穆迪 (MCO) 2008 Q4 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year end 2008 earnings conference call.

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

(Operator Instructions).

I will now turn the conference over to Liz Zale, Vice President, Investor Relations.

Please go ahead.

Please go ahead.

Thank you, Audra.

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

I'm Liz Zale, Vice President of Investor Relations.

Moody's released its results for the fourth quarter and full year of 2008 this morning.

The earnings release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.

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

Also making prepared remarks on the call this morning is Linda Hubert, 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 discussion and analysis section and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2007; the Company's quarterly report on Form 10-K for the quarter ended September 30, 2008, 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 forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I should point out that members of the media may 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, Liz, and thank you all for joining today's call.

I'll begin our remarks this morning with a brief summary of Moody's fourth quarter and full year 2008 results.

Linda will then take you through additional revenue detail and operating highlights and provide commentary on other related matters.

I'll then speak to recent developments in the regulatory area and will provide Moody's outlook for 2009.

After our prepared remarks, we will be happy to respond to your questions.

The weak credit market conditions that prevailed throughout most of 2008 were exacerbated in the fourth quarter by the broader downturn in global economic activity.

In fact, credit market conditions in the fourth quarter were the weakest we have witnessed, resulting in revenue for the quarter of $404 million, down 20% from a year ago.

While these results clearly reflect the challenging market conditions we are facing, Moody's performance in this difficult environment nonetheless reflected ongoing cost management efforts, resilience from the areas of Moody's Investor Service that generate recurring revenue, and growth for Moody's Analytics.

Excluding unfavorable impact of foreign currency translation, revenue declined 18%.

Operating income for the fourth quarter was $125 million, a decline of 41% year over year.

The decline in revenue was made worse by increased expenses relating to acquisitions, as well as comparatively lower incentive compensation costs in the fourth quarter of 2007 due to favorable adjustments in that period.

Diluted EPS for the quarter were $0.37 and included $0.04 of dilution related to our acquisition of Fermat, compared to $0.49 a year ago.

Excluding restructuring charges in 2007, diluted EPS for the quarter declined 38% year over year.

Regarding full year results, revenue for 2008 was approximately $1.75 billion, a decrease of 22% from 2007.

Operating income of $748 million was down 34% from a year ago.

Excluding the favorable foreign exchange impact, revenue and operating income declined 23% and 36%, respectively.

Reported earnings per share of $1.87 for 2008 included a $0.05 benefit related to the resolution of certain legacy tax matters, minor adjustments to the 2007 restructuring, and dilution of $0.04 relating to the Fermat acquisition.

Excluding legacy tax and restructuring items, 2008 diluted earnings per share were $1.82, and decreased 27% from 2007.

Recent credit market activity has improved in selective areas over the lows of the fourth quarter, but is mostly limited to high-grade corporate and financial institution issuance.

Growth for other areas is likely to be constrained as long as spreads remain wide and risk of aversion persists among fixed income investors.

We believe the timing for recovery remains uncertain, and we may see interruptions in bond issuance patterns before sustained recovery occurs.

At this point, I'll turn the call over to Linda to provide further details on our results and other updates.

Thanks, Ray.

I'll begin with revenue for the fourth quarter.

Global revenue for Moody's Corporation was down 20%, and U.S.

revenue declined 29% year over year to $196 million.

Revenue from outside the U.S.

was $208 million, declining 9% versus a year ago, which represented 52% of Moody's total revenue for the quarter.

Recurring revenue of $283 million was up 5% from the fourth quarter of 2007, which represented 70% of total revenue for the quarter.

For the full year 2008, recurring revenue grew 10% to 1.1 billion, which represented 64% of total revenue.

Looking at each of our businesses, Moody's Investor Service revenue for the quarter was $254 million, a decline of 32% year over year.

Excluding the unfavorable impact of foreign currency translation, revenue declined 29%.

Within the U.S., ratings revenue was down 40% compared to a 21% decrease in non-U.S.

ratings revenue.

Revenue from outside the U.S.

represented 50% of total ratings revenue.

Global Structured Finance revenue for the fourth quarter was $92 million, down 42% year over year.

U.S.

Structured Finance revenue decreased 57%, driven by issuance declines in all asset classes.

Non-U.S.

Structured Finance revenue was down 26% from the prior year period.

International trends were consistent with the third quarter of this year, with declines in the European credit derivatives and commercial real estate finance lines of business, partially offset by growth in asset-backed and residential mortgage backed securities.

The growth was driven by bank's securitizing balance sheet assets through the European Central Bank, the Bank of England and others.

Global Corporate Finance revenue, at $57 million for the fourth quarter, declined 37% from a year ago.

U.S.

Corporate Finance revenue decreased 45% year over year, with the majority of the transaction based revenue coming from investment grade ratings and with very limited high yield and bank loan activity.

Outside the U.S., Corporate Finance revenue was down 23% due primarily to an absence of the speculative grade issuance and reduced levels of investment grade issuance.

Global Financial Institutions revenue of $57 million decreased 15% from the fourth quarter of 2007.

U.S.

Financial Institutions revenue was down 16%, due to revenue declines in most business lines, particularly the banking and insurance businesses.

Outside the U.S., Financial Institutions revenue declined 14%, primarily driven by declines in European bank issuance.

Global revenue for public, project and infrastructure finance declined 15% to $49 million.

The decline of 19% in U.S.

revenue from the fourth quarter of 2007 was largely driven by lower levels of activity in the U.S.

public finance business.

Non-U.S.

revenue decreased 7%, as strong increases in project and infrastructure finance activity in Europe and the Middle East were more than offset by difficult market conditions for other business lines and regions.

Turning now to Moody's Analytics, global revenue of $150 million increased 13% from the fourth quarter of 2007.

U.S.

revenue was up 6% to $70 million, while non-U.S.

revenues grew 21% and represented 54% of the total revenue.

Within analytics, global revenue from subscription rose 9% to $122, while the software and consulting businesses saw strong double-digit revenue growth driven by the October acquisition of Fermat International and customer demand for specialized consulting projects, respectively.

Moody's fourth quarter operating expenses were $278 million, 5% lower than the prior year period.

Excluding the 2007 restructuring charge and related adjustments in 2008, operating expenses were 14% higher than the prior year period.

This was largely due to incremental expenses from businesses acquired in 2008 and a fourth quarter impairment charge of $11 million related to software and database intangibles.

The increase was also due to lower incentive compensation costs in the fourth quarter of 2007, when compensation was adjusted to reflect unexpectedly weak performance in the second half of 2007.

Operating margin for the fourth quarter of 2008 was 31% compared to 42% for the fourth quarter of 2007.

Our effective tax rate for the quarter was 28.6% compared with 33.8% for the prior year period.

The decrease was primarily driven by a larger portion of consolidated taxable income generated outside the U.S., which is generally taxed at a lower rate than U.S.

statutory rate, as well as the realization of benefits available for U.S.

based manufacturing and research activities.

The effective tax rate for the year 2008 was 37%.

For 2009, we expect an effective tax rate in the range of 38 to 39%.

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, reinvesting in ratings quality initiatives, making selective acquisitions in related businesses, repurchasing our own stock and paying a modest dividend.

As we mentioned on our previous call, we intends to uphold our commitment to returning capital to shareholders in a manner that is consistent with maintaining sufficient liquidity in this uncertain environment.

In the near term, that means maintaining our current dividend but curtailing share repurchase activities.

During fourth quarter of 2008, Moody's repurchased 4.8 million shares at a total cost of $120 million, and issued 136,000 shares under employee stock based compensation plans.

For the quarter, we repurchased shares at an average price of $25.05.

Share repurchases during the quarter were funded by a combination of free cash flow and borrowings.

Outstanding shares as of December 31, 2008, totaled 235 million, representing a 6% reduction from a year ago.

For full year 2008, Moody's repurchased 18.2 million shares for a total cost of $593 million at an average price of $32.54, and issued about 2.2 million shares under employee stock based compensation plans.

For this period, share repurchases were funded using a combination of free cash flow and borrowings.

As of December 31, 2008, Moody's had 1.4 billion of share repurchase authority remaining under its current program.

Moody's had 1.5 billion of outstanding debt at year end with approximately 300 million of additional available capacity.

Capital expenditures for 2008 were 84 million, including the remaining build out of our corporate headquarters at 7 World Trade Center and planned improvements to other facilities.

For 2009, we expect CapEx to be in the range of $90 million to $120 million, including approximately 50 million related to the build out of our Canary Wharf in London, which began earlier this year.

We will incur rent expense of roughly $10 million in 2009 during the build out, but will realize future cost savings with this consolidation of our London operations.

Before I turn the call over to Ray, I'd like to provide an update on our most recent acquisitions.

Our October 2008 acquisition of Fermat International extends our offering in bank risk management software, positioning Moody's to deliver a comprehensive suite of software solutions for financial institutions worldwide.

Integration is proceeding according to plan, and we expect this acquisition to be a few cents dilutive for 2009 overall, but anticipate it will contribute positively to earnings in the fourth quarter of 2009.

Our acquisition of Enb Consulting in early December further expands our credit and capital markets training service business, providing training programs for financial professionals with emphasis on markets outside the U.S.

And with that, I will turn the call back to Ray.

Thanks, Linda.

I will start with a brief update on regulatory developments.

We continue to have active communications with regulatory authorities on both a global and regional level.

So starting with the U.S., on February 2, the Securities and Exchange Commission published new rules applicable to nationally recognized statistical ratings organizations, or NRSROs, that have been approved in December.

The main point of focus are managing conflicts of interest and enhancing transparencies of credit processes and rating methodologies.

The Commission also reproposed additional rules initially put forth in December and provided for a 45-day comment period.

The rule proposals pertained to the public availability of historical ratings information to facilitate performance comparison across NRSROs, and the distribution of underlying transaction information to all NRSROs by structured finance originators, which aims to eliminate ratings shopping by issuers.

It's clear that there will be further discussion and debate relating to the use of ratings and regulation and the oversight of credit rating agencies.

We also continue to anticipate that there will be additional hearings throughout the year as U.S.

policy makers and regulators seek to restore confidence in the stability and resiliency of the U.S.

financial system.

Turning to Europe, in November the European Commission published a revised proposal for the oversight of rating agencies in the European Union, subject to review, amendments and approval by the European Parliament and the Counsel of the European Union.

That review process is now underway as policy makers and regulators consider potential changes to the broader regulatory regime for the financial system within the EU.

The European Commission's proposal on the regulation of credit rating agencies has four broad objectives: To avoid or adequately manage conflicts of interest; to improve ratings quality; to increase transparency; and to ensure an efficient registration and surveillance framework.

While timing is uncertain, we believe that it is likely a proposal could be voted on within the current legislation session of Parliament which ends in April.

At a global level, we continue our efforts to update the market on the various steps we have taken over the past eighteen months, including revising the Moody's Investor Service Code of Professional Conduct to reflect recent changes to the international organization of Securities Commissions or IOSCO code of conduct for credit rating agencies.

Moody's supports the ongoing efforts undertaken by global policy makers and regulator to say restore confidence in the credit markets.

We will continues to communicate our messages and address issues and concerns that various authorities we may have in our shared goal of greater market stability and the return of investor confidence.

I would like to conclude this morning prepared comments by discussing our full year guidance.

Moody's outlook for 2009 is based on assumptions about many macroeconomic and capital market factors, corporate and consumer borrowing, securitization, and the nature and impact of government-sponsored economic stabilization and stimulus initiatives.

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

We expect full year 2009 revenue for Moody's Corporation to decline in the low single-digit percent range, assuming foreign currency translation at current exchange rates.

Given current business conditions, revenue is likely to show a modest cyclical decline from the fourth quarter through the early part of 2009.

We are maintaining rigorous focus on expense management and planning conservatively for reduced issuance.

Our lower revenue expectations anticipate sluggish fixed income issuance, as well as financial industry challenges that will limit the near-term growth potential of Moody's Analytics.

Recurring revenue from both of our business segments will continue to provide a stable base, and is expected to be about flat to 2008.

Full year operating expenses are expected to increase in the mid single-digit per share range, including costs associated with the Fermat acquisition and rent for Canary Wharf.

Excluding acquisitions, full year 2009 operating expenses are expected to be about flat, and we expect expenses to be relatively constant throughout the year.

Our operating margin for 2009 is expected to be in the mid to high 30s percent range.

The Company projects diluted earnings per share for the full year in 2009 in the range of $1.40 to $1.50, which includes a few cents of dilution for Fermat, as Linda mentioned.

For the Global Moody's Investor Service business, we expect revenue for the full year 2009 to decline in the high single-digit percent range, both inside and outs the U.S.

We expect structured finance revenue to decline into the high 20s to low -- in the high teens to low 20s percent range, reflecting continuing declines across all asset classes.

Corporate finance revenue is expected to decrease in the mid to high single-digit percent range, with weakness most pronounced in issuance of speculative grade bonds and bank loans.

Revenue from financial institutions and public, project and infrastructure finance is expected to be about flat with the full year 2008.

For Moody's Analytics, we expect full year 2009 revenue growth in the mid single-digit percent range, including revenues from Fermat.

In the current business environment, customer attrition is running above historical levels as a result of consolidation among large financial institutions and the contraction in activity in the credit markets.

However, interest in risk measurement and risk management tools is elevated and is simulating demand for our capabilities in other customer settle.

As a result, we expect full year revenue growth for Moody's Analytics, but for it to be well below the historical trend.

U.S.

revenue is expected to be about flat for the full year 2008, while we expect growth outside the U.S.

to be in the low double-digit percent range.

Project revenue declined -- decline in the low single-digit percent range for the subscription business will be offset -- I'm sorry, projected revenue decline in the low single-digit percent range for the subscription business will be offset by strong global revenue growth in both the software and consulting businesses.

That concludes our prepared remarks.

And joining us for the question and answer session are Michel Madelain, the Chief Operating Officer of Moody's Investor Service, and Mark Almeida, President of Moody's Analytics.

We are pleased to take any questions you may have.

Thank you.

(Operator Instructions).

We'll go first to Peter Appert at Piper Jaffray.

Ray, I was hoping you could maybe dig a little deeper into the regulatory issues and give us your perspective on how you read the changes in Washington potentially impacting how the regulatory story might unfold, and in particular the change at the SEC?

Is that something particularly noteworthy from your view?

Well, the -- clearly, we are facing heightened regulatory scrutiny, both in the United States and in the European Union.

In the U.S., we obviously have had changeover in the leadership at the Securities and Exchange Commission.

And I think we are -- I'm at least expecting really two paths to be followed.

We will have a renewed focus on our industry and our business at the SEC.

And I think there will also be consideration of the roll and function of rating agencies in connection with the overall review of the financial system and potential financial system reform.

So I think that really for a lot of 2009, we are going to be in a period of exploration, additional questions coming from the regulatory authorities, additional scrutiny.

I think the clear focus is going to be on conflicts of interest and our business model, and are we managing those conflicts of interest in a way that is both proper and prudent, but also transparent enough that third-parties -- whether they be the oversight authorities or whether they be the market itself -- can reach a comfortable judgment that we are performing our business properly.

So that's really where I see the focus in 2009, and it's going to go on for awhile.

I guess the issue is the SEC to date, it appears from the outside, has been -- the recommendations they've made specifically have been relatively benign would be my interpretation, as it relates to the economics of your business model.

I'm wondering, given the criticism the agency has been under, does that translate into them taking a more aggressive stance versus what they've been doing in terms of how they approach you guys?

Well, I do think they are going to take an aggressive position in looking at the business.

I think they have done so with their inspection process last year, frankly; but I certainly don't expect any let up on that.

I also, though, think that they are going to -- in looking at us -- going to consider the arguments and points of view that explain what is most constructive for this industry and for operating the business, and I think they will look at that in a rational manner and reach rational conclusions.

Okay.

And just two other things.

One, can you give us any color on specifically what you are seeing in January in terms of momentum in different categories?

And two, whether you are seeing any push back from clients from a pricing standpoint?

Well, I'll -- just to tackle the second point first, we have been, I think, appropriately conservative in changing prices for 2009.

It is a difficult environment for many, many institutions that are operating in the capital markets.

And I think that -- I think that it would be inappropriate for us to try to be too aggressive with pricing for the year.

So we are being cautious with that and we are aware of the market conditions that we are operating under.

Where we provide value that we feel that we may not be being paid appropriately for, we do seek to increase prices just to match the value that is being provided.

So there are some price increases.

They are not aggressive.

With respect to issuance activity in January, I think probably many listeners on the call have seen some of the articles that talk about high volumes of issuance coming out of the high-grade market -- the higher end of the investment grade market -- and we certainly are seeing that as well.

I would make two comments around that though.

First of all, last January, we also saw good issuance in the high-grade markets.

So this issuance activity is not coming against a weak first month of 2008.

It's actually coming against a fairly strong first month of 2008.

And secondly, we are not seeing a lot of activity at the speculative grade end of the ratings scale or in bank loan activities.

So it is an active market within a narrow slice of what we would normally be seeing in fixed income issuance, limited really to the high-grade industrials and utilities.

Thanks, Ray.

Next we'll go to Michael Meltz at JP Morgan.

Thanks.

On Peters question, Ray, that you just answered there, in your commentary on guidance you said -- I think you actually said Q1 revenues might be down versus Q4.

Can you talk a little bit more about that?

I don't really understand why they might.

What cyclical issue is there, given the Q4 transaction revenues were probably the trough of the cycle?

And then secondly, Linda, when you ran through your numbers, I think you said you took an $11 million impairment charge.

Is that -- that's -- can you just clarify what that was, where it's showing up in your numbers?

And then I have one follow-up.

Sure.

I think the story for our expectations early this year versus the fourth quarter of last year really are built around two ideas.

First of all, we are not seeing any kind of broad-based market recovery versus the fourth quarter.

As I said to Peter Appert, we do see strength in a slice of the market represented by the high-grade industrial sector.

But we are not seeing the recovery at the lower end of the rating spectrum.

So that leads to the question of, well, what is cyclically down versus the fourth quarter of last year, and the answer there is really the structured finance market, particularly on the international side.

That is a typical cyclical phenomenon.

We expect to see it again; but as a result, we do not expect to see structured finance internationally produce the same kind of revenue early this year that it did in the fourth quarter last year.

And Michael, it's Linda.

on your question on the $11 million charge that I mentioned, that falls within Moody's Analytics.

It's in the software and data basis area of the business; and you can also see that it runs through the depreciation and amortization line.

And again, that's an $11 million charge for the fourth quarter.

So what's the D&A run rate in '09, please?

The D&A run rate in '09 -- it's kind of a squishy number, Michael, obviously because a lot of things move in and out.

But we are kind of thinking sort of 60 to $70 million for '09.

On the OpEX side, in terms of staffing, how are you viewing your current staffing levels in terms of, if we do see some issuance pick up, what's the estimate of flow through to profits?

Do you think it's -- incentives will go up, but that's about it?

Or are there other costs we should consider?

You got about three questions in there.

Let's -- we can talk about the number of people.

We will talk about what we will do if we see an uptick.

And then maybe Ray can talk a little bit about the flow through.

We finished the end of the year 2008, without acquisitions, about flat in headcount to 2007.

It's about 3,600 people.

However, with the acquisitions that we bought we added about 350 people and finished the year at 3,950 employees approximately.

So given those additions, I think we feel we are in pretty good shape for any kind of pick up that we might have in the near term.

On the expense -- on the incentive comp line, Michael, we would expect that next year we would keep it about where it is for this year.

We full year realize that this forecast is a modest one, and we would not see a lot heavier loading of incentive compensation unless we see an increase in performance.

And if we do, of course incentive compensation will move up; but we would suggest that people look at the incentive comp line and stock comp line as being about the same in 2009 as in 2008.

And I'll let Ray talk about the revenue piece of that.

Yes, the reaction that we would have to make to improvement in market activity really depends on where that improvement is coming from.

I expect that improved market activity will be principally on the fundamental side of the business company's municipalities and that improvement will come as the markets eventually work their way down the risk spectrum and investors become somewhat less risk averse.

That would not lead to an immediate need to add any significant numbers of personnel, because we already have the people on board for most of the credits that would be going into the market, monitoring existing debt that is outstanding.

So we have some room with a recovery in the market of that sort to have people that are already with the company look at new debt issuance activity.

If there were -- unexpectedly, in my opinion -- a significant recovery in certain areas of the structured finance market, I think that we would have to look more aggressively at moving people back into structured finance or bringing people in from the outside in structured finance in order to accommodate increased transaction activity.

So it is a little bit dependent on where a recovery would come from and how steep that recovery is, and we are not expecting a V-shaped recovery this year.

Okay.

Last question for me.

Linda, Fermat -- what was the revenue contribution in the fourth quarter, and what is in guidance?

The guidance for Fermat is subsumed in the software section of Moody's Analytics for 2009, and we are not breaking out a specific revenue contribution for Fermat for fourth quarter of 2008.

Okay.

Are you breaking it out for '09?

It's going to be within the software segment of Moody's Analytics, as I said.

Maybe somewhat more helpfully, Michael, it is the majority of the software segment of Moody's Analytics.

Okay.

Great.

Thank you.

Sure.

We'll go next to Craig Huber at Barclays Capital.

Yes, good morning.

Thank you.

First question, like you usually do, can you break out for us the transaction versus nontransaction contribution across your four segments within the ratings business -- those percentages, please?

Sure, Craig, do you want the fourth quarter, do you want the full year?

What would you like?

Why don't you do both for everybody's sake, please.

Fourth quarter and the year, yes.

Okay, well, we will start with the fourth quarter then, and I'll start with structured finance; and as I read these numbers, the first number will be transaction and the second will be relationship.

So for the fourth quarter, Structured Finance transaction revenues were 45% of that revenue total and relationship were 55.

Corporate Finance, transaction 39, relationship, 61.

Financial Institutions were 23 and 77.

And public, project and infrastructure were 52 and 48.

So the arithmetic sum there for the agency, it moved to 40% transaction and 60% relationship.

Now for Moody's Analytics, the numbers skew a little bit differently.

The transaction percentage is 12% and the relationship percentage is 88.

So again, the weighted-average for the Company as a whole for the fourth quarter of 2008 -- 30% transaction, 70% relationship, which is the most skewed toward relationship we've seen in awhile.

Now for the full year 2008 running through the same numbers, Structured Finance, 51%; transaction, 49% relationship for the year.

Corporate was 53 and 47.

Financial Institutions, 33 and 67.

And PPIS, 59 and 41.

So for the rating agency for the whole for the year, we were split about evenly -- transactions were 49%, relationship, 51%.

Again, Moody's Analytics is much more toward relationship.

It's transaction revenues were 9%, relationship was 91%.

And so for the full year, we were at 36% transactions and 64% relationship.

You see as we are moving later in the year we are skewing more toward relationship revenue.

I think that's everything you asked.

Yes, I appreciate that.

If I could just, another question.

This Fermat acquisition -- I know everybody is frustrated with this, because none of us seem to know what the revenues are, the costs -- all we seem to know is its $0.04 dilutive in the quarter.

Can you give any sense of -- perhaps even that D&A you mentioned, like 60 to 70 million next year, how much of that do you think is going to come from Fermat?

I don't think we were planning to go there to break out Fermat.

Mainly, Craig -- and I'm sorry if we are frustrating you and others -- we report Moody's Analytics as the software business, the consulting business and the subscription business.

So Fermat really wouldn't be identified uniquely as part of that.

Maybe we can ask Mark Almeida to comment just a little bit on the nature of the business.

Yes, the Fermat business as Linda said, is being rolled into the overall software segment within Moody's Analytics.

And that is -- that's going to become a much more significant part of the overall business of Moody's Analytics.

It will still be much smaller than the subscription segment, which represents at this stage about 80% of total revenue.

But the idea here is to put together the existing software assets and capabilities that we have within Moody's, put them together with the capabilities that Fermat brings us.

And as a result of that, we are going to be able to offer a much wider range of software solutions to banks around the world.

So much like the other acquisitions that we've done within the analytics business over the last couple of years, we are rolling Fermat into the software segment and we won't be -- won't continue to report out results for that individual business.

What I'm confused about, Linda, is you mentioned, I think, software was mostly all this Fermat acquisition.

But a year ago it was 13.7 million according to your press release here.

Yes.

We picked up some revenue in the fourth quarter for Fermat.

We are going through revenue recognition process and accounting conversion process that's pretty complicated.

So again, we are not trying to be particularly tricky here Craig.

I think the number that we had given was that we expect revenue for Fermat to be $70 million in 2010 as we get this thing on a steady state revenue basis.

So I think we would really rather leave it at that if that's okay.

If I could just ask, how confident are you that it was better to by Fermat as opposed to perhaps spend that rough $200 million to buy back -- it would have been roughly 4% of your shares outstanding at this level, 22, $22 per share.

How confident are you that this is going to work?

This acquisition?

This is Ray.

I think we feel very good about it.

The early indications are that the performance of the firm is going to be as expected.

The integration is going well.

And in looking at ways to grow the Moody's Analytics business, having a preeminent set of products and services that we can offer in the way of software analytics around risk measurement and risk management coming out of this financial crisis seems to us to be exactly where we want to be positioned.

So I would do this again in a second if we had to do it over.

Craig, to follow on to that, we feel we bought this business at an attractive price given its run rate.

Its margin will be very similar to the rest of Analytics.

We are not in the business of buying business that are growing to bring down our margin over the long run, and we do feel quite comfortable with how it's performing so far.

Great.

Thank you for the answers.

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

Hi, thanks.

Just following up on some of the Fermat questions.

It's a software model.

Is that typically an up-front licensed based model?

Yes, it's almost -- it is exclusively an up-front license sale.

There is a small amount of annual maintenance associated with the licenses out into the future, but it's primarily a large up-front fee in the first year of the license.

Okay.

And, Linda, I don't know if you have these numbers in front of you, but I assume they will be in the K., but the operating profitability -- operating margins by MIS versus Analytics in 2008?

Do you have that handy?

Yes.

Would you like the quarter, would you like the year?

What would work?

I guess the year would be good.

Okay.

Moody's, I got it in front of me, Linda.

Moody's Investor Service for the year was 47%; GAAP operating margin and the Moody's Analytics was 27%.

Thanks.

And maybe, Ray, could you maybe talk about your view about some of the possible proposals that are floating around vis-a-vis the so-called bad bank or the [TELF], what those might mean in your view on the efficacy of that kind of a proposal?

Well, I guess in the case of both the bad bank proposal and the [TELF], I would view those as being helpful to our business, really to the extent that they are helpful in stabilizing markets and restoring investor confidence.

I don't see a significant direct revenue opportunity that's going to come from either one of those.

But to the extent that we have banks lending again, and to the extent that we have investors with a greater degree of confidence and the demand from the investors side is matched by the demand from the -- those seeking capital in the markets right now, that obviously is going to be a benefit for, not only our business, but everybody else in the market.

So the direct consequences I would not say are material.

The indirect could be very material.

And regarding the frequent issuer pricing caps, how frequently were those -- I mean, I realize this is a blanket statement,7 but how frequently were those reached in 2008?

And is there any -- if there's unused capacity in 2008, does that roll forward into 2009 or does it stop at the year?

It does not roll forward into 2009.

And I don't know off the top of my head the percentage of institutions that hit caps under frequent issuer pricing program.

It is, generally speaking, the larger investment grade industrials and financial institutions that have those.

To the extent that they were more active in the market last year than other institutions, that would indicate a reasonably high percentage were hitting caps.

But I don't have a specific number for you.

And lastly here -- well, two quick last ones here for Linda.

Could you -- just a little bit more color on the $11 million impairment that ran through D&A in the fourth quarter?

And also the CapEx guidance, 90 to 120 million in '09, was that a reduction from -- I thought it was a -- that you were expecting more like 150, 160 million?

Thank you.

Yes, John, we are going to not say anything further about the $11 million -- not a huge number, and it kind of it is what it is.

Yes, we had said as high as 150 million for CapEx for '09; but as we've gotten more definitive expenses regarding Canary Wharf, which is a big part of this, we are comfortable with the tighter range we gave earlier.

We think Canary Wharf will primarily take the first three quarters of this year.

As we said, during that time, we will have the $10 million double rent expenditure.

That will go through the whole year.

As we said, we expect that costs will be lower in Canary Wharf -- the rental costs -- than they are (inaudible) where we are now, so that's the reason for the CapEx rate.

We would expect that the CapEx rate -- after we get done with Canary Wharf -- would come down to something more typically in the (inaudible), something more like the 60 to $70 million.

But we are having additional capitalized costs on our systems projects, and so you see a little bit of an increase from previous years in the normalized run rate.

Thank you.

Next, we'll move to Edward Atorino at Benchmark Capital -- I'm sorry, Benchmark.

Hi, good morning.

Could you discuss the decline in interest and nonoperating income from 19.8 million to 1.1 million?

Sure, I am going to ask Linda to do that, Ed.

Ed, we realize there's some tricky ins and outs in this line for the quarter; but let us just say that the biggest components here are that we borrowed some money, and obviously the expense on those borrowings has moved up a bit.

So we have an increase there.

But that has been pretty well offset by an FX gain of about $15 million in the fourth quarter.

Excuse me, did you say 15?

Yes, 15.

Thank you very much.

And that's mainly the weakening of the British pound and the restrengthening of the dollar has helped us there.

And is there a normal level one can project for '09, or does that just bounce around randomly?

Ed, if we could predict FX rates exactly we would probably do something else; but I think on that you want to look at the forward curves, and maybe your guess is as good as ours.

So if you take out FX and maybe use that as a run rate?

No.

We built the guidance around foreign exchange at current rates, and so I think that's the best thing for you to go back and worth with, Ed.

Yes, I think you can look at the interest expense as being pretty much a reasonable run rate going forward.

So the interest would be the bulk of the 60 million and change?

Yes, absolutely correct.

Okay, I can add those two.

Thanks.

Good.

(Operator Instructions).

Next, Catriona Fallon at Citi.

Yes, hi.

Thanks for taking the call.

A lot of my questions have been answered but -- so the guidance for D&A is now 60 to 70 million -- what does that mean as far as how much of Q4's depreciation was one-time in nature?

Let me see if I can take a shot at that.

Q4, the biggest components of the non-comp expense line were professional fees, which were up a bit; rent, which was off a bit; and then depreciation and amortization, which ran about three times what we had last year in Q4.

So I would say that about half of the 30-ish million dollars of D&A, Catriona, would be one-time if I had to say roughly.

Okay, great.

And then -- thank you very much for giving us the operating margins for Analytics versus Investor Services.

Can you give us a sense for what we might see if revenues actually exceed your current projections as kind of down low single-digits?

So what's really the incremental margin if we see upside on issuance?

I can't give you a number, Catriona -- not because I have a number that I don't want to give, but I don't have a number -- Because it really depends on the mix.

and we -- if we see recovery coming from areas where, again, we have installed resources in the form of analysts and analytics teams, we would have more of a benefit than if it comes in areas of -- such as securitization or growth in certain international markets where we may not have full analytics teams built out.

So it's going to depend on the mix.

Obviously, I think the margins would go up with increased topline activity, but the amount is unknown.

Right.

And also -- so essentially the guidance is that operating margins come down about 500 basis points next year.

How much of that do you think is due to the fact that the Analytics business being a 27% margin business is now becoming a larger portion of the total revenue for the Company?

Yes, that is definitely one of the components -- the fact that we expect some modest decline in overall revenue is another component.

And we do have some expenses associated with regulatory compliance, both in the U.S.

and in Europe, and then technology project investments that are adding to the expenses side of the equation in addition to Moody's Analytics and whatever happens on the topline.

Perfect.

That's all I had.

Thank you.

Thank you.

(Operator Instructions).

We'll go next to Craig Huber of Barclays Capital.

Yes, I have a follow-up question on Fermat.

I'm sorry, Linda, to go back to this again; but you said that Fermat a year ago obviously wasn't a number -- $13.7 million in revenues and software and 19.1 million this year.

If you assume the underlying software is down, say roughly 10% just to round down to 12 million, that spread versus the 19 million you reported this year is obviously 7 million, maybe add roughly another million for the one -- the eight days or so that you didn't have it in the quarter.

That puts the revenues roughly at 8 million for Fermat in the quarter.

Is there -- am I thing that even remotely close?

I mean, that seems like a very low number -- roughly 30, $32 million annualized?

Or is there something seasonal for the business?

You are in the right zip code, but you're getting into some complexities here with revenue recognition and the way that this business is coming on.

And as John Neff had discussed with Mark, this is a subscription business and a license business; so you can't use that result as a way to extrapolate very accurately, Craig.

And I'm sorry if that's a frustration for you; but once we get a run rate that we are comfortable with, we promise we will let you know what the software run rate should be, maybe -- hopefully as soon as in the next quarter call.

I appreciate that.

You did say -- I I thought you said 70 million you were thinking for maybe 2010?

Is that correct?

Yes, we had put out that number, in fact, I believe when we acquired the business.

So no change in that thought there?

No.

No change in anything on the expense front that investors should be aware of?

No, that's correct.

No.

Okay.

Very good.

Thank you.

Thanks, Craig.

And that does conclude our question and answer session.

Mr.

McDaniel, I will turn the conference back over to you for any closing remarks.

Okay.

Thank you very much.

This concludes the earnings call, and I'd like to remind everyone that a replay of this call is available after 4:00 PM today on our website.

So thank you all again for joining us.

And that does conclude today's conference.

Again, thank you for your participation.

You may now disconnect.