Morningstar, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Morningstar, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2022. The company operates as a global provider of investment research, data, analytics, ratings, indexes, and investment-management solutions, with revenue from license-based, asset-based, and transaction-based offerings. Morningstar reports one operating segment.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $457.0 million | $392.8 million | 16.3% increase |
| Operating income | $56.4 million | $67.2 million | 16.1% decrease |
| Operating margin | 12.3% | 17.1% | Down 4.8 percentage points |
| Net income | $46.1 million | $54.9 million | 16.0% decrease |
| Diluted earnings per share | $1.06 | $1.27 | 17.0% decrease |
| Cash from operating activities | $23.5 million | $64.2 million | 63.4% decrease |
| Free cash flow | $(4.5) million | $41.5 million | Down $46.0 million |
Revenue growth was broad-based: license-based revenue increased 17.2% to $311.9 million, asset-based revenue increased 11.6% to $68.5 million, and transaction-based revenue increased 17.3% to $76.6 million. Organic revenue growth was 18.1%, compared with reported growth of 16.3%, after a $5.1 million unfavorable foreign-currency effect.
Key product growth included PitchBook of 49.4%, Morningstar Sustainalytics of 42.0%, DBRS Morningstar of 16.7%, Morningstar Data of 7.7%, and Morningstar Direct of 8.3%. Assets under management and advisement increased 9.2% to $213.9 billion for Workplace Solutions and 6.9% to $51.1 billion for Investment Management. Asset value linked to Morningstar Indexes increased 55.8% to $151.3 billion.
Total operating expenses increased 23.0% to $400.6 million. Cost of revenue, sales and marketing, and general and administrative expense rose primarily because of higher compensation, headcount, professional fees, sales commissions, and stock-based compensation. Worldwide employees increased to 10,038 from 8,362 a year earlier. Adjusted operating income, a non-GAAP measure excluding intangible amortization and M&A-related costs, was $82.5 million, with an adjusted operating margin of 18.1%.
The effective tax rate increased to 27.3% from 20.4%, primarily because of additional reserves for uncertain tax positions. Other income increased to $8.0 million from $1.6 million, principally reflecting unrealized investment gains. Comprehensive income was $35.6 million, including $10.5 million of other comprehensive loss from foreign-currency translation and investment losses.
Cash, cash equivalents, and investments totaled $544.9 million at March 31, 2022, compared with $546.1 million at December 31, 2021. Cash and cash equivalents were $483.5 million. Accounts receivable were $276.4 million, and deferred revenue was $466.0 million. Total assets were $2.87 billion and total equity was $1.35 billion.
Total debt was $504.4 million, consisting principally of $348.4 million of 2.32% senior notes due 2030 and $156.0 million outstanding under the credit agreement. The company had $155.0 million of revolving-credit availability and was in compliance with its debt covenants. Approximately 61% of cash, cash equivalents, and investments was held outside the United States.
Capital expenditures were $28.0 million, including continued investment in internally developed software. The company repurchased 402,971 shares for $110.6 million during the quarter and paid $15.5 million in dividends. The remaining share-repurchase authorization was $288.1 million at March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, led by PitchBook, Morningstar Sustainalytics, and other license-based products.
- Operating income and net income declined despite revenue growth because operating expenses grew faster than revenue.
- Operating margin contracted by 4.8 percentage points, reflecting increased investment in personnel and strategic growth initiatives.
- Operating cash flow fell by $40.7 million, primarily because of higher bonus payments related to 2021 performance; free cash flow turned negative.
- Debt increased by $145.0 million from year-end, reflecting borrowings under the revolving credit facility.
- Stock-based compensation increased to $13.9 million from $8.1 million.
- The effective tax rate increased by 6.9 percentage points because of additional uncertain-tax-position reserves.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide a clear quantitative full-year revenue or earnings guidance range. Management expects available cash, investments, operating cash flow, and credit capacity to meet operating and cash needs for at least the next 12 months. Management also expects continued capital expenditures for hardware, software, internally developed applications, leasehold improvements, and migration of selected infrastructure to the public cloud.
On April 4, 2022, after quarter-end, Morningstar announced an agreement to acquire Leveraged Commentary & Data from S&P Global for up to $650.0 million in cash. The transaction was expected to close early in the third quarter of 2022 and was supported by a new financing commitment of up to $1.1 billion.
On April 22, 2022, Morningstar invested approximately $25.0 million in cash and converted a $5.0 million SmartX convertible note into SmartX preferred stock. Morningstar also disclosed a proposed $1.15 million SEC settlement involving Morningstar Credit Ratings, LLC; the settlement remained subject to SEC and court approval and was considered immaterial to the company’s financial position.
Principal risks include financial-market volatility affecting asset-based fees and credit-ratings activity, inflation and competition for employees, cybersecurity and data-protection exposure, regulatory compliance, technology and business-continuity risks, foreign-currency exposure, acquisition integration, COVID-19 effects, and the effect of indebtedness on financial flexibility. The filing states that there were no material changes to previously disclosed risk factors.
Other contingencies include third-party data-license audits and regulatory, legal, and tax proceedings. Management states that these matters are not expected to have a material adverse effect, although certain potential losses cannot currently be estimated. A 10% adverse currency fluctuation was estimated to reduce equity by approximately $5.2 million for the Australian dollar, $27.2 million for the British pound, $24.2 million for the Canadian dollar, $1.5 million for the euro, and $23.6 million for other currencies.
Important Facts for Investors to Verify
- Whether revenue growth remains sufficient to offset continued increases in compensation, headcount, professional fees, and other operating costs.
- The sustainability of the reduced operating margin and negative first-quarter free cash flow.
- The financing, closing conditions, purchase accounting, and leverage impact of the planned LCD acquisition.
- Future borrowing costs, covenant compliance, and available liquidity after the new acquisition financing is implemented.
- The effect of market volatility and the reported one-quarter lag on asset-based revenue.
- Developments in uncertain tax positions, tax audits, data-license audits, credit-ratings regulatory matters, and other contingencies.
- The impact of foreign-currency movements, with no significant derivative hedges currently in place.
- Whether share repurchases and dividends remain consistent with investment, acquisition, and debt-reduction priorities.