Business Context and Reporting Period
This Form 8-K Current Report was filed by Morningstar, Inc. on October 6, 2017. The filing serves as a Regulation FD disclosure, providing written responses to investor inquiries received through October 3, 2017. The company operates as a provider of investment research and data, with a strategic focus on organic growth supplemented by targeted acquisitions.
Key Financial Metrics and Transactions
- Divestiture Gain: Morningstar sold the HelloWallet business in June 2017 for $23.7 million, recording a gain of $17.5 million.
- Capitalized Software Costs:
- Full Year 2016: $28.2 million
- Full Year 2015: $21.8 million
- Full Year 2014: $18.8 million
- Six Months Ended June 2017: $23.6 million (compared to $12.4 million in the same period of 2016).
- Acquisition History: The filing references past acquisitions including Logical Information Machines ($50 million in 2011), ByAllAccounts ($28 million in 2014), Total Rebalance Expert (2015), and RequiSight (2016). Management notes these have been relatively immaterial to the balance sheet, revenue, or earnings.
Material Changes and Accounting Explanations
HelloWallet Accounting Treatment: The filing clarifies the accounting behind the $17.5 million gain on the HelloWallet sale. Despite the business being valued at $54 million in 2014 with $39 million in goodwill, no impairment was recorded in prior years. Upon divestiture, Morningstar attributed only $2.4 million of goodwill to the sale based on the fair value allocation method relative to total Morningstar fair value. The gain represents the $23.7 million proceeds less the $2.4 million goodwill and the write-off of remaining net book value of intangible assets.
Software Development Trends: The increase in capitalized software costs is attributed to higher development activities for new products and enhanced features, including the integration of PitchBook and its new platform. Management states the accounting treatment has remained consistent, with the increase reflecting strategic investment levels rather than a change in policy.
Outlook, Risks, and Management Commentary
Acquisition Strategy: Management prefers organic growth but pursues acquisitions for product fit, technology, and intellectual property. Acquisitions are generally fully integrated, with the exception of PitchBook, which retains a separate brand. Management tracks acquisition performance via post-mortem analyses and aims to grow long-term shareholder value through dividends and share buybacks.
Performance of Specific Acquisitions:
- Logical Information Machines (LIM): Remains profitable but has not met growth expectations due to new competition and weakness in energy/commodity prices affecting customer budgets.
- ByAllAccounts & Total Rebalance Expert: Integrated to support financial advisor workflows, providing data aggregation and automated portfolio rebalancing.
- RequiSight: Contributed capabilities for navigating the fiduciary landscape, such as the Best Interest Scorecard.
Risks and Uncertainties: The filing lists significant risks including liability for fiduciary breaches, brand reputation, failure to innovate, technological changes, trends toward passive investment vehicles, data privacy liabilities, regulatory compliance, and the impact of global economic downturns on asset-based fees.
Investor Verification Checklist
- Verify the specific allocation of the $2.4 million goodwill attributed to the HelloWallet divestiture in subsequent financial statements.
- Monitor the integration progress and revenue contribution of the PitchBook acquisition, which is treated as a separate brand.
- Assess the profitability and growth trajectory of the Logical Information Machines (LIM) segment given the cited headwinds in the energy sector.
- Review future quarterly reports for trends in capitalized software development costs relative to total revenue.
- Confirm the status of the "Best Interest Scorecard" and other fiduciary tools derived from the RequiSight acquisition.