Business Context and Reporting Period
This Form 8-K, filed on August 21, 2023, by Morningstar, Inc. (MORN), serves as a Regulation FD disclosure containing responses to shareholder questions received primarily through May 31, 2023. The filing addresses operational details, financial methodologies, and strategic updates regarding Morningstar's core businesses, including PitchBook and Morningstar Wealth, rather than reporting a specific quarterly financial period.
Key Financial Metrics and Business Data
- Revenue: Morningstar Wealth revenue totaled $234 million in 2021 and $225 million in 2022. Organic revenue for Wealth declined 2.2% in 2022, excluding the Praemium acquisition and currency fluctuations.
- Compensation Costs: In 2022, total compensation costs (salary, benefits, bonus, severance) increased by $97.5 million. Excluding bonuses and acquisition-related headcount, compensation costs increased approximately 6% year-over-year.
- PitchBook Market Data: The Total Addressable Market (TAM) for PitchBook was estimated at $6.5 billion as of April 2023, covering over 130,000 firms.
- Customer Mix (PitchBook): As of April 2023, the customer logo count was 31% Company (Corporate), 38% Total Investor (including PE and VC), 23% Total Service Provider, and 6% Limited Partner.
- Licensing: Enterprise license contracts accounted for roughly 20% of PitchBook's total annual contract value (ACV), while seat-based contracts accounted for 80%.
- Non-GAAP Adjustment: A clerical error was identified in the Q2 2023 adjusted diluted EPS calculation, which incorrectly included an $11.8 million expense related to the termination of a license agreement with SBI Global Asset Management. The corrected adjusted diluted EPS was $1.30 (initially reported as $1.60).
Material Changes and Operational Trends
- PitchBook Corporate Segment: The corporate segment faces pressure due to slowed M&A activity and constraints on adding seats or renewing contracts. However, retention rates remained relatively steady through June 30, 2023.
- Sales Productivity: PitchBook sales productivity, which spiked in 2021, returned to 2018-2020 levels starting in mid-2022.
- Headcount Growth: Morningstar expects headcount growth to slow significantly throughout 2023. The company anticipates fully lapping 2022 headcount growth in the second half of 2023.
- Expense Structure: General and Administrative (G&A) expenses as a percentage of revenue increased between 2018 and 2022, driven by higher compensation, professional fees, and stock-based compensation. The company is reducing discretionary costs and slowing headcount growth to manage this.
- Investment Management: Revenue declines in the Investment Management business offset increases from the Praemium acquisition in 2022.
Guidance, Outlook, and Risks
- Guidance: Morningstar does not provide guidance on long-term future client or segment mix. The company notes that the return horizon for investments in Morningstar Wealth is longer than for license-based products.
- Outlook: Management sees strong growth in core investor segments (Private Equity and Venture Capital) and opportunities in private credit following the LCD acquisition. Demand in VC/PE remains robust, though conversion rates have slightly weakened compared to 2021-2022.
- Strategic Initiatives: Morningstar Wealth investments ($30-40 million range cited previously) focused on hiring and technology partnerships to build US and UK wealth platforms. The goal is to attract new advisors and assets through digital workflows and proprietary investment strategies.
- Risks: Key risks include failing to maintain brand reputation, cybersecurity liabilities, regulatory changes, prolonged market volatility affecting asset-based fees, and challenges in integrating acquisitions. Specific risks for PitchBook include churn in the corporate sector and competition from new technologies like AI.
Investor Verification Checklist
- Verify the corrected Q2 2023 adjusted diluted EPS of $1.30 and the exclusion of the $11.8 million SBI license termination expense from the non-GAAP calculation.
- Monitor the trajectory of PitchBook's corporate segment churn and renewal rates as M&A activity remains subdued.
- Track the realization of returns on Morningstar Wealth investments, noting the longer time horizon for margin accretion compared to core licensing businesses.
- Observe the impact of slowing headcount growth on G&A expenses and overall operating margins in upcoming quarters.
- Review the performance of the Investment Management business, which contributed to the organic revenue decline in Morningstar Wealth in 2022.