Morningstar, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Morningstar provides financial data, research, analytics, investment products, credit ratings, and related technology services to institutions, advisors, and individuals. Revenue is generated primarily from license-based subscriptions, asset-based fees, and transaction-based services. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $392.8 million | $324.0 million | 21.2% |
| Operating income | $67.2 million | $44.5 million | 51.0% |
| Operating margin | 17.1% | 13.7% | +3.4 pts |
| Net income | $54.9 million | $23.9 million | Not stated in filing |
| Diluted EPS | $1.27 | $0.55 | Not stated in filing |
| Cash flow from operations | $64.2 million | $48.7 million | 31.8% |
| Free cash flow | $41.5 million | $33.6 million | 23.5% |
| Effective tax rate | 20.4% | 26.2% | -5.8 pts |
License-based revenue increased 23.2% to $266.1 million, asset-based revenue increased 7.3% to $61.4 million, and transaction-based revenue increased 28.5% to $65.3 million. Organic revenue increased 13.0%, excluding acquisitions and foreign currency effects. Adjusted operating income, excluding intangible amortization and M&A-related expenses, was $92.3 million, with an adjusted operating margin of 23.6%.
Cash, cash equivalents, and investments totaled $433.7 million at March 31, 2021. Long-term debt was $404.2 million, consisting primarily of $348.3 million of 2.32% senior notes due 2030 and $55.9 million outstanding under the term facility. Morningstar had $300.0 million of availability under its revolving credit facility, no borrowings under its $50.0 million 364-day facility, and was in compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Revenue growth was led by PitchBook, DBRS Morningstar, Morningstar Data, and Morningstar Direct.
- PitchBook revenue increased 36.0%; DBRS Morningstar increased 27.0%; Morningstar Data increased 14.4%; and Morningstar Direct increased 9.9%.
- Investment Management revenue declined 3.6% because of previously reported client losses, partially offset by growth in Workplace Solutions and Morningstar Indexes.
- Operating expenses increased 16.5%, below the rate of revenue growth. Sustainalytics contributed 9.1% to expense growth and approximately 780 employees were added through the acquisition.
- Employee headcount increased to 8,362 from 6,896 at March 31, 2020.
- Capital expenditures increased to $22.7 million from $15.1 million, including increased software development investment. Capitalized software development was $19.0 million versus $13.5 million.
- Debt declined by $44.9 million from December 31, 2020, primarily due to a $45.0 million term-facility repayment.
- Cash and investments declined by $30.5 million from year-end, reflecting debt repayment, capital expenditures, dividends, and employee tax withholdings.
- Quarterly dividends increased to $0.32 per share declared from $0.30 per share in the prior-year quarter. No shares were repurchased under the $400.0 million authorization.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a clear quantitative full-year revenue or earnings outlook. Management stated that available cash, investments, operating cash flow, and credit facilities should be sufficient to meet operating and cash needs for at least the next 12 months. Management expects continued 2021 capital expenditures for hardware, software, internally developed technology, and leasehold improvements, while migrating portions of its data-center infrastructure to public cloud services.
- COVID-19 remains a significant uncertainty. License-based revenue remained resilient, but customer spending, asset-based fees, credit-market activity, employee operations, and transaction revenue may be affected by the pandemic and related government actions.
- Asset-based revenue is exposed to market movements, client asset levels, redemptions, and reporting lags. Transaction-based revenue is sensitive to credit issuance and global market conditions.
- Future intangible amortization is estimated at approximately $45.6 million for the remainder of 2021.
- Contingent consideration related to Sustainalytics was $51.4 million, with potential payments scheduled for June 30, 2021 and June 30, 2022. The liability is subject to remeasurement based on performance and valuation assumptions.
- The SEC filed a civil action against former subsidiary Morningstar Credit Ratings, LLC concerning historical commercial mortgage-backed securities ratings practices. The company recorded an immaterial accrual and stated that it does not expect a material adverse effect.
- DBRS received an SEC staff Wells Notice concerning the adequacy of policies and procedures for five historical CLO combination-note ratings. The potential loss or impact could not be reasonably estimated.
- Morningstar is subject to third-party data-license audits and reviews. Potential losses generally cannot be reasonably estimated; the filing reports an immaterial accrual for certain matters.
- Approximately 61% of cash, cash equivalents, and investments were held outside the United States. The company does not currently hedge its foreign-currency exposure.
- Sustainalytics remained subject to integration into Morningstar’s internal control framework; management stated that disclosure controls were effective.
Investor verification checklist
- Verify whether organic growth continues after excluding Sustainalytics and favorable foreign-currency effects.
- Track recurring versus transaction-based DBRS Morningstar revenue and credit-market issuance conditions.
- Monitor Investment Management client losses and the effect of market levels on asset-based revenue.
- Reconcile future cash generation with debt repayments, capital expenditures, dividends, and any future share repurchases.
- Review the timing and valuation of the $51.4 million Sustainalytics contingent consideration liability.
- Assess developments in the SEC matters involving Morningstar Credit Ratings and DBRS.
- Evaluate the effect of COVID-19, cloud migration, foreign-currency movements, and increased personnel costs on margins.