Moody's Corp Fireside Chat Hosted by RBC Capital Markets Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : So you've said Gen AI is a generational opportunity. I was just wondering if you could provide more color on why you believe that to be so.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : No, that's great. We were also very pleasantly surprised how quickly Moody's has embraced these technologies. Can you just give some color on how you've achieved this?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great color, Steve and Nick. And we will jump into the Microsoft partnership later because I think that's very important as well. But I just wanted to segue into the comments that you made on the Research Assistant. I was wondering, again, we were very pleasingly surprised how quickly you were able to launch the Research Assistant. And as you said, like because you've been working on these technologies for so long and as Nick highlighted, how the proprietary data being indexed really helped you provide the right framework. But I was wondering if you can just talk more about the Research Assistant product, if it's possible to give a demo or just provide an overview and also talk about how you were able to launch this product so quickly.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Yes. Nick and Steve, this was very helpful color. And maybe it's a good segue to jump into, as Nick, you mentioned, this is just one of the first of multiple different products to come. One of the questions that we get from investors is how should we think about this monetization opportunity from Gen AI? And maybe I was wondering if you could expand further on these products. Nick Reed Yes. So I mean, the honest answer is it's an evolving topic. We think about it, I guess, initially this way. We have always tried to offer as much value to our customers as possible. We really kind of price and go to market based on the value that we deliver to customers. And so we think of this as driving additional value. We think of this as being an opportunity to be able to deliver more value to customers, either because there are different types of people at those customers that will be able to access the content, or because the actual process that they undertake is just going to be better and easier. So if you're a researcher and you're trying to find out something about a company or a sector or a segment and you're trying to do that, your ability to do that using natural language is an increased value to you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 16, 2023 / 5:00PM, RY.TO - Moody's Corp Fireside Chat Hosted by RBC Capital Markets So what we're exploring with customers as part of this preview mode is exactly what that pricing strategy and monetization strategy looks like, grounded on the idea that it will be about delivering additional value to customers. And so I know that's not as specific an answer as some people might like, but this is what we're really testing with customers. We're just working out what do the mechanics look like? How are we going to be able to construct something that allows us to deliver the maximum amount of value and to be able to recoup economic growth in the process?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's fantastic. And I think now the comments that Rob made on the call around this really being -- like Gen AI being the catalyst to propel the risk operating system makes a lot of sense. And if I understood it correctly, you obviously have the ability to charge incremental for these assistant products, which are built in. But also, Nick and Steve, as you mentioned, significant opportunity to cross-sell and upsell as it improves the content discovery, but the value of putting all those data together becomes a lot more powerful in solving the customer solutions. So that's great. Maybe if I can ask another question, and maybe you alluded to it already, but is there also an opportunity that you may have now new use cases with the data that you historically may not have targeted? Is that another way to think about it? Or new customer base, new use cases, which is possible by combining these different data assets together?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great color. And Nick, we do want to talk about the privacy, security aspect, the data protection aspect that you mentioned. But before we jump there, maybe, Nick, a quick question for you because this is more about the ratings. I was wondering if you could talk about how you envision Gen AI being used as part of the MIS analysts and research, how you see this technology being implemented within the ratings business -- or sorry, the MIS business and particularly, because it's a highly regulated business, what do you see the challenge is there? Nick Reed Sure. I mean let's start. So we have an all of Moody's approach to the ability to leverage the underlying technology. And as we've said before, we have equally as many use cases about internal uses as we do kind of external uses. And so part of being able to do that was by creating this kind of safe and secure environment that allowed people to be able to just start doing that exploration, and that includes people in MIS. And so they are starting themselves to explore where is it going to be possible to be able to start using components or pieces of this technology to be able to just be more efficient and more effective. We have a kind of overarching philosophy that says we always want to have a human in the loop because whilst these tools allow us to be able to speed up or allow us to be able to have a kind of broader perspective because of the access that we can get to the underlying information, we do think that these are driving the effectiveness of our resources as much as they are just the efficiency question. And so people in MIS are in earnest exploring opportunities to be able to leverage. This is not a replacement strategy. This is not about being able to avoid scrutiny. Again, there's a pretty regulated, safe and secure process. And we're working inside those boundaries to be LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 16, 2023 / 5:00PM, RY.TO - Moody's Corp Fireside Chat Hosted by RBC Capital Markets able to work out where are there efficiencies that we can unlock, and how can we get our analyst resources to be able to be more informed, to get access to more information, to be able to drive better insight, to be able to leverage their time, to be able to do that kind of work rather than necessarily some of the efficiency type questions that we might have that would also be driven by the technology itself.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's very helpful color, Steve. And again, Steve, going back to the response for the prior question, you're absolutely right. I think like sell side, including person like me, but also buy side would be interested in the rich data set that you provide, that Moody's provide. And maybe it's much easy access.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Yes. But -- and I do want to talk about the efficiency piece that, Nick, you mentioned. But before we go there, I do want to talk about something you mentioned earlier on is just some of the challenges with Gen AI. The question around data protection and privacy, that's definitely #1 thing that gets brought up. The second thing is explainability. And again, maybe, Steve, as you and your team or the users have -- they tested it out, ability to explain the response. But also, right, like in the same way, one of the challenges with these large language model is hallucination or confabulation if I can -- what they call it now. But how do you address all these different challenges?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great. And again, thanks for sharing some of that underlying details on the RAG. Maybe one of the questions that we get, and at a very high level, how should we think about the timelines for some of this? And again, I'm not talking about exact dates or quarters, but is this 3 to 5 quarters? Is this next couple of years? Or is it 3, 5 years? Any high-level views there? Whatever you can share at a high -- very high level.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's fantastic. That's great to hear. Moving on to the next topic, something that, Nick, you mentioned earlier on the efficiency piece. And so I was wondering, both Nick and Steve, if you ¡ Steve, particularly, if you can talk about how do you think about the benefit that comes from the Gen AI. And I think in prior business update, there was a reference to one experiment where there was savings of as much as 40% of cost savings. Can you help us understand what's driving that savings and then also some use cases around it?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Steve, that's great color. So the way I understand it -- and sorry, Nick, I interrupted you, but the way I think about it is essentially, you're shrinking the software development time, which will essentially help you get products to the market faster and better monetization. And as you mentioned, like over the next 12 to 18 months, you have plans to launch several new assistant products since -- and incorporating as part of your software development process. So that's great to hear. Maybe the follow-up question there would be just around like are there use cases also on the data ingestion and processing front? Like software development is what we talked about, but what about there's a lot of data that's used either in the MIS process or even that comes into for your private company data. So can you also talk about the data ingestion and processing and the efficiencies there?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Yes. The opportunity seems pretty big and pretty -- as you said, a generational shift. Maybe just talking about investments, right? How do we think about all of this requires -- and you've already taken a lot of steps around the investment process. But how do we think about investments going forward? Do you have -- do you believe that you have the right engineers within Moody's or do you need to hire more in terms of other investments and technology infrastructure? Are there other things that we need to be cognizant of at a high level?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : The investments, like do you have the right resources in-house?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great. I just wanted to go back to 2 things that was mentioned earlier in our conversation. One was obviously the Microsoft partnership, and we want to drill down further on that front. So if you want to talk more about the Microsoft partnership, both from a technology perspective, but also the channel strategy, right? Nick, you also mentioned as part of the go-to-market strategy, like the channel strategy. And so, Steve, also if you can elaborate further not -- like your relationship with Microsoft, not only as a technology provider, but also as a channel partner.

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Yes, that's great. And so, Steve, as you mentioned, there's opportunity to work together on customers that you have in common, but also, it seems like there's a huge opportunity of accessing the SMB customer base through this particular channel. And so that's a significant LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. AUGUST 16, 2023 / 5:00PM, RY.TO - Moody's Corp Fireside Chat Hosted by RBC Capital Markets expansion of the TAM. And obviously, all these assistant products are also expanding the TAM that you already have in place. So I think that's very exciting. Maybe if I can just ask a quick question on the technology itself. And just like you decided to go with OpenAI, obviously, which is the market leader there, a market leader in Gen AI, but there are other providers. So I was wondering, is that -- was there a specific rationale for using OpenAI? And then just in terms of cloud strategy also, I was wondering if you could just provide some color on your hybrid cloud strategy and how that is also supporting, and as, Nick and Steve, both of you have talked about, like having the right infrastructure, the right data is also helping you propel your strategy faster, but any color on those fronts. Nick Reed Steve, why don't I do the...

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : Yes. So yes, it was just more about like models and then cloud also, your hybrid, multi-hybrid cloud strategy, how is that coming along? And how that has also -- having that strategy in place has helped propel the Gen AI initiatives?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great color. That was a very helpful conversation. Again, I thank -- thanks again for giving us this opportunity. I was just wondering, again, the way I think about it, as you mentioned, it's a generational opportunity, huge, expands your addressable markets, creates much more room for innovation and the pace at which these new products come to the market. I was wondering if you had any -- both, Steve and Nick, any closing thoughts. Anything that we didn't cover or anything that you want investors and us to take away?

Question: Ashish Sabadra - RBC Capital Markets, Research Division - Analyst : That's great. Nick, Steve, this was very helpful conversation, and I'm really excited as well. So thanks for sharing. Thanks for the time.