8-K: Morningstar Details Growth Headwinds and Strategic Shifts in Latest Investor Q&A

Morningstar, Inc. addresses investor questions regarding decelerating growth in its Direct Platform, flat PitchBook client counts, and strategic refocusing efforts across its business segments.

Summary

• Morningstar's Direct Platform organic revenue growth slowed from 8.0% in 2022 to 5.8% in 2024, driven by slower license growth in Morningstar Direct, loss of a large research distribution client, slower growth in Morningstar Advisor Workstation, and customer churn from Direct Web Services overhaul.
• Morningstar Direct US license counts remained relatively flat between 2021 (9,020) and 2024 (9,096) due to price increases, M&A activity, and workforce reductions at large clients.
• The company is expanding its private credit capabilities, with PitchBook projecting private debt assets under management to grow from $3.3 trillion in 2024 to $4.9 trillion by 2029.
• Approximately 25% of Morningstar Credit's ratings-related revenue in 2024 was from private transactions, an increase over 2022 and 2023.
• PitchBook's total addressable market (TAM) estimate increased from $6.5 billion in 2023 to $11.1 billion in 2025, reflecting global expansion, private market growth, and demand for integrated data solutions.
• PitchBook's total client count remained flat at approximately 10,600 at year-end 2024 compared to year-end 2023, with churn in corporate clients offsetting additions in core segments.
• PitchBook's 2024 annual revenue renewal rate declined to 107% from 112% in 2023.
• Morningstar Wealth is being refocused on Morningstar Model Portfolios and the International Wealth Platform, following the sale of TAMP assets to AssetMark in 2024 and the sunsetting of Morningstar Office in 2025.
• The company's capital allocation in 2024 saw roughly three quarters of capital expenditures directed towards external and internal use software development.
• Morningstar adopted a new executive severance policy in May 2025 to align with market practices for attracting and retaining talent, including change-in-control provisions.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While it highlights significant growth opportunities in private credit and strategic refocusing efforts, it also details clear decelerations in key growth metrics (Direct Platform, Direct licenses, Advisor Workstation) and a decline in PitchBook's revenue renewal rate and flat client count. Management provides explanations and strategic responses to these challenges, indicating proactive measures, but the underlying performance trends in several areas are negative compared to prior periods.

Positives

• Private credit is identified as a significant growth opportunity across multiple Morningstar segments, with PitchBook projecting private debt AUM to reach $4.9 trillion by 2029.
• Morningstar Credit's revenue from private transactions increased in 2024, now representing approximately 25% of its ratings-related revenue, indicating successful diversification efforts.
• PitchBook's total addressable market (TAM) estimate has significantly increased from $6.5 billion in 2023 to $11.1 billion in 2025, highlighting substantial market potential.
• Morningstar DBRS maintains consistent analytical processes for both public and private market transactions, reinforcing its credibility.
• The refocusing of Morningstar Wealth on scalable areas like Model Portfolios and the International Wealth Platform aims to improve efficiency and profitability.
• Morningstar is enhancing platform value through deeper data coverage and workflow integrations for PitchBook, and expanding Direct Data offerings to embed PitchBook more deeply into client systems.

Negatives

• Morningstar Direct Platform organic revenue growth decelerated from 8.0% in 2022 to 5.8% in 2024.
• Morningstar Direct annual license growth slowed significantly from 6% in 2022 to 1% in both 2023 and 2024.
• Morningstar Advisor Workstation growth slowed from 4.7% in 2022 to 1.0% in 2024, partly due to AppHub not delivering expected results and product delays.
• The loss of a large research distribution client starting in Q3 2024 negatively impacted Morningstar Data and the broader Direct Platform segment revenue growth.
• The overhaul of Direct Web Services in 2024 led to an anticipated increase in customer churn.
• PitchBook's total client count remained flat at approximately 10,600 at year-end 2024 compared to year-end 2023, with churn in corporate clients offsetting new additions.
• PitchBook's annual revenue renewal rate declined from 112% in 2023 to 107% in 2024.
• The company does not provide guidance on the timeline or required revenue growth for Morningstar Wealth to return to profitable adjusted operating margin levels.

Risks

• Failing to maintain and protect Morningstar's brand, independence, and reputation.
• Failure to prevent and/or mitigate cybersecurity events and protect confidential information.
• Changing economic conditions, including prolonged volatility, recessions, or downturns affecting the financial sector and global financial markets, may negatively impact financial results.
• Compliance failures, regulatory action, or changes in laws applicable to regulated businesses.
• Failing to innovate product and service offerings or meet or anticipate clients' changing needs.
• Impact of artificial intelligence technologies on the business and reputation, and associated legal risks.
• Failure to detect errors in products or failure of products to perform properly due to defects, malfunctions or similar problems.
• Failing to recruit, develop, and retain qualified employees.
• Failing to scale operations and increase productivity to implement business plans and strategies.
• Liability for any losses that result from errors in automated advisory tools or errors in the use of information and data collected.
• Inadequacy of operational risk management and business continuity programs to address materially disruptive events.
• Failure of strategic transactions, acquisitions, divestitures, and investments to yield expected business or financial benefits.
• Failing to maintain growth across businesses due to changes in geopolitics and the regulatory landscape.
• Liability relating to the information and data collected, stored, used, created, and distributed or reports published by software products.
• The potential adverse effect of indebtedness (and rising interest rates) on cash flow and financial and operational flexibility.
• Liability, costs, and reputational risks relating to environmental, social, and governance considerations.
• Dependence on third-party service providers in operations.
• Inadequacy of insurance coverage.
• Challenges in accounting for tax complexities in global jurisdictions could materially affect tax obligations and rates.
• The potential and impact of vendor consolidation and clients' strategic decisions to replace products and services with in-house solutions.
• Ability to build and maintain short-term and long-term shareholder value and pay dividends.
• Ability to maintain existing business and renewal rates and to gain new business.
• The impact on recently issued accounting pronouncements on consolidated financial statements and related disclosures.
• Failing to protect intellectual property rights or claims of intellectual property infringement against the company.

Future Outlook

Morningstar expects continued growth opportunities in private credit, with PitchBook projecting private debt AUM to reach $4.9 trillion by 2029. The company plans to launch new Morningstar Medalist Rating for Semiliquid Funds later in 2025 and will provide historical quarterly sales figures for Morningstar Direct Platform products with its Q2 2025 supplemental deck. While structured finance issuance may slow from 2024's record, it is expected to remain healthy at more normalized levels. PitchBook is focused on enhancing platform value, targeting sales efforts, expanding Direct Data offerings, and prioritizing customer success to improve retention and support growth. Morningstar Wealth is being refocused on scalable areas to improve profitability. The company will continue to evolve its Sustainalytics solutions to align with client demand.

Management Comments

• "Private credit represents an important opportunity for growth across multiple Morningstar segments."
• "Overall, we believe that expanded private credit data, research, and capabilities will help drive demand in multiple client segments."
• "The slowdown [in Morningstar Direct Platform] has been driven by the combination of flat-to-declining revenue trends for non-core products in the segment as well as slower growth in certain core products."
• "Our teams are focused on executing on growth opportunities in our core Morningstar Direct Platform products, including Morningstar Direct, core products within Morningstar Data, and Morningstar Advisor Workstation/Direct Advisory Suite."
• "We align with industry practices by not publishing a specific total addressable market (TAM) figure for Morningstar Direct Platform. This decision reflects the complexities inherent in accurately defining a TAM for products that serve such a broad and diverse audience."
• "With roughly $44.3 billion in global spend on financial data and analysis in 2024, we see ample room for growth both in our current client segments, and as we continue to consider new potential client segments."
• "Morningstar DBRS follows the same analytical processes, using the same criteria, methodology, policies, and procedures to rate private market transactions that it uses to rate public market transactions."
• "The private market also provides a more level playing field for smaller ratings agencies to compete, unlike the public markets where issues related to legacy investment mandates and index eligibility can come into play."
• "While we may see a slowdown from 2024s record issuance, we expect structured finance issuance to remain healthy at more normalized levels."
• "Over the past few years, we have taken steps to diversify Morningstar Credits revenue base with the goal of making the business less vulnerable to fluctuations in structured finance issuance."
• "Overall, we are confident in the PitchBook value proposition and our ability to expand the renewal base over time."
• "With changes over the past year, including our strategic alliance with AssetMark and our decision to retire Morningstar Office, we have refocused Morningstar Wealth on Morningstar Model Portfolios offered on third-party platforms and the International Wealth Platform, both areas where we believe that we can scale and grow more efficiently and improve profitability."
• "Where appropriate, we are structured to leverage a combined market where clients are shared across our segments."
• "As youve seen from our track record, if we come to the conclusion that an activity is non-core, we may exit or deemphasize those activities to enable our teams to focus on our strategic priorities."
• "Our Compensation Committee regularly reviews best practices in the marketplace in consultation with our executive compensation consultants. As such, the driver for adoption [of the new executive severance policy] was to formalize an executive severance policy in alignment with current market executive compensation practices to support our ability to attract and retain top-notch talent."

Industry Context

The document highlights the significant growth in private credit, with PitchBook projecting substantial increases in assets under management, indicating a broader industry trend towards private market investments. Morningstar's efforts to diversify Morningstar Credit's revenue base away from reliance on structured finance issuance reflect a strategic adaptation to market fluctuations. The flat client count and declining renewal rates for PitchBook, particularly among corporate clients, suggest that the broader macroeconomic environment and slower deal activity are impacting demand for private market data, aligning with observed trends in the financial data and analytics sector. The refocusing of Morningstar Wealth aligns with a trend among financial technology providers to streamline offerings and focus on scalable, higher-margin services.

Comparison to Industry Standards

• Morningstar DBRS states it follows the same analytical processes, criteria, methodology, policies, and procedures to rate private market transactions as it does for public market transactions, suggesting a consistent approach comparable to established rating agencies.
• The document notes that historically, larger credit ratings agencies were not focused on private markets, providing a more level playing field for smaller agencies like Morningstar DBRS to compete, unlike the public markets where legacy investment mandates and index eligibility favor larger players.
• The NAIC's retraction of its June 2024 report on smaller credit ratings agencies and SVO ratings due to data quality issues indicates ongoing scrutiny and evolving standards in the private credit rating space, which Morningstar DBRS navigates by emphasizing its consistent methodology.
• Morningstar's decision not to publish a specific Total Addressable Market (TAM) for Morningstar Direct Platform, while evaluating market potential through proprietary and third-party data, aligns with practices of companies serving broad and diverse audiences where a precise TAM is complex to define, contrasting with PitchBook's more defined TAM estimates for its specialized market.

Corporate Governance

Related Party Transactions

• Daniel Mansueto is deemed to beneficially own 56,250 Morningstar shares as trustee of a trust associated with Joe Mansueto and 2.3 million Morningstar shares as voting agent of certain grantor retained annuity trusts (GRATs) for the benefit of Joe Mansueto's children. Joe Mansueto is also deemed to beneficially own these shares under SEC rules.

Stakeholder Impact

• **Shareholders:** Mixed impact due to decelerating growth in key segments and declining renewal rates, offset by strategic refocusing, identified growth opportunities in private credit, and efforts to improve profitability and shareholder value.
• **Employees:** Strategic shifts and divestitures (e.g., sunsetting Morningstar Office, selling Commodity and Energy Data business) may lead to reallocations or changes in roles. The new executive severance policy aims to attract and retain top talent.
• **Customers (Asset Managers, Advisors, Wealth Managers):** Continued product development and enhancements (e.g., private credit capabilities in Direct Platform, Direct Advisory Suite, PitchBook platform value enhancements) aim to better serve client needs. However, product delays and churn from product overhauls could impact some clients.
• **Suppliers/Third-Party Service Providers:** Morningstar's dependence on third-party service providers in its operations is noted as a risk, implying ongoing relationships.
• **Creditors:** The potential adverse effect of indebtedness and rising interest rates on cash flow and financial flexibility is noted as a risk.

Next Steps

• Launch of new Morningstar Medalist Rating for Semiliquid Funds later in 2025, including coverage of private credit funds.
• Morningstar Direct Platform teams focused on executing growth opportunities in core products (Morningstar Direct, core Morningstar Data, Morningstar Advisor Workstation/Direct Advisory Suite).
• Morningstar plans to provide historical quarterly sales figures for the new Morningstar Direct Platform product areas with its Q2 2025 supplemental quarterly deck.
• PitchBook is focused on enhancing platform value, targeting sales and marketing efforts, expanding Direct Data offerings, prioritizing customer success and onboarding, and expanding adoption of use cases to improve retention and support growth.
• Morningstar Wealth will continue to focus on Morningstar Model Portfolios and the International Wealth Platform.
• Morningstar Sustainalytics teams will continue to evolve solutions to align with client demand.

Key Dates

Keywords

Morningstar, SEC filing, 8-K, Investor Q&A, Financial Reporting, Private Credit, Morningstar Direct Platform, PitchBook, Morningstar Credit, Morningstar Wealth, Organic Growth, Revenue Renewal Rate, Total Addressable Market, Capital Allocation, Corporate Governance, Financial Data, Investment Research, Asset Management, Wealth Management