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. 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: •failing to maintain and protect our brand, independence, and reputation; • liability for any losses that result from an actual or claimed breach of our fiduciary duties or failure to comply with applicable securities laws; • liability related to cybersecurity and the protection of confidential information, including personal information about individuals; • compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, or our investment advisory, ESG and index products; • prolonged volatility or downturns affecting the financial sector, global financial markets, and global economy and its effect on our revenue from asset-based fees and credit ratings business; • the impact of the current COVID-19 pandemic on our business, financial condition, and results of operations; • 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; • failing to differentiate our products and services and continuously create innovative, proprietary and insightful financial technology solutions; • 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; • trends in the financial services industry, including fee compression within the asset and wealth management sectors and increased industry consolidation; • 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 ; • our indebtedness could adversely affect our cash flows and financial flexibility; 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, 2020 (our Annual Report). 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. 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. 24
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Table of Contents Understanding our Company Our Business Our mission is to empower investor success. Everything we do at Morningstar is in the service of the investor. The investing ecosystem is complex, and navigating it with confidence requires a trusted, independent voice. We deliver our perspective 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. Our strategy is to deliver insights and experiences 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 our client segments rely on. We have a keen focus on innovation across data, research, product, and delivery so that we can effectively cater to the evolving needs and expectations of investors globally. 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
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 the 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 license-based revenue showed continued resilience
throughout 2020 and during the first quarter of 2021, possible economic and
financial effects of the COVID-19 pandemic and related governmental responses
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, which continue to be
impacted by the ongoing pandemic and client investment decisions, although the
structure of certain contracts and timing of client asset reporting may cause
these impacts to be reflected in our financial results with a lag.
Transaction-based revenue primarily includes DBRS Morningstar, which is
dependent on overall credit market conditions and debt issuance levels. While we
continued to benefit from strong Canadian corporate issuances, credit market
conditions remain sensitive to the impact of the COVID-19 pandemic on 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 continues 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 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 continue to operate under their own contingency
plans, helping them access our products and services remotely. To date, there
have been minimal interruptions in our ability to provide our products,
services, and support to our clients.
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The situation surrounding the COVID-19 pandemic remains fluid with the emergence
of new variants of the virus and vaccine distribution at various stages across
geographies. We continue to actively managing our response and have assessed
potential impacts to our financial position and operating results related to our
consolidated financial statements for the three months ended March 31, 2021 . We
remain focused on maintaining a strong balance sheet and liquidity position. At
March 31, 2021 , our cash, cash equivalents, and investments totaled $433.7
million and we had full availability of our $350.0 million revolving credit
facilities.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security (CARES)
Act was signed into law intended to address the impact of the COVID-19 pandemic.
On December 27, 2020 , an additional stimulus was approved as part of the
Consolidated Appropriations Act, 2021 (CAA). On March 11, 2021 , the American
Rescue Plan (ARP) Act was signed into law intended to provide additional
economic relief to address the ongoing impact of COVID-19. We continue to
monitor any effects that may result from these regulations or other similar
legislation and governmental actions in geographies in which our business
operates.
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Supplemental Operating Metrics (Unaudited)
The tables below summarize our key product metrics and other supplemental data.
Three months ended March 31,
Organic Change
(in millions) 2021 2020 Change (1)
Revenue by Type
License-based (2) $ 266.1 $ 216.0 23.2 % 12.1 %
Asset-based (3) 61.4 57.2 7.3 % 5.8 %
Transaction-based (4) 65.3 50.8 28.5 % 24.8 %
Key product area revenue
PitchBook $ 61.6 $ 45.3 36.0 % 36.0 %
DBRS Morningstar (5) 59.3 46.7 27.0 % 23.5 %
Morningstar Data 58.8 51.4 14.4 % 10.2 %
Morningstar Direct 42.1 38.3 9.9 % 6.9 %
Investment Management (6) 29.4 30.5 (3.6) % (6.1) %
Workplace Solutions 25.2 21.2 18.9 % 18.9 %
Morningstar Advisor Workstation 22.8 21.8 4.6 % 3.9 %
As of March 31,
2021 2020 Change
Select business metrics
Morningstar Direct licenses 16,651 15,998 4.1 %
PitchBook Platform licenses 57,196 41,308 38.5 %
Advisor Workstation clients (U.S. and Canada) 236 249 (7) (5.2) %
Morningstar.com Premium Membership subscriptions (U.S.) 116,593 111,354 4.7 %
Assets under management and advisement (approximate)
($bil)
Workplace Solutions
Managed Accounts $ 100.7 $ 65.3 54.2 %
Fiduciary Services 55.9 41.5 34.7 %
Custom Models/CIT 39.2 28.5 (8) 37.5 %
Workplace Solutions (total) $ 195.8 $ 135.3 44.7 %
Investment Management
Morningstar Managed
Portfolios $ 29.0 $ 23.1 25.5 %
Institutional Asset
Management 12.1 14.0 (13.6) % (9)
Asset Allocation Services 6.7 6.4 4.7 %
Investment Management
(total) $ 47.8 $ 43.5 9.9 %
Asset value linked to Morningstar Indexes ($bil) $ 97.1 $ 47.2 105.7 %
Three months ended March 31,
2021 2020 Change
Average assets under management and advisement ($bil)
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(1) Organic revenue excludes acquisitions, divestitures, the adoption of new
accounting standards, and the effect of foreign currency translations.
(2) License-based revenue includes PitchBook, Morningstar Data, Morningstar
Direct, Morningstar Advisor Workstation, 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.
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(5) For the three months ended March 31, 2021 , DBRS Morningstar recurring
revenue derived primarily from surveillance, research, and other
transaction-related services was 36.9%. For the three months ended March 31,
2020 , recurring revenue was 41.9%.
(6) Investment Management revenue includes the contribution of the Morningstar
Funds Trust, which records revenue as well as sub-advisory fees on a gross
basis. This contribution represented $5.5 million of revenue in the quarter
ended March 31, 2021 compared with $4.0 million in the prior-year period.
(7) Revised to reflect updated enterprise client reporting for Advisor
Workstation to include clients in Canada .
(8) Revised to include CIT assets in the reporting for this category.
(9) The decline in Institutional Asset Management assets is attributed to the
non-renewal of a client contract in the third quarter of 2020.
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