Moody's Steve Tulenko on AI and Growth Strategy

At the 2024 Goldman Sachs Communacopia + Technology Conference, Steve Tulenko, President of Moody's Analytics, shared all the details about Moody's current status, its plans, and what's coming next. This blog post breaks down the main points from the conference, diving into Moody's changes over time, its use of AI, and how the company is doing financially.

The Evolution of Moody's: Beyond the Rating Agency

Moody's has undergone a significant transformation over the years, evolving from a pure-play rating agency to a diversified financial intelligence powerhouse. Steve Tulenko, who has been with the company since 1990, provided historical context to this evolution:

"I started with Moody's in 1990 in a little group at the time which was called the marketing group within the rating agency. We generate something like $10 million worth of revenue at the time. That group ended up becoming Moody's Analytics in 2008. It was about $500 million or $600 million worth of revenue at the time."

This transformation has been marked by impressive growth, with Moody's Analytics now contributing significantly to the company's overall revenue:

"Last year, I think MA produced more revenue overall, a little bit more than half the revenue overall for the business, for the Moody's Corporation."

The growth of Moody's Analytics has been driven by its focus on recurring revenue streams and the development of a comprehensive suite of risk assessment and financial intelligence tools. Tulenko highlighted the company's current position:

"What we've got in MA now is a juggernaut of recurring revenue, a juggernaut of ARR growth. And when you throw 10%, [add a number 4], long enough, it compounds its way up to north of $3 billion."

This evolution demonstrates Moody's ability to diversify its revenue streams and adapt to changing market demands, positioning the company as more than just a rating agency.

Moody's Vast Data Estate: A Competitive Advantage

A key differentiator for Moody's is its extensive data estate, which has been significantly enhanced through strategic acquisitions such as Bureau van Dijk in 2017. Tulenko emphasized the breadth and depth of Moody's data:

"We now have what we think of as the richest and deepest database on corporations in the world. We cover something like 525 million names."

This vast data estate encompasses a wide range of information:

1. Bond and issuer data spanning over 100 years
2. Comprehensive company information, including financial statements for tens of millions of companies
3. Patent tracking data
4. Supply chain risk information, including shipping container tracking
5. Cyber risk data through the BitSight partnership
6. Climate risk data, particularly for physical properties
7. Economic statistics and forecasts

The breadth of this data allows Moody's to provide comprehensive risk assessments and financial intelligence across various dimensions. As Tulenko noted:

"What are the things that people who run companies or who are buying and selling securities or making loans, what do they want to know about in order to refine their understanding of who they do business with?"

This data estate not only serves as a foundation for Moody's current offerings but also positions the company strongly for future growth and innovation, particularly in the realm of AI and machine learning applications.

Moody's Analytics: Financial Performance and Growth Drivers

Moody's Analytics has shown impressive financial performance, particularly in terms of Annual Recurring Revenue (ARR) growth. Tulenko highlighted the consistency of this growth:

"Our ARR numbers in the last, I think, 7 quarters in a row, we've either rounded up or rounded down to 10%. I think that's quite an accomplishment."

Key financial metrics for Moody's Analytics include:

• 95% recurring revenue
• Retention rates in the low to mid-90s, consistently around 94%
• Net expansion rate (net dollar retention) of 108% for several consecutive quarters

These metrics underscore the stability and growth potential of Moody's Analytics business model. The high retention rates and net expansion rate indicate strong customer satisfaction and the ability to upsell existing clients.

Moody's AI Initiatives: Leading the Way in GenAI

Moody's has positioned itself as a frontrunner in implementing Generative AI (GenAI) in the financial services sector. The company's approach to AI is multifaceted, focusing on practical applications that enhance existing products and create new value for clients.

Tulenko emphasized the company's commitment to AI:

"We believe strongly that the concepts of the LLM, right, the ability to synthesize information and draw inference and really assist people in doing analysis is going to be a pretty big deal."

Moody's AI initiatives include:

1. Integration of GenAI capabilities into existing products
2. Development of agentic AI systems for complex problem-solving
3. Creation of a Model Garden to make AI models more accessible and discoverable

The company has also formed strategic partnerships with tech giants to accelerate its AI development:

"We are very focused on demonstrating resiliency and robust controls to customers and then leveraging their OpenAI Azure service as a foundational part of many of the tools that we use. In the Google space, we're doing a little bit more experimental work."

These partnerships not only enhance Moody's AI capabilities but also demonstrate the company's commitment to innovation and its ability to collaborate with industry leaders.

Customer Adoption and Impact of GenAI Tools

Early results from Moody's GenAI-enabled products have been promising. Tulenko shared some key insights:

"What we find is for CreditView users that adopt the Research Assistant, that their usage goes up by about 60%, right? And what's really interesting is it's not just 60% in terms of interactions in total, but there's an increase in the usage of the actual research that they used to buy before."

This increased engagement suggests that GenAI tools are not cannibalizing existing products but are instead enhancing their value and driving deeper customer engagement. Furthermore, these tools are proving to be effective for cross-selling:

"GenAI is a great cross-selling tool in that respect for us. And that's one of the things we're pretty excited about."

However, Tulenko also noted that adoption patterns vary, particularly between larger and smaller institutions:

"The larger the institution, the more important the compliance and resiliency and risk management dynamics become."

This observation highlights the need for Moody's to address compliance and risk management concerns as it continues to roll out GenAI tools, particularly for larger institutional clients.

Future Growth Prospects and Challenges

While Moody's has shown strong growth, particularly in its Analytics segment, the company has recently widened its ARR guidance range due to several factors:

1. The impact of the MSCI deal on ESG scoring
2. Pressure on margins in the asset management sector
3. Slower-than-expected recovery in the banking sector
4. Currency fluctuations
5. Potential impact of the upcoming U.S. election on certain government contracts

Despite these challenges, Tulenko remained optimistic about the company's growth prospects:

"We've widened the range, but we did say our midpoint on the -- our best guess on the estimate was the high end of high single."

The company expects its recent product launches, particularly in the Research & Insights segment, to drive growth in the second half of the year:

"You'll see some movement in the ARR number as we move through the second half of this year, especially because of those product launches."

Debt Issuance Trends and Implications for Moody's

As a major player in the credit rating industry, Moody's performance is closely tied to global debt issuance trends. Tulenko provided insights into how to think about these trends:

"I think for me, the most insightful thing to say about this is to look at the sentiment related to issuance from the perspective of a treasurer or a CFO."

He emphasized the importance of considering factors such as interest rate stability, capital expenditure expectations, and opportunistic borrowing when projecting issuance trends. While acknowledging the strong performance in the first half of the year, Tulenko noted that the company expects "high-teens revenue in the second half."

The potential for a "pothole" or "air pocket" in growth due to pull-forward of debt issuance activity was addressed, with Tulenko emphasizing the long-term trends:

"In the long run, do you expect that people will be leveraging debt financing as a way of financing their company? Is it still going to be -- do you expect it to be the best way for them to do that? Is it an efficient way for them to actually tap capital markets? I think the bet on that in the long run is yes."

This long-term perspective suggests that while short-term fluctuations may occur, the fundamental drivers of Moody's business remain intact.

Margin Expansion and Investment Strategy

Moody's is balancing investments in new technologies and products with a focus on margin expansion. For Moody's Analytics, Tulenko outlined the medium-term target:

"We've talked about getting to mid-30s. And we've said that's probably not going to be a linear path in light of some of these big surges of investment that we're making now."

This target reflects the company's strategy of investing in growth areas while maintaining financial discipline. The investments in GenAI and data interoperability are seen as necessary to drive future growth, even if they impact margins in the short term.

For the Moody's Investors Service (MIS) segment, which includes the core ratings business, margins are already strong:

"The goal and the expectation over the medium term is to be in the low 60s sustainably, right?"

Tulenko highlighted two major programs driving margin improvement in MIS:

1. A technology program to streamline the rating process
2. Integration of GenAI tools to enhance productivity

These initiatives demonstrate Moody's commitment to leveraging technology to improve operational efficiency across its business segments.

Conclusion: Moody's Position for Future Growth

Moody's participation in the Goldman Sachs Communacopia + Technology Conference 2024 provided valuable insights into the company's evolution, current position, and future prospects. Key takeaways include:

1. Moody's successful transformation from a pure-play rating agency to a diversified financial intelligence company
2. The company's vast data estate as a key competitive advantage
3. Strong financial performance in Moody's Analytics, driven by high recurring revenue and customer retention
4. Leadership in GenAI implementation, with promising early results
5. Balanced approach to investment and margin expansion
6. Long-term optimism about debt issuance trends despite short-term fluctuations

While challenges exist, including macroeconomic uncertainties and the need to navigate the adoption of new technologies, Moody's appears well-positioned for future growth. The company's focus on recurring revenue, data-driven insights, and technological innovation, particularly in AI, suggests a strong foundation for continued success in the evolving financial services landscape.

Those watching Moody's should pay close attention to the company's ARR growth, particularly in the second half of 2024, as well as the adoption rates of its GenAI-enabled products. The company's ability to execute on its margin expansion targets while continuing to invest in growth initiatives will also be crucial in determining its long-term performance.

As the financial services industry continues to evolve, Moody's blend of traditional credit expertise and cutting-edge technology positions it as a key player to watch in the coming years.