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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 8-K
______________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 23, 2024
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | | | | |
| Illinois (State or other jurisdiction of incorporation) | 000-51280 (Commission File Number)
| 36-3297908 (I.R.S. Employer Identification No.) |
| | 22 West Washington Street Chicago, Illinois (Address of principal executive offices) |
60602 (Zip Code) |
| | (312) 696-6000 (Registrant’s telephone number, including area code) | |
|
N/A | | |
(Former name or former address, if changed since last report) __________________________________
| |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common stock, no par value | MORN | The Nasdaq Stock Market LLC |
Item 2.02. Results of Operations and Financial Condition.
On February 22, 2024, Morningstar, Inc. (the "Company" or "we") issued a press release announcing its financial results for the fourth quarter ended December 31, 2023. A copy of the press release is attached hereto as Exhibit 99.1. Additionally, on February 22, 2024, the Company published a Supplemental Presentation. A copy of the Supplemental Presentation is attached hereto as Exhibit 99.2. The Press Release and Supplemental Presentation shall be deemed furnished, not filed, for purposes of this Current Report on Form 8-K (this "Report").
Item 5.02. Departure of Directors of Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
As of February 23, 2024, the Company designated Jason Dubinsky (age 50) as principal accounting officer, in addition to his current role as Chief Financial Officer (and principal financial officer) of the Company. Mr. Dubinsky has served as the Company's Chief Financial Officer since 2017.
Item 7.01. Regulation FD Disclosure.
On February 22, 2024, the Company published a Shareholder Letter. The Shareholder Letter is included as Exhibit 99.3 to this Report. The Shareholder Letter shall be deemed furnished, not filed, for purposes of this Report.
The information set forth under Item 2.02, "Results of Operations and Financial Condition" is incorporated herein by reference.
Cautionary Note Regarding Forward-Looking Statements
This Report contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “prospects,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For the Company, these risks and uncertainties include, among others, failing to maintain and protect our brand, independence, and reputation; failure to prevent and/or mitigate cybersecurity events and the failure to protect confidential information, including personal information about individuals; compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, investment advisory, ESG and index businesses; failing to innovate our product and service offerings, or anticipate our clients’ changing needs; the impact of artificial intelligence and related technologies on our business, legal and regulatory exposure profile and reputation; failing to detect errors in our products or the failure of our products to perform properly due to defects, malfunctions or similar problems; failing to recruit, develop, and retain qualified employees; prolonged volatility or downturns affecting the financial sector, global financial markets, and the global economy and its effect on our revenue from asset-based fees and our credit ratings business; failing to scale our operations, increase productivity in order to implement our business plans and strategies; liability for any losses that result from errors in our automated advisory tools or errors in the use of the information and data we collect; inadequacy of our operational risk management and business continuity programs and insurance coverage in the event of a material disruptive event; failing to efficiently integrate and leverage acquisitions and other investments, which may not realize the expected business or financial benefits, to
produce the results we anticipate; failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world; liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products; the potential adverse effect of our indebtedness on our cash flows and financial and operational flexibility; challenges in accounting for tax complexities in the global jurisdictions which we operate in and their effect on our tax obligations and tax rates; and failing to protect our intellectual property rights or claims of intellectual property infringement against us. A more complete description of these risks and uncertainties can be found in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. If any of these risks and uncertainties materialize, our actual future results and other future events may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties and assumptions in our future filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits:
| | | | | | | | |
| Exhibit No. | | Description |
| | |
| | |
| | |
| 104 | | The cover page from this Current Report on Form 8-K formatted in Inline XBRL (included as Exhibit 101). |
_____________________________________________________________________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | | | | | | |
| | MORNINGSTAR, INC. |
| Date: February 23, 2024 | | By:/s/ Jason Dubinsky |
| | Name: Jason Dubinsky |
| | Title: Chief Financial Officer |
News Release22 West Washington Street Telephone: +1 312 696-6000
Chicago Facsimile: +1 312 696-6009
Illinois 60602
FOR IMMEDIATE RELEASE
Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2023 Financial Results
CHICAGO, Feb. 22, 2024 - Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment insights, posted double-digit fourth-quarter revenue growth, with positive contributions from across the business. For the full year, the Company reported positive revenue growth, with particular strength in its license-based products.
"We finished 2023 on a strong note, crossing $2 billion in revenue for the fiscal year and delivering meaningful increases in organic revenue, margins, and cash flow for the quarter" said Kunal Kapoor, Morningstar's chief executive officer. "During the year, we made important progress across a number of initiatives, with highlights including the substantial completion of the LCD integration, the introduction of Direct Lens, the launch of Low Carbon Transition Ratings and physical risk metrics, and the ongoing enhancement of our index suite including the introduction of the Morningstar PitchBook Global Unicorn Industry Vertical Indexes."
The Company's quarterly shareholder letter provides more context on its quarterly results and business and can be found at shareholders.morningstar.com.
Fourth-Quarter 2023 Financial Highlights
•Reported revenue increased 13.4% to $538.7 million compared to the prior-year period; organic revenue increased 12.6%.
•Reported operating income increased 165.9% to $94.4 million; adjusted operating income increased 70.2%.
•Diluted net income per share increased to $1.71 versus $0.08 in the prior-year period. Adjusted diluted net income per share increased 239.7% to $1.97. The increase in diluted and adjusted diluted net income per share included the impact of a lower effective tax rate.
•Cash provided by operating activities increased 33.1% to $137.8 million, and free cash flow increased 59.9% to $107.8 million.
Full-Year 2023 Financial Highlights
•Reported revenue increased 9.0% to $2.0 billion; organic revenue increased 7.5%.
•Operating income increased 37.4% to $230.6 million; adjusted operating income increased 9.2%.
•Diluted net income per share increased 100.6% to $3.29 versus $1.64 in the prior year. Adjusted diluted net income per share increased by 32.3%.
•Cash provided by operating activities increased 6.2% to $316.4 million. Free cash flow increased 17.2% to $197.3 million. Cash flows were impacted by items described in the Balance Sheet and Capital Allocation section totaling $90.8 million. Excluding these and comparable items in the prior year, operating cash and free cash flow would have increased by 19.7% and 36.7%, respectively.
Fourth-Quarter 2023 Results
Fourth-quarter revenue increased 13.4% to $538.7 million compared to the prior-year period. Organic revenue, which excludes foreign currency effects, grew 12.6%.
License-based revenue increased 12.4% versus the prior-year period, or 10.3% on an organic basis. PitchBook, Morningstar Data, Morningstar Direct, and Morningstar Sustainalytics' license-based products all provided meaningful contributions to reported and organic revenue growth in the quarter. Asset-based revenue increased 14.4% versus the prior-year period, or 19.8% organically, driven by growth in Investment Management, Morningstar Retirement, and Morningstar Indexes' asset-based products. This growth was supported by the rebound in global asset values and net inflows across multiple products over the trailing 12 months. Transaction-based revenue increased 18.4%, or 18.0% organically, compared to a relatively weak prior-year period, reflecting growth in credit ratings activities across multiple asset classes.
Operating expenses increased 1.1% to $444.3 million in the fourth quarter of 2023. The primary contributor to the increase was higher compensation costs, which increased $23.4 million over the prior-year period. Excluding the impact of amortization, M&A-related expenses, and costs related to the transition of the Company's China activities, operating expense increased 4.2% in the quarter.
Increases in compensation costs were partially offset by a $14.0 million decline in stock-based compensation, compared to the fourth quarter of 2022 when higher stock-based compensation costs were primarily due to the overachievement of targets under the PitchBook management bonus plan.
Fourth-quarter operating income was $94.4 million, an increase of 165.9% compared with the prior-year period. Adjusted operating income was $113.0 million in the fourth quarter of 2023, an increase of 70.2% compared with the prior-year period. Fourth-quarter operating margin was 17.5%, compared with 7.5% in the prior-year period. Adjusted operating margin was 21.0% in the fourth quarter of 2023, versus 14.1% in the prior-year period.
Net income in the fourth quarter of 2023 was $73.5 million, or $1.71 per diluted share, compared with $3.3 million, or $0.08 per diluted share, in the fourth quarter of 2022. Adjusted diluted net income per share increased 239.7% to $1.97 in the fourth quarter of 2023, compared with $0.58 in the prior-year period.
The Company's effective tax rate decreased to 16.1% versus 88.9% in the prior-year period. In the prior-year period, certain discrete items combined with lower earnings had an adverse and outsized impact on the effective tax rate as discussed in the fourth-quarter 2022 earnings release. Contributors to the full-year tax rate are described in more detail below.
Full-Year 2023 Results
For the full year, revenue increased 9.0% to $2.0 billion compared with the prior year. Organic revenue increased 7.5%.
License-based revenue increased 14.0%, or 11.8% on an organic basis compared with the prior year. PitchBook, Morningstar Data, Morningstar Sustainalytics' license-based products, and Morningstar Direct were the top contributors to full-year organic revenue growth. Asset-based revenue increased 3.8%, or 5.6% on an organic basis primarily driven by second-half 2023 growth in Morningstar Indexes' asset-based products, Morningstar Retirement, and Investment Management, as asset values recovered supported by strong global market performance. Within these areas, the Company experienced stronger growth in the second half of the year as asset values recovered and global market performance improved. Transaction-based revenue decreased by 10.4%, or 11.5% on an organic basis, as Morningstar DBRS revenue declined, primarily reflecting sharply lower levels of credit ratings activity in U.S. commercial mortgage-backed securities.
Full-year 2023 operating income was $230.6 million, an increase of 37.4% compared with the prior year. Adjusted operating income was $326.5 million, an increase of 9.2%. Full-year 2023 operating margin was 11.3%, compared with 9.0% in the prior year. Adjusted operating margin was 16.0%, consistent with the prior year. Severance costs related to targeted reorganizations in certain parts of the business negatively impacted operating margin and adjusted operating margin in 2023 by 0.4% percentage points. In addition, two Morningstar DBRS settlements with the Securities and Exchange Commission (SEC) negatively impacted operating margin and adjusted operating margin by 0.4% percentage points.
Full-year 2023 net income increased by 100.1% to $141.1 million, or $3.29 per diluted share. Full-year 2022 net income was $70.5 million, or $1.64 per diluted share. Adjusted diluted net income per share increased 32.3% to $5.12, compared with $3.87 in the prior year.
The effective tax rate for the full year 2023 was 19.0% versus 44.5% in the prior year, a decrease of 25.5 percentage points. The 2023 effective tax rate was impacted by the one-time recognition of $13.7 million of tax benefits with respect to the 2021 and 2022 tax periods in the second quarter of 2023,
which reduced the 2023 effective tax rate by approximately 7.9 percentage points and impacted diluted net income per share by $0.32.
Product Revenue Contributions
PitchBook, Morningstar DBRS, and Morningstar Data were the top three contributors to consolidated and organic revenue growth in the fourth quarter of 2023. (For more detail on product key metrics, refer to the Supplemental Data table contained in this release and the Supplemental Presentation included on the Company's Investor Relations website at shareholders.morningstar.com under "Financials — Financial Summary".)
Key drivers of the quarterly consolidated revenue trend are provided below. Organic revenue excludes all foreign currency effects, which accounted for the entire difference between reported and organic growth for all product areas.
•PitchBook contributed $132.0 million to consolidated revenue and $21.2 million to revenue growth, with revenue increasing 19.1% on a reported and organic basis, as licenses grew 14.0%. Growth was primarily driven by strength in its core investor and advisor segments, which offset some continued softness in the company (corporate) segment. During 2023, PitchBook substantially completed the integration of Leveraged Commentary & Data's (LCD) core data offering and news onto the PitchBook Platform. At the same time, PitchBook introduced new capabilities to inform investor strategies, including the VC Exit Predictor, a proprietary tool and scoring methodology to predict exit outcomes for VC-backed companies, and the Manager Scoring tool, a new methodology that helps limited partners discover and evaluate top-performing private fund managers. Results exclude stand-alone LCD revenues.
•Morningstar Data contributed $73.3 million to consolidated revenue and $9.2 million to revenue growth, with revenue increasing 14.4%, or 12.4% on an organic basis, supported by growth across major geographies. At the product level, managed investment data, including fund data, continued to be a key driver of higher revenue, followed by growth in equity data and Morningstar Essentials. In 2023, Morningstar Data's coverage continued to evolve to meet client needs, with the addition of structured products and notes data and the continued expansion of coverage on other vehicle types.
•Morningstar DBRS contributed $61.5 million to consolidated revenue and $10.8 million to revenue growth, with revenue increasing 21.3%, or 20.0% on an organic basis, as revenue increased across the U.S., Europe, and Canada compared to a relatively weak prior-year period. The increase was primarily driven by higher asset-backed securities ratings revenue, including revenue related to ratings activity in nontraditional, niche (esoteric) securities; higher corporate ratings revenue, with particular strength in Europe; and higher revenue from U.S.
residential mortgage-backed securities. Revenue related to data licensing products also increased but is currently a small portion of overall revenue in the product area.
•Morningstar Direct contributed $52.0 million to consolidated revenue and $4.5 million to revenue growth, with revenue increasing 9.5% or 8.2% on an organic basis, supported by growth across major geographies. In 2023, Morningstar Direct introduced Direct Lens, which unifies the platform's portfolio capabilities in a clear and intuitive interface; self-service data feeds; and the Morningstar Data Python package, which gives data scientists, data strategists, and quantitative analysts seamless access to data in their favorite coding environments. Morningstar Direct licenses increased 0.8%.
•Investment Management contributed $32.5 million to consolidated revenue and $4.8 million to revenue growth, with revenue increasing 17.3%, or 16.3% on an organic basis. Reported assets under management and advisement (AUMA) increased 9.0% to $55.5 billion compared with the prior year, supported by strong market performance which drove higher asset values. Positive net flows to Managed Portfolios over the trailing 12 months, reflecting strong net inflows outside the U.S. and relatively flat net flows in the U.S, contributed to growth in AUMA. Those offset lower AUM for Institutional Asset Management which experienced significant outflows from a large institutional client.
•Morningstar Sustainalytics contributed $30.4 million to consolidated revenue and $4.2 million to revenue growth, with revenue increasing 16.0% or 13.6% on an organic basis. License-based revenue increased 15.3%, or 12.3% on an organic basis, while transaction-based revenue increased 32.2%, or 29.3% on an organic basis. While still growing at a double-digit rate, license-based revenue continued to slow compared to recent quarters, reflecting softer demand for ESG solutions. Demand for regulatory and compliance solutions supported strong growth in EMEA. Higher second-party opinion revenue across geographies was supported by increased issuance of sustainable bonds, especially green bonds, driving growth in transaction-based revenue. In 2023, Morningstar Sustainalytics launched Low Carbon Transition Ratings, which provide a forward-looking, science-based evaluation of a company’s alignment with a net-zero pathway.
•Morningstar Retirement contributed $30.2 million to consolidated revenue and $4.2 million to revenue growth, with revenue increasing 16.2% on a reported and organic basis. AUMA increased 18.4% to $230.4 billion compared with the prior year, supported by strong market performance. Net inflows to Managed Accounts over the trailing 12 months also contributed to higher AUMA, supported by participant growth, including the impact of the addition of large employer plans during 2023.
•Morningstar Advisor Workstation contributed $25.1 million to consolidated revenue and $0.7 million to revenue growth, with revenue increasing 2.9% on a reported and organic basis, supported by recent product enhancements. In 2023, these included the launch of the Investment Planning Experience, a new workflow which helps advisors meet demand for more personalized advice for investors and has driven new business and upsells with both advisor and enterprise clients, and Enterprise Analytics, which offers firms deeper visibility and insights into firmwide advisor activity.
•Morningstar Indexes contributed $18.2 million to consolidated revenue and $5.5 million to revenue growth, with revenue increasing 43.3%, on a reported and organic basis. The increase in revenue was driven in part by higher investable product revenue, as market performance and strong net flows over the trailing 12 months increased asset value linked to Morningstar Indexes by 19.6% to $176.7 billion over the prior year. Morningstar Indexes licensed data sales also increased. In 2023, Morningstar Indexes completed a multi-year global project to bring index calculations in-house, while introducing a number of new product innovations including the launch of global single factor indexes, the Next Gen AI Index, the Global Unicorn Industry Vertical Indexes, and the Sustainable Activities Involvement Indexes.
Balance Sheet and Capital Allocation
As of Dec. 31, 2023, the Company had cash, cash equivalents, and investments totaling $389.0 million and $972.4 million of debt, compared with cash, cash equivalents, and investments of $414.6 million and $1.1 billion of debt as of Dec. 31, 2022.
Cash provided by operating activities increased by 6.2% to $316.4 million for the full year 2023, compared with $297.8 million in 2022. Free cash flow increased by 17.2% to $197.3 million for the full year 2023, compared with $168.3 million in the prior year.
Operating cash flow and free cash flow in 2023 were impacted by the termination of the Company's license agreement with Morningstar Japan K.K. (renamed SBI Global Asset Management) and the $50.0 million contingent payment related to the acquisition of LCD, of which $4.5 million is reflected in operating cash flows and $45.5 million is reflected in financing cash flows. Excluding the $4.5 million LCD contingent payment within operating cash flow, payments related to the Termination Agreement of $59.9 million, and $26.4 million of severance and other costs paid for the reduction and shift of the Company's China operations, which together totaled $90.8 million, as well as comparable items in the prior year, cash provided by operating activities and free cash flow would have increased by 19.7% and 36.7%, respectively.
In 2023, the Company reduced its debt by $137.2 million, net, paid $63.9 million in dividends, spent $3.7 million related to other minority investments and repurchased $1.4 million of its shares.
Segment Reporting
In response to feedback and comments from the SEC related to the Company's segment reporting and segment aggregation analysis, the Company will be updating its segment reporting presentation in its Form 10-K for the year ended December 31, 2023.
Use of Non-GAAP Financial Measures
The tables at the end of this press release include a reconciliation of the non-GAAP financial measures used by the Company to comparable GAAP measures and an explanation of why the Company uses them.
Investor Communication
Morningstar encourages all interested parties — including securities analysts, current shareholders, potential shareholders, and others — to submit questions in writing. Investors and others may send questions about Morningstar’s business to investors@morningstar.com. Morningstar will make written responses to selected inquiries available to all investors at the same time in Form 8-Ks furnished to the SEC, generally every month.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment insights in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers and owners, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $286 billion in assets under advisement and management as of Dec. 31, 2023. The Company operates through wholly- or majority-owned subsidiaries in 32 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on X @MorningstarInc.
Caution Concerning Forward-Looking Statements
This press release contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” "prospects," or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, failing to maintain and protect our brand, independence, and reputation; failure to prevent and/or mitigate cybersecurity events and the failure to protect confidential information, including personal information about individuals; compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, investment advisory, ESG and index businesses; failing to innovate our product and service offerings, or anticipate our clients’ changing needs; the impact of artificial intelligence and related technologies on our business,
legal and regulatory exposure profile and reputation; failing to detect errors in our products or the failure of our products to perform properly due to defects, malfunctions or similar problems; failing to recruit, develop, and retain qualified employees; prolonged volatility or downturns affecting the financial sector, global financial markets, and the global economy and its effect on our revenue from asset-based fees and our credit ratings business; failing to scale our operations, increase productivity in order to implement our business plans and strategies; liability for any losses that result from errors in our automated advisory tools or errors in the use of the information and data we collect; inadequacy of our operational risk management and business continuity programs and insurance coverage in the event of a material disruptive event; failing to efficiently integrate and leverage acquisitions and other investments, which may not realize the expected business or financial benefits, to produce the results we anticipate; failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world; liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products; the potential adverse effect of our indebtedness on our cash flows and financial and operational flexibility; challenges in accounting for tax complexities in the global jurisdictions which we operate in and their effect on our tax obligations and tax rates; and failing to protect our intellectual property rights or claims of intellectual property infringement against us. A more complete description of these risks and uncertainties, among others, can be found in our filings with the SEC, including our most recent Reports on Forms 10-K and 10-Q. If any of these risks and uncertainties materialize, our actual future results and other future events may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information, future events or otherwise, except as may be required by law. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties and assumptions in our future filings with the SEC on Forms 10-K, 10-Q and 8-K.
# # #
Media Relations Contact:
Stephanie Lerdall, +1 312-244-7805, stephanie.lerdall@morningstar.com
Investor Relations Contact:
Sarah Bush, +1 312-384-3754, sarah.bush@morningstar.com
©2024 Morningstar, Inc. All Rights Reserved.
MORN-E
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Year ended December 31, |
| (in millions, except per share amounts) | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
| | | | | | | | | | | | |
| Revenue | | $ | 538.7 | | | $ | 475.0 | | | 13.4 | % | | $ | 2,038.6 | | | $ | 1,870.6 | | | 9.0 | % |
| Operating expense: | | | | | | | | | | | | |
| Cost of revenue | | 205.4 | | | 195.0 | | | 5.3 | % | | 843.5 | | | 779.3 | | | 8.2 | % |
| Sales and marketing | | 100.4 | | | 93.6 | | | 7.3 | % | | 423.8 | | | 356.5 | | | 18.9 | % |
| General and administrative | | 92.0 | | | 106.1 | | | (13.3) | % | | 355.8 | | | 400.4 | | | (11.1) | % |
| Depreciation and amortization | | 46.5 | | | 44.8 | | | 3.8 | % | | 184.9 | | | 166.6 | | | 11.0 | % |
| | | | | | | | | | | | |
| Total operating expense | | 444.3 | | | 439.5 | | | 1.1 | % | | 1,808.0 | | | 1,702.8 | | | 6.2 | % |
| Operating income | | 94.4 | | | 35.5 | | | 165.9 | % | | 230.6 | | | 167.8 | | | 37.4 | % |
| Operating margin | | 17.5 | % | | 7.5 | % | | 10.0 pp | | 11.3 | % | | 9.0 | % | | 2.3 pp |
| | | | | | | | | | | | |
Non-operating loss, net: | | | | | | | | | | | | |
Interest expense, net | | (11.5) | | | (11.1) | | | 3.6 | % | | (51.7) | | | (28.4) | | | 82.0 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Expense from equity method transaction, net | | — | | | — | | | — | % | | (11.8) | | | — | | | NMF |
| | | | | | | | | | | | |
Other income (loss), net | | 7.4 | | | 6.2 | | | 19.4 | % | | 14.4 | | | (8.8) | | | NMF |
Non-operating loss, net | | (4.1) | | | (4.9) | | | (16.3) | % | | (49.1) | | | (37.2) | | | 32.0 | % |
| | | | | | | | | | | | |
Income before income taxes and equity in net income (loss) of unconsolidated entities | | 90.3 | | | 30.6 | | | 195.1 | % | | 181.5 | | | 130.6 | | | 39.0 | % |
Equity in net income (loss) of unconsolidated entities | | (2.7) | | | (0.9) | | | 200.0 | % | | (7.4) | | | (3.6) | | | 105.6 | % |
| Income tax expense | | 14.1 | | | 26.4 | | | (46.6) | % | | 33.0 | | | 56.5 | | | (41.6) | % |
Consolidated net income | | $ | 73.5 | | | $ | 3.3 | | | NMF | | $ | 141.1 | | | $ | 70.5 | | | 100.1 | % |
| | | | | | | | | | | | |
| Net income per share: | | | | | | | | | | | | |
| Basic | | $ | 1.72 | | | $ | 0.08 | | | NMF | | $ | 3.31 | | | $ | 1.65 | | | 100.6 | % |
| Diluted | | $ | 1.71 | | | $ | 0.08 | | | NMF | | $ | 3.29 | | | $ | 1.64 | | | 100.6 | % |
| Weighted average shares outstanding: | | | | | | | | | | | | |
| Basic | | 42.7 | | | 42.5 | | | 0.5 | % | | 42.6 | | | 42.6 | | | — | % |
| Diluted | | 43.0 | | | 42.7 | | | 0.7 | % | | 42.9 | | | 42.9 | | | — | % |
_________________________________________________________________
NMF - Not meaningful, pp - percentage points
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31 |
| (in millions) | | 2023 | | 2022 |
| | | | | |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 337.9 | | | $ | 376.6 | |
| Investments | | 51.1 | | | 38.0 | |
| Accounts receivable, net | | 343.9 | | | 307.9 | |
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| Income tax receivable, net | | 0.6 | | | — | |
| Other current assets | | 82.2 | | | 88.3 | |
| Total current assets | | 815.7 | | | 810.8 | |
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Goodwill | | 1,578.8 | | | 1,571.7 | |
Intangible assets, net | | 484.4 | | | 548.6 | |
| Property, equipment, and capitalized software, net | | 207.7 | | | 199.4 | |
| Operating lease assets | | 163.9 | | | 191.6 | |
| Investments in unconsolidated entities | | 100.2 | | | 96.0 | |
| Deferred tax asset, net | | 14.6 | | | 10.8 | |
| Other assets | | 38.1 | | | 45.9 | |
| Total assets | | $ | 3,403.4 | | | $ | 3,474.8 | |
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| Liabilities and equity | | | | |
| Current liabilities: | | | | |
| Deferred revenue | | $ | 517.7 | | | $ | 455.6 | |
| Accrued compensation | | 214.4 | | | 220.1 | |
| Accounts payable and accrued liabilities | | 78.4 | | | 76.2 | |
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| Operating lease liabilities | | 36.4 | | | 37.3 | |
| Current portion of long-term debt | | 32.1 | | | 32.1 | |
| Contingent consideration liability | | — | | | 50.0 | |
| Other current liabilities | | 1.8 | | | 11.2 | |
| Total current liabilities | | 880.8 | | | 882.5 | |
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Operating lease liabilities | | 151.4 | | | 176.7 | |
| Accrued compensation | | 23.7 | | | 20.7 | |
| Deferred tax liability, net | | 35.6 | | | 62.9 | |
| Long-term debt | | 940.3 | | | 1,077.5 | |
| Other long-term liabilities | | 43.8 | | | 47.4 | |
| Total liabilities | | 2,075.6 | | | 2,267.7 | |
| Total equity | | 1,327.8 | | | 1,207.1 | |
| Total liabilities and equity | | $ | 3,403.4 | | | $ | 3,474.8 | |
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | Three months ended December 31, | | Year ended December 31, |
| (in millions) | | 2023 | | 2022 | | 2023 | | 2022 |
| Operating activities | | | | | | | | |
Consolidated net income | | $ | 73.5 | | | $ | 3.3 | | | $ | 141.1 | | | $ | 70.5 | |
Adjustments to reconcile consolidated net income to net cash flows from operating activities | | 27.9 | | | 56.2 | | | 147.2 | | | 239.3 | |
| Changes in operating assets and liabilities, net | | 36.4 | | | 44.0 | | | 28.1 | | | (12.0) | |
| Cash provided by operating activities | | 137.8 | | | 103.5 | | | 316.4 | | | 297.8 | |
| Investing activities | | | | | | | | |
| Capital expenditures | | (30.0) | | | (36.1) | | | (119.1) | | | (129.5) | |
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| Acquisitions, net of cash acquired | | (0.8) | | | 0.1 | | | (0.8) | | | (646.7) | |
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| Purchases of investments in unconsolidated entities | | (2.6) | | | (1.1) | | | (3.7) | | | (29.4) | |
| Other, net | | 0.6 | | | (1.2) | | | 41.7 | | | 6.3 | |
Cash used for investing activities | | (32.8) | | | (38.3) | | | (81.9) | | | (799.3) | |
| Financing activities | | | | | | | | |
| Common shares repurchased | | — | | | (8.3) | | | (1.4) | | | (226.0) | |
| Dividends paid | | (16.0) | | | (15.3) | | | (63.9) | | | (61.5) | |
Repayments of debt | | (83.1) | | | (63.2) | | | (397.5) | | | (374.1) | |
Proceeds from debt | | — | | | 15.0 | | | 260.0 | | | 1,125.0 | |
| Payment for acquisition-related earn-outs | | — | | | — | | | (45.5) | | | (16.2) | |
| Other, net | | (4.3) | | | (4.9) | | | (30.1) | | | (32.1) | |
Cash provided by (used for) financing activities | | (103.4) | | | (76.7) | | | (278.4) | | | 415.1 | |
| Effect of exchange rate changes on cash and cash equivalents | | 11.3 | | | 15.4 | | | 5.2 | | | (20.8) | |
Net increase (decrease) in cash and cash equivalents | | 12.9 | | | 3.9 | | | (38.7) | | | (107.2) | |
| Cash and cash equivalents-beginning of period | | 325.0 | | | 372.7 | | | 376.6 | | | 483.8 | |
| Cash and cash equivalents-end of period | | $ | 337.9 | | | $ | 376.6 | | | $ | 337.9 | | | $ | 376.6 | |
Morningstar, Inc. and Subsidiaries
Supplemental Data (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | Three months ended December 31, | | | Year ended December 31, | |
| (in millions) | | 2023 | | 2022 | | Change | | Organic (2) | | | 2023 | | 2022 | | Change | | Organic (2) | |
Revenue by type (1) | | | | | | | | | | | | | | | | | | |
License-based (3) | | 393.0 | | 349.7 | | 12.4 | % | | 10.3% | | | $ | 1,517.5 | | | $ | 1,331.7 | | | 14.0 | % | | 11.8 | % | |
Asset-based (4) | | 75.5 | | 66.0 | | 14.4 | % | | 19.8% | | | 279.6 | | 269.4 | | 3.8 | % | | 5.6 | % | |
Transaction-based (5) | | 70.2 | | 59.3 | | 18.4 | % | | 18.0% | | | 241.5 | | 269.5 | | (10.4) | % | | (11.5) | % | |
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Product revenue contributors (6) | | | | | | | | | | | | | | | | | | |
PitchBook | | 132.0 | | 110.8 | | 19.1 | % | | 19.1% | | | 493.4 | | 407.7 | | 21.0 | % | | 21.0 | % | |
| Morningstar Data | | 73.3 | | 64.1 | | 14.4 | % | | 12.4% | | | 281.2 | | 255.0 | | 10.3 | % | | 10.3 | % | |
Morningstar DBRS (7) | | 61.5 | | 50.7 | | 21.3 | % | | 20.0% | | | 215.4 | | 236.9 | | (9.1) | % | | (8.5) | % | |
| Morningstar Direct | | 52.0 | | 47.5 | | 9.5 | % | | 8.2% | | | 201.9 | | 184.8 | | 9.3 | % | | 9.2 | % | |
Investment Management | | 32.5 | | 27.7 | | 17.3 | % | | 16.3% | | | 122.6 | | 117.6 | | 4.3 | % | | (0.1) | % | |
Morningstar Sustainalytics | | 30.4 | | 26.2 | | 16.0 | % | | 13.6% | | | 117.8 | | 103.0 | | 14.4 | % | | 13.9 | % | |
Morningstar Retirement (8) | | 30.2 | | 26.0 | | 16.2 | % | | 16.2% | | | 110.2 | | 103.7 | | 6.3 | % | | 6.3 | % | |
| Morningstar Advisor Workstation | | 25.1 | | 24.4 | | 2.9 | % | | 2.9% | | | 100.0 | | 95.4 | | 4.8 | % | | 5.2 | % | |
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| | | As of December 31, | | | | | | | | | | | | |
| AUMA (approximate) ($bil) | | 2023 | | 2022 | | Change | | | | | | | | | | | | |
| Morningstar Retirement | | | | | | | | | | | | | | | | | | |
| Managed Accounts | | $ | 134.8 | | $ | 109.3 | | 23.3 | % | | | | | | | | | | | | |
| Fiduciary Services | | 56.2 | | 50.4 | | 11.5 | % | | | | | | | | | | | | |
| Custom Models/CIT | | 39.4 | | 34.9 | | 12.9 | % | | | | | | | | | | | | |
| Morningstar Retirement (total) | | $ | 230.4 | | $ | 194.6 | | 18.4 | % | | | | | | | | | | | | |
| Investment Management | | | | | | | | | | | | | | | | | | |
| Morningstar Managed Portfolios | | $ | 38.7 | | $ | 32.6 | | 18.7 | % | | | | | | | | | | | | |
| Institutional Asset Management | | 7.7 | | 9.8 | | (21.4) | % | | | | | | | | | | | | |
| Asset Allocation Services | | 9.1 | | 8.5 | | 7.1 | % | | | | | | | | | | | | |
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| Investment Management (total) | | $ | 55.5 | | $ | 50.9 | | 9.0 | % | | | | | | | | | | | | |
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| Asset value linked to Morningstar Indexes ($bil) | | $ | 176.7 | | $ | 147.7 | | 19.6 | % | | | | | | | | | | | | |
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| | | Three months ended December 31, | | | | | Year ended December 31, | | | |
| | | 2023 | | 2022 | | Change | | | | | 2023 | | 2022 | | Change | | | |
Average AUMA ($bil) | | $ | 274.8 | | $ | 242.5 | | 13.3 | % | | | | | $ | 261.4 | | $ | 253.6 | | 3.1 | % | | | |
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____________________________________________________________________________ (1) Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type. Prior periods have not been restated to reflect the updated classifications. Revenue from Morningstar Sustainalytics' second-party opinions product was reclassified from license-based to transaction-based. Revenue from Morningstar Indexes data and services products was reclassified from asset-based to license-based. Revenue from Morningstar DBRS' data licensing products was reclassified from transaction-based to license-based.
(2) Organic revenue excludes acquisitions, divestitures, the impacts of the adoption of new accounting standard changes, and the effect of foreign currency translations.
(3) License-based revenue includes PitchBook, Morningstar Data, Morningstar Direct, Morningstar Sustainalytics' license-based products, Morningstar Indexes data and services products, Morningstar DBRS' data licensing products, Morningstar Advisor Workstation, and other similar products.
(4) Asset-based revenue includes Investment Management, the majority of Morningstar Retirement (formerly Workplace Solutions), and Morningstar Indexes.
(5) Transaction-based revenue includes Morningstar DBRS, Morningstar Sustainalytics' second-party opinions product, internet advertising, and Morningstar-sponsored conferences.
(6) The dollar contribution of each product to consolidated revenue growth is provided in the Product Revenue Contributions narrative.
(7) For the three and 12 months ended Dec 31, 2023, Morningstar DBRS recurring revenue derived primarily from surveillance, research, and other transaction-related services was 45.0% and 50.2%, respectively. For the three and 12 months ended Dec 31, 2022, recurring revenue was 50.1% and 42.4%, respectively.
(8) Morningstar Retirement was formerly branded Workplace Solutions.
Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures (Unaudited)
To supplement Morningstar’s condensed consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the SEC, including:
•consolidated revenue, excluding acquisitions, divestitures, adoption of new accounting standard changes (accounting changes), and the effect of foreign currency translations (organic revenue),
•consolidated operating income, excluding intangible amortization expense, all mergers and acquisitions (M&A)-related expenses (including M&A-related earn-outs), and items related to the significant reduction and shift of the Company's operations in China (adjusted operating income),
•consolidated operating margin, excluding intangible amortization expense, all M&A-related expenses (including M&A-related earn-outs), and items related to the significant reduction and shift of the Company's operations in China (adjusted operating margin),
•consolidated diluted net income per share, excluding intangible amortization expense, all M&A-related expenses (including M&A-related earn-outs), items related to the significant reduction and shift of the Company's operations in China, and certain non-operating gains/losses (adjusted diluted net income per share), and
•cash provided by or used for operating activities less capital expenditures (free cash flow).
These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Morningstar presents organic revenue because the Company believes this non-GAAP measure helps investors better compare period-over-period results. Morningstar excludes revenue from acquired businesses from its organic revenue growth calculation for a period of 12 months after it completes the acquisition. For divestitures, Morningstar excludes revenue in the prior-year period for which there is no comparable revenue in the current period.
Morningstar presents adjusted operating income, adjusted operating margin, and adjusted net income per share to show the effect of significant acquisition activity, better compare period-over-period results, and improve overall understanding of the underlying performance of the business absent the impact of acquisitions.
In addition, Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after making capital expenditures. Morningstar's management team uses free cash flow to evaluate the health of its business. Free cash flow should not be considered an alternative to any measure required to be reported under GAAP (such as cash provided by (used for) operating, investing, and financing activities).
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| | | Three months ended December 31, | | Year ended December 31, | |
| (in millions) | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | |
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| Reconciliation from consolidated revenue to organic revenue: | | | | | | | | | | | | | |
| Consolidated revenue | | $ | 538.7 | | | $ | 475.0 | | | 13.4 | % | | $ | 2,038.6 | | | $ | 1,870.6 | | | 9.0 | % | |
| Less: acquisitions | | — | | | — | | | — | % | | (30.9) | | | — | | | NMF | |
| Less: accounting changes | | — | | | — | | | — | % | | — | | | — | | | — | % | |
| Effect of foreign currency translations | | (3.7) | | | — | | | NMF | | 3.2 | | | — | | | NMF | |
| Organic revenue | | $ | 535.0 | | | $ | 475.0 | | | 12.6 | % | | $ | 2,010.9 | | | $ | 1,870.6 | | | 7.5 | % | |
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| Reconciliation from consolidated operating income to adjusted operating income: | | | | | | | | | | | | | |
| Consolidated operating income | | $ | 94.4 | | | $ | 35.5 | | | 165.9 | % | | $ | 230.6 | | | $ | 167.8 | | | 37.4 | % | |
| Add: intangible amortization expense | | 17.6 | | | 18.3 | | | (3.8) | % | | 70.5 | | | 66.7 | | | 5.7 | % | |
Add: M&A-related expenses (1) | | 0.9 | | | 3.4 | | | (73.5) | % | | 9.8 | | | 17.1 | | | (42.7) | % | |
| Add: M&A-related earn-outs (2) | | — | | | 3.6 | | | NMF | | — | | | 11.6 | | | NMF | |
Add: Severance and personnel expenses (3) | | 0.1 | | | 0.5 | | | (80.0) | % | | 5.5 | | | 27.5 | | | (80.0) | % | |
Add: Transformation costs (3) | | — | | | 5.1 | | | NMF | | 7.0 | | | 8.2 | | | (14.6) | % | |
Add: Asset impairment costs (3) | | — | | | — | | | — | % | | 3.1 | | | — | | | NMF | |
| Adjusted operating income | | $ | 113.0 | | | $ | 66.4 | | | 70.2 | % | | $ | 326.5 | | | $ | 298.9 | | | 9.2 | % | |
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| | | Three months ended December 31, | | Year ended December 31, | |
| (in millions) | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | |
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| Reconciliation from consolidated operating margin to adjusted operating margin: | | | | | | | | | | | | | |
| Consolidated operating margin | | 17.5 | % | | 7.5 | % | | 10.0 pp | | 11.3 | % | | 9.0 | % | | 2.3 pp | |
| Add: intangible amortization expense | | 3.3 | % | | 3.9 | % | | (0.6) pp | | 3.5 | % | | 3.6 | % | | (0.1) pp | |
| Add: M&A-related expenses (1) | | 0.2 | % | | 0.7 | % | | (0.5) pp | | 0.4 | % | | 0.9 | % | | (0.5) pp | |
| Add: M&A-related earn-outs (2) | | — | % | | 0.8 | % | | (0.8) pp | | — | % | | 0.6 | % | | (0.6) pp | |
| Add: Severance and personnel expenses (3) | | — | % | | 0.1 | % | | (0.1) pp | | 0.3 | % | | 1.5 | % | | (1.2) pp | |
| Add: Transformation costs (3) | | — | % | | 1.1 | % | | (1.1) pp | | 0.3 | % | | 0.4 | % | | (0.1)pp | |
| Add: Asset impairment costs (3) | | — | % | | — | % | | 0.0 pp | | 0.2 | % | | — | % | | 0.2 pp | |
| Adjusted operating margin | | 21.0 | % | | 14.1 | % | | 6.9 pp | | 16.0 | % | | 16.0 | % | | 0.0 pp | |
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| Reconciliation from consolidated diluted net income per share to adjusted diluted net income per share: | | | | | | | | | | | | | |
| Consolidated diluted net income per share | | $ | 1.71 | | | $ | 0.08 | | | NMF | | $ | 3.29 | | | $ | 1.64 | | | 100.6 | % | |
| Add: intangible amortization expense | | 0.30 | | | 0.32 | | | (6.3) | % | | 1.22 | | | 1.15 | | | 6.1 | % | |
| Add: M&A-related expenses (1) | | 0.02 | | | 0.06 | | | (66.7) | % | | 0.17 | | | 0.29 | | | (41.4) | % | |
| Add: M&A-related earn-outs (2) | | — | | | 0.06 | | | NMF | | — | | | 0.24 | | | NMF | |
| Add: Severance and personnel expenses (3) | | — | | | 0.01 | | | NMF | | 0.09 | | | 0.47 | | | (80.9) | % | |
| Add: Transformation costs (3) | | — | | | 0.09 | | | NMF | | 0.12 | | | 0.14 | | | (14.3) | % | |
| Add: Asset impairment costs (3) | | — | | | — | | | — | % | | 0.05 | | | — | | | NMF | |
| Less: non-operating (gains) losses (4) | | (0.06) | | | (0.04) | | | 50.0 | % | | 0.18 | | | (0.06) | | | NMF | |
| Adjusted diluted net income per share | | $ | 1.97 | | | $ | 0.58 | | | 239.7 | % | | $ | 5.12 | | | $ | 3.87 | | | 32.3 | % | |
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| Reconciliation from cash provided by operating activities to free cash flow: | | | | | | | | | | | | | |
| Cash provided by operating activities | | $ | 137.8 | | | $ | 103.5 | | | 33.1 | % | | $ | 316.4 | | | $ | 297.8 | | | 6.2 | % | |
| Capital expenditures | | (30.0) | | | (36.1) | | | (16.9) | % | | (119.1) | | | (129.5) | | | (8.0) | % | |
| Free cash flow | | $ | 107.8 | | | $ | 67.4 | | | 59.9 | % | | $ | 197.3 | | | $ | 168.3 | | | 17.2 | % | |
_____________________________________________________________________NMF - Not meaningful, pp - percentage points
(1) Reflects non-recurring expenses related to M&A activity including pre-deal due diligence, transaction costs, and post-close integration costs.
(2) The three months and 12 months ended Dec. 31, 2022 include M&A-related earn-outs included in operating expense related to
the Company's acquisition of LCD. The 12 months ended Dec. 31, 2022 also reflect the impact of M&A-related earn-outs included in operating expense due to the earn-out for Morningstar Sustainalytics.
(3) Reflects costs associated with the significant reduction of the Company's operations in Shenzhen, China, and the shift of work related to its global business functions to other Morningstar locations.
Severance and personnel expenses include severance charges, incentive payments related to early signing of severance agreements, transition bonuses, and stock-based compensation related to the accelerated expense recognition from the continued of vesting of restricted stock unit (RSU) and market stock unit (MSU) awards. In addition, the reversal of accrued sabbatical liabilities is included in this category.
Transformation costs include professional fees and the temporary duplication of headcount. As the Company hires replacement roles in other markets and shifts capabilities, it expects to continue to employ certain Shenzhen-based staff through the transition period, which will result in elevated compensation costs on a temporary basis.
Asset impairment costs include the write-off or accelerated depreciation of fixed assets in the Shenzhen, China office that are not redeployed, in addition to lease abandonment costs as the Company plans to downsize office space prior to the lease termination date.
(4) Non-operating (gains) losses in the three and 12 months ended Dec. 31, 2023 related to pre-tax realized and unrealized gains and losses on investments of $3.2 million and $7.1 million, respectively, included in Other income (loss), net. In addition, non-operating (gains) losses for the 12 months ended Dec. 31, 2023 also includes $11.8 million of expense from an equity method transaction, net. Non-operating gains in the three and 12 months ended Dec. 31, 2022 related to pre-tax realized and unrealized gains and losses on investments of $2.2 million and $3.3 million, respectively, included in Other income (loss), net.
Fourth Quarter 2023 Supplemental Presentation February 22, 2024 This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “prospects,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. More information about factors that could affect Morningstar’s business and financial results are in our filings with the SEC, including our most recent Forms 8-K, 10-K, and 10-Q. Morningstar undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. In addition, this presentation references non-GAAP financial measures including, but not limited to, organic revenue, adjusted operating income, adjusted operating margin, adjusted operating expense, and free cash flow. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is provided in the appendix to this presentation and in our filings with the SEC, including our most recent Forms 8-K, 10-K and 10-Q. 2 2 Q4 2023 Financial Performance ($mil) $94.4$35.5 2322 $113.0 ＋13.4% ＋70.2% 2322 $538.7$475.0 2322 $66.4 $107.8 2322 $67.4 Operating Income Free Cash Flow** Revenue Adjusted Operating Income* * 3 3 Adjusted operating income is a non-GAAP measure and excludes intangible amortization expense, other merger and acquisition (M&A) related expenses and earn-outs, and items related to the significant reduction and shift of the Company’s operations in China. **Free cash flow is a non-GAAP measure and is defined as cash provided by or used for operating activities less capital expenditures. See reconciliation tables in the appendix of this presentation. ＋59.9%＋165.9% 2023 Financial Performance ($mil) $230.6$167.8 2322 $326.5 ＋9.0% ＋9.2% 2322 $2,038.6$1,870.6 2322 $298.9 $197.3 2322 $168.3 Operating Income Free Cash Flow** Revenue Adjusted Operating Income* * 4 4 Adjusted operating income is a non-GAAP measure. Operating and adjusted operating income include the impact of $9.0 million in severance costs for targeted reorganizations not related to the Company's shift of China operations and $8.0 million in expense related to the Morningstar DBRS SEC settlements. **Free cash flow is a non-GAAP measure. Excluding the $4.5 million LCD contingent consideration payment within operating cash flow, payments related to the Termination Agreement of $59.9 million, $26.4 million of severance and other costs paid related to the Company's China activities, and comparable items in the prior year, free cash flow would have increased by 36.7%. See reconciliation tables in the appendix of this presentation. ＋17.2%＋37.4%
Q4 2023 Revenue Walk Organic revenue, a non-GAAP measure, excludes revenue from acquisitions for a period of 12 months upon completion of the acquisition, accounting changes, and the effect of foreign currency translations. See reconciliation tables in the appendix of this presentation. **Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. The calculation of organic revenue growth by type compares fourth quarter 2023 revenue to fourth quarter 2022 revenue on the basis of the updated classification. 5 5 * ＋13.4% Reported Revenue Growth ＋12.6% Organic Revenue Growth** License-Based 10.3% Asset-Based 19.8% Transaction-Based 18.0% Organic Revenue Growth* –0.8% Currency Impact Quarterly Revenue Trend: Revenue Type ($mil) Bars represent reported revenue. Percentages represent YOY organic revenue growth (decline), which is a non-GAAP measure. *Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. The calculation of organic revenue growth by revenue type compares quarterly revenue in 2023 to respective quarterly revenue in 2022, based on the updated classifications. 6 6 YTD 2023 Organic Revenue Walk* ($mil) 7 7 * YTD Q4 2022 Reported Revenue M&A and foreign currency adjustments PitchBook Morningstar Data Morningstar Direct Morningstar Sustainalytics Morningstar Indexes Morningstar Advisor Workstation Investment Management Morningstar DBRS Morningstar Retirement** Other products YTD Q4 2023 Reported Revenue $1,870.6 27.7 85.7 26.1 17.1 12.314.4 5.0 –20.0 $2,038.6 Organic revenue is a non-GAAP measure. Product area bars represent organic revenue growth and may not match changes in reported revenue. See reconciliation table in the appendix of this presentation. **In 2023, Workplace Solutions was rebranded to Morningstar Retirement. –6.6 6.5 –0.2 Q4 2023 Revenue Drivers: License-Based Revenue Trend* ($mil) +12.4% Reported + 10.3% Organic 2322 License-Based Q4 23 Organic Revenue Drivers: PitchBook (+19.1%), Morningstar Data (+12.4%), Morningstar Direct (+8.2%), and Morningstar Sustainalytics’ licensed-based products (+12.3%) were the primary contributors. Strength in PitchBook’s core investor and advisor segments offset some continued softness in the company (corporate) segments. Morningstar Data and Morningstar Direct benefited from higher revenue across major geographies. Morningstar Sustainalytics’ license-based revenue growth was primarily driven by EMEA, supported by demand for regulatory and compliance products. Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. The bars represent reported revenue. *Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. The calculation of organic revenue growth by revenue type compares fourth quarter 2023 revenue to fourth quarter 2022 revenue on the basis of the updated classifications. $349.7 $393.0 8 8
Q4 2023 Revenue Drivers: Asset-Based Revenue Trend* ($mil) Asset-Based Q4 23 Organic Revenue Drivers: Investment Management (+16.3%), Morningstar Retirement** (+16.2%), and Morningstar Indexes’ asset-based products (+37.9%), all contributed to organic revenue growth supported by higher AUM driven by market gains and positive net flows across multiple products. +14.4% Reported +19.8% Organic 2322 $66.0 $75.5 9 9 Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. The bars represent reported revenue. *Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. The calculation of organic revenue growth by revenue type compares fourth quarter 2023 revenue to fourth quarter 2022 revenue on the basis of the updated classifications. **In 2023, Workplace Solutions was rebranded to Morningstar Retirement. Q4 2023 Revenue Drivers: Transaction-Based Revenue Trend* ($mil) Transaction-Based Q4 23 Organic Revenue Drivers: Morningstar DBRS revenue increased 20.0% on an organic basis, with a 20.4% increase in transaction- based revenue, driven by higher asset-backed securities, corporate, and residential mortgage-backed securities ratings revenue. +18.4% Reported +18.0% Organic 2322 $59.3 $70.2 10 10 Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. The bars represent reported revenue. *Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. The calculation of organic revenue growth by revenue type compares fourth quarter 2023 revenue to fourth quarter 2022 revenue on the basis of the updated classifications. Quarterly Product Trends PitchBook* ($mil) 11 11 Morningstar Data ($mil) Organic revenue is a non-GAAP measure. See reconciliation table in the appendix of this presentation. *PitchBook licenses totaled 107,840 as of the end of the fourth quarter of 2023, compared to 94,628 in the prior-year quarter. License counts reflect active users, including Morningstar active users. The timing of activities, such as user maintenance, user audits, provisioning access, shutting off of users, and updates to the user lists when enterprise clients renew, results in fluctuations in license counts over time. As a result, license growth trends are best assessed on a rolling 12-month basis. Quarterly Product Trends Morningstar Direct* ($mil) 12 12 Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. *Morningstar Direct licenses totaled 18,562 as of the end of the fourth quarter of 2023, compared to 18,421 in the prior-year quarter. **Revenue for Morningstar Sustainalytics’ license-based products increased 12.3% on an organic basis in the fourth quarter of 2023, while revenue for Morningstar Sustainalytics’ transaction-based products (second-party opinions) increased 29.3% on an organic basis. Morningstar Sustainalytics** ($mil)
Quarterly Product Trends Morningstar Advisor Workstation ($mil) 13 13 Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. Quarterly Product Trends: Morningstar DBRS Revenue by Asset Class ($mil) Morningstar DBRS Q4 2023 Organic Revenue Drivers: In Q4 2023, structured finance ratings accounted for 61% of revenue, fundamental ratings accounted for 34% of revenue, and data licensing revenue totaled 5%. Recurring revenue, which is derived primarily from surveillance, research, and other transaction related services, represented 45.0% of total Morningstar DBRS revenue. Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. (1) Structured Finance (Asset-Backed Securities, Commercial Mortgage-Backed Securities, Residential Mortgage-Backed Securities. (2) Fundamental Ratings include Corporate, Financial Institutions, Sovereign, and Other. (3) In quarterly supplemental presentations prior to 4Q 2023, data licensing revenue was included in “Other” under Fundamental Ratings. 14 14 Quarterly Product Trends: Morningstar DBRS Revenue by Geography ($mil) Morningstar DBRS Q4 2023 Organic Revenue Drivers: Organic revenue increased 21.7% in the U.S. primarily due to higher asset-backed securities and residential mortgage-backed securities ratings revenue. Organic revenue increased 11.0% in Canada, primarily due to higher financial institution, asset-backed securities, and corporate ratings revenue. Organic revenue increased 27.4% in EMEA, primarily due to higher corporate and asset-backed securities ratings revenue. Bars represent reported revenue. Percentages represent organic revenue growth (decline). Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. 15 15 Quarterly Product Trends: Investment Management ($bil) Investment Management Q4 2023 AUM/A: Investment Management’s assets under management and advisement grew 9.0%, compared with the prior year, due to strong market performance and positive net flows to its Managed Portfolios product. Flows to Managed Portfolios were driven by strength outside the U.S., while U.S. flows were relatively flat. Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. *Managed Portfolios – Wholesale: Through our distribution sales team, the Company offers investment strategies and services directly to financial advisors in bank, broker dealers with a corporate RIA, who have a corporate RIA insurance, and RIA channels that offer the Company’s investment strategies and services to their clients (the end investor). This remains the Company’s strategic focus. **Managed Portfolios – Non-Wholesale: The Company sells services directly to financial institutions, such as broker dealers, discount brokers, and wirehouses. Our distribution sales team is not involved with the advisors of these firms. 16 16
Morningstar Retirement Q4 2023 AUM/A: Morningstar Retirement’s assets under management and advisement increased 18.4% compared with the prior year, supported by strong market performance. Net inflows to Managed Accounts also contributed to higher AUMA, supported by participant growth, including the impact of the addition of large employer plans during 2023. Quarterly Product Trends: Morningstar Retirement(1) ($bil) Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. (1) In 2023, Workplace Solutions was rebranded to Morningstar Retirement. (2) Managed Accounts include Retirement Manager and Advisor Managed Accounts. (3) Fiduciary Services helps retirement plan sponsors build appropriate investment lineups for their participants. (4) Custom Models/CITs offer customized investment lineups for clients based on plan participant demographics or other specific factors. 17 17 Quarterly Product Trends: Morningstar Indexes ($bil) 18 18 Organic revenue is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. Morningstar Indexes Q4 2023 Assets: Morningstar Indexes revenue increased 43.3% on an organic basis. The increase in revenue was driven in part by higher investable product revenue, as asset value linked to Morningstar Indexes increased 19.6%, compared to the prior year, driven by market performance and strong positive net flows. Licensed data sales also increased. Q4 2023 Operating Margins 19 19 Adjusted operating margin is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. Adjusted Operating Margin Operating Margin 2322 17.5% 21.0% 2322 7.5% 14.1% Operating Margin Drivers: Revenue growth outpaced expense growth in the quarter, supporting increased operating and adjusted-operating margins. Key drivers of the change in operating expense included: Compensation costs increased $23.4 million from the prior-year period. Increases in compensation costs were partially offset by a $14.0 million decline in stock-based compensation, compared to the fourth quarter of 2022 when higher stock-based compensation costs were primarily due to the overachievement of targets under the PitchBook management bonus plan. QTD Adjusted Operating Income(1) Walk Q4 2022 to Q4 2023 ($mil) (1) Adjusted operating income, a non-GAAP measure, excludes intangible amortization expenses, all M&A-related expenses (including M&A earn-outs), and items related to the significant reduction and shift of the Company’s operations in China. Please see reconciliation table in the appendix of this presentation. Changes in this chart reflect these adjustments and may not match changes in reported expenses. (2) Includes infrastructure costs (including 3rd party contracts with data providers, AWS cloud costs, and software subscriptions), facilities, depreciation/amortization, and capitalized labor. (3) Includes salaries, bonus, company-sponsored benefits, and severance not related to targeted reorganizations or the Company’s China activities. 20 20 Q4 2022 Change in Revenue Stock-based Compensation Travel and Related Activities Professional Fees Advertising and Marketing Infrastructure Costs and Other (2) Q4 2023 $66.4 13.8 63.7 2.3 –0.8 $113.0 Sales Commissions –29.9 –1.2 Compensation and Benefits (3) –1.5 0.2
YTD Adjusted Operating Income(1) Walk Q4 2022 to Q4 2023 ($mil) (1) Adjusted operating income, a non-GAAP measure, excludes intangible amortization expenses, all M&A-related expenses (including M&A earn-outs), and items related to the significant reduction and shift of the Company’s operations in China. Please see reconciliation table in the appendix of this presentation. Changes in this chart reflect these adjustments and may not match changes in reported expenses. (2) Expenses related to the settlements between the SEC and DBRS, Inc. (3) Severance from targeted reorganizations not related to the shift of the Company’s China activities. (4) Includes infrastructure costs (including 3rd party contracts with data providers, AWS cloud costs, and software subscriptions), facilities, depreciation/amortization, and capitalized labor. (5) Includes salaries, bonus, company-sponsored benefits, and other severance not related to targeted reorganizations or the Company’s China activities. 21 21 YTD 2022 YOY Revenue Growth Stock-based Compensation Professional Fees Travel and Related Activities Advertising and Marketing Sales Commissions Infrastructure Costs and Other (4) YTD 2023 $298.9 –21.7 31.4 168.0 6.9 –8.0 2.9 –5.3 $326.5 Morningstar DBRS SEC settlements (2) –8.2 –129.4 Compensation and Benefits (5) –9.0 Severance (3) Quarterly Operating Margin Trends Adjusted operating margin is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. 22 22 Revenue vs. Adjusted Operating Expense Growth 23 23 Adjusted operating expense is a non-GAAP measure. Please see reconciliation table in the appendix of this presentation. Headcount Trends 24 24 Headcount represents permanent, full-time employees.
2023 Cash Flow and Capital Allocation ($mil) 2 $316.4 $197.3 Operating Cash Flow Free Cash Flow* Capital Allocation 25 25 * ($mil) Debt Reduction 137.5 Capital Expenditures 119.1 Dividends Paid 63.9 Termination Agreement** 59.9 Free cash flow, a non-GAAP measure, is defined as cash provided by or used for operating activities less capital expenditures. Excluding certain items, which together totaled $90.8 million, as well as comparable items in the prior-year period, free cash flow would have been $288.1 million for the year ended December 31, 2023. Please see reconciliation table in the appendix of this presentation. **The termination of the Company's license agreement with Morningstar Japan K.K. (renamed SBI Global Asset Management). Appendix QTD 2023 Operating and Free Cash Flow Excluding Certain Items Free cash flow is a non-GAAP measure and is defined as cash provided by or used for operating activities less capital expenditures. *Relates to the termination of the Company’s license agreement with Morningstar Japan K.K. (renamed SBI Global Asset Management). **Includes the operating cash flow impact of contingent consideration payments related to the LCD earn-out payment in 2023 and Sustainalytics earn-out payment in 2022. Q4 2023 Q4 2022 % Change Cash provided by operating activities $137.8 $103.5 33.1% Capital expenditures (30.0) (36.1) Free cash flow $107.8 $67.4 59.9% Items included in cash provided by operating activities Payments related to the Termination Agreement* — — Severance and related costs paid for reduction and shift of China operations S $0.2 $0.5 Contingent consideration related to acquisitions** — — Cash provided by operating activities, excluding certain items $138.0 $104.0 32.7% Free cash flow, excluding certain items $108.0 $67.9 59.1% 27 27 YTD 2023 Operating and Free Cash Flow Excluding Certain Items Free cash flow is a non-GAAP measure and is defined as cash provided by or used for operating activities less capital expenditures. *Relates to the termination of the Company’s license agreement with Morningstar Japan K.K. (renamed SBI Global Asset Management). **Includes the operating cash flow impact of contingent consideration payments related to the LCD earn-out payment in 2023 and Sustainalytics earn-out payment in 2022. YTD 2023 YTD 2022 % Change Cash provided by operating activities $316.4 $297.8 6.2% Capital expenditures (119.1) (129.5) Free cash flow $197.3 $168.3 17.2% Items included in cash provided by operating activities Payments related to the Termination Agreement* $59.9 — Severance and related costs paid for reduction and shift of China operations S $26.4 $2.4 Contingent consideration related to acquisitions** $4.5 $40.0 Cash provided by operating activities, excluding certain items $407.2 $340.2 19.7% Free cash flow, excluding certain items $288.1 $210.7 36.7% 28 28
Reconciliation from Reported to Organic Revenue Change by Revenue Type 29 29 Organic revenue is a non-GAAP measure. Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. Reconciliation from Reported to Organic Revenue Change by Revenue Type 30 30 Organic revenue is a non-GAAP measure. Starting with the quarter ended March 31, 2023, the Company updated its revenue-type classifications to account for product areas with more than one revenue type, impacting Morningstar Sustainalytics, Morningstar Indexes, and Morningstar DBRS. Reconciliation from Reported to Organic Revenue Change by Product Area 31 31 Organic revenue is a non-GAAP measure. Reconciliation from Reported to Organic Revenue Change by Product Area 32 32 Organic revenue is a non-GAAP measure.
Reconciliation from Reported to Organic Revenue Change by Product Area 33 33 Organic revenue is a non-GAAP measure. Reconciliation from Consolidated Operating Income to Adjusted Operating Income ($mil) 34 34 Adjusted operating income is a non-GAAP measure. (1) Reflects non-recurring expenses related to M&A activity including pre-deal due diligence, transaction costs, and post-close integration costs. (2) Reflects the impact of M&A-related earn-outs in relation to the Company’s acquisitions of LCD and Morningstar Sustainalytics. (3) Reflects costs associated with the significant reduction of the Company's operations in Shenzhen, China and the shift of work related to its global business functions to other Morningstar locations. Reconciliation from Operating Margin to Adjusted Operating Margin 35 35 Adjusted operating margin is a non-GAAP measure. Reconciliation from Total Operating Expenses to Adjusted Operating Expense 36 36 Adjusted operating expense is a non-GAAP measure.
© February 22, 2024. Morningstar. All Rights Reserved. Letter from CEO Kunal Kapoor Fourth-Quarter Earnings 2023 Dear Morningstar shareholders, I am pleased to share our 2023 fourth-quarter results. Revenue increased 13.4% (up 12.6% organically) with broad-based growth. Margins also grew meaningfully compared to the prior-year period as did operating and free cash flows, which were up 33.1% and 59.9%, respectively. In this quarter’s letter, I’ll provide an update on our business, followed by a discussion on the progress we’re making with Morningstar Indexes. Today Morningstar Indexes is a relatively small part of our business. But it’s growing quickly and we expect it to make significant contributions in the years to come. I’ll finish with an update on our segment reporting. Finishing the year on a high note During the fourth quarter, we made continued progress in our efforts to grow durably. As I noted in October, we are focused on three key building blocks: Executing to realize growth seeded by investments we made in 2021 and 2022; making sure that our teams are properly sized to the market opportunity; and carefully managing discretionary costs. On the execution front, strength from across the business drove gains in our topline revenue. Our license-based products, which have contributed nicely to growth all year, continued growing at double-digit rates as a group. Morningstar Data and Morningstar Direct had terrific years. As the use cases for data expand rapidly, we’re finding more opportunities in unexpected places and achieving growth while maintaining strong pricing discipline. Moreover, growth has held steady in asset management and remained stronger in the wealth segment. PitchBook revenue increased 19.1%, excluding standalone revenue from Leveraged Commentary & Data (LCD). PitchBook finished the year with revenue up 21.0% annually. Over the trailing 12 months ended September 30, 2023, private capital raised fell about 14% compared to what was reported at the same time for the prior-year period, as detailed in PitchBook’s Global Private Market Fundraising Report. Thus, while growth has been somewhat hindered by fair-weather market participants, including opportunistic corporates and non-traditional asset managers, we continue to see strength in our core segments, including private equity and venture capital. I’d also like to congratulate the PitchBook team on substantially completing the integration of LCD’s core data, research, and news onto the PitchBook platform in the quarter. This is an important milestone, and we’re seeing significant client expansion activities arise from the extension of our private credit data and news coverage. If you haven’t signed up for our new Credit Pitch newsletter, I would encourage you to do so. Morningstar Sustainalytics revenue increased 16.0%, or 13.6% on an organic basis, reflecting growth in our licensed-based products and second-party opinions, which showed strength during the quarter, compared to the prior-year period. The environment in the U.S. continues to be challenging; U.S. sustainable funds experienced net outflows in 2023, although overall assets in sustainable funds grew thanks to market appreciation. We remain more bullish on Europe where regulatory and compliance solutions continue to be an important driver of growth. That said, the year was disappointing relative to our high expectations, and we’ve dialed back the level of investment in this area. Market appreciation and generally positive flows over the past year helped our asset-based product areas, including Investment Management and Morningstar Retirement, to achieve meaningful revenue increases in the fourth quarter. Morningstar Indexes also continued to grow nicely. I’ll share more on how we think about that area a little later in the letter. In the quarter, Morningstar DBRS returned to positive revenue growth. That’s compared to a particularly weak fourth quarter of 2022, so I don’t want to overstate the importance of the trend. But the silver lining was growth in ratings for asset-backed securities and European corporates. We are seeing some impressive trends in Europe, which are offsetting continued weakness in U.S. commercial mortgage-backed securities. Turning to expenses, we continued to keep a tight lid on hiring and controlling discretionary costs in the quarter, including careful management of our real estate footprint and professional fees. We will continue to be prudent here.
Letter from CEO Kunal Kapoor Fourth-Quarter Earnings 2023 © February 22, 2024. Morningstar. All Rights Reserved. On p. 23 of our quarterly supplemental deck, there’s a graph that shows two lines over the past couple of years: the first is our quarterly revenue growth, and the second is the growth of our operating expenses adjusted for the transition of our China activities, M&A, and amortization. You’ll see that starting in the third quarter of 2023 revenues started to grow at a faster pace than expenses, and that trend continued in the fourth quarter. Building on that trend is the key to achieving durable growth and increased profitability. In fact, during the quarter, operating income increased 165.9% to $94.4 million and adjusted operating income increased 70.2% to $113.0 million. Our fourth-quarter operating margin was 17.5%, compared with 7.5% in the prior-year period, and our adjusted operating margin was 21.0%, an increase from 14.1% in the prior-year period. We’re pleased with this progress and remain focused on driving year-over-year improvement during 2024. Those improved margins notably helped drive increases in operating and free cash flows during the quarter and for the full year. After taking on debt to fund the LCD acquisition in 2022, we continued to pay it down with a net debt reduction of approximately $83.1 million in the quarter, bringing the total debt reduction to $137.5 million for the year. That’s important as rate increases have had a meaningful impact on our interest expense. We also declared a higher dividend of 40.5 cents per share in the quarter, an increase of 8%. We did not buy back any shares in the quarter. Morningstar Indexes Morningstar Indexes had a strong year. In 2023, it was recognized as the fastest-growing global index provider by Burton-Taylor International Consulting for the second year running. While it’s true that that growth has so far come off a relatively small base, it’s also a testament to the significant progress we’ve made in the roughly three years since Ron Bundy took over leadership of the business in late 2019. To help understand what’s driven that growth and where we’re headed, I’ll start with a quick review of our offering. Today we are focused on two primary areas. The first is investable products, which accounted for the bulk of Morningstar Indexes revenue in 2023. We work with investment product issuers, including ETF providers, investment banks, and pension plans, who create new vehicles based on Morningstar indexes. In the second instance, we focus on the licensing of index data by investors such as asset managers and asset owners for use cases including benchmarking, research, and performance attribution. We have been successful here in part by disrupting the increasingly high costs incumbents are charging for more common core beta strategies, and in part by winning business in emerging areas such as ESG and alternatives where we can offer innovation and differentiation, or where clients are more willing to easily look away from the legacy players. This represents a smaller portion of Morningstar Indexes’ revenue, but it’s been growing nicely, too. Under Ron’s leadership, we’ve centered on three key areas to drive continued growth. First, we’ve built out our index lineup beginning with core beta indexes, which can be monetized through our licensed data products, but also serve as the building blocks for other investable products. That’s included expansion across asset classes, as we notably ramped up our fixed-income capabilities, aided by Morningstar’s acquisition of LCD, which brought the widely followed LSTA Leveraged Loan indexes into our lineup. We’ve also launched new Morningstar Indexes built on intellectual property from other areas of Morningstar such as equity research, PitchBook, and Morningstar Sustainalytics. For example, we recently launched the Morningstar PitchBook Global Unicorn Vertical Indexes, and a new climate index drawing on Morningstar Sustainalytics is expected later in the first quarter. Second, we developed infrastructure to compete and bring the business to scale. We crossed a major milestone in September with the launch of our in- house index calculation engine. Prior to that, we relied on third parties, who also happen to be our competitors, for this service. We now operate a robust, independent, and globally distributed index platform. With our own in-house capabilities, we save money on index creation and increase our speed to market. Now that capability is built, it also offers a third revenue opportunity as we’re able to provide calculation services ourselves. This was by far one of the best executed large-scale technology projects at Morningstar and completes the integration of Moorgate Benchmarks. Finally, we invested in the buildout of our go-to-market effort including the development of sales, marketing, and product teams. We have invested in our talent to help fuel growth in recent years, adding expertise both from within Morningstar and from the industry in our global sales, marketing, client service, research, product, and communications areas. The index market is a big one with millions of indexes calculated daily. As index-based investing has grown, so has Morningstar’s ability to support the ever-evolving needs of industry participants to the benefit of investors. Although we’re not going to fully displace the incumbent players in the markets for beta indexes to support large investable products, we see plenty of opportunity to grow, and we’re attracting great talent who see our potential. As Morningstar Indexes continues to gain scale, diversify across channels and markets, and capitalize on the launch of our calculation engine, we believe it will build further value for shareholders.
Letter from CEO Kunal Kapoor Fourth-Quarter Earnings 2023 © February 22, 2024. Morningstar. All Rights Reserved. Segment reporting Finally, I wanted to share an update on how we report on our business to you. Last quarter, we started reporting multiple segments, which provided additional transparency into the business and its evolution. We received feedback earlier this month from the Securities and Exchange Commission about our segment reporting presentation and how we aggregated the business, and in response will be making updates to our segment reporting in our year-end 2023 Form 10-K. What I'm reading Here’s recent commentary by our researchers that I especially enjoyed: • Commercial Real Estate Rekindles Market Volatility at U.S. Regional Banks, but a Slow Burn Most Likely, Michael Driscoll, February 15, 2024 • 2023 Model Portfolio Landscape, Adam Millson, Jason Kephart, February 8, 2024 • Global Sustainable Fund Flows: Q4 2023 in Review, Hortense Bioy, January 25, 2024 • 15 Top Wealth Creators in the Fund Industry, Amy Arnott, January 23, 2024 • Why Do Investors Keep Their Financial Advisors Around?, Danielle Labotka, January 22, 2024 • Spot Bitcoin ETFs Are Here. Should You Invest?, Bryan Armour, January 11, 2024 • ESG Proxy Voting: Voting records for the largest US and European managers, Lindsey Stewart, January 11, 2024 • U.S. PE Breakdown, PitchBook, January 9, 2024 • Vertical Snapshot: Semiconductor Scale-Ups, Ali Javaheri, January 2, 2024 • Sustainalytics Insight: What Is Biodiversity Loss & Why Does It Matter for Investors?, Martin Vezer, January 2024 • North America Market Outlook: Q1 2024, David Sekera, Preston Caldwell, December 29, 2023 • Private Credit 2024 Outlook: Negative Rating Actions Likely to Continue to Outpace Positive Actions, Morningstar DBRS, December 11, 2023 • Why Are Active ETFs Everywhere, and Are Investors Abandoning Mutual Funds?, Ryan Jackson, Ruth Saldanha, December 8, 2023 • The Good News on Safe Withdrawal Rates, Amy Arnott, November 13, 2023 • Unlocking Human Rights in Corporate Supply Chains, Sustainalytics, October 31, 2023 • U.S. Credit Markets Quarterly Wrap, PitchBook, Q4 2023 You may also appreciate these recent pieces that share more about our strategy and recent product innovations: • From analyst to boss: Morningstar chief talks AI, sustainability and what elections could mean for equities, City A.M., February 10, 2024 • Morningstar CEO talks Schwab integration, advisors' pain points, and more, Citywire, January 25, 2024, Ian Wenik, January 25, 2024 • Resist Doomism: How Investors Can Address Climate Risks Here and Now, Kunal Kapoor, December 6, 2023 I hope you find this letter helpful. Please keep the feedback coming. Best regards, Kunal
Letter from CEO Kunal Kapoor Fourth-Quarter Earnings 2023 © February 22, 2024. Morningstar. All Rights Reserved. This letter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “prospects,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. More information about factors that could affect Morningstar’s business and financial results are in our filings with the SEC, including our most recent reports on Forms 8-K, 10-K and 10-Q. Morningstar undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. In addition, this letter references non-GAAP financial measures including, but not limited to, organic revenue, adjusted operating income and adjusted operating margin. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. A discussion of our third quarter results, including a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures described in this letter, is provided in our earnings release for the three months ended September 30, 2023, which has been furnished to the SEC and is available on our website.
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Morningstar (NASDAQ:MORN)
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