Morningstar, Inc. — Fiscal 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; fourth-quarter information is included only through annual disclosures. Morningstar provides investment data, research, analytics, credit ratings, wealth-management, retirement, ESG, and index products through five reportable segments: Morningstar Data and Analytics, PitchBook, Morningstar Wealth, Morningstar Credit, and Morningstar Retirement.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $2,038.6 million | $1,870.6 million | +9.0% |
| Operating income | $230.6 million | $167.8 million | +37.4% |
| Operating margin | 11.3% | 9.0% | +2.3 percentage points |
| Adjusted operating income | $326.5 million | $298.9 million | +9.2% |
| Adjusted operating margin | 16.0% | 16.0% | Flat |
| Net income | $141.1 million | $70.5 million | +100.1% |
| Diluted EPS | $3.29 | $1.64 | +100.6% |
| Cash flow from operations | $316.4 million | $297.8 million | +6.2% |
| Capital expenditures | $119.1 million | $129.5 million | -8.0% |
| Free cash flow | $197.3 million | $168.3 million | +17.2% |
License-based revenue increased 14.0% to $1,517.5 million and represented 74.4% of consolidated revenue. Asset-based revenue increased 3.8% to $279.6 million, while transaction-based revenue declined 10.4% to $241.5 million. Organic revenue increased 7.5%.
Operating expenses increased 6.2% to $1,808.0 million. Sales and marketing expense increased 18.9%, while general and administrative expense declined 11.1%, primarily due to lower stock-based compensation and lower professional fees. Depreciation and amortization increased 11.0% to $184.9 million.
Segment performance
| Segment | 2023 revenue | Revenue change | 2023 adjusted operating income | Margin |
|---|---|---|---|---|
| Morningstar Data and Analytics | $747.2 million | +7.3% | $339.8 million | 45.5% |
| PitchBook | $551.9 million | +22.5% | $148.1 million | 26.8% |
| Morningstar Wealth | $229.9 million | +0.4% | $(40.4) million | (17.6%) |
| Morningstar Credit | $215.4 million | (9.1%) | $21.7 million | 10.1% |
| Morningstar Retirement | $110.5 million | +6.3% | $54.1 million | 49.0% |
- PitchBook was the principal growth driver, benefiting from continued demand for private-market information and the integration of LCD. Its renewal rate was approximately 112%, compared with 121% in 2022.
- Morningstar Data and Analytics grew organically across major product areas. Its adjusted margin increased to 45.5% from 45.0%.
- Morningstar Wealth remained loss-making as the company continued investing in U.S. and international wealth platforms. Wealth AUMA increased 9.0% to $55.5 billion, and Managed Portfolios generated more than $2.8 billion of net flows.
- Morningstar Credit declined because of weak issuance activity, especially in U.S. commercial mortgage-backed securities. Transaction-based revenue represented approximately 50% of Morningstar DBRS revenue.
- Morningstar Retirement benefited from stronger markets, participant growth, and additions of large employer plans. Retirement AUMA increased 18.4% to $230.4 billion.
Liquidity, debt, and capital allocation
- Cash, cash equivalents, and investments totaled $389.0 million at December 31, 2023, including $337.9 million of cash and cash equivalents and $51.1 million of investments.
- Total debt, net of issuance costs, was $972.4 million, consisting principally of $623.9 million under the Amended 2022 Credit Agreement and $348.5 million of 2.32% senior notes due 2030. Long-term debt reported on the balance sheet was $940.3 million.
- Borrowing availability under the revolving credit facility was $635.0 million. The company was in compliance with its debt covenants, with consolidated funded indebtedness to consolidated EBITDA of approximately 1.7 times.
- Borrowings under the credit facility are floating-rate and based on SOFR or the lender’s base rate. Management estimated that a 100-basis-point increase in SOFR would increase annual interest expense by approximately $6.2 million.
- The company paid $63.9 million of dividends in 2023 and increased its quarterly dividend to $0.405 per share for 2024, subject to board approval.
- Under the $500.0 million repurchase authorization, Morningstar repurchased 8,484 shares for $1.4 million in 2023; $498.6 million remained available at year-end.
- Management stated that cash, investments, operating cash flow, and available credit capacity should be sufficient to meet operating and cash needs for at least the next 12 months.
Material changes, unusual items, and outlook
- Net income benefited from a substantially lower effective tax rate of 19.0%, compared with 44.5% in 2022, including $13.7 million of tax benefits from a retroactive tax election.
- Operating results included $15.6 million of costs associated with reducing and shifting Shenzhen, China operations, including severance, transformation, and asset impairment costs. The transition was substantially completed during the third quarter of 2023.
- Morningstar DBRS recorded $8.0 million of expense related to two SEC settlements concerning recordkeeping and former CMBS ratings methodologies.
- Morningstar paid $59.9 million to terminate its Japanese brand-license arrangement and received $26.2 million of net proceeds from selling shares in Wealth Advisors. The transactions contributed to equity-method and investment-related gains and losses.
- The company completed no significant acquisitions in 2023 and had no divestitures. It substantially completed the integration of LCD data and research into the PitchBook Platform.
- Management does not provide public financial forecasts or earnings guidance. The stated strategic priorities are differentiated data and research, thoughtful use of artificial intelligence, operational scalability, and talent development.
- Management expects 2024 capital expenditures for software, hardware, and leasehold improvements and anticipates approximately $124.3 million of bonus payments in the first quarter of 2024 related to the 2023 bonus program.
Risks, contingencies, and control matters
- Material weakness: Management concluded that internal control over financial reporting was ineffective as of December 31, 2023 because of ineffective process-level controls and risk assessment related to segment reporting. KPMG issued an adverse opinion on internal control effectiveness. The consolidated financial statements received an unqualified audit opinion.
- Management has begun remediation by enhancing risk assessment and segment-reporting controls, but the weakness will not be considered remediated until controls operate effectively for a sufficient period and are tested.
- Key business risks include financial-market and credit-issuance cycles, cybersecurity and data privacy, artificial-intelligence errors or regulatory restrictions, regulatory scrutiny of credit ratings, investment advice, ESG, and index businesses, intellectual-property claims, foreign exchange, acquisitions, employee retention, and variable-rate debt.
- The company is subject to ongoing regulatory examinations, tax audits, third-party data audits, commercial disputes, and other proceedings. The filing states that no other identified matters are expected to have a material adverse effect, but potential losses from certain data audits cannot currently be estimated.
- Morningstar’s largest shareholder, Joe Mansueto, owned approximately 37.4% of outstanding common stock at December 31, 2023, creating concentrated voting-control risk. A Rule 10b5-1 plan allows him to sell up to 500,000 shares through April 30, 2025.
Investor verification checklist
- Verify the sustainability of growth in recurring license revenue, particularly PitchBook and Morningstar Data and Analytics, and monitor renewal rates after PitchBook’s decline from 121% to 112%.
- Assess whether Morningstar Wealth can reach profitability after continued platform and go-to-market investment.
- Monitor recovery in credit issuance, particularly U.S. CMBS, and the resulting impact on Morningstar Credit revenue and margins.
- Review the remediation of the segment-reporting material weakness and future auditor assessments of internal controls.
- Reconcile reported net-income growth with the $13.7 million retroactive tax benefit and other unusual investment-related items.
- Evaluate debt-service exposure to SOFR, scheduled debt maturities, and the company’s planned dividend, repurchase, capital-expenditure, and bonus-payment commitments.
- Review regulatory, cybersecurity, AI, ESG, data-licensing, and litigation developments, including obligations arising from the SEC settlements involving DBRS.