March 13, 2020

Revenue growth has been a bright spot, but adjusted operating income growth hasn’t kept pace. The company has been investing heavily in the past five quarters and seen negative operational leverage. Are you growing faster in lower margin segments, or

We believe that our major products have margins that are comparable with our peers while still recognizing that our business is not a perfect match to any one company. Comparability is impacted by several factors, including the mix, maturity stage, and life cycle of our products and solutions. Although the above question is focused on the past five quarters, we began presenting five key investment areas back in 2017. These included Morningstar Data, Morningstar Direct, Workplace, Managed Portfolios, and Credit Ratings. We added PitchBook to this group in 2018 and DBRS in 2019. We believe this group represents the solutions across Morningstar that have the most outsized growth potential over the long-term; as such, we’re not shy about making near-term investments in headcount, product development and facilities to support our ability to grow and further scale these areas over the long-term. 

This product group, in aggregate, continues to grow organic revenue at a higher rate than the rest of the company. In 2017, our key growth areas grew 11.7% organically relative to 7.6% for Morningstar as a whole. In 2018, our key growth areas grew 16.7% organically relative to 11.4% for Morningstar as a whole. In 2019, this group (excluding DBRS Morningstar) grew 15.2% relative to 9.5% for Morningstar as a whole. 

In our most recent earnings releases, we’ve called out the major cost categories associated with the increases in operating expense that have occurred as we implement our growth plans. These include cash compensation, stock-based compensation, commissions, production costs, and facilities, which have all increased in support of our key initiatives and the infrastructure needed to support their increasing scale. We don’t grow these expenses without taking a data-driven approach to our decision making, ensuring that we are earning a strong return on the money we invest. 

Importantly, we’ve demonstrated strong ability to generate cash despite the increases in operating expenses. Between 2017-2019, cash from operating activities grew at a 16.1% compound annual growth rate, whereas free cash flow (which we define as cash from operating activities less capital expenditures) grew at a 19% CAGR. Along with the organic revenue growth rates we’ve delivered, we believe these healthy levels of cash generation are evidence of the benefits of our approach.

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