September 23, 2022

Even when you exclude M&A-related earn-out payments, profitability and free cash flow growth were significantly lower in the quarter and your margins are at the lowest levels they’ve been in many years. Can you be more specific about where you’re spending additional dollars across your business?

As we make investments in the business to drive long-term growth, we’ve focused on areas where we see the opportunity to build scale and generate attractive long-term returns. These include investments we’ve made this year in Sustainalytics, where we see a strong case to invest in climate and impact metrics to grow our moat and meet customer needs. At DBRS Morningstar, we’re investing in analytical and operations staff to help maintain our existing business and continue to grow, especially in U.S. middle market and European corporates. At PitchBook we continue to invest to further expand the depth of our equity data and to make enhancements to our platform which have recently included updates to search capabilities and improved collaboration tools. Meanwhile, in Wealth Management we are investing to develop our direct indexing capabilities (with a pilot launched this summer) and our open architecture TAMP. 

Across the business, the most significant contributor to increased expenses and lower margins has been compensation and benefit costs, which increased $30.6 million in the second quarter, excluding the impact of the Sustainalytics earnout. That increase reflected added headcount in parts of the business targeted for growth, especially Morningstar Sustainalytics and PitchBook, and a relatively large annual merit increase, with the budgeted global weighted average percentage increase coming in at roughly double the prior year’s budgeted increase. Please refer to the response to this month’s question on compensation for additional detail. 

Excluding stock-based compensation, the other major drivers of operating expense in the second quarter were:

  • Professional fees (+$10.6m), including legal fees related to the completed independent investigation into certain Morningstar Sustainalytics products, the use of third-party resources for software development and technology improvements, and M&A-related expenses. 
  • Advertising and marketing costs (+$6.6 million), partially due to a timing issue related to our US Morningstar Investment Conference, which was held in May 2022 after last being held in September 2021, and also reflecting advertising and demand generation activities. 
  • Sales commission costs (+$5.3 million), due to strong sales in the quarter and higher amortization of capitalized commissions related to prior-period sales performance. 
  • Travel and related expenses (+$5.0 million), reflecting a rebound in travel off low levels earlier in the pandemic. 

We address the increase in capital expenditures, which contributed to the decline in free cash flow, in a separate question this month. 

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