CHICAGO, July 28 /PRNewswire-FirstCall/ -- Morningstar,
Inc. (Nasdaq: MORN), a leading provider of independent investment
research, today announced its second-quarter 2010 financial
results. The company reported consolidated revenue of $136.1 million in the second quarter of 2010, a
13.9% increase from $119.5 million in
the second quarter of 2009. Consolidated operating income was
$27.7 million, a decrease of 15.4%
compared with $32.7 million in the
same period a year ago. Net income was $18.0
million, or 36 cents per
diluted share, compared with $20.5
million, or 41 cents per
diluted share, in the second quarter of 2009.
Excluding acquisitions and the impact of foreign currency
translations, revenue increased 2.7%. Second-quarter results
included $12.7 million in revenue
from acquisitions as well as a $0.7
million benefit from foreign currency translations. Revenue
excluding acquisitions and foreign currency translations (organic
revenue) is a non-GAAP measure; the accompanying financial tables
contain a reconciliation to consolidated revenue.
In the first six months of 2010, revenue was $264.4 million, an increase of 11.9% compared
with $236.3 million in the same
period in 2009. Revenue for the first half of the year included
$22.4 million from acquisitions as
well as a favorable impact from foreign currency translations of
$4.4 million.
Consolidated operating income declined 12.9% to $58.6 million in the first six months of 2010,
compared with $67.3 million in the
first half of 2009. Net income was $38.2
million, or 76 cents per
diluted share, in the first half of 2010, compared with
$45.5 million, or 92 cents per diluted share, in the same period in
2009.
Joe Mansueto, chairman and chief
executive officer of Morningstar, said, "Organic revenue rose
slightly during the quarter, moving into positive growth territory
for the first time in nearly two years. We're encouraged by this
trend, particularly because our revenue improved despite the loss
of business from the Global Analyst Research Settlement, which
ended last summer. Our Investment Information and Investment
Management segments both had positive revenue growth. Internet
advertising sales for Morningstar.com drove our revenue increase
for the quarter, followed by Morningstar Direct, our web-based
institutional research platform, and Retirement Advice. Morningstar
Direct had its best quarter so far for new licenses globally."
He added, "During the second quarter we completed three key
acquisitions—Realpoint, a Nationally Recognized Statistical Ratings
Organization in the United States
that specializes in structured finance; OBSR, a premier fund
research, ratings, and investment consulting services firm in the
UK; and Aegis Equities Research, a leading provider of equity
research in Australia.
"On the negative side, our operating margin declined
significantly to 20.3% in the second quarter, from 27.3% in the
same period last year, mainly because we made a decision to
increase our employee bonus expense in 2010 after making
substantial reductions in 2009. The loss of revenue from GARS also
had a negative effect on margins. In addition, sales commission
expense was higher, we began phasing back in some benefits we
temporarily suspended last year, and we had some unusually high
medical claims during the quarter. We're continuing to keep a close
eye on discretionary spending, with the goal of improving
margins."
Key Business Drivers
Morningstar has two operating segments: Investment Information
and Investment Management. The Investment Information segment
includes all of the company's data, software, and research products
and services. These products and services are typically sold
through subscriptions or license agreements. The Investment
Management segment includes all of the company's asset management
operations, which earn more than half of their revenue from
asset-based fees.
Revenue: In the second quarter of 2010, revenue in the
Investment Information segment was $109.0
million, an increase of $11.3
million, or 11.5%, including $9.9
million from acquisitions. Higher revenue in the software
and data product lines more than offset the loss of $5.4 million in equity research revenue
associated with the Global Analyst Research Settlement, which ended
in July 2009. Revenue in the
Investment Management segment was $27.1
million, an increase of $5.3
million, including $2.8
million from acquisitions.
Revenue from international operations was $37.1 million in the second quarter of 2010, an
increase of 22.7% from the same period a year ago. International
revenue included $5.1 million from
acquisitions. Foreign currency translations had a favorable impact
of $0.7 million on international
revenue in the second quarter. Excluding acquisitions and foreign
currency translations, international revenue increased 3.5%.
For the first six months of 2010, international revenue
increased $14.0 million, or 23.7%,
including $9.2 million in revenue
from acquisitions. Foreign currency translations had a favorable
impact of $4.4 million. International
revenue excluding acquisitions and foreign currency translations is
a non-GAAP measure; the accompanying financial tables contain a
reconciliation to international revenue.
Operating Income: Consolidated operating income was
$27.7 million in the second quarter
of 2010, a 15.4% decrease from the same period in 2009. Operating
expense rose $21.6 million, or 24.8%.
Incremental operating expense from businesses acquired since the
first quarter of 2009 represented approximately half of the
increase. The company completed six acquisitions in the last nine
months of 2009 and four in the first six months of 2010. Because of
the timing of these acquisitions, the second-quarter and
year-to-date results include operating expense that did not exist
in the comparable periods in 2009.
Higher incentive compensation and employee benefit costs
represented approximately half of the overall operating expense
increase. Bonus expense rose $5.4
million compared with the prior-year period. In the second
quarter of 2009, the company reduced its bonus expense as part of
its efforts to better align its cost structure with revenue in the
challenging business environment. In 2010, the company partially
restored the bonus expense. Acquisitions also contributed to the
increase in bonus expense in the second quarter, but to a lesser
extent. Sales commissions were $2.5
million higher, partly reflecting improved sales activity.
The company also recognized more expense in the quarter because of
a change in its sales commission structure. Under its new
commission plan, the company now records the entire expense in the
quarter versus over the term of the client contract. The company's
healthcare benefit costs were $1.4
million higher in the second quarter of 2010 because of
unusually high medical claims. In addition, in 2010, Morningstar
began phasing in some of the benefits it temporarily suspended in
2009. The company partially reinstated matching contributions to
its 401(k) plan in the United
States, representing approximately $0.8 million of expense in the quarter.
Higher travel, professional, and legal fees, partly related to
acquisitions, also contributed to the operating expense increase in
the second quarter of 2010. Operating expense in the quarter also
includes a $0.5 million expense
related to vacant office space from the equity research and data
business acquired from C.P.M.S. Computerized Portfolio Management
Services Inc. in Canada.
In the second quarter of 2009, Morningstar recorded a
$3.5 million operating expense for
estimated penalties related to the timing of deposits for taxes
withheld on stock option exercises from 2006 through 2009. This
expense did not recur in 2010.
Morningstar's operating margin was 20.3% in the second quarter
of 2010, down from 27.3% in the same period in 2009. In the first
six months of 2010, operating margin was 22.2%, compared with 28.5%
in the first six months of 2009. The margin decline mainly reflects
higher bonus, sales commissions, and employee benefits as a
percentage of revenue. In the second quarter of 2009, the deposit
penalty decreased the margin by approximately 3 percentage
points.
Morningstar had approximately 2,965 employees worldwide as of
June 30, 2010, compared with 2,510 as
of June 30, 2009. Headcount grew year
over year mainly because of acquisitions and continued hiring in
the company's development centers in China and India. In July
2010, Morningstar hired about 45 employees in the United States as part of the Morningstar
Development Program, a two-year rotational training program for
entry-level college graduates. Also in July, the company made some
compensation increases after keeping salary levels flat for nearly
all employees in 2009.
Effective Tax Rate: Morningstar's effective tax rate in
the second quarter of 2010 was 36.2%, a decrease of 4.4 percentage
points compared with 40.6% in the prior-year period. The effective
tax rate in the second quarter of 2009 included 3.7 percentage
points related to the $3.5 million
expense associated with the timing of deposits of taxes withheld on
stock option exercises. Although this expense reduced pre-tax
income, it was not tax deductible, resulting in an increase in the
effective tax rate in the second quarter of 2009. The company's
effective tax rate for the first half of 2010 increased slightly to
35.7% from 35.2% in the prior-year period.
Free Cash Flow: Morningstar generated free cash flow of
$28.4 million in the second quarter
of 2010, a decrease of $9.0 million
compared with free cash flow of $37.4
million in the second quarter of 2009. Second-quarter 2010
free cash flow reflects cash provided by operating activities of
$30.6 million and approximately
$2.2 million of capital expenditures.
Cash provided by operating activities decreased $9.0 million in the quarter, reflecting a
$4.3 million increase in cash paid
for income taxes and a reduction in cash flow generated from
accounts receivable and other operating assets and liabilities.
These items, which reduced cash flow from operations, were
partially offset by an increase in net income adjusted for non-cash
items. Capital expenditures were $2.2
million in the second quarter of 2010, primarily for
computer hardware and software and, to a lesser extent, leasehold
improvements.
In the first six months of 2010, Morningstar generated free cash
flow of $41.2 million, reflecting
cash provided by operating activities of $45.0 million and capital expenditures of
$3.8 million. Cash provided by
operating activities in the first six months of 2010 increased
$13.7 million, reflecting a
$37.5 million decrease in bonuses
paid in the first quarter of 2010. The cash flow impact of a lower
bonus payment was partially offset by an increase of $12.2 million in cash paid for income taxes in
the first half of the year. Also, the company made a payment of
$4.9 million to one former and two
current executives related to adjusting the tax treatment of
certain stock options originally considered incentive stock
options. The company recorded the related operating expense in the
fourth quarter of 2009.
Free cash flow is a non-GAAP measure; the accompanying financial
tables contain a reconciliation to cash provided by operating
activities. Morningstar defines free cash flow as cash provided by
or used for operating activities less capital expenditures.
As of June 30, 2010, Morningstar
had cash, cash equivalents, and investments of $320.4 million, compared with $342.6 million as of Dec.
31, 2009. The company used approximately $22.5 million of cash and investments to complete
two acquisitions in July 2010. It
expects to make capital expenditures of approximately $14 million to $16 million in the second half of
2010, including spending for its new office space in China.
Business Segment Performance
Investment Information Segment: The largest products and
services in this segment based on revenue are Morningstar® Licensed
Data; Morningstar® Advisor Workstation(SM); Morningstar.com®,
including Premium Memberships and Internet advertising sales; and
Morningstar Direct(SM).
- Revenue was $109.0 million in the
second quarter of 2010, an 11.5% increase from $97.7 million in the second quarter of 2009.
- Acquisitions contributed revenue of $9.9
million in the second quarter of 2010.
- The majority of the revenue increase came from Internet
advertising sales on Morningstar.com; Morningstar Direct; and
Equity Research, including revenue from two former Global Analyst
Research Settlement clients. Licenses for Morningstar Direct rose
29.6% to 4,109, with particularly strong growth outside
the United States. Premium
Membership subscriptions for Morningstar.com fell 10.9%. Principia
subscriptions fell 9.5% to 34,715, and Advisor Workstation licenses
rose slightly to 154,226.
- Revenue in the second quarter of 2009 included $5.4 million related to the Global Analyst
Research Settlement, which ended in July
2009.
- Operating income was $30.5
million in the second quarter of 2010, compared with
$37.2 million in the same period in
2009. Operating expense in this segment increased $18.0 million, or 29.7%, partly because of
acquisitions. Higher bonuses, sales commissions, and employee
benefits expense also contributed to the increase.
- Operating margin was 28.0% in the second quarter of 2010 versus
38.1% in the prior-year period. The decrease mainly reflects higher
compensation, bonus, and commission expense as a percentage of
revenue.
Investment Management Segment: The largest products in
this segment based on revenue are Investment Consulting; Retirement
Advice, including Advice by Ibbotson® and Morningstar® Retirement
Manager(SM); and Morningstar® Managed Portfolios(SM).
- Revenue was $27.1 million in the
second quarter of 2010, a 24.2% increase from $21.8 million in the same period in 2009.
- Acquisitions contributed revenue of $2.8
million in the second quarter.
- Retirement Advice was the primary driver of the segment revenue
increase. Morningstar Managed Portfolios and Investment Consulting
also contributed to the increase, but to a lesser extent. As
previously disclosed, Investment Consulting results for the second
quarter of 2009 included revenue related to a contract that was not
renewed in May 2009.
- Total assets under advisement for Investment Consulting rose
approximately 63% to $91.2 billion,
from $56.1 billion as of June 30, 2009. About $31.0
billion of the assets reflects a new fund-of-funds program
that began in May 2010 for an
existing Morningstar Associates client. Previously, Morningstar
created model portfolios for the same client, so the increase in
assets represents incremental growth for an existing revenue
stream. Assets under advisement for Ibbotson Associates rose 6.2%.
Assets under management for Retirement Advice were $16.1 billion as of June
30, 2010, versus $12.5 billion
as of June 30, 2009. Assets under
management for Morningstar Managed Portfolios were $2.2 billion as of June
30, 2010, compared with $1.7
billion as of June 30,
2009.
- Operating income was $14.3
million in the second quarter of 2010, an increase of 9.6%
compared with the second quarter of 2009. Operating expense in the
segment was $12.7 million, an
increase of $4.0 million, or 46.0%,
reflecting incremental expense from acquisitions as well as higher
bonus and sales commission expense.
- Operating margin was 52.9% in the second quarter of 2010 versus
59.9% in the prior-year period. The margin decline mainly reflects
higher bonus and sales commission expense as a percentage of
revenue. Acquisitions also contributed to the margin decline, but
to a lesser extent.
Intangible Amortization and Corporate Depreciation Expense:
Morningstar does not allocate expense for intangible
amortization or corporate depreciation to its operating segments.
Expense for these categories was $7.6
million in the second quarter and $14.9 million in the first half of 2010, a slight
increase compared with the same periods in 2009. The increase in
both periods reflects additional amortization expense for
acquisitions that occurred since the first quarter of 2009.
Corporate Unallocated: This category includes costs
related to corporate functions, including general management,
information technology used to support corporate systems, legal,
finance, human resources, marketing, and corporate communications.
Costs in this category were $9.6
million, a decrease of $0.5
million, or 4.8%.
In the second quarter of 2009, this category included a
$3.5 million operating expense for
estimated penalties related to the timing of deposits for taxes
withheld on stock option exercises from 2006 through 2009. This
expense did not recur in 2010. This expense decline was partially
offset by higher bonus and other compensation-related expense,
professional and legal fees, and a $0.5
million expense for vacant office space related to the
C.P.M.S. acquisition in the second quarter of 2010.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent
investment research in North
America, Europe,
Australia, and Asia. The company offers an extensive line of
Internet, software, and print-based products and services for
individuals, financial advisors, and institutions. Morningstar
provides data on approximately 360,000 investment offerings,
including stocks, mutual funds, and similar vehicles, along with
real-time global market data on more than 4 million equities,
indexes, futures, options, commodities, and precious metals, in
addition to foreign exchange and Treasury markets. The company has
operations in 21 countries.
Caution Concerning Forward-Looking Statements
This press release 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 discussed not to occur or to differ significantly
from what we expected. 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 filings with the Securities and Exchange Commission,
including 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.
Non-GAAP Financial Measures
To supplement Morningstar's consolidated financial statements
presented in accordance with U.S. Generally Accepted Accounting
Principles (GAAP), Morningstar uses the following measures
considered as non-GAAP by the Securities and Exchange Commission:
free cash flow, consolidated revenue excluding acquisitions
and foreign currency translations (organic revenue), and
international revenue excluding acquisitions and foreign currency
translations. These non-GAAP measures may not be comparable to
similarly titled measures reported by other companies.
Morningstar presents free cash flow solely as supplemental
disclosure to help investors better understand how much cash is
available after Morningstar spends money to operate its business.
Morningstar uses free cash flow to evaluate its business. Free cash
flow should not be considered an alternative to any measure
required to be reported under GAAP (such as cash provided by (used
for) operating, investing, and financing activities). For more
information on free cash flow, please see the reconciliation from
cash provided by operating activities to free cash flow included in
the accompanying financial tables. Morningstar presents
consolidated revenue excluding acquisitions and foreign currency
translations (organic revenue) and international revenue excluding
acquisitions and foreign currency translations because the company
believes these non-GAAP measures help investors better compare
period-to-period results. For more information, please see the
reconciliation provided in the accompanying financial tables.
All dollar and percentage comparisons, which are often
accompanied by words such as "increase," "decrease," "grew,"
"declined,"or "was similar" refer to a comparison with the same
period in the previous year unless otherwise stated.
©2010 Morningstar, Inc. All rights reserved.
Contacts:
Media: Margaret Kirch Cohen,
312-696-6383 or margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com or
by fax to 312-696-6009.
MORN-E
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
(in thousands, except per share
amounts)
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$136,091
|
|
$ 119,533
|
|
13.9%
|
|
$ 264,381
|
|
$ 236,265
|
|
11.9%
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
39,738
|
|
30,694
|
|
29.5%
|
|
74,054
|
|
60,946
|
|
21.5%
|
|
|
Development
|
|
11,899
|
|
9,438
|
|
26.1%
|
|
22,788
|
|
18,738
|
|
21.6%
|
|
|
Sales and marketing
|
|
24,435
|
|
18,010
|
|
35.7%
|
|
46,996
|
|
35,546
|
|
32.2%
|
|
|
General and
administrative
|
|
23,106
|
|
19,853
|
|
16.4%
|
|
43,749
|
|
37,006
|
|
18.2%
|
|
|
Depreciation and
amortization
|
|
9,246
|
|
8,850
|
|
4.5%
|
|
18,185
|
|
16,716
|
|
8.8%
|
|
|
Total operating
expense
|
|
108,424
|
|
86,845
|
|
24.8%
|
|
205,772
|
|
168,952
|
|
21.8%
|
|
Operating income
|
|
27,667
|
|
32,688
|
|
(15.4%)
|
|
58,609
|
|
67,313
|
|
(12.9%)
|
|
Operating margin
|
|
20.3%
|
|
27.3%
|
|
(7.0)pp
|
|
22.2%
|
|
28.5%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
593
|
|
764
|
|
(22.4%)
|
|
1,180
|
|
1,742
|
|
(32.3%)
|
|
|
Other income (expense),
net
|
|
(572)
|
|
1,208
|
|
NMF
|
|
(1,338)
|
|
764
|
|
NMF
|
|
|
Non-operating income (expense),
net
|
|
21
|
|
1,972
|
|
(98.9%)
|
|
(158)
|
|
2,506
|
|
NMF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
27,688
|
|
34,660
|
|
(20.1%)
|
|
58,451
|
|
69,819
|
|
(16.3%)
|
|
Income tax expense
|
|
10,225
|
|
14,024
|
|
(27.1%)
|
|
21,220
|
|
24,692
|
|
(14.1%)
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
454
|
|
(21)
|
|
NMF
|
|
843
|
|
361
|
|
133.5%
|
|
Consolidated net
income
|
|
17,917
|
|
20,615
|
|
(13.1%)
|
|
38,074
|
|
45,488
|
|
(16.3%)
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
85
|
|
(71)
|
|
NMF
|
|
116
|
|
18
|
|
544.4%
|
|
Net income attributable to
Morningstar, Inc.
|
|
$ 18,002
|
|
$ 20,544
|
|
(12.4%)
|
|
$ 38,190
|
|
$
45,506
|
|
(16.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
0.37
|
|
$
0.43
|
|
(14.0%)
|
|
$
0.78
|
|
$
0.95
|
|
(17.9%)
|
|
|
Diluted
|
|
$
0.36
|
|
$
0.41
|
|
(12.2%)
|
|
$
0.76
|
|
$
0.92
|
|
(17.4%)
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
49,234
|
|
47,941
|
|
|
|
49,032
|
|
47,661
|
|
|
|
|
Diluted
|
|
50,533
|
|
49,631
|
|
|
|
50,426
|
|
49,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
|
Six months ended June
30
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
2010
|
|
2009
|
|
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
907
|
|
$
715
|
|
|
|
$ 1,622
|
|
$
1,264
|
|
|
|
|
Development
|
|
449
|
|
413
|
|
|
|
842
|
|
767
|
|
|
|
|
Sales and marketing
|
|
486
|
|
422
|
|
|
|
889
|
|
778
|
|
|
|
|
General and
administrative
|
|
1,813
|
|
1,518
|
|
|
|
3,239
|
|
2,984
|
|
|
|
|
Total stock-based
compensation expense
|
|
$ 3,655
|
|
$ 3,068
|
|
|
|
$ 6,592
|
|
$
5,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMF — Not meaningful, pp —
percentage points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Operating Expense as a
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
|
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
100.0%
|
|
100.0%
|
|
-
|
|
100.0%
|
|
100.0%
|
|
-
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
29.2%
|
|
25.7%
|
|
3.5pp
|
|
28.0%
|
|
25.8%
|
|
2.2pp
|
|
|
Development
|
|
8.7%
|
|
7.9%
|
|
0.8pp
|
|
8.6%
|
|
7.9%
|
|
0.7pp
|
|
|
Sales and marketing
|
|
18.0%
|
|
15.1%
|
|
2.9pp
|
|
17.8%
|
|
15.0%
|
|
2.8pp
|
|
|
General and
administrative
|
|
17.0%
|
|
16.6%
|
|
0.4pp
|
|
16.5%
|
|
15.7%
|
|
0.8pp
|
|
|
Depreciation and
amortization
|
|
6.8%
|
|
7.4%
|
|
(0.6)pp
|
|
6.9%
|
|
7.1%
|
|
(0.2)pp
|
|
|
Total operating
expense(2)
|
|
79.7%
|
|
72.7%
|
|
7.0pp
|
|
77.8%
|
|
71.5%
|
|
6.3pp
|
|
Operating margin
|
|
20.3%
|
|
27.3%
|
|
(7.0)pp
|
|
22.2%
|
|
28.5%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
|
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
0.7%
|
|
0.6%
|
|
0.1pp
|
|
0.6%
|
|
0.5%
|
|
0.1pp
|
|
|
Development
|
|
0.3%
|
|
0.3%
|
|
-
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
Sales and marketing
|
|
0.4%
|
|
0.4%
|
|
-
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
General and
administrative
|
|
1.3%
|
|
1.3%
|
|
-
|
|
1.2%
|
|
1.3%
|
|
(0.1)pp
|
|
|
Total stock-based
compensation expense(2)
|
|
2.7%
|
|
2.6%
|
|
0.1pp
|
|
2.5%
|
|
2.5%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Sum of percentages may not
equal total because of rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$
17,917
|
|
$
20,615
|
|
$
38,074
|
|
$
45,488
|
|
Adjustments to reconcile
consolidated net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
9,246
|
|
8,850
|
|
18,185
|
|
16,716
|
|
|
Deferred income tax (benefit)
expense
|
|
275
|
|
355
|
|
(1,012)
|
|
(956)
|
|
|
Stock-based compensation
expense
|
|
3,655
|
|
3,068
|
|
6,592
|
|
5,793
|
|
|
Equity in net (income) loss of
unconsolidated entities
|
|
(454)
|
|
21
|
|
(843)
|
|
(361)
|
|
|
Excess tax benefits from stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
(1,157)
|
|
(4,194)
|
|
(4,205)
|
|
(4,544)
|
|
|
Other, net
|
|
788
|
|
(1,197)
|
|
1,742
|
|
(565)
|
|
Changes in operating assets and
liabilities, net of
|
|
|
|
|
|
|
|
|
|
effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,748)
|
|
9,143
|
|
(6,615)
|
|
9,312
|
|
|
Other assets
|
|
(31)
|
|
(10)
|
|
(511)
|
|
341
|
|
|
Accounts payable and accrued
liabilities
|
|
1,685
|
|
(1,901)
|
|
2,859
|
|
(6,012)
|
|
|
Accrued compensation
|
|
11,362
|
|
9,608
|
|
(11,154)
|
|
(45,431)
|
|
|
Deferred revenue
|
|
(3,253)
|
|
(3,254)
|
|
7,177
|
|
806
|
|
|
Income taxes -
current
|
|
(7,936)
|
|
(986)
|
|
(4,255)
|
|
10,396
|
|
|
Deferred rent
|
|
312
|
|
(130)
|
|
(80)
|
|
(286)
|
|
|
Other liabilities
|
|
(81)
|
|
(399)
|
|
(924)
|
|
570
|
|
|
Cash provided by operating activities
|
|
30,580
|
|
39,589
|
|
45,030
|
|
31,267
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Purchases of
investments
|
|
(34,564)
|
|
(27,870)
|
|
(85,528)
|
|
(50,273)
|
|
Proceeds from sale of
investments
|
|
42,447
|
|
21,376
|
|
130,381
|
|
38,128
|
|
Capital expenditures
|
|
(2,189)
|
|
(2,178)
|
|
(3,839)
|
|
(6,768)
|
|
Acquisitions, net of cash
acquired
|
|
(66,717)
|
|
(18,511)
|
|
(67,455)
|
|
(18,571)
|
|
Other, net
|
|
889
|
|
531
|
|
889
|
|
629
|
|
|
Cash
used for investing activities
|
|
(60,134)
|
|
(26,652)
|
|
(25,552)
|
|
(36,855)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option
exercises
|
|
156
|
|
8,721
|
|
3,650
|
|
11,653
|
|
Excess tax benefits from stock
option exercises
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
1,157
|
|
4,194
|
|
4,205
|
|
4,544
|
|
Other, net
|
|
(110)
|
|
(2)
|
|
205
|
|
(178)
|
|
|
Cash
provided by financing activities
|
|
1,203
|
|
12,913
|
|
8,060
|
|
16,019
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
(2,625)
|
|
4,537
|
|
(3,657)
|
|
2,777
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
(30,976)
|
|
30,387
|
|
23,881
|
|
13,208
|
|
Cash and cash
equivalents—Beginning of period
|
|
185,353
|
|
156,712
|
|
130,496
|
|
173,891
|
|
Cash and cash equivalents—End of
period
|
|
$
154,377
|
|
$
187,099
|
|
$
154,377
|
|
$
187,099
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from cash
provided by operating activities to free cash flow (a non-GAAP
measure):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
30,580
|
|
$
39,589
|
|
$
45,030
|
|
$
31,267
|
|
Less: Capital
expenditures
|
|
(2,189)
|
|
(2,178)
|
|
(3,839)
|
|
(6,768)
|
|
Free cash flow
|
|
$
28,391
|
|
$
37,411
|
|
$
41,191
|
|
$
24,499
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
December 31
|
|
($000)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
154,377
|
|
$
130,496
|
|
|
Investments
|
|
165,973
|
|
212,057
|
|
|
Accounts receivable,
net
|
|
90,127
|
|
82,330
|
|
|
Deferred tax asset,
net
|
|
1,464
|
|
1,109
|
|
|
Income tax receivable,
net
|
|
13,114
|
|
5,541
|
|
|
Other
|
|
12,550
|
|
12,564
|
|
|
Total current assets
|
|
437,605
|
|
444,097
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
56,453
|
|
59,828
|
|
Investments in unconsolidated
entities
|
|
24,099
|
|
24,079
|
|
Goodwill
|
|
281,813
|
|
249,992
|
|
Intangible assets,
net
|
|
156,825
|
|
135,488
|
|
Other assets
|
|
5,731
|
|
6,099
|
|
|
Total assets
|
|
$
962,526
|
|
$
919,583
|
|
|
|
|
|
|
|
|
Liabilities and
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
33,845
|
|
$
29,901
|
|
|
Accrued compensation
|
|
37,744
|
|
48,902
|
|
|
Deferred revenue
|
|
140,802
|
|
127,114
|
|
|
Other
|
|
950
|
|
962
|
|
|
Total current liabilities
|
|
213,341
|
|
206,879
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
4,752
|
|
4,739
|
|
Deferred tax liability,
net
|
|
3,418
|
|
4,678
|
|
Other long-term
liabilities
|
|
24,949
|
|
26,413
|
|
|
Total liabilities
|
|
246,460
|
|
242,709
|
|
|
Total equity
|
|
716,066
|
|
676,874
|
|
|
Total liabilities and
equity
|
|
$
962,526
|
|
$
919,583
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Segment
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
|
Six months ended June
30
|
|
|
|
($000)
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$109,021
|
|
$ 97,739
|
|
11.5%
|
|
$ 212,545
|
|
$ 193,979
|
|
9.6%
|
|
|
Investment Management
|
|
27,070
|
|
21,794
|
|
24.2%
|
|
51,836
|
|
42,286
|
|
22.6%
|
|
|
Consolidated revenue
|
|
$136,091
|
|
$ 119,533
|
|
13.9%
|
|
$ 264,381
|
|
$ 236,265
|
|
11.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S.
|
|
$ 98,986
|
|
$ 89,286
|
|
10.9%
|
|
$ 191,596
|
|
$ 177,434
|
|
8.0%
|
|
|
Revenue—International
|
|
$ 37,105
|
|
$ 30,247
|
|
22.7%
|
|
$ 72,785
|
|
$ 58,831
|
|
23.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S. (percentage of
consolidated revenue)
|
72.7%
|
|
74.7%
|
|
(2.0)pp
|
|
72.5%
|
|
75.1%
|
|
(2.6)pp
|
|
|
Revenue—International
(percentage of consolidated revenue)
|
27.3%
|
|
25.3%
|
|
2.0pp
|
|
27.5%
|
|
24.9%
|
|
2.6pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$ 30,542
|
|
$ 37,242
|
|
(18.0%)
|
|
$ 63,288
|
|
$ 74,079
|
|
(14.6%)
|
|
|
Investment Management
|
|
14,321
|
|
13,062
|
|
9.6%
|
|
27,614
|
|
24,889
|
|
10.9%
|
|
|
Intangible amortization and
corporate depreciation expense
|
(7,620)
|
|
(7,560)
|
|
0.8%
|
|
(14,866)
|
|
(14,335)
|
|
3.7%
|
|
|
Corporate unallocated
|
|
(9,576)
|
|
(10,056)
|
|
(4.8%)
|
|
(17,427)
|
|
(17,320)
|
|
0.6%
|
|
|
Consolidated operating
income
|
|
$ 27,667
|
|
$ 32,688
|
|
(15.4%)
|
|
$ 58,609
|
|
$ 67,313
|
|
(12.9%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
28.0%
|
|
38.1%
|
|
(10.1)pp
|
|
29.8%
|
|
38.2%
|
|
(8.4)pp
|
|
|
Investment Management
|
|
52.9%
|
|
59.9%
|
|
(7.0)pp
|
|
53.3%
|
|
58.9%
|
|
(5.6)pp
|
|
|
Consolidated operating
margin
|
|
20.3%
|
|
27.3%
|
|
(7.0)pp
|
|
22.2%
|
|
28.5%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation expense allocated to each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30
|
|
|
|
|
|
|
2010
|
|
2009
|
|
% change
|
|
Our employees
|
|
|
|
|
|
|
|
|
|
Worldwide headcount
(approximate)
|
|
|
|
2,965
|
|
2,510
|
|
18.1%
|
|
Number of worldwide equity and
fixed-income analysts
|
|
|
|
112
|
|
119
|
|
(5.9%)
|
|
Number of worldwide fund
analysts
|
|
|
|
94
|
|
81
|
|
16.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Our business
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
|
|
|
|
|
|
|
|
Morningstar.com Premium
subscriptions
|
|
|
|
143,392
|
|
160,936
|
|
(10.9%)
|
|
Registered users for
Morningstar.com (U.S.)
|
|
|
|
6,175,874
|
|
6,057,941
|
|
1.9%
|
|
U.S. Advisor Workstation
licenses
|
|
|
|
154,226
|
|
152,971
|
|
0.8%
|
|
Principia
subscriptions
|
|
|
|
34,715
|
|
38,378
|
|
(9.5%)
|
|
Morningstar Direct
licenses
|
|
|
|
4,109
|
|
3,171
|
|
29.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
Assets under management for
Morningstar Managed Portfolios
|
|
|
|
$2.2 bil
|
|
$1.7 bil
|
|
29.4%
|
|
Assets under management for
Intech(1)
|
|
|
|
$3.1 bil
|
|
$2.7 bil
|
|
14.8%
|
|
Assets under management for
managed retirement accounts
|
|
|
|
$16.1 bil
|
|
$12.5 bil
|
|
28.8%
|
|
|
Morningstar
Associates
|
|
|
|
$1.7 bil
|
|
$1.2 bil
|
|
41.7%
|
|
|
Ibbotson Associates
|
|
|
|
$14.4 bil
|
|
$11.3 bil
|
|
27.4%
|
|
Assets under advisement for
Investment Consulting
|
|
|
|
$91.2 bil
|
|
$56.1 bil
|
|
62.6%
|
|
|
Morningstar
Associates
|
|
|
|
$50.2 bil
|
|
$17.5 bil
|
|
186.9%
|
|
|
Ibbotson Associates
|
|
|
|
$41.0 bil
|
|
$38.6 bil
|
|
6.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Intech (Australia) was
acquired on June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Effective tax
rate
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
$
27,688
|
|
$
34,660
|
|
$
58,451
|
|
$
69,819
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
454
|
|
(21)
|
|
843
|
|
361
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
85
|
|
(71)
|
|
116
|
|
18
|
|
|
Total
|
|
$
28,227
|
|
$
34,568
|
|
$
59,410
|
|
$
70,198
|
|
Income tax expense
|
|
$
10,225
|
|
$
14,024
|
|
$
21,220
|
|
$
24,692
|
|
Effective tax rate
|
|
36.2%
|
|
40.6%
|
|
35.7%
|
|
35.2%
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Reconciliations of Non-GAAP
Measures with the Nearest Comparable GAAP Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from consolidated
revenue to revenue excluding acquisitions and foreign currency
translations (organic revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
|
|
Six months ended June
30
|
|
|
|
($000)
|
|
2010
|
|
2009
|
|
% change
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
136,091
|
|
$ 119,533
|
|
13.9%
|
|
$ 264,381
|
|
$
236,265
|
|
11.9%
|
|
Less: acquisitions
|
|
(12,718)
|
|
-
|
|
NMF
|
|
(22,422)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
(671)
|
|
-
|
|
NMF
|
|
(4,402)
|
|
-
|
|
NMF
|
|
Revenue excluding acquisitions
and foreign currency translations
|
|
$
122,702
|
|
$ 119,533
|
|
2.7%
|
|
$ 237,557
|
|
$
236,265
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
|
Six months ended June
30
|
|
|
|
($000)
|
|
2010
|
|
2009
|
|
% change
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International revenue
|
|
$
37,105
|
|
$
30,247
|
|
22.7%
|
|
$
72,785
|
|
$
58,831
|
|
23.7%
|
|
Less: acquisitions
|
|
(5,120)
|
|
-
|
|
NMF
|
|
(9,221)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
(671)
|
|
-
|
|
NMF
|
|
(4,402)
|
|
-
|
|
NMF
|
|
International revenue excluding
acquisitions and foreign currency translations
|
|
$
31,314
|
|
$
30,247
|
|
3.5%
|
|
$
59,162
|
|
$
58,831
|
|
0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar includes an acquired
operation as part of revenue from acquisitions for 12 months after
we complete the acquisition. After
that, we include it as part of
our organic revenue. The table below shows the period in which we
included each acquired operation in
revenue from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
Date of acquisition
|
|
2010 revenue from
acquisitions
|
|
Global financial filings
database business of
Global Reports LLC
|
April 20, 2009
|
|
January 1 through April 19,
2010
|
|
Equity research and data
business of C.P.M.S. Computerized Portfolio Management Services
Inc.
|
|
May 1, 2009
|
|
January 1 through April 30,
2010
|
|
Andex Associates,
Inc.
|
|
May 1, 2009
|
|
January 1 through April 30,
2010
|
|
Intech Pty Ltd
|
|
June 30, 2009
|
|
January 1 through June 30,
2010
|
|
Canadian Investment Awards and
Gala
|
|
December 17, 2009
|
|
January 1 through June 30,
2010
|
|
Logical Information Machines,
Inc.
|
|
December 31, 2009
|
|
January 1 through June 30,
2010
|
|
Footnoted business of Financial
Fineprint Inc.
|
|
February 1, 2010
|
|
February 1 through June 30,
2010
|
|
Aegis Equities
Research
|
|
April 1, 2010
|
|
April 1 through June 30,
2010
|
|
Old Broad Street Research
Ltd.
|
|
April 12, 2010
|
|
April 12 through June 30,
2010
|
|
Realpoint, LLC
|
|
May 3, 2010
|
|
May 3 through June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
SOURCE Morningstar, Inc.