Morningstar, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; filed October 29, 2021. The unaudited statements are prepared under U.S. GAAP. Morningstar reports one operating segment and generates revenue primarily from subscription and license-based services, asset-based fees, and transaction-based services.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|
| Revenue | $428.9 million | $357.2 million | $1,237.1 million | $1,009.1 million |
| Operating income | $67.8 million | $44.3 million | $182.2 million | $150.1 million |
| Operating margin | 15.8% | 12.4% | 14.7% | 14.9% |
| Net income | $49.0 million | $76.2 million | $136.8 million | $148.3 million |
| Diluted EPS | $1.13 | $1.76 | $3.16 | $3.43 |
| Cash flow from operations | $122.6 million | $93.4 million | $314.0 million | $269.7 million |
| Free cash flow | $92.4 million | $70.8 million | $242.4 million | $215.0 million |
- Q3 revenue increased 20.1%; nine-month revenue increased 22.6%. Organic revenue increased 18.6% and 16.2%, respectively.
- Q3 operating income increased 53.0%, with margin expanding 3.4 percentage points. Nine-month operating margin declined 0.2 percentage points.
- Adjusted operating income, excluding intangible amortization and M&A-related expenses, was $83.5 million in Q3 and $272.2 million for nine months. Adjusted operating margins were 19.4% and 22.0%, respectively; these are non-GAAP measures.
- Net income and EPS declined primarily because the prior-year period included a $50.9 million non-taxable holding gain related to the Sustainalytics acquisition.
- Effective tax rates were 24.7% in Q3 and 24.4% for nine months, compared with 18.2% and 21.5% in the prior-year periods.
Revenue and Operating Drivers
| Revenue type | Q3 2021 | Year-over-year change | 9M 2021 | Year-over-year change |
|---|
| License-based | $287.0 million | 18.2% | $830.3 million | 22.1% |
| Asset-based | $68.4 million | 23.5% | $194.6 million | 18.4% |
| Transaction-based | $73.5 million | 24.8% | $212.2 million | 28.8% |
- Growth was led by PitchBook, Sustainalytics, Morningstar Data, Workplace Solutions, Morningstar Indexes, and DBRS Morningstar.
- Q3 PitchBook revenue increased 47.2%; Sustainalytics revenue increased 46.0%; Morningstar Indexes revenue increased 86.9%; and DBRS Morningstar revenue increased 22.1%.
- Average assets under management and advisement increased to approximately $255.7 billion from $210.1 billion. Asset-based revenue may reflect market movements with a one-quarter reporting lag.
- Operating expenses increased 15.4% in Q3 and 22.8% for nine months. Higher compensation, professional fees, commissions, advertising, and marketing costs reflected increased hiring and investment in growth initiatives.
- Worldwide employees increased to 9,272 from 7,692 at September 30, 2020.
Liquidity, Debt, and Capital Allocation
- Cash, cash equivalents, and investments totaled $487.3 million at September 30, 2021, compared with $464.2 million at December 31, 2020. Approximately 66% was held outside the United States.
- Long-term debt was $374.3 million, consisting primarily of $348.3 million of 2.32% senior notes due 2030 and $26.0 million outstanding under the term facility.
- The company had $300.0 million of availability under its revolving credit facility and was in compliance with applicable financial covenants.
- Nine-month investing cash uses included $71.6 million of capital expenditures, $24.6 million for acquisitions, and $15.8 million for equity-method investments.
- Nine-month financing cash uses included $75.0 million of term-facility repayments, $40.6 million of dividends, $34.4 million of acquisition-related earn-out payments, and $22.4 million of employee tax withholding on equity awards.
- The board authorized up to $400.0 million of share repurchases through December 31, 2023. Only 1,200 shares were repurchased during Q3, leaving approximately $399.7 million available.
- In October 2021, the company approved a quarterly dividend of $0.315 per share, payable October 29, 2021.
Material Changes, Acquisitions, and Unusual Items
- Morningstar acquired Moorgate Benchmarks on September 3, 2021. Preliminary purchase accounting included $14.8 million of goodwill and $13.4 million of acquired intangible assets; the allocation remained subject to measurement-period adjustments.
- The prior-year results included a $50.9 million holding gain on the previously held Sustainalytics equity interest and a $27.8 million Sustainalytics acquisition earn-out recorded in compensation expense.
- DBRS, Inc. paid a $1.0 million SEC settlement penalty in Q3 related to policies and procedures for certain collateralized loan obligation ratings.
- The SEC filed a civil action against Morningstar Credit Ratings, LLC in February 2021. The company’s motion to dismiss was awaiting a court decision at September 30, and the company recorded an immaterial accrual.
- Contract liabilities, or deferred revenue, increased $58.7 million during the first nine months to $399.0 million at September 30, 2021.
- Management expects approximately $14.6 million of intangible amortization expense during the remainder of 2021.
Guidance, Outlook, and Principal Risks
- No quantitative full-year revenue, earnings, or margin guidance is provided in the filing text.
- Management expects cash balances, operating cash generation, and available credit to meet operating and cash needs for at least the next 12 months.
- Management plans continued investment in software development, cloud migration, technology infrastructure, and growth areas including PitchBook, Sustainalytics, and Morningstar Investment Management. Cloud migration may temporarily affect capital expenditures and operating expenses.
- COVID-19 effects remained difficult to estimate, although the company reported no significant impact on revenue sources during Q3. Wage inflation and competition for employees were noted as emerging effects.
- Principal risks include financial-market volatility affecting asset-based and ratings revenue, cybersecurity and data protection, regulatory and legal exposure in ratings and ESG businesses, acquisition integration, technology and cloud migration, employee retention, foreign currency movements, intellectual-property claims, and leverage.
- Data-license audits and reviews may require payments for prior usage, but potential losses generally could not be reasonably estimated. Management did not expect these matters to have a material adverse effect.
Investor Verification Items
- Verify the sustainability of reported organic growth after excluding acquisition contributions, particularly from Sustainalytics, DBRS Morningstar, and Moorgate.
- Assess whether compensation, hiring, sales commissions, marketing, and technology investments pressure margins as revenue growth normalizes.
- Monitor asset-based revenue sensitivity to market levels, flows, and the one-quarter lag in reported asset values.
- Review the final purchase-price allocation and integration performance for Moorgate and the continuing effects of prior acquisitions.
- Track debt repayment, covenant compliance, interest-rate exposure, and the maturity and refinancing implications of the 2030 Notes.
- Follow the SEC litigation involving Morningstar Credit Ratings, the DBRS regulatory matter, and third-party data-license audits.
- Confirm the timing and amount of future share repurchases and dividends, given the company’s stated capital-allocation priorities.
