saying $25 million to $30 million a year, but you're not quantifying what that is incrementally?

I think we'd rather not go there until we put out the details in the 8K and the 10K.

Okay. Last question for me. Not to get into the weeds in terms of exposures, but you're -- can you remind us of your transaction and relationship exposures and just perhaps for the full year and where you actually ended the year?

Sure. The silver lining on the structured finance business, particularly in the U.S., coming off a bit is that we have better balance between our transactional and relationship revenue, Michael, so for the total ratings business we're looking at 66% transactional revenue and 34% relationship revenue for the fourth quarter of 2007. And as I noted, that is coming into better balance and we would see that balance continuing to be more even as we move forward into 2008.

Do you have a number for '07?

Yes.

Yes. For the full year '07, transactions 73% of ratings revenue in in relationship to 27% of relationship revenue. So you saw those numbers coming into better balance in the fourth quarter.

Got it. Thank you.

Next we'll move to John Neff at William Blair.

Hi. Thank you. I was just wondering if you could actually quantify for us or give us an estimate, what are the actual credit losses that you're seeing so far in the market for our RMBS, SIBs, CDOs, things of that nature?

Yes. This is Brian Clarkson. And with respect to RMBS transactions, the losses that have flowed through on the '06 is less than 100 basis points, and CDOs, it's a like number.

Okay. Right. And then is there -- baked on your 2008 EPS guidance, is there an expectation of -- how should we think about the share buyback contribution to that performance? Do you expect -- I know it's hard to say, but do you expect to exhaust the current buyback in 2008?

I think John, we were pleased with the results of what we did in 2007. As we said we reduced the share count by 10% in 2007. That was accretive to EPS by $0.07. I think we sort of like that sort of range of reduction in the share count. We are -- we're looking to of course buy back more shares when the price was lower, we would see that that would be likely in the first half of the year and we'll continue to fund the share purchases primarily through a free cash flow, but as we said we do have capacity to borrow if the price looks attractive.

Okay. That will be a good transition to my next question. Could you remind us of the cost of your debt and your view on the debt outstanding over the course of '08, given the plan to fund buybacks from free cash?

Do you want -- are you looking for the interest of debt or the actual amount of debt outstanding?

Yes. The interest expense.

The interest expense amount has of course moved up because we've taken on more debt, and for 2007 the interest expense on borrowing was $15.7 million and again we would expect that to move up for 2008. We haven't quantified that in our guidance for the full year effective, the money that we've borrowed.

Okay. You mentioned the balance between transaction and relationship based, you cited the growth in relationship base revenue in the fourth quarter, is that by default as issuance volumes dropped, or are you actively transitioning certain relationships into that relationship category?

No, that is more by default. The structured finance business and the decline in issuance in that area caused a reweighting between the issue -- transaction-based revenue and recurring revenue from relationships.

Okay. And last question, if I can, can you just remind us of the break down between U.S. structured financed ratings revenues as a percentage of structured global finance? Thank you.

Okay. For the full year of 2007, global structured finance revenue was about 38%, 39% of total Moody's Corporation revenue. And that's going to decline fairly significantly in 2008 because of the expected decline in structured finance issuance activity. So that is going to be a reducing number. It reached a high point of about 45% in the first half of 2007, down to 39% for the full year and it will be below that in 2008, obviously.

Next we'll move to Karl Choi at Merrill Lynch.

Hi, I have a few questions here. First one is, I wonder if you can talk about in your full year guidance you said you expect some return of market liquidity maybe in the back half of the year. In your assumptions, do you actually expect ratings revenue growth by let's say the fourth quarter? And second is, if you could give us a break down of total costs in terms of compensation, and how much of that was in terms of compensation. That would be great.

In terms of the fourth quarter we would expect some modest increase over the fourth quarter of 2007. While we do expect conditions to improve in the second half of the year, we are not expecting those conditions to represent explosive improvement coming off of the weak first half. So I would expect it to be more detracted and more modest, but with increases in year-on-year performance by the end of the year.

Karl. It's Linda. Your question on comp expense, for the full year 2007 total incentive comp of $86.6 million was 12% of total comp. Total stock comp was 12% of the total number and all other compensation was 76%. All of that comes out to comp-to-total expenses, a ratio of 67%. Interestingly, the comparison in the fourth quarter of 2007, that number was down to 61%. Obviously, we had accrued fuller compensation in the first half of the year when the results were looking strong. So total incentive comps was actually a negative number for the fourth quarter, total stock comp was 13% of total comp in the fourth quarter and all other was about 90%. So again as we said, the total comp percentage was down to 61% in the fourth quarter.

And is that why you expect comp to go up in the fourth quarter, because incentive comp was actually negative in the fourth quarter?

Yes. And we expect that that would balance out as we get back to the first quarter appropriate accrual on compensation based on how we did in the fourth quarter.

And can you give us a breakdown of your corporate revenues into investment grade and high yield and the others?

Sure. For total global corporate finance, which is what I have in front of me, I've got high yield, and this is a percentage of total global corporate finance. I'll ask somebody to look at the corporate finance as a percentage of total revenue, but high yield as a percentage of global corporate finance is 12% in 2007, investment grade was 24%, bank credit facilities 18%, and other, which includes MTNs and shelves and commercial paper and so on, was 47%. All of that totaled $104.5 million for the full year 2007. And just a moment here, let me see if Ray has got the full amount for --

Yes, the total corporate ratings revenue is a percent of total MCO revenue was 20%.

And lastly, in terms of option expense, what do you expect option extension to be in 2008.

Hang on just a second here. I think we'd expect option expense, and again option expense would move a bit based on how well we perform next year, but approximately $80 million for 2008.

Great. Thank you.

Next we'll go to Fred Searby at JPMorgan.

Hi. I wondered if you could give us a little bit more color on the regulatory -- what is going on in the regulatory front in Europe? Are there any governmental entities other than IOSCO that are actively investigating you? And is there any sort of unilateral action by different countries, or what your thoughts are there? Thank you.

Sure, Fred. A couple of things. First of all, the -- there are several processes underway for reviewing either rating agencies, processes and performance, therefore reviewing the structured finance market specifically. The work that is being done by IOSCO includes representatives from both the SEC in the U.S. and from the Committee of European Securities Regulators as well as some other regulatory authorities outside of the U.S. and Europe. And that process, while it makes independent recommendations for behavioral processes and conduct at rating agencies, which IOSCO would expect us to implement, is also feeding into the broader process of review of the rating agencies by the financial stability forum, by the President's working group here in the U.S. And so there are independent efforts going on which are funneling into an integrated review at the international level or pan national level. We also do -- we also are subject to reviews or inspections in some individual countries. That's not new. That has been in existence for several years. That includes the U.S. and it includes some countries in Europe.

Okay. Thank you.

Next question is from Ed Atorino at Benchmark.

Hi. Would you repeat -- you give a cost for the first quarter as compared to fourth quarter, I just didn't write fast enough.

What cost are you looking for?

Do you mean fourth quarter expense, Ed?

Yes. You said the first quarter expense versus -- was it up, was it $20 million or $30 million?

$20 million in first quarter over fourth quarter expense. I believe that's excluding the restructuring costs.

Yes. Thanks. Second, the other expense item was rather notably large, $19.8 million. What was in there besides interest expense, and what would that amount sort of be going forward?

Ed, it's Linda. We'd ask you to take a look at this when we file our 10K and we'll have some more detail, but the various components are FX, which is very small, interest income, which was $5.5 million, interest expense, which is $15.7 million, and then we carry some of our FIN 48 -- we carry our FIN 48 item as partially interexpense which is $5.3 million negative number. We have a few additions to that, but it all sums to the $19.8 million that you noted and the main change in that would be as we mentioned the increased interest expense on the borrowing.

So going forward wouldn't be $20 million a quarter, right?

I do not think we've broken out that, but directionally the interest expense is growing as we have increased borrowing.

Okeydoke. Thanks.

And next we'll move to Lucas Binder at UBS.

Hi, guys. A couple of quick questions. Can you -- Ray, you gave an update on IOSCO, but you can talk about where things are domestically from the SEC and the state's attorney general? And then also, are you -- within Moody's Analytics is there plans to still break out the KMV and research revenue breakdowns?

Sure. With respect to the SEC and the various state's attorney general, the SEC is continuing with what is now its normal inspection and review process. That is new pursuant to the reform act and the promulgating rules. But they have been in contact with us and we've been responding to inquiries and requests for information from the SEC pursuant to that. And they have had particular interest, I think, not surprisingly, in processes around structured finance and making sure that they understand those and are comfortable with the information that we're giving them there. And it's a similar story with the state's attorney general in that we are responding to information requests, making all of the information that is being requested available on as timely a basis as we can, and those inquiries continue.

Lucas, to follow up on your second question on how we're reporting Moody's Analytics, as I think Ray said we're going to have three categories within Moody's Analytics going forward which would include subscription, consulting and software, and we will no longer be individually reporting KMV.

Okay. And then just to follow-up with -- looking at the rest of the world, I think you're pretty fair about the outlook for the U.S. I guess, why do you still fee confident that the rest of the world as far as issuance is still going to be able to end ratings revenues and is still going to be able to hold off relative to what is going on in the U.S.?

Well, for the full year 2008, we expect that it is going to be a challenging year, both inside and outside the U.S., clearly. And we do expect that the contagion effect from credit conditions in the U.S. will probably have a greater effect in Europe than they will in Asia. That being said, we have seen that market activity, while it has not been robust, has been healthier in the fourth quarter of 2007 than it was outside of the U.S. than it was inside the U.S. There is a somewhat different mix in the businesses. There is much less of anything that would look like a subprime mortgage market, once one gets outside of the U.S. in structured finance. There is also a smaller contribution to corporate finance activity from high yield than in the U.S. So the downturn in high yield activity has a more material impact on our business here in the U.S. than outside. And, finally, because this intermediation is not as far along outside of the U.S., we have more new rating requests, ratings mandates internationally than we do here, and a lot of that is unrelated to issuance. It's institutions that may be looking for ratings for domestic purposes or counterparty purposes in terms of engaging counterparty activity across border. So all of that I think indicates why we expect things to be a bit better outside than inside this country.

And if I could ask one last question, with regard to the discussion of a change in rating system, changing, adding extra disclosures, extra risk factors, between your yourselves and S&P and Fitch, is there some sort of plan out there for all three. Can you talk about what the time frame is and what the process would be for implementing something like that?

Well, we have, as you obviously know from your question, we have issued a request for comment with respect to rating system management in the structured finance area. In terms of seeking market response to whether different kinds of metrics than are measured by the traditional rating system or different kinds of alerts as to ratings that are heavily based on modeled credit analysis versus more fundamental credit analysis would be helpful to the market. We're doing that for a couple of reasons. One, a number of public sector authorities have indicated an interest in that and I think would like to understand what the private sector would think about that idea.

Secondly, because there are different behavioral characteristics to structured ratings, even if the expected loss in structured finance is comparable to expected loss in the corporate and governmental sectors, the distribution of losses, the influence of pulling together or pooling assets that are relatively homogeneous and originated at the same at the same point in time creates more variability in the performance, both up and down of those ratings. So we're looking at whether we can provide additional clarity. And in providing additional clarity, what would the marketplace find most helpful. So that's all as background. The request for comment, we've asked for comments back by the end of February. And the reason we have asked for that timing is because we would seek to take both the narrative comments and the choices that the marketplace prefers, and summarize those and make the information available to the general public and to oversite authorities, so they have that available in their thinking as they go through the process from the financial stability forum and the G7.

Great. Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Catriona Fallon at Citi.

Hi, good morning. And thanks for taking the question. A quick question for Linda. What are you expecting for depreciation and amortization expense for '08?

Catriona, I don't think we've gotten that granular with where we're going on depreciation for 2008. I don't have that in front of me.

Okay. And I'm wondering if there is any change to the thought of kind of a longer term 50% operating margin goal.

Well, I think we've spoken pretty clearly that it's probably not going to be there in 2008. We are obviously very concerned about the front half of the year where we think the margin will be closer to 40% and then improving in the back half of the year. For the longer term, we would like to be able to return to a 50% margin and that is our goal. I think you can see under very difficult circumstances in the fourth quarter, we've kept a very tightly leash on costs. We're gone through with our restructuring, and we feel we've done very well in terms of dealing appropriately with head count and the other expenses that we have to handle here. So I think that we would like to encourage the shareholders that a 50% margin is achievable, probably not likely in 2008, and the first half of 2008 is going to be a bit tougher than the full year.

Okay. And I'll just add two comments, somewhat offsetting comments. But as far as maintaining an aspirational 50% margin, I think one reason why people might believe that that is going to be difficult to return to, even over the medium to longer term, is because of a misunderstanding and an expectation that we have materially higher margins in structured finance and in the more complex areas of structured finance like credit derivatives which have been hard hit by this downturn, and that's not case. So the margins in that business are similar to the margins in other parts of our ratings business. Now one thing that may cause us to have some difficulty in returning to margins that we've had in the past is that we do expect to have continued strong growth coming out of the Moody's Analytics business and that business is not as high a margin business as the ratings business. We expect that we're going to have improving profitability along with an improving top line in that business, but it -- to the extent is it grows more quickly than the ratings business over the next few years that is going to have downward pressure on the margin.

Okay. And then just to follow-up, Ray, what are some of the things that you're looking at in the market that might make you change your outlook for '08? So, for instance, what is your thoughts on the situation with the bond guarantors? And then maybe some comments on the economy and whether we could see stag-flation this year. And then thirdly, when do you expect to see structured markets enter the structured finance market?

Well, with respect to stag-flation, I have long said that is probably the least favored scenario for our business just as it is for many businesses. And in our business, to the extent that interest rates are required or being directed to address inflation even in a weak economy, that reduces the outlook for both new money issuance by institutions and reduces the refinancing opportunities. So that's why that's a bad scenario for our business.

As far as what I would look for elsewhere, in terms of the pace of a recovery in credit markets, a large part of this I think still has to go back to when there is stabilization in the delinquency and then ultimately the foreclosure rates in the U.S. housing market. That stabilization is going to improve confidence in the marketplace ,and although there are important social policy reasons to hope for stabilization at lower delinquency and default levels rather than higher, the stabilization itself will improve market confidence because it will include the clarity around the value of these assets. That affects many other segments of the capital markets, including other financial services firms, insurance companies, and insurance companies including the financial guarantors. And I certainly think that certainty around the outlook for the financial guarantee industry, again is going to help reestablish clarity and hopefully confidence in the markets. And I know we have an important role to play this. And as I think you're well aware we are continuing our analysis of those companies right now. And it's been a fairly intensive analysis, and we'll make information available on our conclusions as quickly as we can.

Catriona, one other point, in terms of the revenue impact on Moody's as a corporation, the amount of revenue we garner from rating the bond guarantors is less than 1% of Moody's total revenue. And in terms of the transactions that they wrap, we would rate those transactions whether or not they are wrapped. So the direct revenue impact on Moody's is not particularly consequential.

Great. Thank you.

We'll move next to Craig Huber at Lehman Brothers.

Yes. Just a few questions, please. Could you quantify, if you would, the reverse of the accrual set of comp in the fourth quarter? Craig, I think we don't want to get into the magnitude of that exactly, but it was a few million dollars. It's not more than $10 million?

It was modest, but I think the unusual point was that it was down rather than up.

Yes.

And that's unfortunate, but that's the way it went.

Well then you can just -- can you give me a little more color then why you think costs in the upcoming first quarter is roughly $20 million higher? That number is not dramatic then. Sure. We're hoping with the way the numbers are laying out in the first quarter that we will be able to accrue bonuses in a more fulsome way than in the fourth quarter where we had this reversal, because we had accrued at a more healthy pace in the the first and second quarters. So I guess it would be considered a return to normalcy and of course we're starting a new year.

And we did have a work force reduction, which is going to have some impact in the first quarter. It's not going to be a complete offset to annualization of compensation expense, but it is an offset.

Then also for the fourth quarter, could you break out for us the percent of revenue based on transactions for structured for corporate for financial institutions and structured finance. I know it varied within those four categories. Could you just --

I think Linda has that.

Okay. You want fourth quarter -- Yes. Fourth quarter and the full year, I think that would be helpful. Okay. I hope everybody has time and they're not interested in lunch. Okay. Fourth quarter for corporate finance, transactions 64%, relationship 36%. Financial institutions, transactions 42%, relationship 58%. Public finance, transactions 93% and relationship 7%. And structured finance, transactions 73%, relationship 27%. The total for ratings fourth quarter transaction 66%, and relationship 34%.

Going on to full year. For corporate finance, transactions are 69%, and relationships 31%. Financial institutions, transactions 48%, relationship 52%. Public finance, transactions 94%, relationship 7%, and structured finance, transaction 81%, and relationship 19%. For full year 2007, total transaction revenue percentage, 73%, and relationship 27%. So a pronounced shift to relationship revenues in the fourth quarter of 2004. And -- Fourth quarter of 2007, I apologize. I'm going back in time. Thank you for that. One last question. Just to get a little more detail. You talked about this in the past, just for clarity here. Can you just explain to us, you talk about the margins being very similar across the various products that you rate. How much extra time your analysts will spend on a CDO structural finance produce when you allocate those costs versus a more plain vanilla investment grade or high-yield bond? At the end of the day, isn't that why your margins are very similar?

Yes. It is. They are more complex securities in most cases and the more complex securities require more analyst time and often more analysts to look at those transactions. And maybe much longer time to market from when transaction is first brought in and assets to review to when it goes to market.

Can you quantify that if you would, how many days you typically would --

No. It's -- it varies so much that I do not think -- first of all, I don't have the quantification, but if I did, I don't think it would be very helpful.

But you think it nets obviously to about the same margins?

Yes. The fact that we can see there are differences in the fees and we can see what the overall expenses are for our different areas, we can say it nets out.

If I could just sneak in one more. Asia as a percent of your revenue for the fourth quarter, what was that, please?

Let's see. Asia as as a percent of the fourth quarter. Give me just a minute here.

Craig, I'm not sure we have a full -- a quarter on Asia specifically. For the full year 2007, I think it was about 11% comes to mind.

Yes. It was a little little higher in the fourth quarter, Moody's Asia was probably 12%, 13%.

Great. Thank you very much.

Sure.

And we'll move next to Michael Meltz at Bear Stearns.

Hey, there. I just wanted follow up on this, and sorry to carry on here, but just Craig's question about relationship and transaction, so are you saying you ended the year, if I back into the number, basically of total company revenues, 50% are transaction and 50% -- or roughly -- or I think you're saying actually 49% transaction and the balance everything else? Is that right?

I haven't done the math, but we're saying that 66% of approximately 80% was transaction, meaning the rating agency, and then the nonratings business is essentially a recurring or relationship-based revenue business. There is a little bit, about one off, but not much of it.

Got i. Okay. I know -- I think you mentioned this at the beginning. Could you just -- actually, you know what, I'll follow-up off line. Sorry about that.

Okay.

You're welcome.

And next we move to Ed Atarino at Benchmark.

Hi. I'm sorry to prolong this. Fourth quarter -- if you said this, I apologize, and then we can all go to lunch. International versus the U.S. in the fourth quarter revenues -- structured finance revenues?

Structured finance international versus U.S. in Q4?

Yes.

Okay. It was --

$84.5 million of U.S. structured finance revenue in the fourth quarter, Ed.

Okay. And for the year, the breakdown? U.S. -- You got that number? That was the --

The fourth quarter, it was just over 50% that came out of the U.S.

Total rev -- total ratings.

No. Just over 50% of structured finance ratings in Q4 came out of the U.S. And how about total company?

Total company revenues, I have that one, and this is interesting Ed, for the U.S. we're at 55% now and 45% international, so that's rebalancing which we expect to get more even handed going forward. It's very helpful to us and it's one of the things driving the tax rate down, and you see we guided the tax rate to 38.5% to 39.5%. And that is a permanent change, and people should consider that a difference in the way the financials of the company lay out.

Thanks very much.

Sure.

And our last question comes from Catriona Fallon.

Yes. Hi. Just a quick follow-up. Thanks for the break down on each of the different revenue lines on transactional versus relationship. So, am I to assume then for public finance and structured finance, the majority of the relationship revenue is surveillance fees, but for corporate finance and financial institutions it's both surveillance fees and nontraditional types of contracts?

Yes. I would not call them nontraditional contracts but relationship-based where we receive annual fees from corporations or financial institutions as part of the rating relationship outside of monitoring. But aside from the terminology, yes, I would agree with your comment.

Okay. And then can you give us some directional, if you have to -- if you have the actual numbers that's fantastic, but directional ideas of the margins for these different types of relationships?

No, I don't think we're going to be able to make margins available on relationship versus transactional business. So just do not have that available.

Okay. Thanks so much.

Okay.

And Mr. McDaniel, I'll turn the conference back to you for any closing remarks.

Okay. Well, thank you, everybody, for joining and for your detailed and enthusiastic questions. We look forward to speaking with you after the first quarter. Thanks.

That does conclude today's conference. Again, thank you for your participation.