Morningstar, Inc. 2018 Form 10-K Summary
Business Context and Reporting Period
Morningstar provides investment data, research, analytics, software, credit ratings, indexes, and investment management services to individuals, advisors, asset managers, retirement providers, and private-market investors. The filing covers the fiscal year ended December 31, 2018, with quarterly data for the fourth quarter of 2018. Morningstar reported one operating segment and approximately 5,416 employees globally.
Revenue is primarily recurring: licensed-based products represented 73.7% of 2018 revenue, asset-based products 19.6%, and transaction-based products 6.7%. The largest product categories were Morningstar Data, Morningstar Direct, Morningstar Investment Management, PitchBook Data, Advisor Workstation, Workplace Solutions, and Credit Ratings.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1,019.9 million | $911.7 million | 11.9% |
| Operating income | $215.8 million | $169.8 million | 27.1% |
| Operating margin | 21.2% | 18.6% | +2.6 percentage points |
| Net income attributable to Morningstar | $183.0 million | $136.9 million | 33.7% |
| Diluted EPS | $4.25 | $3.18 | 33.6% |
| Cash provided by operating activities | $314.8 million | $250.1 million | 25.9% |
| Free cash flow | $238.7 million | $183.5 million | 30.1% |
| Cash, cash equivalents, and investments | $395.9 million | $353.3 million | 12.1% |
| Long-term debt | $70.0 million | $180.0 million | Down $110.0 million |
Fourth-quarter 2018 revenue was $262.7 million, operating income was $49.3 million, and consolidated net income was $42.4 million. Fourth-quarter diluted EPS was $0.99.
Operating expenses increased 8.4% to $804.1 million, slower than revenue growth. Cost of revenue was $411.1 million, sales and marketing was $148.5 million, general and administrative expense was $147.8 million, and depreciation and amortization was $96.7 million.
At December 31, 2018, total assets were $1.454 billion, total liabilities were $519.1 million, total equity was $934.7 million, and deferred revenue was $210.0 million. Working capital was $238.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated across all revenue types. License-based revenue increased 12.6% to $751.6 million, asset-based revenue increased 10.0% to $200.4 million, and transaction-based revenue increased 9.8% to $67.9 million.
- PitchBook revenue increased 56.6% to $99.6 million, with platform licenses rising to 22,979 from 13,908. PitchBook was the primary growth driver among major products.
- Morningstar Data revenue increased 11.5% to $185.2 million, and Morningstar Direct revenue increased 10.9% to $137.9 million. Direct licenses increased 8.3% to 15,033.
- Morningstar Credit Ratings revenue increased 15.6% to $36.3 million, while new-issue ratings completed increased to 138 from 97.
- International revenue increased 13.8% to $255.7 million and represented approximately 25% of consolidated revenue. International organic revenue increased 9.2%.
- Average assets under management and advisement declined 3.0% to approximately $200.1 billion, reflecting market declines and changes in investment management assets, although related asset-based revenue increased.
- Weighted average annual renewal rates for contract-based products were approximately 100%, compared with 102% in 2017. Subscription retention improved to approximately 68% from 66%.
- The company repaid $110.0 million of long-term debt, repurchased approximately 202,000 shares for $20.9 million, and paid $42.6 million in dividends.
- Morningstar adopted ASC Topic 606 using the modified retrospective method. The adoption increased 2018 revenue by $6.7 million, created $25.1 million of deferred commission assets at year-end, and increased opening retained earnings by $17.0 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Morningstar does not provide public financial forecasts or earnings guidance. Management evaluates the business primarily using revenue, operating income, and free cash flow, with a focus on increasing long-term intrinsic value.
Management expects cash balances, investments, operating cash flow, and available credit to fund operating and cash needs for at least the next 12 months. The $300.0 million revolving credit facility matures December 21, 2020; $70.0 million was outstanding at year-end, leaving $230.0 million available. The company complied with its leverage and interest-coverage covenants.
Management expects quarterly dividends of $0.28 per share in 2019, subject to board approval. It also expected approximately $62.0 million of 2018 performance-bonus payments in the first quarter of 2019 and continued investment in software, cloud migration, technology, and office facilities.
- 2018 results included a $10.5 million revenue benefit from an amended license agreement, recorded in the third quarter, which increased operating income without a corresponding increase in operating expense.
- Non-operating income included a $10.5 million gain on the sale of the 15(c) board consulting services product line and a $5.6 million gain on the sale of part of an equity-method investment.
- The effective tax rate declined to 20.7% from 23.9%, primarily because of the U.S. Tax Cuts and Jobs Act and updates to prior provisional tax estimates.
- Key risks include fiduciary and investment-advisory liability, cybersecurity and privacy obligations, regulatory changes, market declines affecting asset-based revenue, declining demand for actively managed investments, technology outages, cloud migration risks, foreign currency exposure, reliance on offshore operations, competition, intellectual-property claims, and employee retention.
- The company is subject to third-party data-license audits and internal reviews. The filing states that potential losses cannot be reasonably estimated for some matters, although management does not believe the outcomes will materially affect the company.
- A putative RICO class action concerning retirement-plan investments was dismissed with prejudice on January 16, 2019, and no appeal was filed by the deadline. Other ordinary-course legal matters were not expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether PitchBook, Morningstar Direct, Morningstar Data, and other recurring-license products sustain their reported growth and renewal rates.
- The effect of market performance, asset flows, and fee pressure on asset-based revenue and approximately $200.1 billion of average assets under management and advisement.
- The sustainability of the 21.2% operating margin after excluding the $10.5 million amended-license benefit and considering higher compensation, technology investment, and cloud-transition costs.
- Cash deployment, including the remaining $479.1 million share-repurchase authorization, dividend commitments, capital expenditures, and debt repayment capacity.
- The financial and operational impact of cybersecurity, privacy, regulatory, fiduciary, data-license, and business-continuity risks.
- The impact of ASC Topic 606, the January 2019 lease standard adoption, and other accounting changes on comparability and reported margins.
- Concentration and governance risks arising from Joe Mansueto’s approximately 54% ownership and related control over shareholder matters.