Stanley Business Daily

Morningstar, Inc. Reports Third-Quarter 2022 Financial Results

Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, posted solid third-quarter revenue growth, driven by continued momentum across the license-based areas of the business.

“Growth in our license-based products remains a bright spot as investments in these areas are bearing fruit,” said Kunal Kapoor, Morningstar’s chief executive officer. “The broad decline in global markets and rising interest rates proved more challenging for our asset- and transaction-based product areas. We are being prudent and moderating hiring activity as we navigate the current environment.”

Third-Quarter 2022 Financial Highlights

Year-to-Date Financial Highlights

Overview of Financial Results

Third-Quarter 2022 Results

Revenue grew 9.2% to $468.2 million. Organic revenue, which excludes all M&A-related revenue, accounting changes, and foreign currency effects, grew 8.5% versus the prior year, led by strong growth in license-based product areas.

License-based revenue grew 19.4% versus the prior year, or 18.3% on an organic basis. PitchBook, Morningstar Sustainalytics, Morningstar Data, and Morningstar Direct all provided meaningful contributions to growth in the quarter, collectively growing 24.5% on an organic basis. Asset-based revenue declined 1.6% year over year, or 5.3% organically, primarily due to lower revenue from Investment Management and Workplace Solutions, which reflected the continued downturn in global markets. Transaction-based revenue declined 20.7% versus the prior year, or 17.8% on an organic basis, as a result of a marked slowdown in global credit ratings activity.

Operating expense increased 23.6% to $446.2 million, including costs of $30.1 million as the Company began to significantly reduce its China operations and to shift work related to its global business functions to other Morningstar locations. Excluding the impact of these costs, operating expenses increased 15.2%. The largest contributors to operating expense growth were severance-related costs, compensation costs, stock-based compensation, professional fees, sales commissions, and travel and related expenses.

Third-quarter operating income declined 67.6% to $22.0 million. Adjusted operating income declined 8.3% to $76.6 million. Third-quarter operating margin was 4.7%, compared with 15.8% in the prior year. Adjusted operating margin was 16.4% in the third quarter of 2022, versus 19.4% in the prior year. In addition to reflecting expense growth, margins were negatively impacted by declines in revenue in the asset- and transaction-based product areas.

Net income (loss) in the third quarter of 2022 was ($9.0) million, or ($0.21) per diluted share, compared with net income (loss) of $49.0 million, or $1.13 per diluted share, in the third quarter of 2021. The net loss includes the impact of non-operating losses, which represent realized and unrealized foreign exchange losses, realized losses on the sale of investments, and unrealized losses on mark-to-market equity securities. Adjusted diluted net income (loss) per share declined 44.2% to $0.77 in the third quarter of 2022, compared with $1.38 in the prior year, primarily due to lower operating income, higher interest expense, and foreign exchange losses.

The tax provision in the third quarter of 2022 reflected a tax against negative pre-tax book income. For the first nine months of 2022, the effective tax rate was 30.9%, an increase of 6.5 percentage points over the prior year. The increase in the effective tax rate for the nine months ended September 30, 2022 is primarily attributable to minimum taxes, additional reserves for uncertain tax positions that increased the Company’s liability for unrecognized tax benefits, and non-deductible foreign exchange losses. The Company anticipates a lower impact from minimum taxes in the fourth quarter.

Product Area Highlights

On a consolidated basis, PitchBook, Morningstar Sustainalytics, Morningstar Data, and Morningstar Direct were the top four contributors to organic revenue growth in the third quarter of 2022. In aggregate, the Company’s license-based product areas continued to benefit from strong demand and steady renewal rates. (For performance of the largest product areas and key metrics, refer to the Supplemental Data table contained in this release and the Supplemental Presentation included on our Investor Relations website at shareholders.morningstar.com under “Financials — Financial Summary”.)

Highlights of these and other products are provided below. Organic revenue excludes all M&A-related revenue, accounting changes, and foreign currency effects. Foreign currency effects accounted for the entire difference between reported and organic growth in the quarter for Morningstar Data, Morningstar Direct, Morningstar Sustainalytics, and DBRS Morningstar.

License-based

Asset-based

Transaction-based

Reduction and Shift of China Operations

In July 2022, the Company began to significantly reduce its operations in Shenzhen, China and to shift the work related to its global business functions, including global product and software development, managed investment data collection and analysis, and equity data collection and analysis, to other Morningstar locations. These activities will result in a significant headcount reduction in Shenzhen, China and growth in other Morningstar locations including Mumbai, Toronto, Madrid, and Chicago. Going forward, the Company’s work in China will be focused solely on commercial activities in the domestic market.

During the transition period, the Company expects to incur costs related to these efforts in three primary categories and recorded $30.1 million in the third quarter of 2022.

The Company expects that these activities will be substantially complete by the end of the third quarter of 2023 and will result in lower ongoing run-rate costs from the overall net reduction in the related headcount and certain overhead.

Update on LCD and Praemium Integrations

Following the close of the LCD transaction on June 1, 2022, PitchBook started to integrate LCD employees into the relevant teams and added resources to focus specifically on supporting the LCD business. Morningstar Indexes has integrated LCD’s leveraged loan indexes into its global index product and service platform. Customer conversion is proceeding as planned.

Subsequent to the June 30, 2022 close of the Praemium acquisition, all Praemium entities have been renamed and rebranded as Morningstar Wealth Platform. In addition, the product technology separation from the previous parent company is complete. The Company is progressing with other integration efforts, has added Morningstar factsheets and data for funds and foreign exchange to the platform, and is evaluating opportunities to integrate Morningstar reporting, charting, and screening capabilities.

Balance Sheet and Capital Allocation

As of September 30, 2022, the Company had cash, cash equivalents, and investments totaling $407.1 million and $1.2 billion of debt, compared with cash, cash equivalents, and investments of $546.1 million and $359.4 million of debt as of December 31, 2021.

Cash provided by operating activities declined to $102.1 million for the third quarter of 2022, versus $122.6 million the prior year. The decline in operating cash flow was primarily due to lower cash earnings and the impact of softer performance in asset- and transaction-based areas.

In the third quarter of 2022, the Company repurchased $15.2 million of its shares, paid $15.3 million in dividends, and spent $1.9 million on acquisitions and other investments.

In September 2022, the Company executed amendments to its multicurrency credit agreement initially closed on May 6, 2022 to provide greater capacity and flexibility. The amended credit agreement totals $1.3 billion, an increase from the $1.1 billion available under the original credit agreement, and is comprised of a term facility of $650.0 million and a $650.0 million revolving credit facility. As of September 30, 2022, the Company had $649.2 million outstanding under its term facility and $160.0 million outstanding under its revolving credit facility.

Comparability of Year-Over-Year Results

Certain other items, as detailed below, affected the comparability of third quarter of 2022 results versus the prior year:

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 Securities and Exchange Commission, generally every month.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research 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 $239 billion in assets under advisement and management as of September 30, 2022. The Company has operations in 29 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.

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