Morningstar, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
Morningstar provides independent investment research, data, ratings, software, indexes, investment management, retirement solutions, credit ratings through DBRS Morningstar, and ESG research through Sustainalytics. The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. Morningstar operates in 29 countries and reports a single operating segment.
Revenue is generated through license-based subscriptions, asset-based fees, and transaction-based services. Key products include PitchBook, DBRS Morningstar, Morningstar Data, Morningstar Direct, Investment Management, Workplace Solutions, Advisor Workstation, Sustainalytics, and Morningstar Indexes.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $1,699.3 million | $1,389.5 million | 22.3% |
| Operating income | $257.0 million | $215.2 million | 19.4% |
| Operating margin | 15.1% | 15.5% | Down 0.4 percentage points |
| Net income | $193.3 million | $223.6 million | Down 13.6% |
| Diluted EPS | $4.45 | $5.18 | Down 14.1% |
| Cash flow from operations | $449.9 million | $384.3 million | 17.1% |
| Capital expenditures | $101.8 million | $76.7 million | 32.7% |
| Free cash flow | $348.1 million | $307.6 million | 13.2% |
Revenue growth was broad-based. License-based revenue increased 21.1% to $1,131.7 million, asset-based revenue increased 18.4% to $264.9 million, and transaction-based revenue increased 31.2% to $302.7 million. License-based revenue represented 66.6% of consolidated revenue, asset-based revenue 15.6%, and transaction-based revenue 17.8%.
Organic revenue increased 17.6% to $1,634.7 million after excluding acquisitions and foreign currency effects. Foreign currency movements increased reported revenue by $26.7 million.
Major product growth included PitchBook revenue of $290.2 million, up 44.3%; DBRS Morningstar revenue of $271.2 million, up 30.8%; Morningstar Data revenue of $243.5 million, up 13.2%; Morningstar Direct revenue of $173.2 million, up 9.6%; Investment Management revenue of $125.5 million, up 6.1%; and Workplace Solutions revenue of $104.4 million, up 23.6%.
Profitability was pressured by increased compensation, sales commissions, professional fees, advertising, marketing, and investment in product development. Total operating expense increased 22.8% to $1,442.3 million. Adjusted operating income, excluding intangible amortization and M&A-related expenses, increased 14.7% to $363.4 million, while adjusted operating margin declined to 21.3% from 22.8%.
The effective tax rate increased to 24.5% from 21.1%, primarily because of minimum taxes and nondeductible expenses. The 2020 results benefited from a $50.9 million noncash holding gain related to the acquisition of the remaining Sustainalytics interest and $30.0 million of gains on equity-method investments; these items did not recur in 2021.
Liquidity, Debt, and Capital Allocation
- Cash, cash equivalents, and investments totaled $546.1 million at December 31, 2021, up $81.9 million from 2020.
- The company had $483.8 million of cash and cash equivalents and $62.3 million of investments on the balance sheet.
- Long-term debt was $359.4 million, consisting primarily of $348.4 million of 2.32% senior notes due in 2030 and $11.0 million outstanding under the term facility.
- The company had full availability of its $300.0 million revolving credit facility and was in compliance with debt covenants.
- Morningstar paid $54.2 million in dividends in 2021 and increased its quarterly dividend to $0.36 per share, with management expecting regular quarterly dividends of that amount in 2022 subject to board approval.
- The company repurchased 4,900 shares for $1.3 million under its $400.0 million authorization, leaving $398.7 million available at year-end.
- Approximately 57% of cash, cash equivalents, and investments were held outside the United States.
Material Changes Versus the Prior Comparable Period
- PitchBook was the primary growth engine: platform licenses increased 41.4% to 73,940 and its estimated annual renewal rate increased to approximately 127% from 115%.
- Sustainalytics revenue increased 168.1% to $78.9 million, although its organic contribution was included for only the last six months of 2021.
- DBRS Morningstar benefited from stronger CMBS and RMBS issuance and growth in corporate and financial institution ratings.
- Workplace Solutions assets under management and advisement increased 18.1% to $212.9 billion; Investment Management assets increased 11.8% to $52.2 billion.
- Asset value linked to Morningstar Indexes increased 82.4% to $147.0 billion.
- Worldwide headcount increased 19.8% to 9,556 employees. Average employee turnover increased to 18.5% from 11.8%, while the engagement score improved slightly to 81% from 80%.
- Capitalized software development increased, and capital expenditures rose 32.7% as Morningstar accelerated product development and cloud migration efforts.
- Morningstar acquired Moorgate Benchmarks in September 2021. It also agreed to acquire Praemium’s U.K. and international wealth management platform business, with closing expected in the second or third quarter of 2022, subject to regulatory approval.
Guidance, Outlook, Risks, and Unusual Items
Morningstar does not provide public financial forecasts or earnings guidance. Management expects available cash, investments, operating cash flow, and the revolving credit facility to be sufficient for operating and cash needs for at least the next 12 months. The company expected approximately $141.5 million of annual bonus payments in the first quarter of 2022 related to the 2021 bonus program.
Strategic priorities include expanding differentiated insights across public and private asset classes, building a leading ESG position, improving operational scalability, investing in cloud and technology infrastructure, expanding wealth management and retirement solutions, and developing an inclusive, highly engaged workforce.
- Market downturns, interest-rate changes, inflation, reduced debt issuance, and lower asset values could adversely affect asset-based revenue, credit ratings revenue, and customer demand.
- Competition is intense across data, research, ratings, ESG, software, indexes, and investment management. Larger competitors generally have greater financial resources.
- Cybersecurity, data privacy, cloud-provider outages, operational disruptions, and cross-border data-transfer restrictions could cause regulatory, reputational, and financial losses.
- Morningstar faces extensive regulation of credit ratings, investment advisory, retirement, ESG, index, privacy, and benchmark-administration activities. Regulatory requirements are evolving and may increase compliance costs.
- Fiduciary claims, errors in research or data, intellectual-property disputes, and liability associated with automated investment technology could result in litigation or significant expenses.
- Employee retention and wage pressure are risks, particularly given elevated turnover and competition for technology, research, ESG, and credit-analysis talent.
- DBRS, Inc. paid a $1.0 million SEC civil money penalty in 2021 and remains subject to certain undertakings. A separate SEC action involving former Morningstar Credit Ratings methodology remained pending, although one count and the SEC’s request for a permanent injunction were dismissed in January 2022.
- At year-end, Morningstar had a $17.3 million contingent consideration liability related to Sustainalytics, with potential payment scheduled for June 30, 2022.
- The company is evaluating the transition of its credit facility from LIBOR to an alternative reference rate and expects to modify the facility before the end of 2022.
KPMG issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting. Revenue recognition was identified as the critical audit matter because of the number of revenue streams and differing recognition processes.
Important Facts for Investors to Verify
- Confirm the sustainability of PitchBook’s exceptional growth and renewal rate, and assess its exposure to a downturn in private capital markets.
- Evaluate the recurring versus transaction-based mix, particularly the dependence of DBRS Morningstar on debt issuance volumes.
- Monitor operating-margin trends as compensation, hiring, commissions, cloud migration, and product-development spending continue to increase.
- Review the impact of the 2022 bonus payments, Praemium acquisition, Moorgate integration, and Sustainalytics contingent consideration on cash flow and leverage.
- Assess exposure to market movements through asset-based revenue, managed assets, index-linked assets, and the company’s investment portfolio.
- Review pending and future ESG, benchmark, privacy, cybersecurity, credit-rating, and investment-advisory regulations and related compliance costs.
- Consider shareholder-control and governance implications of Executive Chairman Joe Mansueto’s approximately 41.6% ownership stake.
- Verify future dividend policy, share repurchases, debt covenant compliance, LIBOR transition terms, and the availability of the revolving credit facility.