Let’s just do it right now. Some are locking into multiyear agreements, by the way. So they’re believers in this as a productivity enhancer for them. On the other side of the spectrum, where we have big customer relationships with large banks, we’re engaging very differently. The character of the conversation is a lot more like what we’ve seen over the years in the software and workflow sales dynamics. So we’re engaging very senior levels. They’re talking about leveraging what we’re doing as a transformational tool to change the way they do business. They see the opportunity to cut cost, maybe lower their cost of goods sold, maybe lower their increased productivity through platforming and using our capability as an element in their platforming efforts, like what we’re doing in terms of leveraging GenAI throughout the organization.
And we’re seeing transformation projects where people are looking forward to working with us, evaluating us very, very intentionally. And we’re engaging with scores of users to get a reading on can they really make a difference leveraging this tool or can we make a difference leveraging us in their organization. And we’re seeing some really interesting conversations often at the C level. So this isn’t your run of the mill add-on to the research service, which we’ve been doing for decades. This is a, gosh, this might really change the way I do investment research. This might really change the way I think about doing credit research at scale. And that’s one of the reasons we’re very excited about that dynamic. So the first couple of months have been interesting.
Smaller, faster decisions are happening, and people are buying the product at a rate that’s above our normal rate of sales patterns. The patterns are faster than normal. And at the top end, we’re seeing really good engagement in a way that I say, I think, is going to be quite profound for us.
Operator: Your next question will come from the line of Jeff Silber with BMO Capital Markets.
Jeff Silber: I think earlier in the call, you gave a little color on cadence for first half versus second half in terms of revenues and margins for MIS. And I’m wondering if you could do the same thing for the MA division.
Rob Fauber: Caroline, do you want to take that?
Caroline Sullivan: So for MA, we see a slightly different picture to MIS with regards to both revenue and with regards to expenses. So if we start at the fourth quarter for MA, we recorded just under $800 million of MA revenue and we’re expecting just above $800 million in Q1, and then steadily ramping up by $20 million to $25 million through quarter four. The MA margin will kind of follow a similar path. However, Q1 will be influenced just by some seasonality to our expenses associated with our annual compensation programs with our employees. So we’ll see higher payroll taxes associated with the vesting of employee stock grants and bonus payments. But then the margin is expected to follow a similar pattern to revenue, steadily ramping from a couple of percentage points below our full year guide of 30% to 31% in the first quarter to a couple of points above it by the time we get to Q4.
Rob Fauber: And while we’re on the topic of — now that we’ve covered MIS and MA calendarization, maybe let me just add a little bit in terms of thinking about then kind of pulling this together and thinking about what it might mean for adjusted diluted EPS. So we’ve got a little bit front end loaded issuance pattern that we talked about, the cadence that Caroline just touched on. From an adjusted diluted EPS standpoint, we think that the first quarter will be our strongest quarter in terms of absolute adjusted diluted EPS, followed by the second quarter. And maybe the easiest way to think about it is this. If you take the average quarterly EPS at the midpoint of our full year guide, and I think that’s somewhere between $2.60 and $2.70, then given the stronger front half issuance that we’ve talked about, we’d expect first quarter EPS to be something like $0.15 to $0.20 higher than that average for the first quarter.
Operator: Your next question comes from the line of Craig Huber with Huber Research Partners.
Craig Huber: Mike or Rob, I’m curious, with the ongoing massive problems out there in the commercial real estate market out there, I’m curious what your thought is on the potential impact for your CMBS issuance for this year, ratings there? And also, more importantly, on your banking client potential impact this year on the commercial real estate market out there, what are you sort of expecting for issuance there as well? And just my quick housekeeping question, what was the incentive comp in the fourth quarter, please, and also for the full year last year?
Rob Fauber: We’ll get Caroline teed up on that incentive comp question. I think, Craig, commercial real estate, actually, if you think about it kind of threads through a bunch of parts of our business, in terms of impact to the ratings business and it’s not just the CRE sector but the banking sector, and then the tools needed by folks in the market and sales cycle. So let me start with Mike.
Mike West: So on the structured finance, just to try and put that into context. I mean, we are anticipating overall that structured finance will grow mid single digit. And when you look into that, there’s different types of assets. And when we think about CMBS, let me just pick on CMBS first for your question. We believe that will still be muted given what’s going on in the CRE market, particularly in office. It is a viable funding alternative to bank finance, particularly as borrowers face restrictive lending standards. But I do want to emphasize that when we look at our structured finance business we are expecting still a active market in ABS and CLOs. I’m very happy at some point on the call to talk a little bit more about CLOs. RMBS, on the other hand, again, muted because of the asset formation, which we expect to improve as the year goes on. But with that, I might just pass it to Steve about the MA side of CRE.
Steve Talinko: So I mean, I think we’ve been talking a lot in the firm and with our customers about the impact of, I’ll call it, stress in the CRE sector, particularly in the office sector. And we all know many of the causes there. We’ve had really good interest from our banking customers especially. We launched — you may remember at the Innovation Day back in September, we highlighted the CreditLens CRE module, which was really a credit decisioning tool, software application that combines all of our data and analytics capabilities in the commercial real estate space to help lenders do their jobs more effectively. And we’ve seen really good growth there in the banking segment, that was one of the big drivers of growth for us.
So I would say that’s exactly what you would expect. As people start to be more aware of risk, they start to call us a little bit more. And this is one of those dynamics in MA where risk goes up, people call us more often. Risk goes down, they start to think about taking more chances, so maybe looking for more alpha perhaps. So we get called there, too. So the CRE segment and the CRE, I’ll call it, stress is something that we find an attractive dynamic for the business overall.
Rob Fauber: There’s almost like a tipping point where when there’s too much stress in the banking system, it can ultimately become a headwind for us. As Steve said, when there’s the need for real insight and better understanding around credit, that’s a positive. And I think what we saw in March of last year was just about going over that tipping point. Caroline, do you want to answer the second part of Craig’s question?
Caroline Sullivan: Craig, with regards to incentive comp, for the fourth quarter, we recorded about $100 million. So that got us to about $400 million for all of fiscal 2023. And just with regards to 2024, we expect incentive comp to be between about $400 million to $420 million, so think about $100 million to $105 million per quarter.
Operator: Your next question comes from the line of Owen Lau with Oppenheimer.
Owen Lau: So going back to your MIS revenue guidance, you guided to high single digit to low double digit percentage, which is higher than your peers and mid to high single digits. And I know you have limited information about your peers. But could you please try and talk about some of the potential drivers for the difference?
Rob Fauber: I think, Mike, why don’t I hand that to you?
Mike West: I’ll start at the macro level. And as Rob mentioned, overall, constructive outlook for 2024. And underpinning this is that, first of all, market uncertainty that we’ve experienced over the last couple of years starts to subside. And if you think that transmission is to a lower execution risk in the primary markets and also improved secondary trading that leaves more opportunity for issuance, and that’s what we’re seeing at the moment. We have an assumption around a rate decrease in the second quarter and that’s unchanged despite some of the CPI print today. We’ve already seen that spreads have come in meaningfully, both in investment grade and sub-investment grade, which leaves the market open for the rating scale from investment grade down to the lower rated credits.
And that’s important as one of our expectations here is that leverage finance improves and recovers during the year from historical lows over the last couple of years. In here is also the 10% increase in the refinancing walls, we talked about that on the last call, and a modest recovery in M&A. That’s still uncertain but there’s certainly sizable dry powder and cash on the corporate balance sheet. There’s also a backdrop here. Even though we’ve got moderating economic growth, we are assuming an avoidance of a deep recession and therefore, economic resiliency, and looking towards that growth in 2025 as people think about deploying long term capital. At the same time, as spread comes in, that is also a key assumption in our default study. And as we get over that peak default period during the year, as spreads come in, that is a more favorable environment for the lower end of spec grade.
So that’s underpinning a lot of our macro picture. But Rob, do you want to add anything?
Rob Fauber: And we can — if people want to get into the asset level guidance, we’re happy to do that in another question. I also — I think it was Manav that asked a question about recurring revenue in MIS, and maybe let me just come back to that. That continues to be — our view on that is it continues to be in that kind of low to mid-single digit range for revenue. This ties in part to first time mandates. Obviously, first time mandates are what build the stock of rated issuers that we surveil. So just a little insight there. We saw a pretty significant slowdown in first time mandates since, I’d say, third quarter of 2022. The fourth quarter, first time mandates were about in line with the fourth quarter of 2022. We are expecting that to start to pick back up. And that’s not surprising given what you see as our expectations for high yield and leveraged loans. And so that will support a slight uptick, I think, in recurring revenue growth for MIS.
Operator: Your next question comes from the line of Scott Wurtzel with Wolfe Research.
Scott Wurtzel: I just wanted to go back to the Research Assistant. I understand it’s only been a couple of months since you launched the product, but wondering if you could maybe share some feedback since the launch and anything you’ve learned about the product in the last couple of months?
Rob Fauber: I would say we are happy about a couple of things. One, the product development process, the work we did in engineering and product development to get this thing out happened more quickly than maybe some of our previous product launches. So we’re really excited about some of the changes we’ve made and we were able to get to market faster, that’s partially because of the fact that we’re leveraging GenAI tools and partially because we have some platform engineering elements that make us able to move a little bit more quickly. So that’s one good note. In terms of take-up among customers, it’s early days. Oftentimes, the initial stage of the sales cycles I would measure in months. But we have more units in the first six weeks than we’ve seen among virtually any other product we’ve launched in the past.
So the people are making buying decisions quickly. Remember, we started with a December 1 commercial launch. So they’re making decisions within six weeks. Oftentimes, you would look at a sales cycle being measured in months. So that’s a really good sign. And again, I mentioned earlier that we’re really encouraged by the engagement at the senior levels, CEOs. I literally know one of the largest banks in the United States. We were the topic of conversation at the CEO’s table within the last few weeks where they literally were thinking and talking about this is one of the elements in their transformation program. COOs, senior levels of investment managers and banks and insurance companies, where I’m talking to people and our sales reps are talking to people at a different level than we’ve seen in the past.
So I would say we’re very encouraged by that. Those sales cycles, I think, will go faster than maybe they might have in previous product launches. But you still need to engage with people and their technology groups, their cyber groups, their compliance groups, to make sure when you’re making this big of a decision that this transformational that you’ve got all your bases covered. So we’re pretty encouraged by that. Hopefully, that’s a good sense for color on the demand environment.
Operator: Your next question comes from the line of Shlomo Rosenbaum with Stifel.
