Business Context and Reporting Period
This Form 8-K, filed on March 18, 2019, by Morningstar, Inc., serves as a Regulation FD disclosure containing responses to investor questions regarding the company's financial performance, strategic investments, and operational outlook. The filing primarily addresses results and trends from the fiscal year ended December 31, 2018.
Key Financial Metrics
- Operating Margin: 21.2% for 2018 (up from 18.6% in 2017). The 5-year average adjusted for a 2014 litigation settlement was 22.4%.
- Revenue Growth: Organic revenue growth was 11.4% in 2018. Licensed-based revenue grew 12.6%.
- Expense Growth: Overall expense growth was 8.4% in 2018.
- Headcount: Increased approximately 10% in 2018.
- Capital Expenditures: Increased 14.3% in 2018, driven by capitalized software development.
- PitchBook Performance: Revenue increased 56.6% to $99.6 million in 2018, representing nearly 10% of consolidated revenue. New license growth for PitchBook was 65.2%.
- Renewal Rates: Weighted average renewal rate across licensed-based products was approximately 100%.
Material Changes and Trends
Operating margins improved significantly from 2017 to 2018, though they remain below the 5-year historical average due to the dilutive impact of the PitchBook acquisition and associated amortization. The company reported strong organic growth driven by key product lines including PitchBook, Morningstar Data, and Morningstar Direct. Headcount expansion was split between PitchBook integration and offshore development capabilities in India and China. The company noted a shift in capital allocation priorities in 2018, favoring debt reduction and dividend increases over share repurchases.
Guidance, Outlook, and Risks
Outlook and Strategy: Management does not provide specific operating margin goals or future financial targets but emphasizes sustainable long-term growth and operating leverage. The company anticipates continuing to invest prudently in key growth areas, including data, research, and analytics. While open to M&A, management maintains a high hurdle for acquisitions due to current high valuations in the financial technology sector, preferring to be opportunistic during market downturns.
Operational Initiatives: The company is rolling out robotic process automation (RPA) to improve efficiency and is migrating technology infrastructure to the public cloud, which may cause transitional effects on capital expenditures and operating expenses.
Risks and Contingencies: Forward-looking statements are subject to risks including liability for fiduciary breaches, brand reputation issues, failure to innovate, data security liabilities, regulatory changes, and volatility in global financial markets. Specific risks also include the concentration of data and development work in offshore facilities in China and India.
Investor Verification Checklist
- Verify the trajectory of operating margins as PitchBook matures and amortization impacts decrease.
- Monitor the success of the public cloud migration and its impact on capital expenditures and operating costs.
- Assess the sustainability of PitchBook's 56.6% revenue growth rate and its contribution to overall margin accretion.
- Review future capital allocation decisions, specifically the balance between debt reduction, dividends, and potential M&A activity.
- Track the effectiveness of robotic process automation (RPA) in offsetting headcount growth and expense increases.