CHICAGO, Oct. 25,
2023 /PRNewswire/ -- Morningstar, Inc. (Nasdaq:
MORN), a leading provider of independent investment insights,
posted solid third-quarter revenue growth, driven primarily by the
performance of its license- and asset-based products.
"We saw strength in the business this quarter as license-based
products continued to thrive and our asset-based products rebounded
with the markets," said Kunal
Kapoor, Morningstar's chief executive officer. "Supported by
that growth, as well as careful management of expenses, we made
meaningful progress expanding margins. Among other highlights for
the quarter, we launched Enterprise Analytics for Morningstar
Advisor Workstation, introduced the Intelligence Engine API to help
financial services firms build their own generative AI, and
announced that ADP, a leading provider of retirement plan services,
will offer access to Morningstar Investment Management's
advisor-managed accounts."
Starting with the Company's Form 10-Q for the quarter ended
Sept. 30, 2023, the Company will
begin to report multiple segments. The Company's quarterly
shareholder letter provides more context on its quarterly results
and business and can be found at shareholders.morningstar.com.
Third-Quarter 2023 Financial Highlights
- Reported revenue increased 10.1% to $515.5 million compared to the prior-year period;
organic revenue grew 9.3%.
- Reported operating income increased to $70.0 million from $22.0
million; adjusted operating income increased 20.1%.
Operating and adjusted operating income both include a $6.0 million expense related to settlements
between DBRS Morningstar and the U.S. Securities and Exchange
Commission (SEC) described below and $5.0
million in severance costs related to reorganizations in
certain areas of the business, excluding activities related to the
Company's China operations.
- Diluted net income (loss) per share increased to $0.91 versus $(0.21); adjusted diluted net income per share
increased 66.2% to $1.28.
- Cash provided by operating activities increased 28.0% to
$130.7 million. Free cash flow
increased 48.2% to $101.4 million.
Cash flows were negatively impacted by $16.1
million in severance and related costs paid in the quarter
related to the reduction and shift of the Company's China operations. Excluding these items and
comparable items in the prior-year period, cash provided by
operating activities and free cash flow would have increased by
41.2% and 67.1%, respectively.
Year-To-Date Financial Highlights
- Reported revenue increased 7.5% to $1,499.9 million compared to the prior-year
period; organic revenue grew 5.8%.
- Reported operating income increased 2.9% to $136.2 million; adjusted operating income
decreased by 8.2%.
- Diluted net income per share increased 1.3% to $1.58; adjusted diluted net income per share
decreased by 4.8% to $3.14.
- Cash provided by operating activities decreased 8.1% to
$178.6 million. Free cash flow
decreased 11.3% to $89.5 million.
Cash flows were negatively impacted by certain items described in
the Balance Sheet and Capital Allocation section totaling
$90.6 million. Excluding these items
and comparable items in the prior-year period, cash provided by
operating activities and free cash flow would have increased by
14.0% and 26.1%, respectively.
Third-Quarter 2023 Results
Revenue increased 10.1% to $515.5
million. Organic revenue, which excludes foreign currency
effects, increased 9.3% versus the prior-year period, reflecting
solid growth in the Company's license- and asset-based product
areas.
License-based revenue increased 12.2% versus the prior-year
period, or 10.6% on an organic basis. PitchBook, Morningstar Data,
Morningstar Direct, and Morningstar Sustainalytics license-based
products all provided meaningful contributions to reported and
organic revenue growth in the quarter. Asset-based revenue
increased 6.2% versus the prior-year period, or 10.4% organically,
driven by growth in Morningstar Indexes' asset-based products,
Morningstar Retirement (previously branded Workplace Solutions),
and Investment Management. This growth was supported by the rebound
in global asset values and net inflows across multiple products
compared to the prior-year period. Transaction-based revenue
increased 2.1% compared to the prior-year period and was roughly
flat on an organic basis.
Operating expense decreased slightly to $445.5 million. Costs related to the reduction
and shift of the Company's China
operations totaled $2.6 million in
the quarter, compared to $30.1
million in the prior-year period, as the Company
substantially completed these activities in the quarter. Excluding
the impact of these costs, M&A-related expenses, and
amortization in both periods, operating expense increased 8.1% in
the quarter, with the DBRS SEC settlements and targeted
reorganizations in certain parts of the business contributing 2.8
percentage points to that increase.
The largest contributors to the decline in reported operating
expense were severance, stock-based compensation, and professional
fees.
- Severance expense decreased by $20.4
million, compared to the prior-year period when severance
related to the transition and shift of the Company's China operations totaled $26.3 million. This decline was partially offset
by $5.0 million of severance expense
related to targeted reorganizations in certain areas of the
business during the quarter.
- Stock-based compensation expense decreased by $7.4 million, primarily driven by the PitchBook
management bonus plan. The current year of the plan features lower
target payouts versus the prior-year plan. In 2022, higher
stock-based compensation was driven in large part by the
overachievement of targets under the prior-year plan.
- Professional fees decreased by $6.5
million, reflecting efforts to reduce the use of outside
professional services as well as lower expenses for third-party
resources supporting M&A activity and the transition of the
Company's China-based
activities.
The above decreases were partially offset by growth in
compensation costs, expense related to the DBRS Morningstar SEC
settlements, and higher depreciation expense.
- Compensation costs increased $26.8
million, reflecting higher average headcount during the
quarter compared to the prior-year period and merit increases.
Headcount as of Sept. 30, 2023
decreased 1.3% compared to Sept. 30,
2022, and 4.6% sequentially from June
30, 2023 to 11,566.
- On Sept. 29, 2023, DBRS
Morningstar entered into two settlements with the SEC requiring
DBRS Morningstar to pay an aggregate of $8.0
million in civil monetary penalties. The SEC settlements
resulted in a $6.0 million expense
for the quarter, bringing the total expense to $8.0 million for the year-to-date period. The SEC
settlements were paid in early October
2023.
- Depreciation expense increased $3.5
million primarily as a result of higher capitalized software
costs for product enhancements in prior periods.
Third-quarter operating income was $70.0
million, compared to $22.0
million in the prior-year period. Adjusted operating income
was $92.0 million, an increase of
20.1%. Third-quarter operating margin was 13.6%, compared with 4.7%
in the prior-year period. Adjusted operating margin was 17.8% in
the third quarter of 2023, versus 16.4% in the prior-year period.
During the quarter, the Company engaged in targeted reorganizations
and headcount reductions at Morningstar Sustainalytics, Morningstar
Wealth, and DBRS Morningstar. The most significant reductions were
in Morningstar Sustainalytics. These reorganizations were in
response to slower than anticipated progress versus growth targets
due in part to softening demand for ESG solutions for Morningstar
Sustainalytics, the impact of sharp market declines in 2022 for
Morningstar Wealth, and weak credit issuance activity, especially
in U.S. commercial-mortgage backed securities (CMBS), for DBRS
Morningstar. Severance costs related to these reorganizations
negatively impacted operating margin and adjusted operating margin
by 1.0 percentage point. In addition, the DBRS Morningstar SEC
settlements negatively impacted operating margin and adjusted
operating margin by 1.2 percentage points.
Net income (loss) in the third quarter of 2023 was $39.1 million, or $0.91 per diluted share, compared with net income
(loss) of $(9.0) million, or
$(0.21) per diluted share, in the
third quarter of 2022. Adjusted diluted net income per share
increased 66.2% to $1.28 in the third
quarter of 2023, compared with $0.77
in the prior-year period.
The Company's effective tax rate was 29.9% in the third quarter
of 2023 and was not comparable to the third quarter of 2022 when
the tax provision reflected a tax expense against negative pre-tax
book income. The Company's effective tax rate for the first nine
months of 2023 was 21.8%, compared to 30.9% in the prior-year
period. The decrease was primarily due to the recognition of
$13.7 million of tax benefits in the
second quarter of 2023 related to the approval of a retroactive tax
election with respect to our 2021 and 2022 tax periods.
Product Revenue Contributions
PitchBook, Morningstar Data, Morningstar Direct, and Morningstar
Sustainalytics were the top four contributors to consolidated and
organic revenue growth in the third quarter of 2023. (For more
detail on product key metrics, refer to the Supplemental Data table
contained in this release and the Supplemental Presentation
included on our Investor Relations website at
shareholders.morningstar.com under "Financials — Financial
Summary".)
Key drivers of the quarterly consolidated revenue trend are
provided below. Organic revenue excludes all foreign currency
effects, which accounted for the entire difference between reported
and organic growth for all product areas.
- PitchBook contributed $20.7
million to consolidated revenue growth, with revenue
increasing 19.8% on a reported and organic basis, driven by
strength in its core investor and advisor segments, which offset
some continued softness in the company (corporate) segment.
Licenses grew 11.2%, reflecting both new client users and expansion
with existing clients, as well as variability driven by user
maintenance activities and updates to user lists when enterprise
clients renew. During the quarter, PitchBook continued its
integration of Leveraged Commentary & Data (LCD), with a
meaningful expansion of debt deals and new bond and loan data sets
available on the platform. Additional enhancements to the platform
included the introduction of Manager Scores, a new tool to uncover
top-performing fund managers across vintages and strategies.
Results exclude LCD revenues.
- Morningstar Data contributed $7.9
million to consolidated revenue growth, with revenue
increasing 12.5%, or 10.2% on an organic basis, supported by growth
across all geographies, especially North
America. At the product level, fund data continued to be the
key driver of higher revenue, followed by growth in equity data and
Morningstar Essentials.
- Morningstar Direct contributed $5.3 million to consolidated revenue growth, with
revenue increasing 11.5%, or 9.8% on an organic basis, reflecting
growth across all geographies. During the quarter, Morningstar
Direct launched Direct Lens, which received positive initial
feedback and adoption from customers. Direct licenses increased
2.1%.
- DBRS Morningstar contributed $1.1
million to consolidated revenue growth, with revenue
increasing 2.1%, or 1.4% on an organic basis, primarily driven by
an increase in asset-backed securities (ABS) revenue, including
revenue related to ratings activity in nontraditional, niche
("esoteric") securities. Corporate ratings revenue also increased
modestly, reflecting gains in Europe and Canada and a decline in the U.S. where market
conditions remain challenging for private and middle-market
corporate debt issuance. This growth was largely offset by declines
in residential mortgage-backed securities ratings revenue and CMBS
ratings revenue. Revenue related to data products also increased.
Organic revenue increased in Europe, was relatively flat in Canada, and decreased modestly in the
U.S.
- Investment Management contributed $2.0 million to consolidated revenue growth, with
revenue increasing 6.9% on a reported and organic basis. Reported
assets under management and advisement (AUMA) increased 7.4% to
$50.7 billion compared with the
prior-year period, primarily due to market gains and positive net
flows for direct-to-advisor sold Managed Portfolios, which
reflected strong net inflows outside the U.S. and flat flows in the
U.S. This offset lower AUMA for the Institutional Asset Management
product, which experienced a client loss in the second quarter of
2023. Organic results include contributions from Praemium.
- Morningstar Sustainalytics contributed $4.7 million to consolidated revenue growth, with
revenue increasing 17.9% or 13.7% on an organic basis.
License-based revenue increased 21.7%, or 17.4% on an organic
basis, while transaction-based revenue decreased 11.6%, or 13.5% on
an organic basis. While still strong, license-based product revenue
growth slowed across regions compared to recent quarters reflecting
softer demand for ESG solutions. Growth rates were strongest in
EMEA, which continued to benefit from solid demand for regulatory
and compliance products, and AsiaPac. Growth in North America was weaker, reflecting softness
in parts of the U.S. asset management and wealth segments. Softer
demand for new second-party opinions on sustainable bond issuance
contributed to the decline in transaction-based revenue.
- Morningstar Retirement (formerly Workplace Solutions)
contributed $2.7 million to
consolidated revenue growth, with revenue increasing 10.8% on a
reported and organic basis. AUMA increased 10.8% to $212.9 billion compared with the prior-year
period, reflecting market gains and positive net flows, supported
by growth in Advisor Managed Accounts. With the addition of a new
large employer in the quarter, Morningstar Retirement now offers
its managed retirement accounts to two of the 10 largest defined
contribution retirement plans with combined plan assets totaling
nearly $1 trillion as of 2022.
- Morningstar Advisor Workstation contributed $1.0 million to consolidated revenue growth, with
revenue increasing 4.1%, or 4.6% on an organic basis. The
Investment Planning Experience (IPX), launched earlier this year,
continued to drive new business and upsells with both advisor and
enterprise clients. During the quarter, IPX was enhanced to include
goal planning capabilities, which allow advisors to demonstrate how
their advice will help investors meet financial goals. In addition,
Advisor Workstation launched Enterprise Analytics in mid-September,
which offers firms deeper visibility and insights into firmwide
advisor activity and has contributed to early sales wins.
- Morningstar Indexes contributed $3.8 million to consolidated revenue growth, with
revenue increasing 27.8%, or 27.3% on an organic basis. The
increase in revenue was driven in part by higher investable product
revenue, supported by market gains and net inflows. Licensed-data
revenue also increased. LCD-related revenue was included in organic
growth for the quarter.
Reduction and Shift of China Operations
During the quarter the Company substantially completed the
reduction of its operations in Shenzhen,
China and the shift of work related to its global business
functions. Costs related to this transition totaled $2.6 million in the third quarter of 2023 and
$15.5 million for the year-to-date
period and included severance and personnel costs; transformation
costs, which consisted of professional fees and the temporary
duplication of headcount as the Company hired replacement roles in
other markets and continued to employ certain Shenzhen-based staff through the transition;
and asset impairment costs.
Balance Sheet and Capital Allocation
As of Sept. 30, 2023, the Company
had cash, cash equivalents, and investments totaling $363.7 million and $1.1
billion of debt, compared with $414.6
million and $1.1 billion,
respectively, as of Dec. 31, 2022.
Cash provided by operating activities increased 28.0% to
$130.7 million for the third quarter
of 2023, compared to the prior-year period. Free cash flow
increased 48.2% to $101.4 million,
compared to the prior-year period. The increases in cash provided
by operating activities and free cash flow were primarily driven by
higher cash earnings. During the third quarter, the Company paid
$16.1 million of severance and other
costs related to the significant reduction and shift of the
Company's operations in China,
which was mostly offset by other positive changes in working
capital. Excluding the impact of these severance payments and
related costs and comparable items in the prior-year period, cash
provided by operating activities and free cash flow would have
increased by 41.2% and 67.1%, respectively. In addition, the
Company paid $16.0 million in
dividends in the quarter.
Cash provided by operating activities decreased 8.1% to
$178.6 million for the first nine
months of 2023 compared to the prior year. Operating cash flow and
free cash flow were impacted by the termination of the Company's
license agreement with Morningstar Japan K.K (renamed SBI Global
Asset Management) and the final $50.0
million contingent payment related to the acquisition of
LCD, of which $4.5 million is
reflected in operating cash flows and $45.5
million is reflected in financing cash flows. Excluding the
$4.5 million LCD contingent payment
within operating cash flow, payments related to the termination
agreement of $59.9 million, and
$26.2 million of severance and other
related costs paid for the China
transition, which together totaled $90.6
million, as well as comparable items in the prior-year
period, cash provided by operating activities and free cash flow
would have increased by 14.0% and 26.1%, respectively.
New Reporting Presentation
The Company re-evaluated its operating segments and will begin
reporting multiple segments in the Form 10-Q for the quarter ended
Sept. 30, 2023, which is expected to
be filed with the SEC on or before the statutory filing deadline of
Nov. 9, 2023.
At the time the Form 10-Q is filed, the Company will update its
supplemental quarterly presentation to provide more detail on its
reportable segments. Going forward, the Company is also evaluating
how best to communicate to investors under the new segment
reporting framework in future press releases reporting financial
results. It welcomes questions on the change submitted in writing
to investors@morningstar.com and will make written responses to
selected inquiries available to all investors at the same time in
one or more Form 8-Ks furnished to the SEC.
Use of Non-GAAP Financial Measures
The tables at the end of this press release include a
reconciliation of the non-GAAP financial measures used by the
Company to comparable GAAP measures and an explanation of why the
Company uses them.
Investor Communication
Morningstar encourages all interested parties — including
securities analysts, current shareholders, potential shareholders,
and others — to submit questions in writing. Investors and others
may send questions about Morningstar's business to
investors@morningstar.com. Morningstar will make written
responses to selected inquiries available to all investors at the
same time in Form 8-Ks furnished to the SEC, periodically.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent
investment insights in North
America, Europe,
Australia, and Asia. The Company offers an extensive line of
products and services for individual investors, financial advisors,
asset managers and owners, retirement plan providers and sponsors,
and institutional investors in the debt and private capital
markets. Morningstar provides data and research insights on a wide
range of investment offerings, including managed investment
products, publicly listed companies, private capital markets, debt
securities, and real-time global market data. Morningstar also
offers investment management services through its investment
advisory subsidiaries, with approximately $264 billion in
assets under advisement and management as of Sept. 30, 2023. The Company operates through
wholly- or majority-owned subsidiaries in 32 countries. For
more information, visit www.morningstar.com/company. Follow
Morningstar on Twitter @MorningstarInc.
Caution Concerning Forward-Looking Statements
This press release contains forward-looking statements as that
term is used in the Private Securities Litigation Reform Act of
1995. These statements are based on our current expectations about
future events or future financial performance. Forward-looking
statements by their nature address matters that are, to different
degrees, uncertain, and often contain words such as "may," "could,"
"expect," "intend," "plan," "seek," "anticipate," "believe,"
"estimate," "predict," "potential," "prospects," or "continue."
These statements involve known and unknown risks and uncertainties
that may cause the events we discuss not to occur or to differ
significantly from what we expect. For us, these risks and
uncertainties include, among others, failing to maintain and
protect our brand, independence, and reputation; liability related
to cybersecurity and the protection of confidential information,
including personal information about individuals; compliance
failures, regulatory action, or changes in laws applicable to our
credit ratings operations, investment advisory, ESG and index
businesses; failing to innovate our product and service offerings,
or anticipate our clients' changing needs; prolonged volatility or
downturns affecting the financial sector, global financial markets,
and the global economy and its effect on our revenue from
asset-based fees and our credit ratings business; failing to
recruit, develop, and retain qualified employees; liability for any
losses that result from errors in our automated advisory tools;
inadequacy of our operational risk management and business
continuity programs in the event of a material disruptive event;
failing to realize the expected business or financial benefits of
our acquisitions and investments; failing to scale our operations
and increase productivity and its effect on our ability to
implement our business plan; artificial intelligence and related
new technologies may present business, compliance, and
reputational risks; failing to maintain growth across our
businesses in today's fragmented geopolitical, regulatory and
cultural world; liability relating to the information and data we
collect, store, use, create, and distribute or the reports that we
publish or are produced by our software products; the potential
adverse effect of our indebtedness on our cash flows and financial
flexibility; challenges in accounting for complexities in taxes in
the global jurisdictions in which we operate that could materially
affect our tax rate; failing to protect our intellectual property
rights or claims of intellectual property infringement against us;
the impact of any litigation, regulatory, and other business
matters; our new reporting segments and the associated disclosures.
A more complete description of these risks and uncertainties can be
found in our filings with the Securities and Exchange Commission,
including our most recent Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q. If any of these risks and uncertainties
materialize, our actual future results and other future events may
vary significantly from what we expect. We do not undertake to
update our forward-looking statements as a result of new
information or future events.
Media Relations Contact:
Stephanie Lerdall, +1 312-244-7805,
stephanie.lerdall@morningstar.com
Investor Relations Contact:
Sarah Bush, +1 312-384-3754,
sarah.bush@morningstar.com
©2023 Morningstar, Inc. All Rights Reserved.
MORN-E
Morningstar, Inc.
and Subsidiaries Unaudited Condensed Consolidated
Statements of Income
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in millions, except
per share amounts)
|
|
2023
|
|
2022
|
|
Change
|
|
2023
|
|
2022
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 515.5
|
|
$ 468.2
|
|
10.1 %
|
|
$
1,499.9
|
|
$
1,395.6
|
|
7.5 %
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue
|
|
202.9
|
|
195.4
|
|
3.8 %
|
|
638.1
|
|
584.3
|
|
9.2 %
|
Sales and
marketing
|
|
106.3
|
|
89.7
|
|
18.5 %
|
|
323.4
|
|
262.9
|
|
23.0 %
|
General and
administrative
|
|
89.7
|
|
116.9
|
|
(23.3) %
|
|
263.8
|
|
294.3
|
|
(10.4) %
|
Depreciation and
amortization
|
|
46.6
|
|
44.2
|
|
5.4 %
|
|
138.4
|
|
121.8
|
|
13.6 %
|
Total operating
expense
|
|
445.5
|
|
446.2
|
|
(0.2) %
|
|
1,363.7
|
|
1,263.3
|
|
7.9 %
|
Operating
income
|
|
70.0
|
|
22.0
|
|
NMF
|
|
136.2
|
|
132.3
|
|
2.9 %
|
Operating
margin
|
|
13.6 %
|
|
4.7 %
|
|
8.9 pp
|
|
9.1 %
|
|
9.5 %
|
|
(0.4) pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income
(loss), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
(12.8)
|
|
(10.5)
|
|
21.9 %
|
|
(40.2)
|
|
(17.3)
|
|
NMF
|
Expense from equity
method transaction, net
|
|
—
|
|
—
|
|
— %
|
|
(11.8)
|
|
—
|
|
NMF
|
Other income (loss),
net
|
|
0.2
|
|
(13.8)
|
|
NMF
|
|
7.0
|
|
(15.0)
|
|
NMF
|
Non-operating income
(loss), net
|
|
(12.6)
|
|
(24.3)
|
|
(48.1) %
|
|
(45.0)
|
|
(32.3)
|
|
39.3 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes and equity in investments of unconsolidated
entities
|
|
57.4
|
|
(2.3)
|
|
NMF
|
|
91.2
|
|
100.0
|
|
(8.8) %
|
Equity in investments
of unconsolidated entities
|
|
(1.6)
|
|
(1.3)
|
|
23.1 %
|
|
(4.7)
|
|
(2.7)
|
|
74.1 %
|
Income tax
expense
|
|
16.7
|
|
5.4
|
|
NMF
|
|
18.9
|
|
30.1
|
|
(37.2) %
|
Consolidated net income
(loss)
|
|
$
39.1
|
|
$
(9.0)
|
|
NMF
|
|
$
67.6
|
|
$
67.2
|
|
0.6 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
0.92
|
|
$
(0.21)
|
|
NMF
|
|
$
1.59
|
|
$
1.57
|
|
1.3 %
|
Diluted
|
|
$
0.91
|
|
$
(0.21)
|
|
NMF
|
|
$
1.58
|
|
$
1.56
|
|
1.3 %
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
42.7
|
|
42.5
|
|
0.5 %
|
|
42.6
|
|
42.7
|
|
(0.2) %
|
Diluted
|
|
42.9
|
|
42.7
|
|
0.5 %
|
|
42.8
|
|
43.0
|
|
(0.5) %
|
|
|
|
NMF - Not
meaningful, pp - percentage points
|
Morningstar, Inc.
and Subsidiaries Unaudited Condensed Consolidated Balance
Sheets
|
|
|
|
As of September
30,
|
|
As of
December 31,
|
(in millions)
|
|
2023
|
|
2022
|
|
|
|
|
|
Assets
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash and cash
equivalents
|
|
$
325.0
|
|
$
376.6
|
Investments
|
|
38.7
|
|
38.0
|
Accounts receivable,
net
|
|
298.0
|
|
307.9
|
Income tax receivable,
net
|
|
8.8
|
|
—
|
Other current
assets
|
|
87.7
|
|
88.3
|
Total current
assets
|
|
758.2
|
|
810.8
|
|
|
|
|
|
Goodwill
|
|
1,569.0
|
|
1,571.7
|
Intangible assets,
net
|
|
495.4
|
|
548.6
|
Property, equipment,
and capitalized software, net
|
|
204.3
|
|
199.4
|
Operating lease
assets
|
|
163.4
|
|
191.6
|
Investments in
unconsolidated entities
|
|
104.8
|
|
96.0
|
Deferred tax assets,
net
|
|
10.4
|
|
10.8
|
Other assets
|
|
38.6
|
|
45.9
|
Total
assets
|
|
$
3,344.1
|
|
$
3,474.8
|
|
|
|
|
|
Liabilities and
equity
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Deferred
revenue
|
|
$
486.9
|
|
$
455.6
|
Accrued
compensation
|
|
180.6
|
|
220.1
|
Accounts payable and
accrued liabilities
|
|
70.1
|
|
76.2
|
Operating lease
liabilities
|
|
36.0
|
|
37.3
|
Current portion of
long-term debt
|
|
32.1
|
|
32.1
|
Contingent
consideration liability
|
|
—
|
|
50.0
|
Other current
liabilities
|
|
3.8
|
|
11.2
|
Total current
liabilities
|
|
809.5
|
|
882.5
|
|
|
|
|
|
Operating lease
liabilities
|
|
148.7
|
|
176.7
|
Accrued
compensation
|
|
23.0
|
|
20.7
|
Deferred tax
liabilities, net
|
|
52.3
|
|
62.9
|
Long-term
debt
|
|
1,023.4
|
|
1,077.5
|
Other long-term
liabilities
|
|
43.1
|
|
47.4
|
Total
liabilities
|
|
2,100.0
|
|
2,267.7
|
Total
equity
|
|
1,244.1
|
|
1,207.1
|
Total liabilities and
equity
|
|
$
3,344.1
|
|
$
3,474.8
|
Morningstar, Inc.
and Subsidiaries Unaudited Condensed Consolidated
Statements of Cash Flows
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in millions)
|
|
2023
|
|
2022
|
|
2023
|
|
2022
|
Operating
activities
|
|
|
|
|
|
|
|
|
Consolidated net income
(loss)
|
|
$
39.1
|
|
$
(9.0)
|
|
$
67.6
|
|
$
67.2
|
Adjustments to
reconcile consolidated net income (loss) to net cash flows from
operating activities
|
|
57.9
|
|
79.2
|
|
119.3
|
|
183.1
|
Changes in operating
assets and liabilities, net
|
|
33.7
|
|
31.9
|
|
(8.3)
|
|
(56.0)
|
Cash provided by
operating activities
|
|
130.7
|
|
102.1
|
|
178.6
|
|
194.3
|
Investing
activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(29.3)
|
|
(33.7)
|
|
(89.1)
|
|
(93.4)
|
Acquisitions, net of
cash acquired
|
|
—
|
|
(0.2)
|
|
—
|
|
(646.8)
|
Purchases of
investments in unconsolidated entities
|
|
(0.2)
|
|
(1.7)
|
|
(1.1)
|
|
(28.3)
|
Other, net
|
|
8.2
|
|
(0.4)
|
|
41.1
|
|
7.5
|
Cash used for
investing activities
|
|
(21.3)
|
|
(36.0)
|
|
(49.1)
|
|
(761.0)
|
Financing
activities
|
|
|
|
|
|
|
|
|
Common shares
repurchased
|
|
—
|
|
(15.2)
|
|
(1.4)
|
|
(217.7)
|
Dividends
paid
|
|
(16.0)
|
|
(15.3)
|
|
(47.9)
|
|
(46.2)
|
Repayments of
debt
|
|
(128.1)
|
|
(90.0)
|
|
(314.4)
|
|
(310.9)
|
Proceeds from
debt
|
|
30.0
|
|
70.0
|
|
260.0
|
|
1,110.0
|
Payment of
acquisition-related earn-outs
|
|
—
|
|
—
|
|
(45.5)
|
|
(16.2)
|
Other, net
|
|
(6.0)
|
|
(6.6)
|
|
(25.8)
|
|
(27.2)
|
Cash provided by (used
for) financing activities
|
|
(120.1)
|
|
(57.1)
|
|
(175.0)
|
|
491.8
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
(7.6)
|
|
(16.5)
|
|
(6.1)
|
|
(36.2)
|
Net decrease in cash
and cash equivalents
|
|
(18.3)
|
|
(7.5)
|
|
(51.6)
|
|
(111.1)
|
Cash and cash
equivalents-beginning of period
|
|
343.3
|
|
380.2
|
|
376.6
|
|
483.8
|
Cash and cash
equivalents-end of period
|
|
$
325.0
|
|
$
372.7
|
|
$
325.0
|
|
$
372.7
|
Morningstar, Inc.
and Subsidiaries Supplemental Data
(Unaudited)
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in
millions)
|
|
2023
|
|
2022
|
|
Change
|
Organic
(2)
|
|
2023
|
|
2022
|
|
Change
|
Organic
(2)
|
Revenue by
type (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License-based
(3)
|
|
$
384.5
|
|
$
342.6
|
|
12.2 %
|
10.6 %
|
|
$
1,124.5
|
|
$
982.0
|
|
14.5 %
|
12.3 %
|
Asset-based
(4)
|
|
71.5
|
|
67.3
|
|
6.2 %
|
10.4 %
|
|
204.1
|
|
203.4
|
|
0.3 %
|
1.0 %
|
Transaction-based
(5)
|
|
59.5
|
|
58.3
|
|
2.1 %
|
0.1 %
|
|
171.3
|
|
210.2
|
|
(18.5) %
|
(19.7) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
contributors (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PitchBook
|
|
$
125.4
|
|
$
104.7
|
|
19.8 %
|
19.8 %
|
|
$
361.4
|
|
$
296.9
|
|
21.7 %
|
21.7 %
|
Morningstar
Data
|
|
71.2
|
|
63.3
|
|
12.5 %
|
10.2 %
|
|
207.9
|
|
190.9
|
|
8.9 %
|
9.5 %
|
DBRS Morningstar
(7)
|
|
52.9
|
|
51.8
|
|
2.1 %
|
1.4 %
|
|
153.9
|
|
186.2
|
|
(17.3) %
|
(16.4) %
|
Morningstar
Direct
|
|
51.2
|
|
45.9
|
|
11.5 %
|
9.8 %
|
|
149.9
|
|
137.3
|
|
9.2 %
|
9.6 %
|
Investment
Management
|
|
31.1
|
|
29.1
|
|
6.9 %
|
6.9 %
|
|
90.1
|
|
89.9
|
|
0.2 %
|
(5.3) %
|
Morningstar
Sustainalytics
|
|
30.9
|
|
26.2
|
|
17.9 %
|
13.7 %
|
|
87.4
|
|
76.8
|
|
13.8 %
|
14.0 %
|
Morningstar Retirement
(8)
|
|
27.6
|
|
24.9
|
|
10.8 %
|
10.8 %
|
|
80.0
|
|
77.7
|
|
3.0 %
|
3.0 %
|
Morningstar Advisor
Workstation
|
|
25.2
|
|
24.2
|
|
4.1 %
|
4.6 %
|
|
74.9
|
|
71.0
|
|
5.5 %
|
6.0 %
|
|
|
|
As of September
30,
|
|
|
|
|
|
|
|
|
|
|
Assets under management
and advisement (approximate) ($bil)
|
|
2023
|
|
2022
|
|
Change
|
|
|
|
|
|
|
|
|
|
Morningstar
Retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed
Accounts
|
|
$
121.1
|
|
$
109.0
|
|
11.1 %
|
|
|
|
|
|
|
|
|
|
Fiduciary
Services
|
|
54.9
|
|
47.9
|
|
14.6 %
|
|
|
|
|
|
|
|
|
|
Custom
Models/CIT
|
|
36.9
|
|
35.3
|
|
4.5 %
|
|
|
|
|
|
|
|
|
|
Morningstar Retirement
(total)
|
|
$
212.9
|
|
$
192.2
|
|
10.8 %
|
|
|
|
|
|
|
|
|
|
Investment
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar Managed
Portfolios
|
|
$
35.4
|
|
$
30.7
|
|
15.3 %
|
|
|
|
|
|
|
|
|
|
Institutional Asset
Management
|
|
7.3
|
|
9.2
|
|
(20.7) %
|
|
|
|
|
|
|
|
|
|
Asset Allocation
Services
|
|
8.0
|
|
7.3
|
|
9.6 %
|
|
|
|
|
|
|
|
|
|
Investment Management
(total)
|
|
$
50.7
|
|
$
47.2
|
|
7.4 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value linked to
Morningstar Indexes ($bil)
|
|
$
166.0
|
|
$
133.3
|
|
24.5 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our employees
(approximate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
headcount
|
|
11,566
|
|
11,716
|
|
(1.3) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2023
|
|
2022
|
|
Change
|
|
|
2023
|
|
2022
|
|
Change
|
|
Average assets under
management and advisement ($bil)
|
|
$
263.5
|
|
$
246.1
|
|
7.1 %
|
|
|
$
255.3
|
|
$
255.6
|
|
(0.1) %
|
|
|
|
|
|
(1)
|
Starting with the
quarter ended March 31, 2023, the Company updated its revenue-type
classifications to account for product areas with more than one
revenue type. Prior periods have not been restated to reflect the
updated classifications. Revenue from Morningstar Sustainalytics'
second-party opinions product was reclassified from license-based
to transaction-based. Revenue from Morningstar Indexes data and
services products was reclassified from asset-based to
license-based. Revenue from DBRS Morningstar's data products was
reclassified from transaction-based to license-based.
|
(2)
|
Organic revenue is a
non-GAAP measure that excludes acquisitions, divestitures, the
impacts of the adoption of new accounting standards or revisions to
accounting practices, and the effect of foreign currency
translations. In addition, the calculation of organic revenue
growth by product revenue type compares the three and nine months
ended Sept. 30, 2023 revenue to the prior periods on the basis of
the updated classifications.
|
(3)
|
License-based revenue
includes PitchBook, Morningstar Data, Morningstar Direct,
Morningstar Sustainalytics' license-based products, Morningstar
Indexes data and services products, DBRS Morningstar's data
products, Morningstar Advisor Workstation, and other similar
products.
|
(4)
|
Asset-based revenue
includes Investment Management, the majority of Morningstar
Retirement (formerly Workplace Solutions), and Morningstar
Indexes.
|
(5)
|
Transaction-based
revenue includes DBRS Morningstar, Morningstar Sustainalytics'
second-party opinions product, Internet advertising, and
Morningstar-sponsored conferences.
|
(6)
|
The dollar contribution
of each product to consolidated revenue growth is provided in the
Product Revenue Contributions narrative.
|
(7)
|
For the three and nine
months ended Sept. 30, 2023, DBRS Morningstar recurring revenue
derived primarily from surveillance, research, and other
transaction-related services was 51.8% and 52.2%, respectively. For
the three and nine months ended Sept. 30, 2022, recurring revenue
was 48.6% and 40.3%, respectively.
|
(8)
|
Morningstar Retirement
was formerly branded Workplace Solutions.
|
Morningstar, Inc. and Subsidiaries
Reconciliations
of Non-GAAP Measures with the Nearest Comparable GAAP Measures
(Unaudited)
To supplement Morningstar's condensed consolidated financial
statements presented in accordance with U.S. Generally Accepted
Accounting Principles (GAAP), Morningstar uses the following
measures considered as non-GAAP by the Securities and Exchange
Commission, including:
- consolidated revenue, excluding acquisitions, divestitures,
adoption of new accounting standards or revision to accounting
practices (accounting changes), and the effect of foreign currency
translations (organic revenue),
- consolidated operating income, excluding intangible
amortization expense, all mergers and acquisitions
(M&A)-related expenses (including M&A-related earn-outs),
and items related to the significant reduction and shift of the
Company's operations in China
(adjusted operating income),
- consolidated operating margin, excluding intangible
amortization expense, all M&A-related expenses (including
M&A-related earn-outs), and items related to the significant
reduction and shift of the Company's operations in China (adjusted operating margin),
- consolidated diluted net income (loss) per share, excluding
intangible amortization expense, all M&A-related expenses
(including M&A-related earn-outs), items related to the
significant reduction and shift of the Company's operations in
China, and certain non-operating
gains/losses (adjusted diluted net income per share), and
- cash provided by or used for operating activities less capital
expenditures (free cash flow).
These non-GAAP measures may not be comparable to similarly
titled measures reported by other companies.
Morningstar presents organic revenue because the Company
believes this non-GAAP measure helps investors better compare
period-over-period results. Morningstar excludes revenue from
acquired businesses from its organic revenue growth calculation for
a period of 12 months after it completes the acquisition. For
divestitures, Morningstar excludes revenue in the prior-year period
for which there is no comparable revenue in the current period.
Morningstar presents adjusted operating income, adjusted
operating margin, and adjusted diluted net income per share to show
the effect of significant acquisition activity, better compare
period-over-period results, and improve overall understanding of
the underlying performance of the business absent the impact of
acquisitions.
In addition, Morningstar presents free cash flow solely as
supplemental disclosure to help investors better understand how
much cash is available after making capital expenditures.
Morningstar's management team uses free cash flow to evaluate the
health of its business. Free cash flow should not be considered an
alternative to any measure required to be reported under GAAP (such
as cash provided by (used for) operating, investing, and financing
activities).
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in millions)
|
|
2023
|
|
2022
|
|
Change
|
|
2023
|
|
2022
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
consolidated revenue to organic revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenue
|
|
$
515.5
|
|
$
468.2
|
|
10.1 %
|
|
$
1,499.9
|
|
$
1,395.6
|
|
7.5 %
|
Less:
acquisitions
|
|
—
|
|
—
|
|
— %
|
|
(30.9)
|
|
—
|
|
NMF
|
Less: accounting
changes
|
|
—
|
|
—
|
|
— %
|
|
—
|
|
—
|
|
— %
|
Effect of foreign
currency translations
|
|
(3.8)
|
|
—
|
|
NMF
|
|
6.9
|
|
—
|
|
NMF
|
Organic
revenue
|
|
$
511.7
|
|
$
468.2
|
|
9.3 %
|
|
$
1,475.9
|
|
$
1,395.6
|
|
5.8 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
consolidated operating income to adjusted operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating
income
|
|
$ 70.0
|
|
$ 22.0
|
|
NMF
|
|
$
136.2
|
|
$
132.3
|
|
2.9 %
|
Add: Intangible
amortization expense
|
|
17.7
|
|
18.7
|
|
(5.3) %
|
|
52.9
|
|
48.4
|
|
9.3 %
|
Add: M&A-related
expenses
|
|
1.7
|
|
4.9
|
|
(65.3) %
|
|
8.9
|
|
13.7
|
|
(35.0) %
|
Add: M&A-related
earn-outs (1)
|
|
—
|
|
0.9
|
|
NMF
|
|
—
|
|
8.0
|
|
NMF
|
Add: Severance and
personnel expenses (2)
|
|
1.3
|
|
27.0
|
|
(95.2) %
|
|
5.4
|
|
27.0
|
|
(80.0) %
|
Add: Transformation
costs (2)
|
|
0.6
|
|
3.1
|
|
(80.6) %
|
|
7.0
|
|
3.1
|
|
NMF
|
Add: Asset impairment
costs (2)
|
|
0.7
|
|
—
|
|
NMF
|
|
3.1
|
|
—
|
|
NMF
|
Adjusted operating
income
|
|
$ 92.0
|
|
$ 76.6
|
|
20.1 %
|
|
$
213.5
|
|
$
232.5
|
|
(8.2) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
consolidated operating margin to adjusted operating
margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating
margin
|
|
13.6 %
|
|
4.7 %
|
|
8.9 pp
|
|
9.1 %
|
|
9.5 %
|
|
(0.4) pp
|
Add: Intangible
amortization expense
|
|
3.4 %
|
|
4.0 %
|
|
(0.6) pp
|
|
3.5 %
|
|
3.5 %
|
|
0.0 pp
|
Add: M&A-related
expenses
|
|
0.3 %
|
|
1.0 %
|
|
(0.7) pp
|
|
0.6 %
|
|
1.0 %
|
|
(0.4) pp
|
Add: M&A-related
earn-outs (1)
|
|
— %
|
|
0.2 %
|
|
(0.2)
pp
|
|
— %
|
|
0.6 %
|
|
(0.6) pp
|
Add: Severance and
personnel expenses (2)
|
|
0.3 %
|
|
5.8 %
|
|
(5.5) pp
|
|
0.4 %
|
|
1.9 %
|
|
(1.5) pp
|
Add: Transformation
costs (2)
|
|
0.1 %
|
|
0.7 %
|
|
(0.6) pp
|
|
0.5 %
|
|
0.2 %
|
|
0.3 pp
|
Add: Asset impairment
costs (2)
|
|
0.1 %
|
|
— %
|
|
0.1 pp
|
|
0.2 %
|
|
— %
|
|
0.2 pp
|
Adjusted operating
margin
|
|
17.8 %
|
|
16.4 %
|
|
1.4 pp
|
|
14.3 %
|
|
16.7 %
|
|
(2.4) pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
consolidated diluted net income (loss) per share to adjusted
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated diluted
net income (loss) per share
|
|
$ 0.91
|
|
$
(0.21)
|
|
NMF
|
|
$
1.58
|
|
$
1.56
|
|
1.3 %
|
Add: Intangible
amortization expense
|
|
0.31
|
|
0.32
|
|
(3.1) %
|
|
0.91
|
|
0.83
|
|
9.6 %
|
Add: M&A-related
expenses
|
|
0.03
|
|
0.08
|
|
(62.5) %
|
|
0.15
|
|
0.24
|
|
(37.5) %
|
Add: M&A-related
earn-outs (1)
|
|
—
|
|
0.02
|
|
NMF
|
|
—
|
|
0.18
|
|
NMF
|
Add: Severance and
personnel expenses (2)
|
|
0.02
|
|
0.47
|
|
(95.7) %
|
|
0.09
|
|
0.46
|
|
(80.4) %
|
Add: Transformation
costs (2)
|
|
0.01
|
|
0.05
|
|
(80.0) %
|
|
0.12
|
|
0.05
|
|
NMF
|
Add: Asset impairment
costs (2)
|
|
0.01
|
|
—
|
|
NMF
|
|
0.05
|
|
—
|
|
NMF
|
Less: Non-operating
(gains) losses (3)
|
|
(0.01)
|
|
0.04
|
|
NMF
|
|
0.24
|
|
(0.02)
|
|
NMF
|
Adjusted diluted net
income per share
|
|
$ 1.28
|
|
$ 0.77
|
|
66.2 %
|
|
$
3.14
|
|
$
3.30
|
|
(4.8) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
cash provided by operating activities to free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by
operating activities
|
|
$
130.7
|
|
$
102.1
|
|
28.0 %
|
|
$
178.6
|
|
$
194.3
|
|
(8.1) %
|
Capital
expenditures
|
|
(29.3)
|
|
(33.7)
|
|
(13.1) %
|
|
(89.1)
|
|
(93.4)
|
|
(4.6) %
|
Free cash
flow
|
|
$
101.4
|
|
$ 68.4
|
|
48.2 %
|
|
$
89.5
|
|
$
100.9
|
|
(11.3) %
|
|
|
|
|
|
NMF - Not
meaningful, pp - percentage points
|
(1)
|
Reflects the impact of
M&A-related earn-outs included in operating expense
(compensation expense), primarily due to the earn-out
for Morningstar Sustainalytics.
|
(2)
|
Reflects costs
associated with the significant reduction of the Company's
operations in Shenzhen, China, and the shift of work related to its
global business functions to other Morningstar
locations.
|
|
Severance and personnel
expenses include severance charges, incentive payments related to
early signing of severance agreements, transition bonuses, and
stock-based compensation related to the acceleration of vesting of
restricted stock unit and market share unit awards. In addition,
the reversal of accrued sabbatical liabilities is included in this
category.
|
|
Transformation costs
include professional fees and the temporary duplication of
headcount. As the Company hired replacement roles in other markets
and shifted capabilities, it employed certain Shenzhen-based staff
through the transition period, which resulted in elevated
compensation costs on a temporary basis.
|
|
Asset impairment costs
include the write-off or accelerated depreciation of fixed assets
in the Shenzhen, China office that were not redeployed, in
addition to lease abandonment costs as the Company downsized its
office space prior to the lease termination date.
|
(3)
|
Non-operating (gains)
losses in the three and nine months ended Sept. 30, 2023 and Sept.
30, 2022, related to realized and unrealized gains and losses on
investments. In addition, non-operating (gains) losses for the nine
months ended Sept. 30, 2023 also includes expense from an equity
method transaction, net.
|
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SOURCE Morningstar, Inc.