Business Context and Reporting Period
Company: Morningstar, Inc.
Filing Type: Form 8-K (Current Report)
Date: July 6, 2023
Item: 7.01 Regulation FD Disclosure
Context: This filing contains responses to shareholder questions received through May 31, 2023, regarding profitability profiles, growth investments, and operational strategies across key business units including PitchBook, DBRS Morningstar, Morningstar Sustainalytics, and Morningstar Indexes.
Key Financial Metrics and Performance
The filing provides specific historical revenue data for certain segments but does not disclose current period (Q2 2023) financial results, total revenue, profit, cash flow, or debt levels.
- PitchBook Revenue: Grew from $63.6 million (2017) to $201.1 million (2020) and $407.7 million (2022).
- DBRS Morningstar Revenue: Increased from $207.3 million (2020) to $271.2 million (2021), then declined to $236.9 million (2022) due to a sharp decline in global ratings activity.
- Revenue Mix: Approximately 70% of 2022 revenues were from license-based products.
- Operating Expenses: Expenses increased 5% sequentially in Q1 2023 compared to Q4 2022, driven by annual merit increases and higher bonus accruals, partially offset by lower stock-based compensation.
- Headcount: Headcount growth is expected to slow significantly for the remainder of 2023.
Material Changes and Segment Updates
- DBRS Morningstar: Experienced market share pressure in commercial mortgage-backed securities (CMBS) due to divergent credit views and declining issuance. The company has repositioned parts of the CMBS team and eliminated certain roles to align capacity with demand. Growth is being pursued in US middle-market and private corporate ratings.
- Morningstar Sustainalytics: Facing short-term challenges in the US retail asset management and wealth management segments due to political crossfire and slowed decision-making. The company is slowing investments to align expense growth with revenue growth and has consolidated leadership under Ron Bundy.
- PitchBook: Successfully integrating LCD (formerly S&P) data. Pricing increases instituted in mid-2022 are becoming effective at contract renewal. Margins remain below other licensed areas due to ongoing growth investments.
- Investment Management: Q1 2023 revenue growth was weak due to a lag in Assets Under Management and Advisement (AUMA) reporting (tied to prior quarter assets) and foreign exchange impacts. Less than half of AUMA is in non-US dollar currencies.
- Workplace Solutions: AUMA declined year-over-year in Q1 2023 despite market recovery, primarily due to a one-quarter reporting lag reflecting Q4 2022 asset levels.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Investment Criteria: No significant changes to criteria; hurdle rates adjusted for higher interest rates. Focus remains on cash-on-cash returns exceeding the cost of capital.
- Cost Control: The company is actively controlling costs by slowing hiring, stopping backfills for certain roles, eliminating selective roles, and reducing discretionary spending (travel, marketing, professional fees). Real estate footprint optimization is underway.
- ESG Outlook: Optimistic about long-term ESG demand driven by regulations and transition plans, despite near-term US headwinds. Second-party opinion (SPO) demand is expected to recover over the long term as sustainable bond issuance stabilizes.
- Indexes Business: Expected to see profit growth and margin improvement as the business scales and realizes benefits from in-house index calculation capabilities.
Risks and Contingencies:
- Cybersecurity and data protection liabilities.
- Regulatory changes affecting credit ratings, investment advisory, and ESG businesses.
- Prolonged market volatility affecting asset-based fees and credit ratings volume.
- Challenges in recruiting and retaining qualified employees, particularly in ESG.
- Integration risks related to acquisitions (PitchBook, DBRS, LCD).
Investor Verification Checklist
- Verify the timeline and financial impact of the LCD integration into the PitchBook platform.
- Monitor the recovery trajectory of CMBS issuance volumes and DBRS Morningstar's market share in structured finance.
- Assess the effectiveness of cost-cutting measures (hiring slowdown, role eliminations) on operating margins in upcoming quarters.
- Track the adoption rate of the new Low Carbon Transition Rating and Impact Rating within Morningstar Sustainalytics.
- Review future quarterly reports for the stabilization of AUMA in Investment Management and Workplace Solutions as reporting lags resolve.