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):
March 5, 2010
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)
Illinois
|
|
000-51280
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36-3297908
|
(State or
other jurisdiction
of incorporation)
|
|
(Commission
File Number)
|
|
(I.R.S.
Employer
Identification No.)
|
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
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 April 5, 2010.
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
current global financial uncertainty; 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, 2009. 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: March 2010
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 March 3, 2010. 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
Fourth-Quarter and
Full-Year 2009 Financial Results
1.
Relative to the option-related expense of $6.1 million, how much of it
was in COGS and how much was in S&M or G&A?
The entire $6.1 million
option-related expense (related to adjusting the tax treatment of some stock
options that were originally considered incentive stock options and should have
been considered non-qualified stock options) was recorded as a general &
administrative (G&A) expense.
2.
Could you please comment on the higher cost of goods sold and the
corresponding drop in gross margin? Thank you.
In the fourth quarter of 2009, cost
of goods sold increased about $4.6 million, or 14.6% from the same period in
2008. About two-thirds of the increase was driven by higher compensation costs,
which increased because we added employees through acquisitions and we
continued hiring for our development center in China. We added about 225
employees in 2009. Higher production expense, mainly reflecting production
expense for the real-time data (Tenfore) operation we acquired in 2008, also
contributed to the growth in cost of goods sold.
3.
Within the general & administrative expense line on the income
statement, given the decrease on a year-over-year basis for the fourth quarter
of 2009, what were the primary contributors to the decline, and do you see
those expenses being restored as we move through 2010?
In the fourth quarter of 2009,
G&A expense increased about 11% over the same period in 2008. For full-year
2009, G&A was down about 3%, driven mainly by lower bonus expense. We also
spent less on travel, training, and conferences, although costs in that area
picked up late in the year as sales activity increased. These expense
reductions were partially offset by the $6.1 million of expense recorded in the
fourth quarter related to adjusting the tax treatment of incentive stock
options, as well as $1.8 million of expense recorded in the second quarter
related to the deposit penalty and $2.7 million of expense from increasing a
liability for vacant office space. To the extent that revenue growth improves,
we would expect G&A costs to go up in 2010.
4.
Of the 2,600 employees at year-end 2009, how many are in Development?
Can you break that down into how many are in Development by country or
geographic region?
We have approximately 540 employees
included in development, roughly half of whom are based in our offshore
development center in Shenzhen, China.
5.
The fourth quarter has $1.1 million of other expense. I was
wondering if you could break that down into its component parts as I try to
look at the differential between 2009s and 2008s figure for that line item on
the Income Statement.
The $1.1 million of other expense,
net was primarily for realized foreign exchange losses on intercompany
transactions, which made up close to about two-thirds of this amount. We
typically settle a large number of intercompany balances in the fourth quarter.
Stock Options
6.
Weve now had two one-time charges driven by errors in your
accounting/administration of stock options. This is probably a complex area
rife with tax issues. That said, this has happened more than once. Whats going
on in this area? Can you explain whats been
3
done to button down these issues? What is the likelihood that tax or
other issues will surface with past options issuance?
Our 2009 results include a total of
$9.5 million in operating expense for two unanticipated matters: We incurred
$3.4 million in operating expense for penalties related to the timing of
deposits for taxes withheld on stock-option exercises from 2006 through 2009,
and we recorded a $6.1 million operating expense related to adjusting the tax
treatment of some stock options that were originally considered incentive stock
options.
With respect to the first issue, we
believe it is common practice for some companies to pay taxes withheld on
stock-based compensation along with a regularly scheduled payroll deposit. This
approach, however, does not technically comply with Internal Revenue Service
guidelines concerning deposits of taxes withheld in connection with stock-based
compensation, which generally require that if a companys cumulative deposit
liability for all compensation exceeds $100,000, the tax withholding must be
deposited by the following business day. Transactions related to stock-based
compensation frequently cause companies to exceed this threshold outside of
their regularly scheduled payroll cycles, thus triggering the accelerated
deposit rules. Although we believe our approach was reasonable, we have settled
this matter with the IRS and have increased the frequency of deposits for taxes
withheld on stock-option exercises.
On the second issue, the options in
question were originally granted in 1998, 1999, and 2000. In 2009, we
determined that certain options granted to three individuals in those years
should have been treated as nonqualified stock options instead of incentive
stock options for the executives and our income tax purposes. As a result, we
paid these individuals a total of $4.9 million to compensate for the difference
in tax treatment. We also recorded a $1.2 million expense, primarily for
potential penalties related to this matter. We regret this error, but we take
some comfort in the fact that we identified it internally and took appropriate
steps to fix it. In addition, we expect the cash-flow impact to be largely
offset by a cash tax benefit in the future.
While we cant guarantee that tax or
other issues wont come up, weve added to our tax and legal capabilities as
our company has expanded. We now have a much stronger structure and process in
place with respect to administering our equity-based compensation, including
stock options and restricted stock units. We also have in-house tax, legal, and
financial reporting teams. These capabilities are all significantly stronger
than what we had in place when we were a privately held company.
Investment
Management Segment
7.
You noted in your release that you lost a few, smaller
retirement-advice clients after losing two larger investment consulting clients
over the past year. Can you refresh/update your disclosure on client losses and
gains in 2009? Is it possible to see net cash flows, which would give us a
sense for the underlying health/customer engagement in these businesses?
Separately, this appears to be somewhat of a fixed-cost business. Can you give
us a sense of whether costs need to ramp up inline with potential asset growth?
The margins are quite healthy and having a better sense of the cost structure
helps an investor think about how margins might evolve in various AUM growth
scenarios.
In Investment Consulting, the net
total number of clients was approximately the same as of year-end 2009 and
year-end 2008, but two of the clients that didnt renew their contracts (one in
October 2008 and one in May 2009) were both relatively large and
therefore had a significant negative impact on revenue. In Retirement Advice,
we primarily earn license-based fees for our advice and guidance services, and
revenue for these services declined because of several smaller client
nonrenewals in 2009.
We dont have access to detailed
cash flow data for most of the portfolios on which we provide advisory services
because we dont have custody of the assets. Based on the information we do
4
have, though, we believe cash flows
were generally positive in 2009. For Morningstar Associates, assets declined
because of the larger client non-renewal mentioned above.
The cost base in our Investment
Management business is largely fixed. Although we may add additional sales
capacity or portfolio management resources from time to time, the business
tends to be highly scalable because we can increase assets without a
proportionate increase in our cost base.
Investment
Information Segment
8.
Is the 15% decline in Morningstar.com subscribers the largest on
record? How much did Internet advertising sales fall in 2009? How does that ad
sales loss stack up with history and is it in line or worse with your peers? Do
you think weakness at Morningstar.com indicates that your addressable market
for the site in the U.S. was shrunken by the crisis/bear market? It seems like
growth in this unit (with positives like Direct and negatives like Principia)
may have hit a wall for the time being. Is that a fair assessment from where
you sit?
Yes, the 15% decline in
Morningstar.com subscriptions in 2009 was the largest weve experienced to
date. Revenue from Internet advertising sales declined about 40% in 2009, but we
also experienced a large decline in Internet advertising during the market downturn
in 2000-2001. We dont have access to information about advertising sales
revenue for all of our peers, but we believe the 2009 decline was similar to
those of other sites focused on financial information. We attribute the
weakness in Morningstar.com to the ongoing economic downturn, which has put
pressure on consumer discretionary spending. This translated into negative
trends in subscriber growth and new trials in 2009, but we dont believe that
the addressable market for Premium investment content in the United States has
permanently declined. Its also worth noting that we moderately increased
subscription prices for Premium Membership in both January 2009 and 2008,
which partially offset lower revenue from the subscription decline.
International
Operations
9.
Can you provide a geographic breakdown for 2009s revenues by country
and region? Where do you envision international revenues as a percent of
the total going over the next 3-to-5 years?
The graph below shows a breakdown of
our revenue by region over the past five years. We dont issue financial
forecasts, so we cant really speculate about what percentage of the total
international revenue may make up in three to five years, other than to note
that international revenue has been trending up as a percentage of total
revenue. As weve said previously, about half of the worlds investable assets are
outside the United States, so wed expect our revenue to approximate that
breakdown over time.
5
10.
More broadly, how do you see your overseas business evolving over the
next five years? It still seems to mainly be a data business. Will it have a
similar/different margin profile than U.S. operations? How many of your foreign
units are profitable today? Given that this is going to be a major driver for
your business (if all goes according to plan) it would be helpful to have more
details here. Currently, we dont know very much.
Outside of the United States, weve
primarily been known as a data and tools provider to date. Roughly 60% to 65%
of our non-U.S. revenue is from Licensed Tools, Licensed Data, and
institutional software. Our vision is to broaden our global footprint to
include additional products and services in our existing operations, as well as
expanding to reach more countries that offer good financial opportunities. In
particular, we see opportunities in real-time data, qualitative investment
research and ratings, investment indexes, and consulting. We also plan to
explore new regions, such as Latin America, Eastern Europe, and the Middle
East, and expand our sales and product support infrastructure to help build
more business.
Slightly more than half of our
international operations were profitable in 2009 based on operating income.
The table below shows pre-tax income
for our U.S. and international operations:
($000)
|
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2009
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2008
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2007
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U.S.
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$
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123,948
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$
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135,997
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$
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107,774
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Non-U.S.
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4,306
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7,374
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15,709
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Income
before income taxes and equity in net income of unconsolidated entities
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$
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128,254
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$
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143,371
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$
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123,483
|
|
11.
When will you begin charging subscription fees on the overseas
websites? Where will these fees be set relative to the U.S. site? Do you think
these fees would be material enough to help offset the fall-off in subscription
revenue from your U.S. site?
We currently offer Premium
Membership services for our investment websites in the United States, China,
Australia, and the United Kingdom and charge subscription fees for all of those
sites. We dont have any near-term plans to launch additional Premium website
services, though we may introduce them as market needs evolve (see question
below for more information).
6
12.
What is the roadmap for launching more subscription websites/products
overseas? It seems like this is the main growth driver for this part of your
business. Is that a fair assessment?
We plan to launch Premium Membership
services in additional markets as market needs evolve, focusing on larger,
more-established markets first. We expect that any additional Premium sites we
introduce would likely start out with a small number of subscribers and
gradually increase over time.
Mergers and
Acquisitions
13.
Can you explain how youve integrated the following companies and the
degree to which these deals have allowed you to offer new products, add value
to existing products, or raise prices? Im just trying to gauge which of these
deals is actually growing your addressable market and has the potential to bring
in the most incremental revenue at a good margin. Any insight on those fronts
would be much appreciated.
·
Hemscott
·
Financial
Computer Support
·
Fundamental
Data Limited
·
10-K
Wizard Technology
·
Tenfore
Systems Limited
·
InvestData
(Proprietary) Limited
·
Global
financial filings database business of Global Reports LLC
·
Equity
research and data business of C.P.M.S. Computerized Portfolio Management
Services Inc.
·
Andex
Associates, Inc.
·
Intech
Pty Ltd
·
Logical
Information Machines
We made good strides integrating our
previous acquisitions in 2009. Here are some highlights on the acquired
operations you mentioned:
Hemscott
: This
acquisition supported our strategy of building a global equity database and
enhancing our historical equity data. With it, we acquired a leading retail
website in a large market and expanded our product line to include investor
relations services and tools. Weve completed most of the integration steps,
including consolidating administrative functions; merging our equity data
collection teams; creating teams for data, media, and investor relations;
expanding our global equity data coverage; and integrating sales teams.
Financial Computer
Support, Inc. (FCSI):
This acquisition allowed us to add
portfolio management functionality to round out our Principia module for
financial advisors. We also acquired a new service bureau team based in Central
Maryland that focuses on Morningstar Office, as well as other internal products
and institutional clients. Weve added FCSIs dbCAMS+ to Principia and renamed
it as Principia CAMS.
Fundamental Data
Limited:
With this acquisition, we acquired a leading global
closed-end fund database, as well as expertise and relationships in the
closed-end field and a blue-chip client base in the UK banking, brokerage, and
asset management communities. Were now including Fundamental Datas content in
our offerings.
10-K Wizard
Technology:
This acquisition complemented our data and document
offerings with a comprehensive, searchable database of SEC filings. It enhanced
our technology with additional database searching and document retrieval
capabilities and gave us access to a new client base
7
in the accounting and legal fields.
Weve integrated the sales and marketing functions and eliminated duplicate
costs for third-party data and administrative functions. Weve implemented 10-K
Wizards search technology at Morningstar.com, renamed 10-K Wizards offerings
as part of our Morningstar Document Research platform, and have added
Morningstar content such as mutual fund summary reports and fundamental data
along with 10-K Wizards offerings on Morningstar Document Research.
Tenfore Systems
Limited:
We acquired Tenfore Systems to significantly expand the scope
of our data offerings with the addition of real-time pricing data and position
Morningstar among larger, more diversified data vendors. The acquisition also
allowed us to populate our existing platforms (including Direct, Morningstar
Advisor Workstation, and Morningstar.com) with Tenfore data, enhancing their
capabilities while reducing third-party data costs. We have maintained Tenfore
as a stand-alone business (per our original plan). We consolidated Tenfores
Frankfurt operations center with our London back office and renamed Tenfore as
Morningstar Real-Time Data. Weve also developed a beta version of Morningstar
QuoteSpeed, a new web-based solution that delivers real-time market data
through a simplified desktop application.
InvestData
(Proprietary) Limited:
We added a new operation in South
Africa with this acquisition. Weve completed the data integration and have
also begun selling other Morningstar products in South Africa.
Global financial
filings database business of Global Reports LLC:
This
business provides timely online access to full-color financial filings from
more than 37,000 publicly traded companies in approximately 130 countries and
offers more than 500,000 current and historical filings and reports, such as
annual and interim reports, initial public offerings, and Corporate and Social
Responsibility reports, in their native languages and in English when
available. Weve added the content from Global Reports (along with 10-K Wizard)
to our Morningstar Document Research platform. Weve also added Global Reports
information to our other product offerings, such as Morningstar.com.
Equity research
and data business of C.P.M.S. Computerized Portfolio Management Services Inc.
(CPMS):
CPMS tracks fundamental equity data for approximately 4,000
securities in the United States and Canada and provides earnings estimates for
Canadian stocks. CPMS also has a software platform that allows clients to
screen stocks based on its model portfolios or their own investment strategies.
Weve integrated CPMS data with our database and combined its operations with
our office in Toronto.
Andex Associates:
Andex is
known for Andex Charts, which illustrate historical market returns, stock index
growth, inflation rates, currency rates, and general economic conditions for
the United States dating back to 1926, and for Canada dating back to 1950. Weve
integrated Andex as part of our Financial Communications business, where we
offer a similar line of charts with the Ibbotson Stocks, Bonds, Bills, and
Inflation series.
Intech Pty Ltd.:
Intech is a
leading provider of multimanager and investment portfolio solutions in Sydney,
Australia and allowed us to expand our consulting business in Australia. Intech
also manages a range of single sector, alternative strategy, and diversified
investment portfolios, has one of the leading separately managed account
databases in Australia, and offers the Intech Desktop Consultant, a research
software product for institutions.
Intech
is now reporting to Peng Chen, head of our Ibbotson Associates unit, and has
started doing business as Ibbotson Associates. Peng has been working closely
with the Intech team to leverage our global capabilities and build a solid plan
for growth.
Logical
Information Machines, Inc.:
Our purchase of Logical Information
Machines, Inc. (LIM) at the end of 2009 complemented our core data and
software businesses and provided a new distribution channel for Morningstar.
LIM is an analytical software service that aggregates
8
financial and energy data from a
large number of sources. LIMs software lets clients query these multiple data
sets simultaneously to support their research, analysis, and trading
operations. The majority of LIMs clients are in the energy and commodities
industries, which are new segments for us. Although we just completed the
acquisition on December 31, 2009, were planning to maintain LIM as a
stand-alone operation, so the integration process should be relatively
straightforward.
14.
It has always been tricky to judge the overall profitability of your
acquisitions and thats becoming increasingly hard as the number of small bolt-on
deals grows. Can you provide any numbers here? What is your ROIC on
acquisitions made over the past three years or two years or one year? As these
deals mount up and become a bigger part of your business, it seems odd that we
have so little sense (beyond Ibbotson for instance) of whether they are
actually good investments. It looks like youve paid, on average, 2x sales for
deals made over the past 12 months. Is that accurate? How did you arrive at
that valuation? What are the financial hurdle rates and modeling you use in
weighing acquisitions?
We dont have a single number
summarizing the return on invested capital (ROIC) of all of our acquisitions,
but we complete a detailed post-mortem for all our acquisitions once a year.
Our analysis includes reviewing each acquired operations contributions to our
financial results (including revenue and income before taxes), comparing the
actual results to the assumptions that we modeled before the acquisition,
updating the status of integration milestones, and evaluating the acquisitions
contribution to our growth strategies. We tend to be fairly conservative in the
assumptions we make prior to purchase, and most of our acquisitions have met or
exceeded our expectations.
We measure the potential value of an
acquisition by performing a discounted cash flow analysis of all of the cash
flows we expect from the acquisition over its lifetime, using our estimate of
the cost of capital for the business being acquired as the discount rate. We
dont have a single, predetermined hurdle rate that we apply in every
acquisition; instead, the cost of capital estimate varies depending on the
nature of the business were considering.
Some of the ways we can create value
with an acquisition include streamlining infrastructure (for example, by
leveraging the data processing or general and administrative functions) or by
leveraging sales opportunities with a new customer base. It often takes time
for these benefits to be fully realized, so we evaluate the ultimate success of
an acquisition over many years. We would consider an acquisition successful if
returns on the acquisition exceeded the cost of capital (as well as returns we
could earn through internal investment or other opportunities).
Long-Term Growth
Rate
15.
After posting enviable top-line growth for more than two decades (~29%
over the past five years), sales took an understandable (and fairly modest)
step back in a very tough 2009. Your fourth-quarter results were not heartening
in that organic growth is still saggingless than in 3Q but down year over year
in any event. How would you counsel a shareholder to think about a rational
long-run growth rate going forward-not in 2010 or any year, but over the next
five years or 10 years? What are the key tenets of the case for this business
returning to above-average growth over the next five or 10 years and what are
the main impediments to that transpiring?
Its tough to answer this question
because we dont give out financial forecasts, but we can make a few general
points. As weve said in the past, its more difficult to achieve high growth
rates from a larger base because of the law of large numbers (each dollar of
increased revenue translates into a lower percentage gain). So as our revenue
base expands, its reasonable to expect growth to taper off to some extent. At
the same time, its worth pointing out that our
9
company is still relatively small
compared with many others in the industry, and we see plenty of opportunities
for continued growth.
Some of the factors that make us
positive about our long-term growth prospects include:
·
Increasing
need by investors around the world for independent investment research
·
Long-term
demographic trends, including the Baby Boom generation entering retirement and
rising life expectancies around the world
·
Positive
long-term spending trends for economic and financial data
·
Pull demand
from large and loyal customer base, as our strong retail presence helps foster
new business from advisors and institutions
·
Our business
model helps support growth, as each dollar of incremental investment makes our
database, research, and software more valuable, which in turn gives us more
resources to reinvest in the business
·
Innovative,
proprietary research tools and expertise in research, technology, and design
give our product offerings an edge versus those of competitors
·
Potential
market size in most of our audience segments is significantly larger than our
current reach
A few potential impediments to
growth would be:
·
Competition
from larger companies with greater financial resources
·
Consolidation
among our clients
·
Global
economic and market conditions, including those that impact advertising sales
and consumer discretionary spending
·
Impact of
market movements on revenue from asset-based fees
We detail several other potential
impediments to our long-term growth in the Risk Factors section of our 10-K,
which is available at the link below:
http://sec.gov/Archives/edgar/data/1289419/000110465910010688/a09-35963_110k.htm
2010 Operating
Expense Structure
16.
You noted that in 2010 some of the cost-control efforts from last
year-hiring/salary freezes, 401(k) matching, etc.-will be rolled back at
least partially. These cuts were difficult and very disciplined. I think they
were quite shareholder-friendly. They helped you avoid a layoff, but also
rationalized your cost base in relation to your sales. Is the roll-back an
indication that you feel you cant hold the line much longer without affecting
morale and the business? Or is it an indication that you believe sales will
support a higher expense level?
Thanks for your comments. Our
rationale for restoring some of the compensation-related expenses we reduced in
2009 was really based on both of the factors you mentioned. We feel better
about the market environment heading into 2010, and we also realize that our
employees value the benefits that were reduced, so we wanted to restore them as
soon as we felt it was possible. We had to make many tough decisions in 2009
and appreciate the sacrifices our staff made to help us make it through a difficult
year while still investing in our future growth. Now that business conditions
seem more positive, were in a better position to reinstate benefits and other
compensation-related expenses.
2010 Business
Trends
17.
Can you give us any color on YTD trends in your business? Do you feel
you have more pricing power than in 2009? Does it seem that youre beyond the
nadir in customer
10
demand/confidence? Are Morningstar.com subscriptions still falling? Are
institutional customers budgets still shrinking? What is your retention rate
when contracts expire vs. past years? Is there a risk that (at least on the
margin) belt-tightening customers have realized they dont need all the
services they previously used or that they may have overpaid for them in the
past?
Its our policy not to comment on
intra-quarter trends, so we cant really answer these questions. Well be
commenting on first-quarter business performance when we issue our next
quarterly earnings release (on April 28).
18.
Is there any way you can help us frame what kind of operating margin
leverage you could gain from modest (~10% YY) revenue growth if that were to
occur?
Relative
to adding back salary increases, 401(k) matching and hiring, is there the
potential that operating margins could remain flat or step backwards for a
couple quarters if revenues continued to grow modestly from here?
I
know you dont give guidance, but any help you can offer on where margins could
be headed if I make the assumption that MORN could return to 10%-type revenue
growth rates for the next 4-6 quarters.
Particularly for the next couple of quarters, wondering what the risk
may be of operating margins taking a step backward as you ramp some of these
expenses back up.
As you mentioned, we dont provide
financial forecasts or guidance, but we can give you some information about the
costs that we reduced in 2009. Here are some of the major items we reduced as
part of our cost-savings efforts:
Category ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
% change
|
|
Bonus
|
|
$
|
21,019
|
|
$
|
49,912
|
|
$
|
(28,893
|
)
|
-57.9
|
%
|
401(k) match
|
|
0
|
|
6,668
|
|
(6,668
|
)
|
-100.0
|
%
|
Advertising and marketing
|
|
10,140
|
|
14,477
|
|
(4,337
|
)
|
-30.0
|
%
|
Travel, Telephone, Training, and Conferences
|
|
10,248
|
|
14,712
|
|
(4,464
|
)
|
-30.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
Regarding the cost reductions, and then the re-establishment of some of
those (401(k) match, bonuses), in which line items of your income
statement would they be included on?
We include compensation expense
(including bonus) as cost of goods sold, development, sales and marketing, or
general and administrative expense, depending on the area focused on by the
employees.
Mutual Fund Rating
Systems
20.
I noticed S&P has a new rating methodology that has a five star
rating metric, which is eerily similar to your own. Are they allowed to
use the same metric? How do you view this new system from S&P in
relation to your own?
There are a variety of mutual fund
rating systems in the industry, and other companies are free to develop their
own rating methodologies and icons (including the use of geometric shapes such
as stars). We believe the Morningstar Rating (the star rating) is so
well-known that its considered the industry standard in the United States, so
were not overly concerned about other rating methodologies.
11
Capital Allocation
21.
Given the FCF-generative nature of your business, has the board given
more thought to a dividend? Given how cash continued to build through the
downturn, it would seem that you could actually pay out a fairly significant
portion of earnings (30% for instance) while still investing in the business
and continuing to make acquisitions. If you did pay a dividend, would you favor
a variable approachi.e. a given percentage of income each yearor the more
traditional approach where youd set it at a low level and then grow the payout
roughly in line with earnings over time?
We have had some conversations with
our board of directors about potential uses of cash (including dividends and
share repurchases), but it would be premature to comment on what form a
dividend payment might take if we eventually began paying one. We expect to
continue this discussion with our board during 2010.
12
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.
|
MORNINGSTAR, INC.
|
|
|
|
|
|
|
Date: March 5, 2010
|
By:
|
/s/ Richard E. Robbins
|
|
Name:
|
Richard E. Robbins
|
|
Title:
|
General Counsel and Corporate
Secretary
|
13
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