CHICAGO, Oct. 27 /PRNewswire-FirstCall/ -- Morningstar,
Inc. (Nasdaq: MORN), a leading provider of independent investment
research, today announced its third-quarter 2010 financial results.
The company reported consolidated revenue of $139.8 million in the third quarter of 2010, a
16.4% increase from $120.1 million in
the third quarter of 2009. Consolidated operating income was
$30.2 million in the third quarter of
2010, a decrease of 10.5% compared with $33.7 million in the same period a year ago. Net
income was $20.8 million, or
41 cents per diluted share, compared
with $22.5 million, or 45 cents per diluted share, in the third quarter
of 2009.
Excluding acquisitions and the impact of foreign currency
translations, revenue increased 6.6%. Third-quarter results
included $12.0 million in revenue
from acquisitions. Foreign currency translations had a slightly
unfavorable effect. 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 nine months of 2010, revenue was $404.2 million, an increase of 13.4% compared
with $356.4 million in the same
period in 2009. Revenue for the first nine months of the year
included $34.4 million from
acquisitions and $4.2 million from
foreign currency translations. Excluding acquisitions and foreign
currency translations, revenue rose 2.6%. Consolidated operating
income declined 12.1% to $88.8
million in the first nine months of 2010, compared with
$101.0 million in the first nine
months of 2009. Net income was $59.0
million, or $1.16 per diluted
share, in the first nine months of 2010, compared with $68.0 million, or $1.37 per diluted share, in the same period in
2009.
Joe Mansueto, chairman and chief
executive officer of Morningstar, said, "Organic revenue growth
continued to improve in the quarter, with positive trends across
most product lines. Licensed Data, Morningstar Direct, and
advertising sales on Morningstar.com were the main contributors to
organic revenue growth. Our Investment Management business also had
a good quarter, resulting from strong market performance as well as
new business wins."
"We've had a positive market response to several of our recent
initiatives. For example, building our thought leadership in ETF
research is a key area of focus for us, and we've already been able
to monetize our expertise in this growing area. Our new ETF Centers
in the United States, France, Germany, and Switzerland have been popular with online
advertisers, and we just launched research in Canada and Australia. During the quarter,
TD Ameritrade launched a new ETF Market Center that includes a
list of ETFs evaluated and selected by our investment consulting
team at Morningstar Associates. We also entered into our first
credit research agreement with a major financial services firm to
provide credit ratings and research to its 18,000 financial
advisors. We've continued to invest in hiring people to support our
growth initiatives and put resources behind our product
development, research, design, and technology teams."
"I'm also pleased to announce that our board of directors has
authorized a regular quarterly cash dividend of 5 cents per share beginning in January and a
$100 million share repurchase
program. We have a strong balance sheet and we've consistently
generated healthy cash flow, even after using cash for
acquisitions. Our board has determined that it makes sense to
return some of our cash to shareholders through the new dividend
and share repurchase programs," Mansueto added.
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 third quarter of 2010, revenue in the Investment
Information segment was $112.1
million, an increase of $16.6
million, or 17.4%, including $10.7
million from acquisitions. Higher revenue in the software
and data product lines more than offset the loss of $1.5 million in equity research revenue
associated with the Global Analyst Research Settlement, which ended
in July 2009. Revenue in the
Investment Management segment was $27.8
million, an increase of $3.1
million, including $1.3
million from acquisitions.
Revenue from international operations was $39.9 million in the third quarter of 2010, an
increase of 15.5% from the same period a year ago. International
revenue included $3.5 million from
acquisitions. Foreign currency translations had a slightly
unfavorable effect. Excluding acquisitions and foreign currency
translations, international revenue increased 6.0%.
For the first nine months of 2010, international revenue
increased $19.3 million, or 20.7%,
including $12.7 million from
acquisitions and $4.2 million from
foreign currency translations. Excluding acquisitions and foreign
currency translations, international revenue increased 2.6%.
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
$30.2 million in the third quarter of
2010, a 10.5% decrease from the same period in 2009. Operating
expense rose $23.3 million, or 26.9%.
Incremental operating expense related to businesses acquired in
2009 and 2010 represented approximately half of the increase. The
company completed six acquisitions in 2009 and six in the first
nine months of 2010. Because of the timing of these acquisitions,
the third-quarter and year-to-date results include operating
expense that did not exist in the comparable periods in 2009.
Higher salary expense represented approximately 40% of the total
operating expense increase, reflecting higher headcount from
acquisitions and filling open positions, as well as salary
increases that were effective in July
2010 following generally flat salary levels in 2009.
Incentive compensation and employee benefit costs represented
approximately one-third of the overall operating expense increase.
Bonus expense rose $3.6 million
compared with the prior-year period. In 2010, the company partially
restored the bonus expense after reducing it in 2009. Acquisitions
also contributed to the increase in bonus expense in the third
quarter, but to a lesser extent. Sales commissions were
$1.4 million higher, reflecting
improved sales activity and a change in the company's U.S. sales
commission structure earlier in the year. 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 partially
reinstated matching contributions to its 401(k) plan in
the United States, representing
approximately $0.9 million of expense
in the quarter.
Intangible amortization expense increased $3.1 million compared with the prior-year period.
The expense recorded in the third quarter of 2009 reflected a
$1.7 million reduction of previously
recorded intangible amortization expense. The remaining increase
reflects amortization expense from acquisitions.
In the third quarter of 2009, Morningstar recorded an expense of
$2.4 million to increase its
liability for vacant office space, primarily for the former
Ibbotson headquarters. This expense did not recur in 2010.
Operating margin was 21.6% in the third quarter of 2010, down
from 28.0% in the same period in 2009. In the first nine months of
2010, operating margin was 22.0%, compared with 28.3% in the first
nine months of 2009. Acquisitions represented approximately 2
percentage points of the margin decline in both periods. The
remainder of the margin decline primarily reflects higher
compensation, bonuses, sales commissions, and employee benefits as
a percentage of revenue. The lease vacancy expense recorded in the
third quarter of 2009 had a negative effect of approximately 2
percentage points in that period.
Morningstar had approximately 3,165 employees worldwide as of
Sept. 30, 2010, compared with 2,525
as of Sept. 30, 2009. Headcount grew
year over year mainly because of acquisitions and continued hiring
in the company's development centers in China and India.
Non-operating income: In conjunction with the acquisition
of Morningstar Denmark, the company
recorded a non-cash gain of $5.1
million. Because this gain was substantially offset by
non-cash income tax expense, the gain, net of the tax adjustments,
did not have a significant impact on net income or earnings per
share in the quarter or year-to-date periods.
Effective Tax Rate: Morningstar's effective tax rate was
43.2% in the quarter and 38.6% year to date, an increase of 7.7
percentage points and 3.3 percentage points, respectively. Income
tax expense in the quarter includes $5.8
million of non-cash income tax expense related to the gain
from the acquisition of Morningstar
Denmark and non-cash taxes from prior periods related to
Morningstar's share of earnings in equity method investments,
primarily Morningstar Japan K.K. These items increased the
effective tax rate by approximately 11 percentage points in the
quarter and 4 percentage points year to date.
The effective tax rate in the third-quarter and year-to-date
periods of 2009 was approximately 35%, including the effect of
$2.1 million in tax credits from
previous years, which lowered the tax rate by 6 percentage points
in the quarter and 2 percentage points year to date. The
year-to-date tax rate also benefited from the reversal of
$2.2 million in reserves for
uncertain tax positions. These items were partially offset by the
impact of the non-deductible deposit penalty expense recorded in
the second quarter of 2009.
Free Cash Flow: Morningstar generated free cash flow of
$31.4 million in the third quarter of
2010, reflecting cash provided by operating activities of
$35.3 million and approximately
$3.9 million of capital expenditures.
Free cash flow declined $1.1 million
in the quarter as cash provided by operating activities declined
$0.8 million and capital expenditures
increased $0.3 million.
In the first nine months of 2010, Morningstar generated free
cash flow of $72.6 million,
reflecting cash provided by operating activities of $80.3 million and capital expenditures of
$7.7 million. Cash provided by
operating activities in the first nine months of 2010 increased
$13.0 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 a reduction in cash flow
generated from accounts receivable and other operating assets and
liabilities, including an increase of $4.4
million in cash paid for income taxes in the first nine
months of the year. During this period, the company also made a
$4.9 million payment to one former
and two current executives related to adjusting the tax treatment
of certain stock options originally considered incentive stock
options.
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 Sept. 30, 2010, Morningstar
had cash, cash equivalents, and investments of $339.3 million, compared with $342.6 million as of Dec.
31, 2009. In the fourth quarter of 2010, the company plans
to use approximately $14.1 million to
acquire the annuity intelligence business of Advanced Sales and
Marketing Corp. In addition, the company expects to make capital
expenditures of approximately $10 million to
$12 million, including spending for its new office space in
China.
Morningstar also announced today that on Jan. 14, 2011, the company will make its first
regular quarterly dividend payment of 5
cents per share to shareholders of record as of Dec. 31, 2010. The company also said that its
board of directors has approved a share repurchase program that
authorizes the company to repurchase up to $100 million of the company's outstanding common
stock. For more information about the dividend and share repurchase
programs, please visit
http://www.global.morningstar.com/dividendandsharerepurchase.
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 $112.1 million in the
third quarter of 2010, up 17.4%, from $95.4
million in the third quarter of 2009.
- Acquisitions contributed revenue of $10.7 million in the third quarter of 2010.
- Licensed Data; Morningstar Direct; and Internet advertising
sales on Morningstar.com drove most of the revenue increase. Equity
Research, including revenue from two former Global Analyst Research
Settlement clients, also contributed to the increase. Licenses for
Morningstar Direct rose 32.3% to 4,403, with particularly strong
growth outside the United States,
partly reflecting client migrations from Institutional Workstation.
Premium Membership subscriptions for Morningstar.com fell 9.7%.
Principia subscriptions were down 11.0% to 33,252, and Advisor
Workstation licenses rose slightly to 154,403.
- The company entered into its first credit research agreement
with a major financial services firm to provide credit ratings and
research to its 18,000 financial advisors beginning in the third
quarter. The firm's internal credit research team also has access
to Morningstar's institutional credit research platform.
- Revenue in the third quarter of 2009 included $1.5 million related to the Global Analyst
Research Settlement, which ended in July
2009.
- Operating income was $32.8
million in the third quarter of 2010, compared with
$33.3 million in the same period in
2009. Operating expense in this segment rose $17.1 million, or 27.6%, with approximately half
of the increase from acquisitions. Higher compensation, bonuses,
sales commissions, and employee benefits expense also contributed
to the increase.
- Operating margin was 29.3% in the third quarter of 2010 versus
34.9% in the prior-year period. Approximately 4 percentage points
of the margin decline reflects higher compensation, bonus, and
commission and benefits expense as a percentage of revenue. The
remainder of the margin decline reflects the impact of recent
acquisitions.
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 $27.8 million in the
third quarter of 2010, a 12.5% increase from $24.7 million in the same period in 2009.
- Acquisitions contributed revenue of $1.3
million in the third quarter.
- Retirement Advice and Investment Consulting were the primary
drivers of the segment revenue increase, followed by Morningstar
Managed Portfolios.
- Total assets under advisement for Investment Consulting rose
48.5% to $101.3 billion, from
$68.2 billion as of Sept. 30, 2009. About $35.0 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. Excluding assets from the new
fund-of-funds program, assets under advisement for Investment
Consulting declined slightly year over year, reflecting a client
non-renewal that occurred in the fourth quarter of 2009, partially
offset by net inflows and new client wins. Assets under management
for Retirement Advice were $17.8
billion as of Sept. 30, 2010,
versus $14.6 billion as of
Sept. 30, 2009. Assets under
management for Morningstar Managed Portfolios were $2.5 billion as of Sept.
30, 2010, compared with $1.9
billion as of Sept. 30,
2009.
- Operating income was $13.5
million in the third quarter of 2010, a decrease of 6.0%
compared with the third quarter of 2009. Operating expense in the
segment was $14.2 million, an
increase of $3.9 million, or 38.4%,
reflecting incremental expense from acquisitions as well as higher
compensation, bonus, and sales commission expense.
- Operating margin was 48.7% in the third quarter of 2010 versus
58.3% in the prior-year period. The margin decline mainly reflects
higher compensation, 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 $8.1
million in the third quarter and $22.9 million in the first nine months of 2010,
an increase of $3.0 million and
$3.6 million, respectively, compared
with the same periods in 2009. The increase in both periods
reflects additional amortization expense for acquisitions. The
expense recorded in the third quarter of 2009 reflected a
$1.7 million reduction of previously
recorded intangible amortization expense.
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 $8.1
million in the quarter, a decrease of $0.9 million, or 9.7%. The company recorded a
$2.4 million expense in the third
quarter of 2009 to increase its liability for vacant office space;
this expense did not recur in 2010. This operating expense
reduction was partially offset by higher compensation expense and
acquisition-related professional fees.
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 370,000 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 26 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.
MORN-E
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.
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
(in thousands, except per share
amounts)
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 139,817
|
|
$ 120,088
|
|
16.4%
|
|
$
404,198
|
|
$ 356,353
|
|
13.4%
|
|
Operating
expense1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
40,713
|
|
31,954
|
|
27.4%
|
|
114,767
|
|
92,900
|
|
23.5%
|
|
|
Development
|
|
12,703
|
|
9,447
|
|
34.5%
|
|
35,491
|
|
28,185
|
|
25.9%
|
|
|
Sales and marketing
|
|
22,881
|
|
17,730
|
|
29.1%
|
|
69,877
|
|
53,276
|
|
31.2%
|
|
|
General and
administrative
|
|
23,462
|
|
20,643
|
|
13.7%
|
|
67,211
|
|
57,649
|
|
16.6%
|
|
|
Depreciation and
amortization
|
|
9,897
|
|
6,631
|
|
49.3%
|
|
28,082
|
|
23,347
|
|
20.3%
|
|
|
Total operating
expense
|
|
109,656
|
|
86,405
|
|
26.9%
|
|
315,428
|
|
255,357
|
|
23.5%
|
|
Operating income
|
|
30,161
|
|
33,683
|
|
(10.5%)
|
|
88,770
|
|
100,996
|
|
(12.1%)
|
|
Operating margin
|
|
21.6%
|
|
28.0%
|
|
(6.4)pp
|
|
22.0%
|
|
28.3%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
512
|
|
572
|
|
(10.5%)
|
|
1,692
|
|
2,314
|
|
(26.9%)
|
|
|
Other income, net
|
|
5,694
|
|
221
|
|
2476.5%
|
|
4,356
|
|
985
|
|
342.2%
|
|
|
Non-operating
income, net
|
|
6,206
|
|
793
|
|
682.6%
|
|
6,048
|
|
3,299
|
|
83.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of unconsolidated
entities
|
|
36,367
|
|
34,476
|
|
5.5%
|
|
94,818
|
|
104,295
|
|
(9.1%)
|
|
Income tax expense
|
|
15,807
|
|
12,407
|
|
27.4%
|
|
37,027
|
|
37,099
|
|
(0.2%)
|
|
Equity in net income of
unconsolidated entities
|
|
333
|
|
429
|
|
(22.4%)
|
|
1,176
|
|
790
|
|
48.9%
|
|
Consolidated net
income
|
|
20,893
|
|
22,498
|
|
(7.1%)
|
|
58,967
|
|
67,986
|
|
(13.3%)
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
(106)
|
|
22
|
|
NMF
|
|
10
|
|
40
|
|
(75.0%)
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
20,787
|
|
$ 22,520
|
|
(7.7%)
|
|
$
58,977
|
|
$ 68,026
|
|
(13.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
0.42
|
|
$
0.46
|
|
(8.7%)
|
|
$
1.19
|
|
$
1.42
|
|
(16.2%)
|
|
|
Diluted
|
|
$
0.41
|
|
$
0.45
|
|
(8.9%)
|
|
$
1.16
|
|
$
1.37
|
|
(15.3%)
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
49,401
|
|
48,457
|
|
|
|
49,157
|
|
47,930
|
|
|
|
|
Diluted
|
|
50,544
|
|
50,048
|
|
|
|
50,453
|
|
49,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
|
|
|
2010
|
|
2009
|
|
|
|
2010
|
|
2009
|
|
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
960
|
|
$
690
|
|
|
|
$
2,582
|
|
$
1,954
|
|
|
|
|
Development
|
|
517
|
|
410
|
|
|
|
1,359
|
|
1,177
|
|
|
|
|
Sales and marketing
|
|
469
|
|
407
|
|
|
|
1,358
|
|
1,185
|
|
|
|
|
General and
administrative
|
|
1,799
|
|
1,356
|
|
|
|
5,038
|
|
4,340
|
|
|
|
|
Total stock-based
compensation expense
|
|
$
3,745
|
|
$
2,863
|
|
|
|
$
10,337
|
|
$
8,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMF — Not meaningful, pp —
percentage points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Operating Expense as a
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
|
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
100.0%
|
|
100.0%
|
|
-
|
|
100.0%
|
|
100.0%
|
|
-
|
|
Operating
expense1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
29.1%
|
|
26.6%
|
|
2.5pp
|
|
28.4%
|
|
26.1%
|
|
2.3pp
|
|
|
Development
|
|
9.1%
|
|
7.9%
|
|
1.2pp
|
|
8.8%
|
|
7.9%
|
|
0.9pp
|
|
|
Sales and marketing
|
|
16.4%
|
|
14.8%
|
|
1.6pp
|
|
17.3%
|
|
15.0%
|
|
2.3pp
|
|
|
General and
administrative
|
|
16.8%
|
|
17.2%
|
|
(0.4)pp
|
|
16.6%
|
|
16.2%
|
|
0.4pp
|
|
|
Depreciation and
amortization
|
|
7.1%
|
|
5.5%
|
|
1.6pp
|
|
6.9%
|
|
6.6%
|
|
0.3pp
|
|
|
Total operating
expense2
|
|
78.4%
|
|
72.0%
|
|
6.4pp
|
|
78.0%
|
|
71.7%
|
|
6.3pp
|
|
Operating margin
|
|
21.6%
|
|
28.0%
|
|
(6.4)pp
|
|
22.0%
|
|
28.3%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
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
|
|
0.4%
|
|
0.3%
|
|
0.1pp
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
Sales and marketing
|
|
0.3%
|
|
0.3%
|
|
-
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
General and
administrative
|
|
1.3%
|
|
1.1%
|
|
0.2pp
|
|
1.2%
|
|
1.2%
|
|
-
|
|
|
Total stock-based
compensation expense2
|
|
2.7%
|
|
2.4%
|
|
0.3pp
|
|
2.6%
|
|
2.4%
|
|
0.2pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$
20,893
|
|
$
22,498
|
|
$
58,967
|
|
$
67,986
|
|
Adjustments to reconcile
consolidated net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
9,897
|
|
6,631
|
|
28,082
|
|
23,347
|
|
|
Deferred income tax (benefit)
expense
|
|
6,671
|
|
109
|
|
5,659
|
|
(847)
|
|
|
Stock-based compensation
expense
|
|
3,745
|
|
2,863
|
|
10,337
|
|
8,656
|
|
|
Equity in net income of
unconsolidated entities
|
|
(333)
|
|
(429)
|
|
(1,176)
|
|
(790)
|
|
|
Excess tax benefits from stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
(680)
|
|
(1,180)
|
|
(4,885)
|
|
(5,724)
|
|
|
Holding gain upon acquisition of
additional
|
|
|
|
|
|
|
|
|
|
|
ownership of equity method
investments
|
|
(5,073)
|
|
(352)
|
|
(5,073)
|
|
(352)
|
|
|
Other, net
|
|
(765)
|
|
291
|
|
977
|
|
(274)
|
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(639)
|
|
4,209
|
|
(7,254)
|
|
13,521
|
|
|
Other assets
|
|
(1,997)
|
|
1,865
|
|
(2,508)
|
|
2,206
|
|
|
Accounts payable and accrued
liabilities
|
|
(834)
|
|
4,005
|
|
2,025
|
|
(2,007)
|
|
|
Accrued compensation
|
|
8,884
|
|
3,637
|
|
(2,270)
|
|
(41,794)
|
|
|
Deferred revenue
|
|
(9,115)
|
|
(9,780)
|
|
(1,938)
|
|
(8,974)
|
|
|
Income taxes -
current
|
|
4,564
|
|
2,603
|
|
309
|
|
12,999
|
|
|
Deferred rent
|
|
522
|
|
(67)
|
|
442
|
|
(353)
|
|
|
Other liabilities
|
|
(460)
|
|
(837)
|
|
(1,384)
|
|
(267)
|
|
|
Cash provided by operating activities
|
|
35,280
|
|
36,066
|
|
80,310
|
|
67,333
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Purchases of
investments
|
|
(42,515)
|
|
(61,330)
|
|
(128,043)
|
|
(111,603)
|
|
Proceeds from maturities and
sales of investments
|
|
46,816
|
|
26,351
|
|
177,197
|
|
64,479
|
|
Capital expenditures
|
|
(3,862)
|
|
(3,518)
|
|
(7,701)
|
|
(10,286)
|
|
Acquisitions, net of cash
acquired
|
|
(21,242)
|
|
(744)
|
|
(88,697)
|
|
(19,315)
|
|
Other, net
|
|
(59)
|
|
(6)
|
|
830
|
|
623
|
|
|
Cash
used for investing activities
|
|
(20,862)
|
|
(39,247)
|
|
(46,414)
|
|
(76,102)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option
exercises
|
|
1,557
|
|
2,725
|
|
5,207
|
|
14,378
|
|
Excess tax benefits from stock
option exercises
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
680
|
|
1,180
|
|
4,885
|
|
5,724
|
|
Other, net
|
|
(734)
|
|
(127)
|
|
(529)
|
|
(305)
|
|
|
Cash
provided by financing activities
|
|
1,503
|
|
3,778
|
|
9,563
|
|
19,797
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
5,574
|
|
1,704
|
|
1,917
|
|
4,481
|
|
Net increase in cash and cash
equivalents
|
|
21,495
|
|
2,301
|
|
45,376
|
|
15,509
|
|
Cash and cash
equivalents—Beginning of period
|
|
154,377
|
|
187,099
|
|
130,496
|
|
173,891
|
|
Cash and cash equivalents—End of
period
|
|
$
175,872
|
|
$
189,400
|
|
$
175,872
|
|
$
189,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from cash
provided by operating activities to free cash flow (a non-GAAP
measure):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
35,280
|
|
$
36,066
|
|
$
80,310
|
|
$
67,333
|
|
Less: Capital
expenditures
|
|
(3,862)
|
|
(3,518)
|
|
(7,701)
|
|
(10,286)
|
|
Free cash flow
|
|
$
31,418
|
|
$
32,548
|
|
$
72,609
|
|
$
57,047
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
($000)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
175,872
|
|
$
130,496
|
|
|
Investments
|
|
163,469
|
|
212,057
|
|
|
Accounts receivable,
net
|
|
94,638
|
|
82,330
|
|
|
Deferred tax asset,
net
|
|
1,081
|
|
1,109
|
|
|
Income tax receivable,
net
|
|
9,554
|
|
5,541
|
|
|
Other
|
|
14,316
|
|
12,564
|
|
|
Total current assets
|
|
458,930
|
|
444,097
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
57,716
|
|
59,828
|
|
Investments in unconsolidated
entities
|
|
24,043
|
|
24,079
|
|
Goodwill
|
|
311,249
|
|
249,992
|
|
Intangible assets,
net
|
|
167,311
|
|
135,488
|
|
Other assets
|
|
6,948
|
|
6,099
|
|
|
Total assets
|
|
$
1,026,197
|
|
$
919,583
|
|
|
|
|
|
|
|
|
Liabilities and
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
37,504
|
|
$
29,901
|
|
|
Accrued compensation
|
|
47,893
|
|
48,902
|
|
|
Deferred revenue
|
|
135,843
|
|
127,114
|
|
|
Other
|
|
532
|
|
962
|
|
|
Total current liabilities
|
|
221,772
|
|
206,879
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
5,094
|
|
4,739
|
|
Deferred tax liability,
net
|
|
18,353
|
|
4,678
|
|
Other long-term
liabilities
|
|
25,552
|
|
26,413
|
|
|
Total liabilities
|
|
270,771
|
|
242,709
|
|
|
Total equity
|
|
755,426
|
|
676,874
|
|
|
Total liabilities and
equity
|
|
$
1,026,197
|
|
$
919,583
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Segment
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
change
|
|
2010
|
|
2009
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$
112,055
|
|
$
95,410
|
|
17.4%
|
|
$
324,600
|
|
$
289,389
|
|
12.2%
|
|
|
Investment Management
|
|
27,762
|
|
24,678
|
|
12.5%
|
|
79,598
|
|
66,964
|
|
18.9%
|
|
|
Consolidated revenue
|
|
$
139,817
|
|
$
120,088
|
|
16.4%
|
|
$
404,198
|
|
$
356,353
|
|
13.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S.
|
|
$
99,933
|
|
$
85,548
|
|
16.8%
|
|
$
291,529
|
|
$
262,982
|
|
10.9%
|
|
|
Revenue—International
|
|
$
39,884
|
|
$
34,540
|
|
15.5%
|
|
$
112,669
|
|
$
93,371
|
|
20.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S. (percentage of
consolidated revenue)
|
|
71.5%
|
|
71.2%
|
|
0.3pp
|
|
72.1%
|
|
73.8%
|
|
(1.7)pp
|
|
|
Revenue—International
(percentage of consolidated revenue)
|
|
28.5%
|
|
28.8%
|
|
(0.3)pp
|
|
27.9%
|
|
26.2%
|
|
1.7pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$
32,811
|
|
$
33,298
|
|
(1.5%)
|
|
$
96,099
|
|
$
107,377
|
|
(10.5%)
|
|
|
Investment Management
|
|
13,523
|
|
14,391
|
|
(6.0%)
|
|
41,137
|
|
39,280
|
|
4.7%
|
|
|
Intangible amortization and
corporate depreciation expense
|
|
(8,064)
|
|
(5,022)
|
|
60.6%
|
|
(22,930)
|
|
(19,357)
|
|
18.5%
|
|
|
Corporate unallocated
|
|
(8,109)
|
|
(8,984)
|
|
(9.7%)
|
|
(25,536)
|
|
(26,304)
|
|
(2.9%)
|
|
|
Consolidated operating
income
|
|
$
30,161
|
|
$
33,683
|
|
(10.5%)
|
|
$
88,770
|
|
$
100,996
|
|
(12.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
29.3%
|
|
34.9%
|
|
(5.6)pp
|
|
29.6%
|
|
37.1%
|
|
(7.5)pp
|
|
|
Investment Management
|
|
48.7%
|
|
58.3%
|
|
(9.6)pp
|
|
51.7%
|
|
58.7%
|
|
(7.0)pp
|
|
|
Consolidated operating
margin
|
|
21.6%
|
|
28.0%
|
|
(6.4)pp
|
|
22.0%
|
|
28.3%
|
|
(6.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation expense allocated to each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September
30
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
%
change
|
|
Our employees
|
|
|
|
|
|
|
|
|
|
Worldwide headcount
(approximate)
|
|
|
|
3,165
|
|
2,525
|
1
|
25.3%
|
|
Number of worldwide equity and
fixed-income analysts
|
|
|
|
116
|
|
111
|
|
4.5%
|
|
Number of worldwide fund
analysts
|
|
|
|
90
|
|
72
|
2
|
25.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Our business
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
|
|
|
|
|
|
|
|
Morningstar.com Premium
subscriptions
|
|
|
|
140,118
|
|
155,200
|
|
(9.7%)
|
|
Registered users for
Morningstar.com (U.S.)
|
|
|
|
6,226,554
|
|
6,131,977
|
|
1.5%
|
|
U.S. Advisor Workstation
licenses
|
|
|
|
154,403
|
|
153,603
|
|
0.5%
|
|
Principia
subscriptions
|
|
|
|
33,252
|
|
37,365
|
|
(11.0%)
|
|
Morningstar Direct
licenses
|
|
|
|
4,403
|
|
3,329
|
|
32.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
Assets under management for
Morningstar Managed Portfolios
|
|
|
|
$2.5 bil
|
|
$1.9 bil
|
|
31.6%
|
|
Assets under management for
Ibbotson Australia (formerly Intech)
|
|
|
|
$3.6 bil
|
|
$3.3 bil
|
|
9.1%
|
|
Assets under management for
managed retirement accounts
|
|
|
|
$17.8 bil
|
|
$14.6 bil
|
|
21.9%
|
|
|
Morningstar
Associates
|
|
|
|
$1.8 bil
|
|
$1.4 bil
|
|
28.6%
|
|
|
Ibbotson Associates
|
|
|
|
$16.0 bil
|
|
$13.2 bil
|
|
21.2%
|
|
Assets under advisement for
Investment Consulting
|
|
|
|
$101.3 bil
|
|
$68.2 bil
|
|
48.5%
|
|
|
Morningstar
Associates
|
|
|
|
$56.0 bil
|
|
$20.2 bil
|
|
177.2%
|
|
|
Ibbotson Associates
|
|
|
|
$45.3 bil
|
|
$48.0 bil
|
|
(5.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Revised
|
|
|
|
|
|
|
|
|
|
(2) Morningstar has revised the
fund analysts total to only include employees responsible for
writing analyst research reports.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Effective tax
rate
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net
|
|
|
|
|
|
|
|
|
|
|
income of unconsolidated
entities
|
|
$
36,367
|
|
$
34,476
|
|
$
94,818
|
|
$
104,295
|
|
Equity in net income of
unconsolidated entities
|
|
333
|
|
429
|
|
1,176
|
|
790
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
(106)
|
|
22
|
|
10
|
|
40
|
|
|
Total
|
|
$
36,594
|
|
$
34,927
|
|
$
96,004
|
|
$
105,125
|
|
Income tax expense
|
|
$
15,807
|
|
$
12,407
|
|
$
37,027
|
|
$
37,099
|
|
Effective tax rate
|
|
43.2%
|
|
35.5%
|
|
38.6%
|
|
35.3%
|
|
|
|
|
|
|
|
|
|
|
|
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 September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
% change
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$ 139,817
|
|
$ 120,088
|
|
16.4%
|
|
$ 404,198
|
|
$ 356,353
|
|
13.4%
|
|
Less: acquisitions
|
|
(11,964)
|
|
-
|
|
NMF
|
|
(34,386)
|
|
-
|
|
NMF
|
|
Unfavorable (Favorable) impact
of foreign currency translations
|
|
183
|
|
-
|
|
NMF
|
|
(4,219)
|
|
-
|
|
NMF
|
|
Revenue excluding acquisitions
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreign currency
translations
|
|
$ 128,036
|
|
$ 120,088
|
|
6.6%
|
|
$ 365,593
|
|
$ 356,353
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2010
|
|
2009
|
|
% change
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International revenue
|
|
$
39,884
|
|
$ 34,540
|
|
15.5%
|
|
$ 112,669
|
|
$ 93,371
|
|
20.7%
|
|
Less: acquisitions
|
|
(3,470)
|
|
-
|
|
NMF
|
|
(12,691)
|
|
-
|
|
NMF
|
|
Unfavorable (Favorable) impact
of foreign currency translations
|
|
183
|
|
-
|
|
NMF
|
|
(4,219)
|
|
-
|
|
NMF
|
|
International revenue excluding
acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and foreign currency
translations
|
|
$
36,597
|
|
$ 34,540
|
|
6.0%
|
|
$ 95,759
|
|
$ 93,371
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
2010
|
|
Logical Information Machines,
Inc.
|
|
|
|
December 31, 2009
|
|
January 1 through September 30,
2010
|
|
Footnoted business of Financial
Fineprint Inc.
|
|
|
|
February 1, 2010
|
|
February 1 through September 30,
2010
|
|
Aegis Equities
Research
|
|
|
|
April 1, 2010
|
|
|
April 1 through September 30,
2010
|
|
Old Broad Street Research
Ltd.
|
|
|
|
April 12, 2010
|
|
April 12 through September 30,
2010
|
|
Realpoint, LLC
|
|
|
|
May 3, 2010
|
|
|
May 3 through September 30,
2010
|
|
Morningstar Danmark
A/S
|
|
|
|
July 1, 2010
|
|
|
July 1 through September 30,
2010
|
|
Seeds Group
|
|
|
|
July 1, 2010
|
|
|
July 1 through September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOURCE Morningstar, Inc.
Copyright . 27 PR Newswire