穆迪 (MCO) 2008 Q1 法說會逐字稿

Good day, and welcome ladies and gentlemen to the Moody's Corporation first quarter 2008 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'll now turn the conference over to Lisa Westlake, Vice President Investor Relations.

Please go ahead.

Thanks.

Good morning everyone, and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2008.

I am Lisa Westlake, Vice President of Investor Relations.

Moody's released its results for the first quarter of 2008 this morning.

The earnings release and a presentation to accompany this teleconference are both available on our website ati IR.Moodys.com.

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

Also on the call the call this morning 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 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 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 2007, and in other SEC filings made by the Company from time to time.

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

These set fourth important factors that could cause actual results to 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.

Now I am pleased to turn the call over to Ray McDaniel.

Thanks, Lisa, and thank you all 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 will then take you through the quarter's operating highlights, provide some commentary on revenue and expenses and update you on our share repurchase program.

I'll then review recent developments in the regulatory area and finish with Moody's outlook for 2008.

After that we'll be happy to respond to your questions.

Moody's revenue results in the first quarter clearly reflect the difficult credit market conditions in which we are operating.

Revenue for the quarter was $431 million, down 26% from a year ago.

Significant decreases in ratings revenue from new issuance across most sectors and asset classes were partially offset by our solid base of recurring revenue and strong growth in Moody's Analytics.

As a result while Moody's rated issuance was down 56% versus prior year quarter our revenue decline was only about half that amount.

Operating income for the first quarter was $199 million, a decrease of 35% year-over-year.

Prudent cost management helped to limit the impact of the weak operating environment on overall performance and foreign currency translation had a positive impact on both revenue and operating income of approximately 200 basis points.

Diluted earnings per share of $0.48 for the quarter declined 23% from $0.62 in the year ago period.

Before turning the call over to Linda I want to remind you that as of January 2008 we changed Moody's reported segments to reflect our business reorganization into Moody's investor service and Moody's Analytics.

The credit rating agency is reported in the Moody's investor service segment and all of Moody's other commercial activities including Moody's KMV and sales and research produced by Moody's analysts are reported in the Moody's Analytics segment.

At this point I'll turn the call over to Linda who will provide further detail on revenue and expenses for the quarter.

Thanks, Ray.

I'll begin with revenue at the Corporate revenue.

Moody's U.S.

revenue declined 39% year-over-year to $233 million while while non-U.S.

revenue was down just 3% from the same period.

Revenue from outside the U.S.

accounted for 46% of of Moody's total revenue for the quarter.

Focusing on details by segment, for Moody's investor service revenue was $298 million, representing a 37% decrease year-over-year.

U.S.

revenue from the ratings business was down 48% while non-U.S.

revenue declined 13%.

Revenue from outside the U.S.

Represented 44% of total revenue.

Changes in revenue and operating income were positively impacted by foreign currency translation of approximately 200 basis points and 220 basis points respectively.

Global structured finance revenue was $107 million, down 57% year-over-year.

U.S.

structured finance revenue decreased 69% driven by significant declines in issuance across most categories with the biggest impact coming from residential mortgage backed securities, commercial real estate finance, and credit to derivatives ratings businesses.

Non-U.S.

structured finance ratings revenue was down 29% from the prior year period, led by declines in the European credit derivatives and commercial real estate finance sectors.

Global corporate finance revenue of of $72 million for the first quarter declined 31% from the prior year period.

U.S.

Corporate finance revenue decreased 41% year-over-year.

Significant revenue growth from rating U.S.

investment grade debt was more than offset by high double digit declines in revenue from ratings speculative grade bonds and bank loans.

Outside the U.S.

Corporate finance revenue was down 6% due primarily to a decline in revenue from rating European speculative grade securities.

Global financial institutions revenue of $64 million decreased 4% for the first quarter of 2008.

U.S.

financial institutions revenue was down 5% year-over-year.

Growth in the banking sector was more than offset by revenue declines in the insurance, finance, and securities sectors.

Outside the U.S., financial institutions revenue declined 4% as growth in the insurance sector was more than offset by a decline in revenue from the larger European banking sector.

Global revenue from the public project and infrastructure finance business was up 9% from a year ago, supported by double digit growth in project and infrastructure finance.

While U.S.

revenue was flat for this business, non-U.S.

revenue increased 32%.

Turning now to Moody's Analytics, global revenue of $133 million increased 20% from the prior year period.

Demand outside of the U.S.

Continued to be robust with non-U.S.

revenue representing about 50% of the total.

Revenue from subscriptions grew to $118 million and contributed the greatest dollar growth while the smaller software and consulting businesses delivered 22% and 42% revenue growth respectively.

Foreign currency translation positively impacted operating results increasing revenue and operating income growth by approximately 220 basis points and 310 basis points respectively.

Moving on to operating expenses, Moody's operating expenses for the quarter totaled $231 million, down 17% from the prior year period.

Cost reduction initiatives that we began in the second half of 2007 contributed to these results.

About three quarters of the expense reduction was driven by lower personnel costs including lower incentive compensation expense while the remaining quarter was driven by savings across non-compensation related expenses.

first quarter 2008 operating expenses benefited from approximately $10 million or about $0.02 per share of expense reductions specific to this quarter.

Largely from stock based compensation expense.

Non-operating expenses for the quarter included a benefit of approximately $9 million from foreign currency translation.

Operating margins in the quarter was 46.3% which was 600 basis points lower than the first quarter of 2007.

Our effective tax rate for the quarter was 38.5%.

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

Moody's remains 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 and by repurchasing our own stock and paying a modest dividend.

During the first quarter of 2008 Moody's repurchased 7.5 million shares at a total cost of $265 million and issued about 1 million shares under employee stock based compensation plans.

Outstanding shares as of March 31, 2008, totaled 244.7 million representing an 11% decrease from a year earlier.

first quarter share repurchases were funded using a combination of free cash flow and borrowings.

At quarter end Moody's had $1.2 billion of outstanding debt with an additional $400 million in existing capacity available.

Also at the end of the quarter Moody's had 1.8 billion of share repurchase authority remaining under its current program.

In terms of expanding our business, the acquisition of BQuotes in January added a key component to Moody's new pricing and valuation services.

BQuotes is a global provider of price discovery tools and end of day pricing services for a wide range of fixed income securities.

In conjunction with our earlier acquisition of Mergent and our internally developed discounted cash flow valuation service, Moody's is now positioned to offer a complete range of fixed income pricing and valuation services.

Moody's also signed a to technical service agreement in February with BRC Investor Services a rating agency based in Bogota, Columbia.

This relationship provides us with an important entry into another emerging market within Latin America.

The terms for these transactions were not disclosed and the financial impact to Moody's is not expected to be material.

Finally, I'd like to remind everyone that Moody's will host its third annual Investor Day on Thursday June 5, 2008, in New York City.

The event will be webcast and detail is going to be provided on Moody's Investor Relations website and with that I'll turn the call back over to Ray.

Thanks, Linda.

I'd like to now provide a brief update on regulatory developments.

We continue to have active communications with Regulatory Authorities in the U.S.

and internationally.

As discussed last quarter, policy makers and regulators continue to focus closely on the financial services sector including specific attention to the role, use and performance of rating agencies.

On a global level, in preparation for its mid April meeting, the G7 Finance Ministers and Central Bank Governors had asked the Financial Stability Forum which is a working group of securities regulators and banking authorities to provide a set of specific recommendations on five topics including the role and use of credit ratings in valuing structured finance products.

To ensure that its report to the G7 represented a coordinated regulatory approach, the Financial Stability Forum or FSF in turn asked a number of global regulatory authorities including the International Organization of Securities Commissions and the Bank of International Settlements for their views and recommendations.

The FSFs final report was delivered to the G7 at their meeting on April 11, in Washington.

With respect to the credit rating agency industry, the FSFs recommendations addressed improving the quality of the rating process and managing conflicts of interest, distinguishing ratings on structured finance products from those on corporate ratings, expanding the initial and ongoing information provided on the risk characteristics of structured products and enhancing the review of the quality of the data input and of the due diligence performed on underlying assets by others involved in structured finance products.

The FSF also recommended that both investors and regulators carefully assess their use of ratings and that investors develop standards of due diligence and credit analysis before investing in structured products.

In addition, we understand that the SEC is wrapping up its examination of the rating agencies including Moody's, and that it expects to issue a report early this summer.

After this report is published the SEC is expected to begin a second round of rule making.

Moody's supports the ongoing efforts being undertaken by U.S.

and global policy makers and regulatory organizations.

Moody's has been responding to questions from these officials 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, and steps that we're taking to demonstrate sound, independent rating processes.

While we continue to proactively communicate our messages and seek to understand and address the issues and concerns that various authorities may have, the ultimate outcome is still undetermined and is difficult to forecast.

I'd like to conclude this morning's prepared remarks by discussing our outlook for 2008.

Moody's outlook for 2008 is based on assumptions about many macroeconomic and capital market factors including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer spending , residential mortgage borrowing and refinancing activity, securitization levels and capital markets issuance.

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

Our full year outlook for Moody's 2008 performance is unchanged from our previous guidance issued on March 11.

For Moody's overall full year 2008 revenue is expected to decline in the mid to high teens percent range.

This decline assumes foreign currency translation in 2008 at current exchange rates.

Revenue guidance for certain lines of business has changed somewhat based on conditions specific to those sectors and geographies.

We anticipate the weakness of the first quarter to continue at least through the second quarter with some improvement in market liquidity and issuance conditions later in the year.

Recently, we have seen modest improvement of debt issuance in some sectors that are under stress, but overall activity remains constrained and confident sensitive.

We remain cautious about the likely pace and strength of recovering credit markets in 2008 and note that Moody's will continue to face challenging year on year comparison against record 2000 performance for the remainder of the first half of this year.

That said, we do not -- we do expect modest sequential improvement in revenue through 2008.

Full year expenses are expected to decline about 8% on an as reported basis compared to full year 2007.

Excluding the restructuring charge of of $50 million in 2007, full year expenses are expected to decline about 5%.

We expect the full year 2008 operating margin to be in the mid 40% range due primarily to lower ratings revenue.

Earnings per share for 2008 are projected in a range from $1.90 to $2.00.

For the global Moody's investor service business, we expect revenue for the full year 2008 to decline in the mid 20% range.

Within the U.S., we project Moody's investor service revenue to decrease in the mid 30% range for the full year.

In the U.S.

structured finance business, we expect revenue for the year to decline in the high 50% range reflecting large double digit percent declines in most asset classes, led by residential mortgage backed securities, commercial real estate finance, and credit derivative ratings.

In the U.S.

Corporate finance business we expect revenue to decrease in the mid to high 20% range for the year, driven primarily by declines in speculative grade bond and bank loan ratings.

In the U.S.

financial institutions and public project and infrastructure finance sectors, we project revenue in 2008 to grow in the low to mid single digit percent ranges respectively.

Outside the U.S., we expect Moody's investor service revenue to decrease in the high single digit percent range, good growth from rating financial institutions, public project and infrastructure finance, and Corporate securities is expected to be more than offset by a decline in structured finance ratings revenue primarily in Europe.

For Moody's Analytics we continue to expect revenue growth in the midteens percent range.

Growth in the U.S.

and outside the U.S.

is projected to be in the low teens and a high teens percent range respectively.

Growth in the subscription business is expected to be in the midteens percent range reflecting continued demand for credit and economic research, structured finance analytics and the impact of our newly formed pricing and valuation business.

In the software business, we expect revenue to be about flat compared to 2007.

And in the smaller consulting business we anticipate very strong growth reflecting a robust pipeline of professional services engagements and credit training projects.

There is considerable demand for Moody's expertise and credit education risk modeling and scorecard development as customers implement more sophisticated risk management processes and comply with regulatory requirements.

That concludes our prepared remarks, and joining us for the question and answer session are Brian Clarkson, President and Chief Operating Officer of Moody's Investor Service; and Mark Almeida, President of Moody's Analytics.

We would be pleased to take any questions you

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to Karl Choi at Merrill Lynch.

Hi, a couple questions.

One is on the revenue side, could you split or give us a split between transactions versus non-transactions revenues in the quarter, and also for non-transaction ratings revenues how did they do in the quarter?

Karl, it's Linda.

I've got the split of relationship and transaction revenues for the quarter.

It's very easy now.

It's exactly 50/50.

And how did relationship based revenues do in the quarter?

For MIS, the total relationship revenue for the quarter was $148.4 million.

But what about year-over-year growth I guess is what I was looking for.

It's -- the relationship based revenue is up from last year.

Obviously more than offset by the reduction in transaction based revenue year on year, and it would be -- my estimate would be about $20 million up for the relationship based revenue.

Okay.

And as far as expenses, Linda could you go through a little bit of the details about incentive compensation, how much it was and also could you explain a little bit more the $10 million lower stock based compensation?

Sure.

Obviously we've been watching expenses very carefully, Karl, and we're very pleased to have expenses down 17%.

We intend to keep the focus on the expense line and as we had said for the rest of the year I think Ray indicated expenses will be down 5% as compared to last year, ex the restructuring charge.

Incentive compensation for the first quarter was 7% of total compensation that was down from 16% in this quarter last year, so a little bit less than half.

Stock compensation was 7% of total compensation, down from 11% last year, and all other was 86%.

So total compensation for the first quarter was [$151.5] million, and I hope that's what you were looking for.

Yes.

And if you deliver on your guidance, what sort of percentage in terms of incentive compensation, what should we expect as a percentage of revenue?

I think we usually have compensation of about 70% of our total expenses and I think we would probably think that would hold in line, Karl, but of course if we do do better throughout the balance of the year, we would have to add to our compensation pools but it's a little early to forecast that right now.

Okay, thank you.

We'll move next to Peter Appert at Goldman Sachs.

Thanks, Linda, keeping on that topic for a second, are you pretty much done then with the staff reduction initiatives you'd started at the end of last year?

And can you tell us where you are on staffing?

Sure.

We had announced at the end of last year that we would eliminate 275 employees and at this point, we are most of the way through that.

We do have some individuals who will be transitioned as we outsource our data center here at Moody's.

The net effect of all of this though, Peter, since we have had some additions in other parts of the business because we have purchased other businesses, our headcount at the end of Q1 2008 was 3515, and at the end of Q4 2007 we were about 3600 people so you can see the net difference is not that great.

Okay, great.

Thank you, and Linda or Ray, can you give us any added color on what you're seeing in terms of the pipeline going into the second quarter, anything interesting in terms of geographic differences or specific product categories you can comment on?

Peter, it's a little bit difficult to comment on the pipeline across the businesses right now for a couple of reasons, but to answer your question, I would say that in the structured finance area, we probably see the credit card and auto receivable pipelines holding up best.

We've seen a little bit more activity recently coming out of collateralized loan obligations and commercial real estate but those are still weak compared to what we had seen before the credit turmoil, and outside of structured where we normally look to the pipeline is on high yield and leveraged loans and again I would make the same comment.

There's been a little bit of an uptick but still very weak compared to what we would consider normal conditions and normal pipeline.

The other problem though is what comes into the pipeline and what then comes out of the pipeline, and so the question about what assets or pooled assets or corporate loans and bonds are actually being issued is heavily susceptible to investors willingness to step up and buy credit sensitive instruments and there is still a competence sensitivity issue.

Right, right, fair enough, thank you.

And then just last thing, Linda?

What's your thought on taking the debt levels up higher to fund further stock repurchases?

Would you be willing to do that or is the stock purchases going forward have to come pretty much exclusively from cash flow from Operations?

I think Peter that would be our first source.

The most important thing for us is to maintain, comfortably maintain our A1 commercial paper rating so we watch that very carefully.

We do have additional capacity as we had discussed and I think we've moved quite energetically to buyback the stock when it was cheap, if you do the division I think we bought back the shares in the first quarter below 35.50 so we think we caught a lot of it at the weakest point in the stock, we hope.

So going forward, we'll monitor this and see how it goes, but we're pretty comfortable with where we are and we probably look more toward free cash flow for the rest of the year.

Great.

Thanks very much.

Next we'll go to Michael Meltz of Bear Stearns.

Hi.

Three questions.

Following up on Peter's question, Internationally, Ray, can you talk about what you're seeing there?

I think there's certainly a variance between your performance there in the first quarter in the U.S.

and internationally and can you just give us a sense as to what you're seeing in Q2?

Secondly, your guidance talks about sequential revenue improvement throughout the year.

Can you just clarify, is that on a percentage basis or you're talking absolute dollars which wouldn't make all that much sense, but I'm just -- want to make sure I understand that.

And then lastly, analytics, can you just tell us in the first quarter what was U.S.

Versus international growth rates, please?

Sure.

Let me address the -- our expectation for modest sequential improvement first.

We do expect to have some modest increase in dollar revenues through the remainder of the year compared to the first quarter but it is modest.

To the extent that we've had a dramatic decline in most of our transaction based businesses, any recovery does not have to be robust for that to contribute to top line growth versus the first quarter.

So when I say sequential improvement, I'm saying sequential improvement over the first quarter not year on year compared to 2007.

Does that mean you're expecting, understanding you have a tough comparison in Q2, does that mean you're expecting revenues to grow in the fourth quarter?

Am I expecting revenues to grow in the fourth quarter over the first quarter of this year?

Nope, over the fourth quarter of '07.

We're not giving out quarterly guidance on revenues but I do expect sequential improvement from the first quarter of this year.

And Michael on your question on analytics, it's split quite evenly for the first quarter in terms of revenue between U.S.

and international.

Both of them are about $66 million.

The growth rates in the U.S, 15% and internationally 25%.

And just to address your last question, Michael, I'm going to ask Brian Clarkson if he would offer some comments on the U.S.

International.

Sure.

With respect to U.S.

versus international, I think your question was specifically what we're seeing with respect to international, and what we're hoping or seeing with respect to the the pipeline is a modest increase over the first quarter.

We think that even though banking and financial institutions was down in the first quarter, that was mostly due to transactions being pushed off into the second and third quarter.

We expect that to sort of pick up over time.

We also expect to see an improvement or some improvement with respect to CLOs, unlike the U.S.

What we've seen is a fairly robust pipeline, in the U.S., we've seen a fairly modest pipeline but the problem is sort of the close rate in international has been down.

We see a lot of transactions being put together looking for sort of spreads to come in so you can actually issue those.

We expect modest increase with respect to CLOs.

We expect modest increase with respect to financial institutions and bank loans.

We don't see it with respect to leverage loans, so if I were to sort of estimate, you'll see it probably tip a little further with respect to international versus U.S.

but not a lot.

Okay, thank you.

Yes.

We'll go next to John Neff at William Blair.

Hi, thank you.

A few questions for you.

Just from a quick one from a big picture standpoint, do you foresee anymore shoes left to drop in the debt capital markets?

In other words, things like SIVs or auction rates or do you think that we've pretty much exposed all of the problems that we can reasonably expect at this point?

And then kind of a related question.

Does your guidance implicitly, assuming that the bottoms been put in in the first quarter from an issuance standpoint?

Well, with respect to the debt capital markets, as we've all seen, this has been a rolling credit crunch, as it has moved from sector to sector and across geographies.

While I think it would be a stretch for me to say that we won't see any other areas affected, I think the bigger concern on the downside at this point in my opinion would be recycling of credit problems back into areas that have already been under stress, and the consumer sector in the U.S.

for example, if we have a spike in unemployment and how that might affect the U.S.

housing market further, how that might affect consumer debt outside of mortgages.

So we may see some further contagion, but I would pay most attention to a recycling of problems through the areas that have already been hardest hit.

And I apologize, I didn't get the second question.

Yes, just does your guidance essentially, it sounds to me a little bit like there is an assumption there that we've put the bottom in in the first quarter from the standpoint of issuance volumes?

Well, whether we have put in a firm bottom or not is of course going to be subject to some speculation.

I do believe that if we are not at the bottom we are near it , in terms of our business and I say that because the transaction based businesses have been very very hard hit.

This includes both structured finance in the U.S.

and internationally.

It includes speculative grade bonds and bank loans U.S.

and internationally.

So not everything that can go wrong has gone wrong, but a lot of what can go wrong has gone wrong, and so that encourages me to think that we are, if not at the bottom, near

Okay, that's very helpful.

The consulting piece in the analytics business up 44%, can you just remind us what the consulting business entails?

You sort of touched on it in your comments and also what parts of that business are potentially being targeted by regulators here, some of the comments circulating earlier this week.

I'd be happy to answer that.

I'll let Mark Almeida begin and I might jump in with a couple of comments.

The consulting piece in Moody's analytics first is a relatively small piece of the overall business, but it primarily reflects validation and calibration projects that we do for banks that as part of their BASL-2 compliance activities and it also reflects our training services, our credit training programs that we offer to banks and other customers.

Just from the regulatory perspective, two comments.

One is, there is clearly a regulatory interest in seeing that any work that might come under a consulting label is fire walled from the credit rating agency and we have, I think done that very effectively.

Secondly, once it is firewalled from the rating agency, we are receiving strong encouragement both from market participants and from oversight authorities to provide these kinds of services such as credit training to raise awareness about credit risk, credit analytics, and the assessment of instruments that are being offered to the institutional investor community.

Thank you.

And then Linda, a question for you.

Any color on D&A expense outlook?

Is the first quarter kind of a good run rate and along that line, have you given any CapEx expectations for this year?

Are we kind of back to normal after the new headquarters related spike last year?

Yes, I think we have a little bit heavier CapEx in the first quarter than might be expected for the rest of the year because we've been finalizing our cat at this building.

It would probably be good to use about a $40 billion number for the whole year, John, and so a little bit heavier in the first quarter.

Okay, that's great.

And then kind of a last question here and I can get back in the queue.

Historically second quarter EPS has been higher than the first quarter.

You're talking about a sequential increase in revenues from the first quarter baseline.

Can we expect sort of a similar EPS sort of progression over the course of the year?

And then related to that, you're still guiding to a mid 40% operating margin for this year, for the full year despite doing 46.3% in this quarter and expectations of a more stable credit environment and sequentially increasing revenue on a go forward basis.

So if you could just sort of reconcile that a little?

Okay.

Linda and I may share this answer, but let me start.

Our revenue expectations for the remainder of the year as we've talked about do expect improved, we do expect improvement off of first quarter but we don't expect a lot of improvement.

In particular, some of the seasonality that we have seen in this business in prior years, I think is going to be importantly dampened and that seasonality historically had heavily come from our structured finance business, and because of the overall decline in issuance activity and ratings in that business, I think that will take out some of the spikes that we've seen in the sawtooth nature of the business that we had seen in prior years.

Against that expected modest increase in revenue, we are continuing to manage expenses as prudently as we can but we did point out that a bit of our expense management in the first quarter related to first quarter specific items and expense savings that I don't think we'll be able to count on or at least forecast for the rest of the year.

So that will constrain our ability to grow EPS if we do see a low growth revenue environment as we are expecting.

And John, to take the other side of that as Ray and I sometimes do, I think we just say that we're very pleased with how the margin came out for the first quarter.

Obviously we watch it very very closely and since we're not going to have the sawtooth seasonality that we did in previous years, if we do have revenue growth at this point we do have quite a bit of operating leverage because we've removed a lot of costs from the business.

So we would hope if conditions do improve that potentially we may see some improvement but as Ray said, it's far too early to call that at this moment but we continue to manage costs very very tightly and of course, if revenues do pick up, we would be looking to do more on our compensation lines for our people if we do have improved conditions toward the end of the year.

Thank you very much.

We'll go next to Ed Atorino at Benchmark Company.

Hi.

A couple of questions.

On the other line which was $3 million, down rather dramatically from the fourth quarter, I know that line bounces around a lot, I thought it would be much higher.

Is there any way you could provide some insight as to what that line might look like as the year goes along some

Yes, Ed.

We worked very hard to make sure that this line was minimized in the first quarter and we did quite well.

We're pleased about this.

The big components of non-operating expense would be an FX gain of $8.6 million and interest income of about $5 million.

Now, the expense on borrowings we have higher borrowings obviously it's about 13 million.

We've got our FIN 48 expensed about $3 million and some other items in there.

About $11 million of that may not recur in further quarters so what we were looking at expenses of about $3 million on the total all other line for the first quarter, that might look more like $14 million on a more normalized basis, but obviously we're working very hard to minimize that line.

Okay, secondly, on this 5% increase, I'm reading that meaning second, third, fourth quarter this year versus last year costs will be up 5%, I mean down 5%?

Yes.

Okay.

And lastly, Ray, would you want to speculate on--?

Ed, I'm sorry, to interrupt.

Just to be clear, we're anticipating costs to be down 5% full year.

Over the course of the year.

Oh, for the full year?

Not the next, not just the next three quarters?

Correct.

Okay.

Just want to make sure we were clear.

So take last years costs and knock it down 5% and then spread it out?

Yes.

Okay.

Second, I mean I've read Mr.

Cox's statements and there's a big New York Times article you're aware of I got a call this morning from a guy, where might -- can you speculate where this might go other than just beat up the rating agencies?

It seems you're a little bit ahead of the curve so to speak in doing what they want you to do.

Is there any -- smoking gun is a bad word.

Is there any, you know, really sneaky thing in there that might cause a problem?

Well, the process is ongoing.

The SEC has been in and met with us a number of times and they are expected to release their report in early Summer so we know that much .

Beyond that they have not communicated to us privately what their findings or conclusions are going to be in the report.

I think we have done many of the things that they're identifying, as being appropriate and necessary for this business and so I feel good about that and I would just add one comment, based on the hearing yesterday, I did note that the Chairman commented that because they have staff on site at the rating agencies, when they see issues, they act on those on the spot and I can confirm that we have not been asked to respond to any issues that they have identified.

So there may be things that come up in the report that we have to address and I understand that that process is not complete but they have not asked us to take any actions

Thank you.

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

Yes, hi, Linda two quick questions for you and then a follow-up then for Ray.

Linda, I know you gave the 50/50 split on transaction versus surveillance, but can you give that by segment so by structure, by corporate by financial institutions?

Yes, Catriona, I can.

What we've got for corporate finance, we've got transactions are 53% of revenue and relationships are 47.

For financial institutions, it's 44 transaction, 56 relationship.

For the PPIF segment, it's 58 transaction and 44 relationship, and for structured finance now it's 48 transaction and 52 relationship and all that when weighted and so on comes out to exactly 50/50.

Okay, great.

And then just to clarify, of the $10 million in expense reduction that was related to stock based comp on the quarter, can you help us understand why that was specifically related to this quarter and is it something that's ongoing?

Is this something that's going to kind of snap back in Q4?

Well, it's actually related to the restructuring charge that we took and so we had a higher than normal equity forfeiture rate, Catriona, meaning that we had a fewer people here who were receiving equity in the first quarter than we might have had otherwise.

So given that the results of those restructuring actions are rolling through and are largely completed, we would see that the main impact of that would be in the first quarter.

Okay, great.

And then Ray, so I've been following, the report from ASCO and from the G7 and -- I'm sorry, FSF and the main comments that I had questions around were the comments around the due diligence, so it's my understanding that securities law dictates who has the responsibility for carrying out the due diligence and providing accurate information.

What do you make of the comments around requiring or asking the rating agencies to do more due diligence and what might have to change in the cost structure, if something like that were to be passed on to the rating agencies and would there be a change in the fee structure for instance as well?

Well, you're correct, Catriona, there's clearly an interest by regulatory authorities in seeing an improvement in the quality and consistency of information that is being made available and not just to rating agencies but to market participants more broadly, and the regulatory authorities are looking for mechanisms to achieve that objective.

They have talked about, I think because of the positions that the rating agencies occupy in looking at the securities being issued, they are interested in seeing what we can do to help assure that there is this greater consistency and quality in the underlying assets associated with those securities.

To the extent that we are asked to provide some sort of service that checks that the third parties that have provided this information have gone through their own vetting and validation process, I think that is workable and probably something the industry has the capacity to take on.

To the extent that they are looking at us to be due diligence firms in terms of looking at the full range of consumer and commercial assets that are being made available in the capital markets, that would be a large burden, and the latter would have to be accompanied by more fundamental changes in the business, the staffing, the kind of work that we do, and there would be costs associated with that.

My view is that it is more efficient and achieves essentially the same ends, having us oversee and verify that other third parties have done this work but that decision has not been finally reached yet.

And if it were do you think that could also then be something that's passed on as an additional cost to the issuer from the rating agencies?

Again, it depends on how significant what we're being asked to do is.

If we're being asked to do something very resource intensive, time consuming, staff consuming, yes, we would have to pass those costs along.

Great.

Thank you.

We'll go next to Lucas Binder at UBS.

Hi, thank you very much.

A couple of quick questions.

If we can go back to the expense items for the quarter, Linda, can you maybe walk us through, first of all the percent of expenses that were for stock based comp and for expenses comp for all of last year or at least the last three quarters of last year so we understand where the benefit is going to translate through the rest of the year because this was a pretty meaningful impact in the first quarter, wouldn't you get that benefit the rest of the year as well?

Lucas, unfortunately I've only got the quarter-over-quarter comparison here in front of me and I can do those, but I can't do full year.

Most of it will come in the first quarter.

Okay.

I don't have the numbers, Lucas, but most of it will be associated with the first quarter.

And the same thing goes with the incentive compensation as well, those benefits?

Because last year second quarter was so good, I would have thought there would have been some more accruals there.

Yes.

The incentive based compensation will to the extent that we don't have a miraculous recovery in the markets, will also be reflected in the second quarter because we did have such a strong first half last year.

Okay.

And then maybe Ray, if you want to talk a little bit about obviously you guys have been the most proactive with regard to considering alternatives to the ratings and changes of the ratings and working with the regulators.

Have you seen in the investment community how Moody's is being perceived or a change in the way that the investors are kind of using your ratings?

I think that the ratings are still largely being used for their traditional purposes, but there is clearly interest and in some areas demand for us to make additional information content available around complex securities, and as we've talked about before, whether we can provide additional information on rating transition or volatility risk, whether we can make additional information available on the assumptions and sensitivities to changes in assumptions that go into our models, that I think would very much be welcomed by the market as opposed to, for example, a change in our core rating system and how that might be used.

So it's more an enhancement of what we provide and an enhancement in how ratings can be used rather than changing the way they are currently used.

One last question with regard to international.

I know you spoke a bit about where certain parts of the business are holding up.

When you look at how deterioration hit the U.S.

as rapidly as it did, do you see any trends internationally that give you any pause or do you think that you give a pretty good sense of where that backlog currently stands?

Well, Brian may have some additional comments on this, but I guess my initial comment would be that the international business is clearly being affected by problems that started here in the U.S.

It has not been as bad as what we've seen in the U.S.

for a number of reasons, including the fact that despite some housing stress internationally, we don't have exactly the same kind of subprime problem that we do here, but also some of the more sensitive areas or areas that are under stress are not as large, a part of our business internationally.

So for example, the speculative grade bond and loan market are important to us in Europe in particular but they are not nearly the size as in the U.S.

even on a percentage basis.

It's more of an investment grade market and we have more secular growth coming out of the international markets because of formally unrated institutions coming in and seeking ratings for the first time and we see this in a lot of emerging markets, Central, Eastern Europe for example.

So there is more of a flow of new rating mandates.

The only thing that I would add is that what we've seen is we've seen it more in EMEA than we've seen in Asia.

Asia has been much less affected.

Other areas, China, Brazil, Russia, India have been much less affected and the impact that we've seen on transactions is due to spread widening and also a lack of liquidity in the market rather than an issue with respect to subprime which as Ray said we didn't really see.

You don't see 100% LTV loans, you don't see no doc loans in Europe so it's more an effect of the overall sort of financial markets than it is a specific issue related to subprime.

Great.

Thank you very much.

Thank you.

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

Yes, thank you.

Can you give us a percent change of your overall transition, revenues within ratings, percent change for the non-transaction, please?

Yes.

From within the Moody's Investor Service first quarter last year, it was about 73% was transaction, 27% was revenue, and as Linda said that's now gone to a 50/50 split.

We got there in a way that wasn't desirable but it's still moved to a 50/50 split.

And I would expect we are going to continue to see something like that split going forward for awhile.

Okay and then can you speak about your revenues outside of Europe, outside of the U.S., what that percent change was for those ratings related revenues in the quarter, please?

What was the percent change there?

Our international business in Asia and Latin America in the first quarter was up.

It was up modestly.

It was mid single digits for Moody's Investor Service and then when we layer in Moody's Analytics it was up just about 10%.

Okay then can we talk a little bit about your expenses, they were down 17% in the first quarter, your guidance excluding the restructuring charge was down, just simple math implies last three quarters year-over-year would be down about 1%.

Yes, about flat, right.

So you walk through that, I mean, roughly $231 million in the first quarter, the average last three quarters is roughly $265 million.

Can you walk us through roughly that $34 million delta each quarter versus what happened in the first quarter?

Craig it's Linda.

We aren't going to go through it quarter by quarter.

I think it would be fair to say that in Moody's Analytics we got a business growing 20%, we've got some good growth internationally and we're doing some acquisitions.

We would see that what we're trying to do is manage taking expenses down with reinvesting them in the growing part of the business and we think so far we've got that pretty much right, but our intention would be to try to manage that balance prudently and make sure we're able to invest in the growing areas of business and maybe Ray may have more to say.

No, I think that's fair.

But other than the items you talked about in the first quarter is there anything else that just bridge this gap, is that the $34 million reported in the first quarter?

Or your negative 5% just trying to be overly conservative perhaps.

Well, we're conservative folks here, Craig.

One of the things I would point out to you as a for instance, our TD line was down from $9 million in the first quarter last year to $4.5 million this year.

Some of that is because of travel efficiencies and some of that is because our folks have just taken fewer trips.

As the market picks back up it's pretty important that they get back out on there on the road and do what they need to do so we would expect savings on that line while it may be down versus last year, we may actually see some growth and that would be healthy as the market recovers and people need to get back out on the road.

So we're trying to be prudent about what we would see in terms of expense management here.

We are relentlessly focused on it though and we're being very careful to make sure that we're looking at every single line that we have and that we're dealing appropriately with our costs.

One of the things we're looking to do, for example, is we will be coming out of our New Jersey office space, we're moving 250 million -- I'm sorry, 250 people, no 250 million, 250 people back here to New York to our 7 World Trade Center location.

That would help us on an expense run rate for each of the next four years, reduce expenses by about $6 million, have tax benefits and then we have additional benefits coming from the city and state of New York for bringing those jobs back here.

So we're looking at every single line but we don't want to shut off prudent investment to the growing parts of the business.

So is part of it then you're expecting latter part of the year just bringing in more people then?

This whole gap of 30 million, 35 million just perplexing to me.

Yes, I think we probably -- from where we are now I think we probably will have some increase in staff.

Again, we do want to both grow the parts of the business that are growing.

We want to make sure we continue our international expansion in a prudent way.

We may have some additional compliance costs.

That would not be surprising given the close regulatory scrutiny that the industry has been under.

So yes, I think it's fair to say that while we are managing costs closely, we are going to continue to feed the business where either it's necessary or we think is setting us up for growth in '09 and 2010.

Great.

Thank you.

Next we'll go to [William Slocum] at Value Act Capital.

Ray and Linda, first, I wanted to congratulate you on strong cost management and analytics growth through obviously a very difficult issuance environment, but had a couple questions sort of looking out longer term at this business, and Ray, you talked about last Fall for 10 to 12% of the revenue going away for at least the next couple of years.

How should investors think about certainly there's a secular decline or secular component and there's a cyclical component.

How do you think about that 10 to 12% going forward to 2009, 2010 as well as how you think about that 10, 15% long term growth rate?

Thanks, Will.

The 10 to 12% revenue extinction that I've talked about before I think is secular.

That is not as a result of cyclical conditions.

Those are sectors of fixed income activity coming out of structured finance that I just don't believe are going to return.

Now, some alternative sources of funding may very well take their place, whether it's through direct corporate issuance or financial institution issuance to support capital raising activities, I think it's fair to say that once we get out of this turmoil, there will be some alternatives emerging but I do think that 200 million to $250 million that we talked about before is going on a essentially a permanent basis.

The other areas of the business including some of the areas of structured finance that are being very hard hit right now, I think are subject to cyclical but not secular conditions.

I would expect to see commercial real estate finance and collateralized loan obligation activity pick up again.

Certainly would expect to see speculative grade bond and loan activity pick up again.

Those areas have always been very cyclical.

So we're currently dealing with declines in areas that are attributable to both secular and cyclical downturns and we're going to get some of that back, but not the 200 million to 250 million.

I just don't think we're going to get that back.

And that was off of a 2006 number or is that off of a 2007 number?

Coincidentally it's approximately the same because structured finance ended up being about flat last year on revenue after the very strong first half and the steep decline in the second half, so it would come off of each year.

And then the second question is regarding the incentive comp and I believe the budget was set off of the original guidance, which is more like $2.21 per share.

How did you on an earnings basis perform relative to that initial budget and initial guidance?

Will, it's Linda.

We then as you saw when we reissued our guidance on I believe it was February 11, we reset our comp view of course--.

March 11.

Sorry, excuse me, March 11, we like to minimize the number of times we reissue guidance, we sort of recalibrated as of March 11, and we took down our compensation view as a result of that.

So that's where we are.

We did not publicly put out a first quarter forecast so I don't want to do it retroactively now.

Okay.

So the incentive comp for the year is a function of that original guidance or is it a function of the $1.90 to $2.00 per share?

It's a function of the $1.90 to $2.00 per share.

Okay.

All right, thank you.

Sure, thanks, Will.

We'll move next to Karl Choi at Merrill Lynch.

Linda, just wonder if you can give us the split between transaction and relationship revenues for the second quarter of last year?

No.

Well, it's -- we have a lot of information in front of us but we don't have that.

Okay.

So.

I would expect though it would look quite similar to what we saw in the first quarter last year, that 73/27 split, without having the numbers in front of me just thinking back to market conditions, the first and second quarters last year were both very strong, off of the transaction side of the business, so roughly speaking I would expect to see the same kinds of numbers.

Yes, and Karl for the first quarter that was 70, 80%, 80% being the high nd structured finance for transactions and the relationship being the balance, but as we said, that's come nicely into 50/50 balance for the whole Company for the first quarter this year.

I'll follow-up with Lisa then.

Could you give us the split in terms of corporate finance revenues into the buckets then?

Yes.

That we do have.

If you're looking for first quarter of 2008, Karl, is that okay?

Yes.

Are you looking for first quarter of '7 or '8?

'08, sorry.

Good because we've got that.

The high yield percentage is 6% which is versus 20% for the first quarter of last year.

Investment grade is 24% down, I'm sorry up from 14% from last year.

Bank Credit Facilities are 13% versus 28% from last year and other which is medium term notes, shelves, commercial paper, and other things is 57% versus 38% from last year.

And the corporate finance number is 24% of total MIS and last year it was 22%.

That get you there, Karl?

Yes, great.

We'll take our final question from Edward Atorino at Benchmark Company.

Oh, guidance issuance after the fact, it's a great concept.

Getting back to this loss of business forever, one has to believe Wall Street has got some pretty bright guys left to trading desks.

Any thoughts of whether you said you'd lose X, or whether there could be new instruments coming around that would basically replace all of the business that's been lost?

Or is that just too speculative to think about?

Ed, this is Brian Clarkson.

How are you?

Hi, fine.

Good.

We talk to the Street all the time.

They're certainly working on a number of things.

I'd say that none of them are far enough along where we would feel comfortable to say this is going to be a revenue stream on a going forward basis.

Most of them are definitely in the preliminary category and there's certainly vulture funds out there looking at things, they're looking at different types of structures.

What I will say is in the near term and it's hard to define is what we're seeing is people going back to simplicity.

You're seeing simpler structures, you're seeing deleveraging, you're seeing investors looking for things that the same types of instructors you saw four or five years ago where there's not a lot of complexity, that's easier to understand, easier to take to credit committees.

So while we are seeing some innovation, it's very preliminary right now and we're mostly seeing sort of a flight to simplicity.

I would just add also that we certainly recognize that the ability to introduce new instruments or instruments that are currently not very active back into the market is heavily reliant on a restoration of confidence and credit ratings and what we do, and we are very focused on that to have a justifiable sense of confidence in the opinions we are putting out through our credit ratings.

But that, that process is going to take awhile.

Folks have lost a lot of money and they're going to take awhile to come back into certain areas of the capital markets.

One other thought.

If you begin to have this split ratings system whatever it's going to be with at risks or letters, would that affect the price structure for those ratings products or is it too early to make that kind of a comment?

In terms of the rating fees, I think at this point, we are looking at what else we can associate with the ratings and see what the market take up would be with that, how much does the market value it, how useful does it become as part of the apparatus and infrastructure of the markets.

Depending on that value and whether it's high or low we'll see whether there's a pricing opportunity.

Thanks a lot.

Thank you.

That does conclude the question and answer session.

I'll turn the conference back over to management.

All right.

I just want to thank everyone for joining us today, and remind you that we do have our Investor Day in June.

Looking forward to seeing or hearing from many of you then.

Thank you very much.

That does conclude today's conference.

Again, thank you for your participation.