Good day, everyone. And welcome to the Moody's Corporation Fourth Quarter and Full Year 2023 Earnings Call. At this time, I would 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 question and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. And good morning, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2023, as well as our outlook for full year 2024. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call in US GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion & Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2022, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the safe harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I will now turn the call over to Rob.

Thanks, Shivani. Good morning. And thanks to everybody for joining today's call. We're here from a snowy New York City. I'm going to start with some highlights from 2023 and then discuss our expectations for 2024. And after my prepared remarks, Steve Talinko, who is the President of Moody's Analytics; and Mike West, the President of Moody's Investor Service, will be joining me along with Caroline Sullivan, our Interim CFO for the Q&A portion of the call. And before we get into it, I have some very exciting news. As you may have seen this morning, we announced the appointment of Noemie Heuland as our new Chief Financial Officer, and she's reporting directly to me. Noemie brings a wealth of knowledge to Moody's after nearly 25 years in senior roles at global public companies, including most recently as CFO of Dayforce, formerly Ceridian, and over a decade with global enterprise application software provider SAP, during which it transitioned to a global software as a service business model. So as CFO, she's going to lead the global finance organization that includes accounting and controllership, financial planning and analysis, financial systems, Investor Relations, strategic sourcing and procurement and tax and treasury. And her firsthand experience in scaling high growth category-leading public software companies, along with her extensive global experience, I think, really makes her the ideal CFO for Moody's as we invest in and grow our subscription-based analytics businesses and continue to expand our ratings business around the world. So it's an exciting time for Moody's and I look forward to Noemie jumping in beginning April 1st, and of course, she's going to be a regular fixture on this call going forward. Before we get into the results, I also want to thank Caroline Sullivan, who is here with me for her immense contributions and support over the last few months as Moody's Interim-CFO and Caroline will remain as our Chief Accounting Officer and Corporate Controller. So with that, moving on to our results. 2023 really was a defining year for us here at Moody's. We delivered 8% revenue growth, we grew adjusted diluted EPS by 16% and we were an early mover in GenAI adoption and innovation, launching our first-ever GenAI enabled product in December. And I have to say that the energy and excitement across the organization really was palpable throughout the year as we launched new products, we entered into strategic partnerships with some of the world's leading tech companies and we increased the gap in our Chartis RiskTech100 number one ranking. And as we grew, we also increased our margin by over 100 basis points for the year, all while investing across the firm in technology, in products and in people. Amidst what was a pretty challenging operating environment for our financial services customers, MA delivered ARR growth of 10% with retention rates in the mid-90s. Looking at the three reporting lines of business in MA, that's decision solutions, data and information, and research and insights, we delivered ARR growth of 11%, 10% and 7% respectively. As we have upped the pace of product development to meet the strong market demand for tools to better manage risk and to digitize and transform workflows for 2024, we expect MA revenue to grow at approximately 10% with ARR growth in the low double-digit percent range. MIS meanwhile delivered 19% growth in the quarter and 6% for the full year. Corporate finance, financial institutions, and public project and infrastructure finance all achieved double-digit revenue growth compared to 2022 on gradually improving market conditions. I think I used the phrase fragile when describing the markets back on our third-quarter earnings call. And this turned out to be true for Q4, where despite a very active November, December issuance was more muted than we had expected. We’ve seen a very constructive start to the year, and consequently our revenue expectations for 2024 are in the high single to low double-digit percent range for MIS, and I'll touch on this a bit more on the call, as well as I'm sure some asset-specific issuance guidance. Looking out over 2024 and beyond, we're really excited about the great momentum in the business and the tremendous growth potential that we've got in front of us. To capitalize on these opportunities, we're accelerating and increasing the level of organic investment this year in three critical areas: GenAI, new product development, and platforming and technology. This is a delivered investment program to fully capture the power of AI across our business, to expand the reach and connectedness of MA Solutions and accelerate the technology enablement of the ratings agency, all to deliver on our ambitious medium-term targets. Our capital allocation priorities remain unchanged. First, invest in our business whenever we see great opportunities, and we are, in fact, doing that. Second, return capital to stockholders. This year, we expect to nearly double the amount of capital we return to our stockholders through dividends and share repurchases. This brings me to our EPS guidance. We’re anticipating adjusted diluted EPS to be in the range of $10.25 to $11 for 2024. This incorporates a wider range at the beginning of the year to capture some of the uncertainty around issuance and we expect this to narrow during the course of the year. Of note, as you compare 2024 EPS guidance to 2023, you might remember we had some outsized tax benefits in the first half of last year that resulted in a 2023 effective tax rate of 16.9%, and for 2024, we're expecting the rate to be in the range of 22% to 24%. If you look through the 2023 benefit at the midpoint of our 2024 range, our 2024 adjusted EPS represents a 24% growth rate since 2022 and that's in line with the low double-digit percentage growth that we've targeted over the medium term. Looking at 2023, I want to take a moment to touch on a few data points that highlight what a powerful franchise we have and also put our 2023 accomplishments into some perspective amidst, as I said, what was a very challenging operating environment for many of our customers last year. Despite relatively modest MIS rated issuance growth of about 5%, we generated approximately $450 million in incremental revenue growth across our entire company. Today, we have a base of recurring revenue of over $4 billion while our more transactional-oriented revenue model across a $74 trillion universe of rated debt gives us upside as debt velocity improves. Together, this underpins our confidence in accelerating our revenue growth to the high single to low double-digit percent range in 2024. Over the years, we have built a customer base that’s almost like no other company with 97% of the Fortune 100 and 87% of the Forbes 1000 being a Moody’s customer today. The world’s leading companies turn to us, they trust our market-leading solutions, and that gives us a tremendous base to sell into. This shows up in the many external accolades and awards that we’ve received. We had over 150 last year alone. I want to give a special shout-out to our MIS team as we were awarded best credit rating agency for the 12th year in a row by Institutional Investor—that is great stuff. I think we all understand our market-leading position in ratings, but we’ve also built a market-leading position with our MA business. For the second year in a row, we were ranked number one in the Chartis RiskTech100, supported by category wins in strategy, banking, and insurance, and a number of solutions categories ranging from climate risk to credit risk to financial crime data and many more. Understanding the critical importance of attracting and retaining the best talent in this environment, we continue to lean into our culture to make this the kind of place where the brightest minds want to build their careers and help our customers address some of the world's great challenges. To sustain our growth, you frequently hear about the investments that we make in our solutions to help our customers make better, more informed decisions about risk, and we achieved a number of important milestones in 2023, too many to get into on this call, but I am going to focus on just a few of the highlights. In ratings, we continue to expand the markets we serve through Moody's Local. We also developed dedicated teams in digital finance and private credit, so that we're at the forefront of opportunities in the global debt markets. In private credit specifically, we're coordinating across our ratings franchise to ensure that we have the engagement, the methodologies, and the analytical and commercial resources to be the agency of choice for players in this market, ranging from BDCs to alternative asset managers, insurance companies, and debt funds. To further address the private credit opportunity, we added more than 12,000 unrated entities to our CreditView research service in November, which triples the breadth of our coverage and provides a new runway for growth for our research business. Another growth opportunity in our Research and Insights business that many of you have heard about is our Research Assistant product, which is our first GenAI enabled product that we launched commercially on December 1st. It's the first of several GenAI enabled tools that we’re developing, and we’re excited about the initial customer feedback and early traction with this product. I'm sure we're going to touch on this a bit more in the Q&A. We also continue to enhance and expand our massive company database in important ways to create valuable early warning signals for our customers and address the increasing demand for third-party risk management. There were really three elements to that in 2023 that I'll call out. First was integrating our predictive analytic tools and credit scores on over 450 million companies into Orbis. The second was expanding our coverage of over a million AI-curated and scored news stories available in companies in Orbis. Lastly, leveraging our investment in BitSight over the course of 2023, we integrated over 6 million cyberscores into Orbis, and that number continues to grow. Across decision solutions, we developed new solutions and integrated more datasets to expand the utility of our offerings. In KYC, our new entity verification tool combines real-time registry content with our Orbis data to help our customers identify risky shell companies and minimize the potential for fraud and sanctions risk. With the launch of our most recent Sanctions360 tool, we are the only one in the market who can look through multiple complex layers of corporate hierarchies and ownership structures to identify potential sanctions breaches. In banking, we integrated climate analytics into a broad range of workflow solutions from loan origination to portfolio management to stress testing. In insurance, in just a year, we more than doubled the number of customers using our cloud-based intelligent risk platform; that's a versatile cloud-based risk analytics platform that enables customers to analyze hundreds of millions of commercial and residential locations. It’s not just being used by insurers; we are attracting a diverse set of customers who have a tangible and growing need for our more sophisticated climate data and analytics. I have to say I’m proud to report that at the end of January, we signed one of the world’s largest banks as a new customer of our climate and catastrophe modeling solutions to support in-depth climate analysis for required regulatory disclosures and stress testing. Underpinning all of this is our ongoing foundational investments in the business, which will enhance our ability to integrate our data state across all of our customer use cases more efficiently and effectively. I hope you get a sense that there are a lot of exciting things happening here at Moody’s. As I consider the numerous opportunities for growth ahead, I am energized by all that's in front of us. We are doing three things to drive future growth: land new customers, expand customer relationships, and innovate continuously to deliver more value. I touched on the breadth and quality of our existing customer relationships. We’ve got a fantastic customer base, especially in financial services, where we’ve been developing relationships for literally decades—landing new customers, expanding relationships, and innovating with a proven track record of growth. In recent years, we’ve been successful in growing these relationships further and diversifying into new areas like KYC and supplier risk management. Our net expansion rate in the financial services sector stands at a healthy 109%, which is a clear indication of our ability to deepen relationships and deliver value. Now, leveraging GenAI and our broader content sets and capabilities, expanding and deepening these relationships will continue to offer significant opportunities for us. Building on these successes, we’ve got a great opportunity to expand into new customer segments, supporting new use cases. While financial institutions account for about 70% of ARR and MA, there’s been very good demand coming from newer relationships beyond the financial services segment, showing a 14% new sales compound annual growth rate over the last two years in these sectors, particularly in corporate and public sectors. During this period, we’ve established significant relationships with major companies in the United States and Europe. We’re leveraging our expertise for customer and supplier risk assessments. Our ratings business also has opportunities to serve existing and new customers, and I think of those as the markets of tomorrow. We’ve expanded our footprint in domestic and emerging debt markets where the growth is faster than in more developed debt markets. Interesting data point: the Moody’s Local initiative in Latin America, which you’ve heard me talk about, is a great example of doing that where organic revenue grew 22% in 2023. These land and expand opportunities are supported by major secular trends that are driving demand for our offerings. I would cite a few of those: we’re poised to capitalize on content, unlock opportunities from GenAI enablement and innovation; the widespread digitization and transformation programs across banks and insurers; the growing demand for third-party risk management solutions; and the ongoing growth of the private credit sector. With our wide range of capabilities that we've put together to deliver this holistic view of risk, we are uniquely well-positioned at the intersection of these trends. We reflected a lot on these opportunities as we entered our annual operating plan cycle this fall. Not dissimilar to past years, we were challenged to prioritize and balance organic investments with operational efficiency and productivity initiatives. On the efficiency side, we expect to generate savings from resource redeployment, alternative staffing models, automation, GenAI enablement, and geolocation strategies; we’re prioritizing investment spending on areas that enable us to deliver at our current growth rates, including SaaS-based product development, sales deployment, operational resiliency, and ratings workflows. These initiatives are funded within what we think of as our regular pace of operating margin expansion. As we exited the initial sprint around GenAI innovation last year, we reflected on the opportunities ahead of us. We considered the deep customer relationships I’ve just touched on, our unique data assets we often discuss, the market trends mentioned, as well as our growth strategy. We proactively upped the organic investments that we started in the summer of last year. We are increasing our budgeted operating expenses for 2024 by an additional $60 million in three primary investment areas. First, and I’m sure this isn’t surprising, is GenAI. We're increasing product-related investments across MA that will build on our early mover momentum from 2023 and investments across the company and initiatives to accelerate employee adoption and improve productivity. On the product side, we have a few really interesting things that are moving ahead fairly quickly. CreditLens, our flagship banking origination solution, will be the next to launch a GenAI enabled capability to generate a credit memo within seconds, leveraging the digitized information about borrowers and their credit facilities stored natively in our software. We’ll save loan officers and credit professionals countless hours compiling information and generating the first draft of the documents produced with virtually every commercial loan. We’ve got our first beta customer already and are currently in preview with several others. I’m also encouraged by our new GenAI enabled commercial real estate early warning system that we believe will significantly enhance commercial real estate portfolio monitoring capabilities for both lenders and investors. I recently sat through a demo of this in the last week or two, and the early warning system incorporates a wide range of our datasets and enables the evaluation of news events in real-time, running scenarios and calculations that link together market forecasts, listings, property data, tenant data, and valuation and credit models. Again, the early feedback has been very positive, and we're looking to extend these capabilities beyond just commercial real estate. From an internal perspective, we’ve rolled out GitHub Copilot and other GenAI tools to more than 1,500 engineering professionals across the company. As a result of our experience last year, we’ve specifically planned for efficiency gains in our engineering budgets in 2024.We'll roll out our next generation of AI-enabled tools for our sales teams across the company over the next several months. So that’s the first area. The second area is product development. As part of our land and expand strategy in MA, we’re building on the success and momentum of our KYC business, which has grown to over $300 million of ARR in just a few years. Those who have been on this call for a while have heard me mention before that Know Your Customer is probably too limiting of a term for this business as it continues to expand. This year, we’re increasing investments to develop solutions focused on the growing market demand for solutions to serve their customer and supplier risk needs. We’re especially encouraged by recent wins with a number of large government and Fortune 100 customers. This year, we’re going to invest in product, technology, and data and go-to-market capabilities to scale in these customer segments. The ratings ecosystem continues to evolve. In early January, we received the very first rating on a tokenized bond fund. While digital finance is still nascent, we’re ready to help our customers deliver our ratings on the platforms wherever they will issue. That’s the second area. The third relates to technology platforming. We’re building on the platforming work we highlighted in our Innovation Open House event back in September. This work is critical to strengthening the interoperability of all of our data estate and enhancing synergies across our solutions. By investing in our platforming and engineering capabilities, we’ll accelerate our time to market, enhance the customer experience, better enable cross-selling and up-selling, and deliver engineering efficiencies. The faster this work gets done, the sooner we’ll realize the revenue and efficiency benefits. The same is true in ratings, where more tech-enabled workflow is essential for quality, speed, efficiency, and compliance. We’ve been on a journey to modernize, digitize, and automate our systems. We’ve made good headway, but there is still more to do. Optimizing our data estate and moving more of our workflows into cloud-based applications is more important than ever given the promise of AI and the digitization of financial markets. Here too, we decided to accelerate our efforts, which will be critical in achieving our medium-term margin targets. Now let me turn to our issuance outlook very briefly. We’re expecting more constructive market conditions in 2024. And as you all have seen, it was a busy start to the year, with over $150 billion in investment grade issuance in January alone. Underpinning our MIS revenue growth outlook of high single to low double digits is an increase in MIS rated issuance in the mid-to-high single-digit percent range. For corporates, we expect leverage finance to grow faster than investment-grade issuance, which should be favorable to our revenue mix. Our outlook is built on the macroeconomic assumptions detailed on Page 20 of our webcast deck, notably incorporating a soft landing here in the US and rate cuts beginning in the second quarter of this year. I imagine we’ll dive deeper into both our issuance and macroeconomic assumptions in the Q&A session. Before moving off of MIS, I want to highlight that early last year, we committed to reviewing our medium-term guidance for MIS revenue growth once we saw a sustainable improvement in the debt markets. I’m happy to share that following 6% revenue growth in 2023 and the expectation of at least high single-digit growth in 2024, we have updated our medium-term revenue growth target for MIS to be in the mid to high single-digit percent growth range. Moving back to our 2024 annual guidance, Moody's revenue is expected to grow in the high single to low double-digit percent range. The Moody's adjusted operating margin is projected to be in the range of 44% to 46%, which is about 100 basis points of margin improvement at the midpoint. The Moody's revenue and adjusted operating margin guidance ranges incorporate the variability of that MIS transaction-based revenue, balanced against the subscription base in MA where nearly 95% of our revenues are recurring. In regards to M&A, we’re guiding to a tighter range of approximately 10% revenue growth and low double-digit growth in ARR. MA’s adjusted operating margin is expected to be in the range of 30% to 31% this year, absorbing the impact of the incremental organic investments discussed. In the medium term, we expect MA’s adjusted operating margin to be in the mid-30% range. As I have discussed with several of you, the path to that target is not exactly linear. For 2024, MIS’ adjusted operating margin is expected to be in the range of 55.5% to 57.5%, representing a 200 basis point improvement versus 2023 at the midpoint and projecting solidly on toward the medium-term target of low 60s percent. Our expenses overall are expected to grow in the mid to high single-digit percent range. Notably, we closed out our 2022-2023 geolocation restructuring program at the end of 2023. Caroline can talk more about that. We’re expecting depreciation and amortization expenses of approximately $450 million in 2024, an increase of about 20% compared to 2023. This growth is largely related to the cumulative effect of our shift toward developing exclusively SaaS-based solutions starting back in 2021, along with the increased capital expenditures associated with the three primary areas of incremental organic investment discussed. We’re expecting free cash flow of between $1.9 billion and $2.1 billion and adjusted EPS to be in the range, as I said earlier, of $10.25 to $11, again reflecting a 24% increase at the midpoint versus 2022, considering the tax benefits discussed. I’ll wrap up by stating it was a really great year for us here in 2023, and I'm expecting an even more exciting one ahead. I’m energized by our strategy, and we believe that now is the time to invest in the opportunities in front of us—to fully embrace the power of AI across our business, to accelerate the build-out of our technology platform, and to unify our content to build new solutions with unique value propositions that will accelerate growth. With that, I welcome Caroline, Steve, and Mike to join me for Q&A. Operator, please open the call up to questions.

Our first question comes from George Tong with Goldman Sachs.

I wanted to ask about your planned incremental strategic investments in GenAI products and platforming. Can you talk a bit more about the timing of these investments as well as the benefits you're expecting and the margin impact for 2024?

Yes, I will start by providing more insight into the three main components, and then we’ll discuss the timing and margin impact. Regarding GenAI, we have a generative intelligence team, an established MCO infrastructure, some incremental engineering costs, and additional licenses, including GitHub Copilot, which will provide benefits but comes with upfront costs. We also face incremental cloud and token costs related to large language models. In product development, we are focusing on enhancing our customer and supplier risk offerings for both the corporate and public sectors, which involves data, workflow, and go-to-market strategies. On the technology and platforming side, we are working on building out the MA platform, which includes engineering for single sign-on and entitlement to achieve efficiencies faster. I will now turn it over to Caroline to assist George with the timing details.

We anticipate, looking at both MIS and MA, that MIS has delivered an operating margin in 2023 of 54.5%, roughly in line with our target of 55%. In 2024, we're expecting adjusted operating margin to increase by about 200 basis points. MA's margin is going to remain consistent with what we saw based on 2023. Without that $60 million we talked about in Rob's comments related to investments, MA margins would have been on track to increase and expand by 120 basis points.

Your next question comes from the line of Toni Kaplan with Morgan Stanley.

Rob, I wanted to take a step back for a second, and not ask about '24 at all, just in general. Where do you think a normalized level of issuance is? How much upside is there from here to get back to a more normal growth environment, particularly with rates potentially at a higher level than they have been in the last couple of years?

So maybe a couple of ways to triangulate around this. As far back as 2022, you remember we had that significant decline in issuance from the pandemic years. On the call, I talked about how total global issuance was modestly below what was a, I'll call it kind of a 10-year average from 2012 to '22, excluding the two pandemic years. Total issuance in 2022 was about 5% below that average. It’s not a big number, and remember, that was in the context of a 30% decline in issuance that year. But we drilled down and I think we made the point that corporate issuance was about 15% below that long-term average, excluding the pandemic. Drilling even further into leveraged finance, it’s even farther below average. Corporate issuance, particularly leveraged finance issuance, is favorable to our revenue mix. It’s interesting, Toni. As you move forward and look at where 2023 ended relative to that average, it’s roughly in line. Corporate issuance was close to in line, modestly below that long-term. With 2024, issuance will be slightly above that long-term average, holding true for corporate issuance where there are stronger growth expectations. I think that means we’re getting back to something that feels more like a normalized level of issuance. The caveat, though, is this idea of debt velocity. There’s been an enormous amount of debt issued over that period, and when we look at annual issuance as a percent of the total outstanding stock, that's what we think of as debt velocity. That number still looks considerably lower than the averages over the last decade, suggesting there’s still room for issuance growth. Looking at structured finance currently, that’s significantly below the 10-year average for reasons we may discuss later.

Your next question comes from the line of Manav Patnaik with Barclays.

Maybe I could just ask about 2024 in terms of the cadence of issuance you've assumed for either the first half or the back half, and then maybe just some color on how we should think about your non-transaction piece of the MIS business, how that should grow, I guess, this year?

Manav, I think I might ask Mike to give us some color around how we should think of the first half and second half and then I might add some finer points on that.

First of all, we expect issuance in the first half to be stronger than in the second half, which is a common pattern if you look over previous years. Some of that is due to the constructive conditions we're seeing at the moment with spreads tightening and sentiment improving. These issuers are trying to lock in the rates they want before any potential volatility. Some of it is actually seasonality that we see every year since we expect a slowdown in the second half through summer, which sometimes tails off into December. The other important factor when you think about issuance is that some of those more frequent issuers in investment-grade in corporate and banks tend to come earlier in the market to secure their funding and manage their balance sheets. Infrequent issuers, on the other hand, can be opportunistic and will wait for those windows that seem suitable. Consistent with the comments I just made is what we've discussed with the market. Just noting, structured finance tends to be more balanced between the first half and second half. While we expect the first half to be busier, we anticipate activity will continue into the second half as well.

And I know people want to have a good sense of forming their models. Last year, as Mike noted, issuance was more front end loaded. We had a rising rate environment, with approximately 56% of 2023 annual issuance occurring in the first half of the year, and while we expect a rate decline in the second half of the year, as Mike mentioned, we still think issuance will be front end loaded. Our current assumption for issuance closely aligns with the pattern we saw in 2023. When translating this to MIS revenue, the impact is somewhat less pronounced in terms of first half vs. second half. We’re expecting just over half, maybe low 50s percent of MIS revenue to occur in the first half. This is lower than the issuance mix since banks tend to issue and do more front-end loading of their issuance, leading to different economics for frequent bank issuers.

Your next question will come from the line of Faiza Alwy with Deutsche Bank.

I wanted to ask about MIS margins. I think, Rob, you alluded to some investments, but could you put a finer point on that? I would have thought you would have better margin flow-through given the revenues you're expecting. Is it all investments? Is there some mix? Please provide a bit more color around those investments.

To follow on to what Mike and Rob mentioned regarding revenue phasing, we forecast higher margins in the first half of the year versus the second half, so that’s what we will see for MIS. But overall, we're expecting adjusted operating margins to increase by 200 basis points.

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets.

I just wanted to better understand how we should consider the ROI for the strategic investments. Obviously, the investments made in the prior year have accelerated MA revenue growth. I’m wondering, how should we think about the growth accretion from these investments? As a follow-up, how should we consider the GenAI monetization in '24 but also midterm?

Maybe I'll start with that and then hand it to Steve. As you think about the return on these investments, we’re investing in the highest growth parts of our business. GenAI products are designed to augment growth across our SaaS and hosted solutions. Steve will expand on that shortly. We’re investing in enhanced solutions for corporates and public sectors around customer and supplier risk, and I noted earlier that we’ve had a 14% CAGR in sales growth from those sectors over the last two years. We think we can further enhance that growth at scale as we invest in products specifically for those customer segments, alongside platforming. We expect revenue growth from our SaaS and hosted solutions to grow in the low teens this year, aligning with our medium-term targets. In fact, growth has been even higher in decision solutions, trending more like high teens for SaaS and hosted solutions being forecast this year. I think there’s a solid case for investment in these high growth parts of our business.

Maybe just a couple of other comments. We’re doing what we do well: developing solid product development pipelines, creating new product life cycles to generate revenue growth and support customer value propositions, and continuing to invest in the sales force. Today, we are making even more incremental investment in GenAI, especially in areas where we think we can land new blue-chip customers outside of financial services. We have a tremendous franchise with the financial services sector and are seeing great opportunities as well as impressive growth trends with new customers in non-financial corporations or public sector entities. You can expect many new products coming online this year, particularly in the GenAI space. Rob mentioned a few that are progressing quickly in the next quarter or two. We're actively engaged throughout our product development and engineering teams to build more value propositions and leverage GenAI to support our customers, helping them not just conduct their business faster and save some money, but become more effective and productive. They'll be making better decisions based on enhanced analyses. I expect that the Research Assistant we've launched will start making contributions to the research and insights line towards the end of this year as sales ramp up, subsequently impacting growth numbers.

Your next question comes from the line of Alex Kramm with UBS.

This is actually a direct follow-up to the prior question. Because Rob, I think a couple of quarters ago, I asked you about GenAI being potentially part of your guidance already for this year in terms of revenue contribution. It would be helpful to give a bit more specificity regarding both revenue and ARR. What are you budgeting in terms of contributions here for the year since you've raised some high expectations? Additionally, you mentioned some early feedback, so I would be interested in your ability to upsell, with customers not solely responding by saying that you're asking for more money without being willing to pay as much as you anticipate.

I believe we’ve learned a lot over the last few months as we've engaged with customers, signed customers, and built the pipeline. This is informing our guidance. Steve, why don’t I hand it to you, to provide some insight into what we’ve learned and how this is flowing through the MA business.

The research and insights line is where you can expect the biggest contribution from GenAI-related products because that’s where we’ve launched a product into the market. The sales cycle takes some time to develop, but we’re seeing interesting patterns. Investment managers and smaller hedge funds, who are typically more agile and able to make quicker decisions, are purchasing this product immediately. Our initial sales are many of these players where the decision-maker is at the table with the users, closely engaged. They are saying, 'Wow, this is really going to make a difference. Let’s just do it.' Some have signed multiyear agreements, believing this will be a productivity enhancer for them. Conversely, among larger banking relationships, we engage differently. Discussions are happening at much higher levels of seniority, and the focus is on leveraging what we’re doing as a transformational tool to improve their business model. They see opportunities for cost reductions, perhaps lowering costs of goods sold while enhancing productivity through platforming and using our capabilities for various growth initiatives. We’re currently seeing a strong level of engagement, often at the C-level. This doesn’t follow the typical add-on to the research service that we’ve been doing for decades. This could significantly change how they approach investment research and credit research at scale. That dynamic has us encouraged. The last couple of months have been intriguing; smaller, faster decisions are occurring, reflecting above our typical sales pace, and our largest customers are engaging positively in a transformative manner.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

I think earlier in the call, you provided color on cadence for the first half versus the second half in terms of revenues and margins for MIS. Could you extend the same sentiment for the MA division?

Caroline, do you want to take that?

For MA, we see a slightly different picture from MIS concerning both revenue and expenses. In Q4 for MA, we recorded just under $800 million of revenue and expect just over $800 million in Q1, steadily ramping by $20 million to $25 million through Q4. The MA margin will follow a comparable trajectory. Q1 will be influenced by some seasonality in our expenses associated with our compensation programs, leading to higher payroll taxes from stock grants and bonuses. However, we expect margins to steadily approach a couple percentage points above our full year guide of 30% to 31% by Q4.

Now that we've covered MIS and MA calendarization, let’s consider how this might shape adjusted diluted EPS. Given the front-end loaded issuance pattern previously mentioned, the cadence Caroline highlighted, we anticipate Q1 will present our strongest quarter in absolute adjusted diluted EPS, followed by Q2. The easiest way to think about this: if you take the average quarterly EPS at the midpoint of our full year guidance, which I believe is between $2.60 and $2.70, we expect Q1 EPS to be about $0.15 to $0.20 higher than the average for that quarter.

Your next question comes from the line of Craig Huber with Huber Research Partners.

Mike or Rob, I'm curious about the ongoing significant challenges in the commercial real estate market. What are your thoughts on the potential impact for your CMBS issuance this year, particularly regarding ratings? More importantly, what’s your outlook on your banking client's potential impact stemming from the commercial real estate market this year regarding issuance?

Caroline will tee up on the incentive comp question in a bit. In terms of commercial real estate, it impacts several segments of our business. For structured finance, let me pass this to Mike.

Regarding structured finance, we anticipate overall growth at mid-single digit levels. When looking at CMBS, we expect it to remain muted given the challenges in the CRE market, particularly in the office sector. That’s a viable funding alternative to bank finance, especially as borrowers face stricter lending standards. However, we see an active market for ABS and CLOs. I’d be happy to provide more details regarding CLOs if needed. As for RMBS, we’re expecting muted outcomes because of asset formation, but we anticipate improvement as the year progresses. Additionally, I’ll turn the conversation to Steve about MA's side.

We’ve been discussing the stress in the CRE sector, particularly in the office space. We've received significant interest from our banking clients lately. You may recall that during our Innovation Day in September, we unveiled the CreditLens CRE module, which serves as a credit decisioning tool software application incorporating our data and analytics capabilities in commercial real estate. This has fueled strong growth in the banking segment and has been a key growth driver for us. As risk awareness increases, we’re observing more engagement from clients, confirming that when risk elevates, inquiries for our services increase. When risk retreats, there are pressures to take more chances, ultimately leading to diversifying strategies for alpha. This CRE segment stress creates a buzz that ultimately benefits our business.

When there’s too much pressure on the banking system, it can become a headwind for us. As Steve indicated, higher demand for insight and enhanced understanding of credit is beneficial. We noticed this during March last year when we passed that critical threshold.

Regarding incentive compensation, for the fourth quarter, we recorded around $100 million, totaling about $400 million for all of fiscal 2023. For 2024, we estimate incentive comp to be between $400 million to $420 million, roughly translating to about $100 million to $105 million per quarter.

Your next question comes from the line of Owen Lau with Oppenheimer.

Returning to your MIS revenue guidance, you guided to high single-digit growth to low double-digit growth, which outpaces your peers' expectations for mid to high single digits. While I know you have limited insights into your peers, can you elaborate on potential drivers for the difference?

I’ll let Mike elaborate on that.

At the macro level, the outlook for 2024 is constructive. Many factors underpin this outlook, first being that recent market uncertainties are beginning to dissipate. Lower execution risk in primary markets leads to improved secondary trading, providing more opportunities for issuance. We're currently experiencing that. Our expectation remains that the rate will decline in Q2, despite today’s CPI print. We’ve observed noticeable tightening of spreads in both the investment-grade and sub-investment-grade markets, leaving the markets accessible across various rating scales. But above all, we're expecting that leveraged finance will improve and recover from historic lows throughout the year. This includes the anticipated 10% increase in the refinancing walls discussed in the last call and a modest recovery in M&A. This aspect remains uncertain, but it shows a significant amount of available cash on corporate balance sheets. Even amidst moderate economic growth, we anticipate avoiding a deep recession, ensuring economic resilience and allowing for growth in 2025 as the long-term capital is deployed. As the spreads tighten, this is a crucial assumption in our research on defaults. We’re climbing over peak defaults this year, and as spreads tighten, it creates a more favorable environment especially for lower spec grades. This is the core of our macro perspective.

We welcome any inquiries into asset level guidance during the Q&A. It’s also worth mentioning that there has been a notable slowdown in first-time mandates since Q3, 2022. We expect that to rebound. This slowdown in the fourth quarter held steady compared to Q4 2022. Consequently, we foresee an uptick in recurring revenue growth for MIS.

Your next question comes from the line of Scott Wurtzel with Wolfe Research.

I wanted to return to the Research Assistant. While I understand it's only been a couple months since launch, can you share any feedback or insights on the product's performance and any lessons learned in recent months?

We’re pleased with a few outcomes. Our product development process and overall timeline to market for this product was faster than for previous launches, which is exciting. We've leveraged GenAI tools and have refined our platform engineering capabilities, enabling us to expedite this process. Customer traction is still in early stages; however, our take-up during the first six weeks actually surpassed that experienced with almost any other product we've launched in our history. Many customers are making rapid purchasing decisions within six weeks of our commercial launch. In terms of customer engagement, we’re observing discussions at senior levels. We recently saw one of the largest US banks engaged in high-level discussions regarding potential adoption of our product, emphasizing how influential this tool could be in their transformation projects. Given this context, I expect sales cycles to be faster than those seen in prior launches.

Your next question comes from the line of Shlomo Rosenbaum with Stifel.

I wanted to ask for some insights on general sales cycles. Are they getting shorter, staying the same, or getting longer? How do they appear sequentially? Additionally, regarding incentive compensation, has there been any shift in the mix between the two units, relating to margin expansion for MIS?

In the spring last year, we received many questions about elongated sales cycles. While we noted that sales cycles were extending slightly over a few days, it wasn’t material. However, we were witnessing higher price points in proposals, leading to richer value propositions. Current trends suggest that sales cycles are still slightly longer than they were a few years back due to larger price points and more comprehensive value propositions. Let's summarize that aspect.

We haven’t observed any significant changes in the incentive compensation mix between segments compared to '24 versus '23.

Your next question comes from the line of Seth Weber with Wells Fargo.

I just wanted to follow up again on the MIS margin question. I'm trying to balance the investments you’re making against the anticipated long-term technological benefits and cost savings. Could you remind us or update us on how we should perceive incremental margins for the MIS business moving forward? Has there been any change to the incremental margin framework for that business?

Let me also revisit Q4 MIS, as there were some inquiries regarding that. The fourth quarter truly illustrated the operational leverage we have in this business. Revenues came in below expectations, but expenses aligned almost exactly with our budget, resulting in minimal percentage growth over last year’s quarter. Consequently, the missed revenue dropped directly to our adjusted operating income. This remains core to what we appreciate about this business. It’s worth mentioning that our expenses consist primarily of labor costs, and during that critical period at year-end, no leeway existed for modifying our expense base. We noted a brief decline in issuance that impacted our performance. With favorable revenue forecasts for 2024, we continue to discuss whether these trends are cyclical or structural. We’re still comfortable with our target margins in the low 60s. Investing in areas where we are strengthening our capabilities, such as domestic debt markets, digital finance, and private credit, is essential, as is integrating technology across the business.

We’re eager about the potential of GenAI to enhance our ratings business internally while continuing to integrate it across workflows, which should improve overall efficiency and productivity.

We will be deliberate and clear about how we leverage generative AI in the ratings agency, and we are in dialogue with our regulators to clarify our approach.

Your next question comes from the line of Heather Balsky with Bank of America.

Regarding your medium-term margins, you've mentioned previously that the path may not be linear. Can you help us anticipate how that may look over the next couple of years, especially considering your areas of investment? How comfortable are you in committing to those margins if opportunities arise for short-term top-line growth, or are you wary of sacrificing those margins?

You’ve seen us doing exactly that: making investments that come before revenue growth materializes. We’re making necessary investments that will facilitate accelerated growth in the MA business as we progress. As we have ambitious medium-term targets, we feel secure with those targets. The investments we’re making will prove vital for sustaining longer-term revenue growth.

Your next question comes from the line of Andrew Steinerman with JPMorgan.

Could you provide additional insights about the 20% increase in depreciation and amortization (D&A)? Were there any changes in accounting assumptions or methods? Should we expect D&A to remain around these levels as a percentage of revenues?

I’ll get started on that. The increase you’re seeing in D&A reflects our ongoing investment strategy. We’ve discussed how our SaaS products are leading to higher capital expenditures over recent years; this is starting to manifest as capitalized software expenses. Additionally, our rapidly growing SaaS product growth rates put us in this trajectory. Caroline, would you provide a bit more detail from an accounting perspective?

Certain development costs that relate to SaaS-based solutions get capitalized and depreciated over their useful life, typically around four to five years, in accordance with US GAAP.

And should D&A remain at a similar level going forward, as a percentage of revenues?

As we increase CapEx, we do anticipate D&A to stay relatively aligned with revenue growth.

And your next question comes from the line of Craig Huber with Huber Research Partners.

For 2024, could you discuss your outlook specifically regarding investment-grade, high-yield, and bank loan issuance, including thoughts on financial institutions in your outlook? Additionally, could you explain your cost ramp assumptions for each of the four quarters of the year?

Regarding investment-grade issuance, we're expecting growth around 5% in 2024, after seeing a 20% uptick last year. This is demonstrated through upcoming maturities and a supportive M&A landscape in specific sectors, although that remains a potential upside variable. Spreads create favorable conditions at higher ends of the rating scale, leading us to expect leverage finance issuance to recover as market conditions become more favorable. For the leverage loans, we anticipate a growth led mainly by refinancing, including amendments and extensions. Some public market refinancing for deals previously arranged in private markets is becoming available as well. Easier access to lower ratings is occurring and we're estimating around 20% growth for leverage loans. The financial institutions segment, however, is projected to remain relatively stable year-over-year.

When we think about public-private investment frameworks (PPIFs), we are expecting mid-single digit growth, driven primarily by infrastructure financing needs. With transitioning monetary policy coming from the tightening that's occurred, there will likely be a surge in long-term infrastructure projects, as stakeholders will want to lock in lower rates.

Since I touched on the structured finance category earlier, expect that to grow at mid-single digits as well. It’s important to assess various asset classes within structured finance, but we project ABS will lead in that area.

This concludes Moody's Corporation’s fourth-quarter and full-year 2023 earnings call. As a reminder, following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you.