Business Context and Reporting Period
This Form 8-K is a current report filed by Morningstar, Inc. on May 5, 2017. The filing serves as a Regulation FD disclosure containing responses to investor questions regarding the company's first quarter of 2017 performance, strategic investments, and operational outlook.
Key Financial Metrics and Operational Data
- Bonus Expense: Increased by $4.7 million in Q1 2017 compared to Q1 2016. This increase is attributed to results being closer to full-year 2017 targets rather than prior year performance.
- PitchBook Performance: Reported a net loss of approximately $6 million for Q1 2017. This figure includes $2.6 million in intangible amortization and $1.7 million in management bonus plan expenses.
- PitchBook Adjusted Loss: Excluding amortization and management bonuses, the net loss was approximately $1.2 million.
- Capital Allocation: Share repurchases slowed in 2016 and Q1 2017 due to the PitchBook acquisition, which reduced available excess cash. The company is currently balancing buybacks with debt repayment.
Material Changes and Strategic Developments
- Expense Management: After deviating from expense discipline in 2016 to invest in credit ratings, retirement, and Morningstar Direct, the company is actively monitoring costs in 2017, limiting hiring to targeted areas, and utilizing efficiency targets.
- Technology Investments: The company is automating data collection processes to moderate expenses over time.
- Product Development: A new website for individual investors (beta.morningstar.com) is being optimized with plans to ramp up traffic. New features include managed products investment reports and an expanded video center.
- Global Expansion: Product development efforts are underway in Australia, Canada, and the United Kingdom, with a specific focus on adapting assets for Australian individual investors.
Guidance, Outlook, and Risks
Outlook and Management Commentary:
- PitchBook Profitability: Management states PitchBook is relatively close to break-even on a cash-flow basis. While intangible amortization and bonus plans will negatively impact margins for a few years, profitability is expected to improve as revenue ramps up. The company emphasizes the high lifetime value of PitchBook users.
- Pricing Strategy: Morningstar does not plan to increase pricing solely to boost operating margins. Price increases are tied to value enhancements, such as the 20% expansion of PitchBook's data coverage in 2016.
- Margin Improvement: The company aims to keep expense growth lower than revenue growth. Investments made in 2016 are expected to bear fruit later in 2017 with new wealth management tools.
Risks and Contingencies:
- Liability for breaches of fiduciary duties and data storage errors.
- Failure to maintain brand independence or differentiate products.
- Trends in the asset management industry, specifically the rise of passively managed vehicles.
- Regulatory changes affecting investment advisory or credit rating operations.
- Operational risks related to offshore facilities in China and India.
Investor Verification Checklist
- Verify the trajectory of PitchBook's cash-flow break-even point against the company's aggressive investment strategy.
- Monitor the impact of the new Morningstar.com beta site on individual investor traffic and engagement metrics.
- Track the company's ability to reduce expense growth below revenue growth in upcoming quarters following the 2016 investment surge.
- Assess the competitive landscape for PitchBook against firms like CB Insights, Preqin, and S&P Capital IQ.
- Review future capital allocation decisions regarding the balance between debt repayment and share repurchases.