UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13
or 15(d) of
the Securities
Exchange Act of 1934
Date of Report (Date of earliest
event reported):
September 4, 2009
MORNINGSTAR,
INC.
(Exact name of registrant as
specified in its charter)
Illinois
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000-51280
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36-3297908
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(State or
other jurisdiction
of incorporation)
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(Commission
File Number)
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(I.R.S.
Employer
Identification No.)
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22 West
Washington Street
Chicago, Illinois 60602
(Address of principal executive
offices)
(312) 696-6000
(Registrants telephone number,
including area code)
N/A
(Former name or former address,
if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
o
Written communications pursuant to Rule 425
under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12
under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o
Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 2.02. Results of
Operations and Financial Condition.*
The information set forth in Question 1 under Item 7.01 of this Current
Report on Form 8-K is hereby incorporated by reference in Item 2.02.
Item 7.01. Regulation FD
Disclosure.
The following information is included in this Current Report on Form 8-K
as a result of Morningstar, Inc.s policy regarding public disclosure of
corporate information. Answers to additional inquiries, if any, that comply
with this policy are scheduled to become available on October 2, 2009.
Caution Concerning Forward-Looking Statements
This current report on Form 8-K 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, general industry
conditions and competition, including the current global financial crisis that
began in 2007; the impact of market volatility on revenue from asset-based
fees; damage to our reputation resulting from claims made about possible
conflicts of interest; liability for any losses that result from an actual or
claimed breach of our fiduciary duties; financial services industry
consolidation; a prolonged outage of our database and network facilities;
challenges faced by our non-U.S. operations; and the availability of free or
low-cost investment information.
A more complete description of these risks and uncertainties can be found
in our Annual Report on Form 10-K for the year ended December 31,
2008. 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.
Investor Questions and Answers: September 2009
We plan to make written responses available addressing investor questions
about our business on the first Friday of every month. The following answers
respond to selected questions received through September 2, 2009. We
intend to answer as many questions as time allows, although we will not answer
product support questions through this channel. We may wait to respond to a
given question until the following month if we need more time to research the
answer.
If you would like to submit a question, please send an e-mail to
investors@morningstar.com, contact us via fax at 312-696-6009, or write to us
at the following address:
Morningstar, Inc.
Investor Relations
22 W. Washington
Chicago, IL 60602
2
2009 Operating
Segments
1.
Is
there any way possible to get a longer quarterly restatement of the new
segments? Trying to get a sense of margins over a longer time series so I
can assess the operating leverage in each segment. Five years would be
wonderful but three years also helpful.
We havent restated the segment
results going back five years or three years, but we can give you quarterly
data for the new segments starting in 2007, which is shown in the table below. Note:
Under our new operating structure, we no longer allocate corporate expense to
each segment, with the exception of stock-based compensation expense.
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2007
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2008
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2009
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($000)
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Q1
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Q2
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Q3
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Q4
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Q1
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Q2
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Q3
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Q4
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Q1
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Q2
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Revenue
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Investment
Information
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$
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72,136
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$
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83,144
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$
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83,784
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$
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88,308
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$
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96,506
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$
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101,580
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$
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97,075
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$
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95,532
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$
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96,240
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$
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97,739
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Investment
Management
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23,311
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26,541
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28,075
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29,808
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28,938
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30,657
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28,430
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23,739
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20,492
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21,794
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Consolidated
revenue
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$
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95,447
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$
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109,685
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$
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111,859
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$
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118,116
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$
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125,444
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$
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132,237
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$
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125,505
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$
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119,271
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$
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116,732
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$
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119,533
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Operating income (loss)
(
1)
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Investment
Information
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$
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25,110
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$
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28,576
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$
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30,473
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$
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30,789
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$
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33,288
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$
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38,697
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$
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33,595
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$
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33,322
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$
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36,837
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$
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37,242
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Investment
Management
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10,561
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13,672
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14,943
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16,219
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15,259
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17,496
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16,149
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11,492
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11,827
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13,062
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Intangible
amortization and corporate depreciation expense
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(4,140
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(4,898
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(4,924
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(4,560
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(5,070
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(5,198
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(5,144
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(5,138
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(6,775
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(7,560
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Corporate
unallocated
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(7,504
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(8,904
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(9,047
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(9,112
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(8,792
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(9,425
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(10,424
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(10,988
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(7,264
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(10,056
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Consolidated
operating income
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$
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24,027
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$
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28,446
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$
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31,445
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$
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33,336
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$
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34,685
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$
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41,570
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$
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34,176
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$
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28,688
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$
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34,625
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$
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32,688
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Operating margin(1)
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Investment
Information
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34.8%
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34.4%
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36.4%
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34.9%
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34.5%
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38.1%
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34.6%
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34.9%
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38.3%
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38.1%
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Investment
Management
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45.3%
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51.5%
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53.2%
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54.4%
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52.7%
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57.1%
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56.8%
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48.4%
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57.7%
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59.9%
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Consolidated
operating margin
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25.2%
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25.9%
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28.1%
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28.2%
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27.6%
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31.4%
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27.2%
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24.1%
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29.7%
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27.3%
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(1) Includes stock-based compensation expense allocated
to each segment.
2.
Right
now, in Investment Information Im including the following products:
Morningstar.com, Morningstar Advisor Workstation, Morningstar Principia,
Licensed Data, Morningstar Equity Research, Newsletters and other publications,
Morningstar Direct, and Other.
In Investment Management Ive included: Investment Consulting,
Morningstar Managed Portfolios, Retirement Advice and Morningstar Indexes.
First, is this the correct way to look at these products? Second, could
you provide or point me to some additional information on the products which
are not included in the top five? As I have it now, I have about $130 million in
FY08 unattributed in the Investment Information segment. Also, any additional
drivers of the Licensed Data line you could provide would be very helpful.
The products you mentioned are in
the correct segments except for Morningstar Indexes, which is part of our Investment
Information segment.
3
Some of the other major products in
the Investment Information segment include Licensed Tools and Content, which is
a set of online tools and editorial content that institutional clients can use
in their Web sites and software; the institutional Workstation product formerly
known as S&P Micropal Workstation; Investment Profiles and Guides, which
are communication materials for use by individual investors and retirement plan
participants; Morningstar EnCorr, an asset allocation software platform for
institutional investors; Financial Communications, which includes investment
conferences, presentation materials, permission fees for advisors,
MorningstarAdvisor.com, and
Morningstar Advisor
magazine; the Hemscott investor relations business in the United Kingdom; and a
variety of other software products for institutions and advisors.
The Investment Management segment
includes Investment Consulting, Retirement Advice, and Morningstar Managed
Portfolios.
Licensed Data is currently our
largest product based on revenue. Our Licensed Data service gives institutions
access to a set of proprietary data spanning a full range of investments. The
data packages we offer include proprietary statistics, such as the Morningstar
Style Box and Morningstar Rating, and a wide range of other data, including
information on investment performance, risk, portfolios, operations data, fees
and expenses, cash flows, and ownership. Institutions can use Licensed Data in
a variety of investor communications, including Web sites, print publications,
and marketing fact sheets, as well as for internal research and product
development. We deliver Licensed Data through electronic data feeds and provide
daily updates to clients. Pricing for Licensed Data is based on the number of
funds or other securities covered, the amount of information provided for each
security, and the level of distribution.
Morningstar Essentials, the subset
of Licensed Data that includes our proprietary statistics and is often used for
marketing and client communication purposes, accounts for about one-fourth of
total Licensed Data revenue. The second-largest primary use for Licensed Data
is for redistributors, where our data appears on other software platforms, such
as FactSet. Other major uses include investor fact sheets, data updates for
client-facing Web sites, internal research, and product development.
Some of the major drivers for
Licensed Data include changes in asset levels and the number of mutual funds globally,
our ability to reach additional market segments in the United States and
globally, and our ability to extend the Licensed Data business beyond our core
position in mutual fund data to include additional revenue from other database
types.
3.
Is
it fair to assume that Morningstar earns a similar price (in terms of basis
points) on the AUM under retirement advice as they do in Investment Consulting?
This makes it possible to reconcile the products back to the reported Investment
Consulting revenue line, but leaves me just dumping the rest in Morningstar
indexes. Am I missing anything?
Its hard to generalize about pricing
for retirement advice relative to Investment Consulting because pricing for
each area varies depending on the scope of work and the level of service provided.
In addition, many of our retirement advice contracts include other fees in
addition to the basis points charged on assets, including usage fees, flat fees,
and portfolio construction fees. Overall, though, our asset-based fees for
managed retirement accounts are typically a bit higher than those for
Investment Consulting. As mentioned in our response to the previous question,
the Investment Management segment consists of three major product lines:
Investment Consulting, Retirement Advice, and Morningstar Managed Portfolios. The
Morningstar Indexes are in the Investment Information segment.
Revenue Run Rate
4.
Can
you provide your run rate representing subscription and investment product
license agreements in place for a large portion of your total revenues for the
following 12 months? The Run Rate at a particular point in time
represents the forward-looking fees
4
for the next 12 months from all subscriptions and investment product
licenses currently being provided to clients under renewable contracts assuming
all contracts that come up for renewal are renewed and assuming then-current
exchange rates.
We dont currently provide information
about our revenue run rate, but well consider adding this figure to our
disclosure at some point in the future.
Morningstar Equity
Research
5.
Do
you know yet how much of the Spitzer-settlement-related equity research revenue
youll be able to retain?
We expect to continue providing analyst research to two of
the banks that were previously clients for our research under the terms of the
Global Analyst Research Settlement (GARS). While contract values for research related
to GARS were relatively high, these new contracts are closer to the normal
range for our institutional contracts. These two contracts have a combined annual
contract value of about 10% of the previous amount for all of our research related
to GARS.
6.
On the cost side, I was wondering if management felt that their
coverage universe was broad enough, or if they were planning on continuing to
expand (i.e. will we reach a maximum number of research analysts?). Your
available positions dont seem to show the need for new analysts. Will this be
more acquisition-based in the future?
Weve been continuing to expand our analyst coverage on
mutual funds domiciled outside of the United States, but we dont currently
plan to expand our coverage universe on the equity side. We rank as one of the
largest independent sources for equity analysis in the world and provide
coverage on a high percentage of the most widely held stocks. We dont determine
our coverage level or number of analysts based on acquisitions; instead, we try
to target a level of coverage that meets client demand and allows us to provide
investors with both depth and breadth of coverage on a variety of market
segments. As weve previously mentioned, in the future we may need to adjust
our equity coverage and staffing levels based on client demand. We also
periodically adjust our coverage list to make sure were covering individual
stocks that are of the most interest to investors in the United States and
other markets around the world.
Investment
Consulting
7.
Have
you lost any significant investment consulting clients/revenue since June 30?
We always win and lose clients in
the normal course of business, but we havent experienced any larger Investment
Consulting client losses since the two we announced previously.
Morningstar Indexes
8.
Can
you provide any color on Morningstar Indexes?
The Morningstar Indexes are a small
but growing product line that provides us with an opportunity to generate
revenue and increase our brand presence. The Morningstar Indexes currently
cover U.S. equities (by style, capitalization, sector, and dividend),
commodities, bonds, and a focused index tracking 20 wide- out moat stocks with
the best valuations as measured by the Morningstar price/fair value ratio. In
addition, we recently launched a new family of 13 Lifetime Allocation Indexes
and five Target Risk Indexes. The Morningstar Indexes are rooted in our
proprietary research and can be used for precise asset allocation and
benchmarking and as tools for portfolio construction and market analysis. We
have several institutional clients that license the Morningstar Indexes for the
creation of investment products, and we also have a few customers that license
Morningstar index data for benchmarking or investor communications.
5
9.
What
is the number of primary exchange listings of ETFs linked to Morningstar Indexes?
There are currently 14
exchange-traded products linked to the Morningstar Indexes.
10.
What
are the assets in ETFs linked to Morningstar Indices?
Exchange-traded funds linked to the
Morningstar Indexes currently hold about $1.6 billion in assets.
11.
Have
you seen an increase in the interest level to license your indices for
index-linked investment products to capitalize on their growth in number and
variety?
Yes, weve seen more interest in the
Morningstar Indexes, partly reflecting the broader suite of products that we now
offer (including commodity, fixed-income, and asset allocation indexes). Although
sales cycles tend to be long, weve had several discussions with U.S. and
European asset management firms interested in licensing our indexes.
12.
What
percentage of your total revenues is your equity index business?
We dont disclose revenue for our
index business because its not among our top five products. It currently
accounts for a small percentage of our consolidated revenue.
*The information furnished under
Item 2.02 of the Current Report on Form 8-K is furnished and shall not be
deemed to be filed for the purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), or incorporated by
reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in
such a filing.
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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MORNINGSTAR, INC.
|
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Date: September 4, 2009
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By:
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/s/ Scott Cooley
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Name:
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Scott Cooley
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Title:
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Chief Financial Officer
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