MORNINGSTAR, INC. The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q (this Quarterly 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, including the expected impacts of COVID-19. 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," 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: •the impact of the current COVID-19 pandemic on our business, financial condition, and results of operations; •liability for any losses that result from an actual or claimed breach of our fiduciary duties; •failing to maintain and protect our brand, independence, and reputation; •liability related to cybersecurity and the protection of confidential information, including personal information about individuals; •failing to differentiate our products and continuously create innovative, proprietary research tools and financial advisor software; •inadequacy of our operational risk management and business continuity programs in the event of a material disruptive event; •failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy; •compliance failures, regulatory action, or changes in laws applicable to our investment advisory or credit ratings operations; •volatility in the financial sector, global financial markets, and global economy and its effect on our revenue from asset-based fees and credit ratings business; •trends in the asset management industry, including the increasing adoption of investment strategies and portfolios relying on passively managed investment vehicles and increased industry consolidation; •liability relating to the collection or distribution of information and data we collect and produce, or errors included therein; •an outage of our database, technology-based products and services, or network facilities or the movement of parts of our technology and data infrastructure to the public cloud and other outsourced providers; •the failure of acquisitions and other investments to be efficiently integrated and produce the results we anticipate; •the failure to recruit, develop, and retain qualified employees; •challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities inChina andIndia ; and •the failure 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 other filings with theSecurities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year endedDecember 31, 2019 (our Annual Report). If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expected. We do not undertake to update our forward-looking statements as a result of new information or future events. All dollar and percentage comparisons, which are often accompanied by words such as "increase," "decrease," "grew," "declined," "was up," "was down," "was flat," or "was similar" refer to a comparison with the same period in the previous year unless otherwise stated. 29
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Table of Contents Understanding our Company Our Business Our mission is to empower investor success. The investing ecosystem is complex and navigating it with confidence requires a trusted, independent voice. Our perspective is delivered to institutions, advisors, and individuals with a single-minded purpose: to empower every investor with the conviction that he or she can make better-informed decisions and realize success on his or her own terms. We deliver insights and experiences to clients that are essential to investing. Proprietary data sets, meaningful analytics, independent research and effective investment strategies are at the core of the powerful digital solutions that investors across client segments rely on. We generate revenue through products and services in three major categories:
•Subscriptions and license agreements, which typically generate recurring revenue; •Asset-based fees for our investment management business; and •Transaction-based revenue for products that involve primarily one-time, non-recurring revenue.
COVID-19 Update
As ofSeptember 30, 2020 , we continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it affects team members, customers, suppliers, and global markets. Given the dynamic nature of these circumstances, the long-term impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall future financial performance cannot be reasonably estimated at this time. While the recurring nature of our licensed-based revenue showed continued resilience in the third quarter, a prolonged economic downturn caused by the COVID-19 pandemic could lead clients to adjust purchasing decisions or product and service implementations, or may cause them to cancel or reduce spending with us. Our asset-based revenue is subject to global market conditions and client investment decisions, although the structure of certain contracts and timing of client asset reporting may cause certain impacts to be reflected in results with a lag. Transaction-based revenue primarily includes DBRS Morningstar, which is dependent on overall credit market conditions and debt issuance levels. Global structured finance markets began opening up in lateAugust 2020 , which led to a rebound inU.S. and European structured finance issuance in the third quarter of 2020. We also continued to benefit from strong Canadian corporate issuances. Nevertheless, credit market conditions remain sensitive to the overall global economic environment. Our operations also continue to be affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many jurisdictions continue to impose a wide range of restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19. We have taken numerous steps, and will continue to take further actions, in our approach to addressing the COVID-19 pandemic. We continue to evolve our business continuity plans and our incident management team is in place to respond to changes in our global environment quickly and effectively. To protect the health and safety of our team members, we continue to conduct business with a large portion of our global workforce in remote work environments, which has had relatively little impact on the productivity of our employees, including our ability to gather data. Based on the guidelines of local authorities and our own safety standards, we continued to re-open certain offices on a limited capacity basis during the third quarter and will continue to do so to provide flexibility for employees with a focus on social distancing and safety. We are also working closely with our clients to support them as they implement their own contingency plans, helping them access our products and services remotely. There have been minimal interruptions in our ability to provide our products, services, and support to our clients. 30 -------------------------------------------------------------------------------- Table of Contents The situation surrounding the COVID-19 pandemic remains fluid, and we continue to actively manage our response and assess potential impacts to our financial position and operating results. This includes the continued evaluation and implementation of certain cost control efforts to help us mitigate the impact that reduced revenues may have on our 2020 financial results. We are focusing on maintaining a strong balance sheet and liquidity position. OnOctober 26, 2020 , we completed the issuance and sale of$350.0 million aggregate principal amount of 2.32% senior notes dueOctober 26, 2030 , in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Our cash, cash equivalents, and investments totaled$377.8 million at the end of the third quarter of 2020 and we had approximately$300.0 million of availability under our$350.0 million revolving credit facilities. We remain in compliance with our financial covenants under these facilities. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act had no impact on our consolidated financial statements for the three and nine months endedSeptember 30, 2020 . We continue to monitor any effects that may result from the CARES Act and other similar legislation or governmental actions in geographies in which our business operates.
For more information, see Item 1A. Risk Factors for further discussion of the impact of the COVID-19 pandemic on our business.
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Supplemental Operating Metrics (Unaudited)
The tables below summarize our key product metrics and other supplemental data.
Three months ended September 30, Nine months ended September 30,
Organic Change Organic Change
(in millions) 2020 2019 Change (1) 2020 2019 Change (1)
Revenue by Type
License-based (2) $ 242.9 $ 204.6 18.7 % 10.0 % $ 680.0 $ 601.0 13.1 % 10.3 %
Asset-based (3) 55.4 54.5 1.7 % 1.3 % 164.4 155.9 5.5 % 5.8 %
Transaction-based (4) 58.9 54.7 7.7 % 6.8 % 164.7 89.7 83.6 % (2.3) %
Key product area revenue
Morningstar Data $ 54.0 $ 48.9 10.4 % 8.6 % $ 158.7 $ 146.3 8.5 % 8.7 %
DBRS Morningstar (5) 53.3 49.6 7.5 % 6.7 % 149.7 69.7 114.8 % 6.7 % (6)
PitchBook 51.3 38.7 32.6 % 32.6 % 144.6 106.1 36.3 % 36.3 %
Morningstar Direct 39.9 37.4 6.7 % 5.5 % 116.9 110.5 5.8 % 6.2 %
Investment Management 30.3 29.8 1.7 % 1.0 % 88.1 85.3 3.3 % 3.8 %
Morningstar Advisor Workstation 21.8 22.2 (1.8) % (1.7) % 64.8 66.8 (3.0) % (2.8) %
Workplace Solutions 20.3 20.0 1.5 % 1.5 % 61.2 58.2 5.2 % 5.2 %
As of September 30,
2020 2019 Change
Select business metrics
Morningstar Direct licenses 16,282 15,660 4.0 %
PitchBook Platform licenses 48,331 32,587 48.3 %
Advisor Workstation clients (U.S.) 148 167 (11.4) %
Morningstar.com Premium Membership
subscriptions (U.S.) 113,103 111,424 1.5 %
Assets under management and advisement
(approximate) ($bil)
Workplace Solutions
Managed Accounts $ 82.5 $ 65.5 26.0 %
Fiduciary Services 52.4 47.5 10.3 %
Custom Models 35.4 34.3 3.2 %
Workplace Solutions (total) $ 170.3 $ 147.3 15.6 %
Investment Management (7)
Morningstar Managed
Portfolios $ 26.4 $ 45.9 (42.5) % (8)
Institutional Asset
Management 11.2 15.1 (9) (25.8) % (10)
Asset Allocation Services 6.6 7.7 (14.3) %
Investment Management
(total) $ 44.2 $ 68.7 (35.7) %
Asset value linked to Morningstar Indexes
($bil) $ 65.6 $ 64.0 2.5 %
Three months ended September 30,
Nine months ended
2020 2019 Change 2020 2019 Change
Average assets under management and
advisement ($bil) $ 209.8 $ 215.9 (2.8) % $ 207.5 $ 208.8 (0.6) %
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(1) Organic revenue excludes acquisitions, divestitures, adoption of new accounting standards, and the effect of foreign currency translations.
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(2) License-based revenue includes Morningstar Data, Morningstar Direct,
Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar
products.
(3) Asset-based revenue includes Investment Management, Workplace Solutions, and
Morningstar Indexes.
(4) Transaction-based revenue includes DBRS Morningstar, internet advertising,
and Morningstar-sponsored conferences.
(5) For the three and nine months ended September 30, 2020 , transaction-based
revenue derived primarily from one-time ratings fees was 60.3% and 59.4%,
respectively, while recurring revenue from surveillance, research, and other
services comprised the remainder for the period.
(6) Revenue from DBRS Morningstar is excluded from the reporting of organic
revenue growth through the second quarter of 2020.
(7) Revenue for Investment Management includes Morningstar Managed Portfolios,
Institutional Asset Management, and Asset Allocation Services.
(8) The decline in Morningstar Managed Portfolios assets was largely attributed
to a client contract change from a variable to fixed-fee arrangement. Excluding
the assets from this client contract in the prior-year period, assets in
Morningstar Managed Portfolios increased 0.4%. The increase in revenue for
Investment Management diverged from the decline in assets under management and
advisement due to the aforementioned contract change, the impact of average
asset calculations on Morningstar Managed Portfolios billing, and increased
assets in the Morningstar Funds Trust.
(9) Revised to reflect updated asset reporting.
(10) The decline in Institutional Asset Management assets was attributed to the
non-renewal of a client contract in the third quarter of 2020.
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Three and Nine Months Ended
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