Business Context and Reporting Period
This Form 8-K Current Report, filed on March 3, 2017, by Morningstar, Inc., serves as a Regulation FD disclosure containing responses to investor questions regarding the company's business operations and financial performance. The report addresses strategic decisions made throughout 2016, including the full acquisition of PitchBook, headcount expansion, and capital allocation policies.
Key Financial Metrics and Operational Data
- Headcount: Total employees increased by 665 (17%) to 4,595 as of December 31, 2016. Approximately half of this increase was due to the PitchBook acquisition; organic growth was 335 employees (8.5%).
- PitchBook Financials (Q4 2016): Contributed $4.1 million in revenue and $7 million in expenses. Operating expenses included $1.1 million in acquisition-related costs and $0.9 million in amortization of intangible assets.
- Share Repurchases (2016): The company repurchased approximately 645,000 shares of common stock for a total of $49.5 million.
- Compensation: The 2016 bonus pool was not fully funded due to missing revenue and profitability goals. Future performance share awards for PitchBook employees are targeted at $7.5 million annually for 2017 and 2018, and $15.0 million for 2019.
Material Changes and Strategic Shifts
Headcount growth in 2016 materially exceeded organic revenue growth, ranging from 500 to over 1,200 basis points, which negatively impacted EBIT margins. This deviation from historical expense management was intentional, driven by investments in credit ratings, retirement solutions (Morningstar Plan Advantage), and Morningstar Direct. The company completed the acquisition of the remaining ownership interest in PitchBook on December 1, 2016, to integrate private capital data with its existing public market data.
Outlook, Management Commentary, and Risks
Management Outlook: Morningstar does not expect to continue hiring at a rate that outpaces revenue growth. The goal is to generate more robust revenue growth than seen in recent years while keeping expense growth lower than revenue growth. Management expects PitchBook's long-term operating margins to align with Morningstar's consolidated margins through scale and leverage, rather than cost-cutting.
Capital Allocation: Slower share repurchases in 2016 were attributed to reduced excess cash following the PitchBook acquisition and a disciplined approach to valuation, repurchasing only when shares trade below intrinsic value.
Risks and Contingencies: The filing highlights risks including liability for fiduciary breaches, brand reputation, failure to innovate, technology strategy failures, data privacy liabilities, regulatory compliance, and the impact of market volatility on asset-based fees. Specific risks related to the PitchBook acquisition include failing to achieve anticipated results.
Investor Verification Checklist
- Verify the timeline for revenue acceleration resulting from 2016 headcount investments in technology, sales, and analyst roles.
- Monitor the integration progress of PitchBook's private capital data with Morningstar's public data to assess cross-selling synergies.
- Review the upcoming proxy statement (filed March 31) for detailed calculations regarding the 2016 bonus pool shortfall.
- Track future share repurchase activity against the company's stated valuation thresholds and cash flow availability.
- Assess the impact of the $7.5 million to $15.0 million annual performance share awards on future expense structures.