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):
December 3
, 2010
MORNINGSTAR, INC.
(Exact
name of registrant as specified in its charter)
Illinois
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000-51280
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36-3297908
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(State
or other
jurisdiction
of incorporation)
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(Commission
File Number)
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(I.R.S.
Employer
Identification No.)
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22 West Washington Street
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Chicago, Illinois
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60602
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(Address
of principal executive offices)
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(Zip
Code)
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(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 January 7, 2011.
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: December 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 December 1, 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
General/Strategy
1.
In a past Q+A your answers have identified
the firm is examining ways to more effectively leverage the combined expertise
across the franchise to better support clients. Can you elaborate more on what
exactly you are evaluating and what types of revenue opportunities may be
present over time? Any color would be appreciated.
2
We see
significant opportunities in the international arena. Our business division
presidents are now directly responsible for identifying opportunities outside
the United States and working with our country managers to execute those plans.
Were also working to better integrate our capabilities within the Investment
Management segment. Were bringing the people and strengths of all of our
investment management units together under one leader so were able to deliver
a more powerful, integrated solution to our clients. As a unified team, we
expect to be able to deliver a broader, deeper, and more flexible suite of
investment management services to our clients around the globe.
As far as
revenue opportunities generally, we believe theres ample room for expansion
across many areas of our business. Outsell, Inc. estimates the total
market size for financial information is approximately $21 billion globally,
with an additional $20 billion for credit ratings and information. With $527
million in revenue for the trailing 12 months through September 30, 2010,
were currently reaching a small portion of this potential market.
Were
continuing to target five major areas for future growth:
·
Building a premier global investment database
·
Integrated software platforms for individual investors, financial
advisors, and institutions
·
Independent investment research on stocks, mutual funds, ETFs,
fixed-income securities, and other areas
·
Fund-of-funds investment management
·
Expanding international business
2.
Generally over time what percentage of your
incremental revenue/sales comes from existing clients versus new ones? Has this
changed now versus prior to the financial crisis?
Looking at
our contract- and licensed-based business (and excluding subscription-based
products such as Morningstar.com Premium membership, newsletters, and
Principia), about 65%-70% of our incremental revenue typically comes from
existing clients The percentage of incremental revenue from new clients was
higher before the financial crisis in 2008, declined in 2009, and began picking
up again in 2010.
3.
What are your clients telling you they want
to see more of within any of your business units?
Weve
always tried to listen to what our clients want and marshal our resources to
create the best resources to meet their needs. Here are a few trends weve
noticed recently:
·
Clients are interested in tools and interfaces that simplify the use and
value of our data. For example, weve had a positive response to our new
Essentials website for Licensed Data, which helps clients more easily access
the most relevant data.
·
A high-touch, in-territory sales and support model has worked well for
products such as Morningstar Office and Morningstar Direct. Our clients
appreciate the higher level of contact and support, and this has paid off with
positive sales trends.
·
We are seeing more demand for outsourcing enterprise data management and
back-office services.
·
Weve seen strong investor interest in data, tools, and analysis related
to exchange-traded funds and alternative investments.
·
Our credit research has been well-received in the marketplace. We believe
investors are looking for an alternative to entrenched players, and our
research provides additional insights that go beyond summary credit ratings.
·
Our qualitative research and ratings on funds in Europe and Asia have
been well-received by individual investors, financial advisors, and
institutions.
3
·
Weve seen strong interest in risk-aware and volatility controlled
portfolios.
Business
Environment
4.
What is your current view of customer health
and demand for your products?
Weve
continued to see steady improvement in customer demand in most areas, although
some clients continue to be cautious and price-sensitive in the wake of the
financial crisis.
Acquisitions
5.
In general (or specifically) could we get an
update on how your acquisitions over the past year have performed in absolute
terms and/or according to your plans? Is it possible to get more financial
detail on the sales, margins, and free cash flow dynamics of these operations?
We dont
report financial details for acquired operations individually, but we can give
you some aggregate information that reflects the overall impact of acquisitions
made during the past 12 months. For the first nine months of 2010, acquisitions
contributed $34.4 million in revenue and approximately $34.5 million in
operating expense, including $4.1 million in intangible amortization. Acquired
operations had a negative impact of about 2 percentage points on our operating
margin for the first nine months of 2010.
6.
How are your acquisitions structured in
terms of retention of the prior principals of the business being acquired? Are
these individuals generally signed to long-term non-compete contracts? Are they
issued MORN shares and/or options? Assuming this is the case which has driven
some of the increase in share-based compensation over the past few quarters or
is this a reflection of an elevated level of non-cash, share-based compensation
payments to existing employees given the more difficult environment in
2008/2009 versus prior years?
We look at
each acquisition individually and try to structure a purchase agreement that
makes sense given the nature of the business being acquired. For senior
managers who are remaining with Morningstar, we generally seek to establish a
non-compete contract and offer some amount of stock-based compensation. For
existing employees, weve continued to grant similar levels of stock-based
compensation as in the past.
7.
What does the M&A deal pipeline look
like right now from a segment, product (data, research, software, investment
management), and geographic (U.S. vs. non-U.S.) perspective? Has it begun to shrink as the world seemingly
continues to trudge out of the mess of the past few years?
Its our
policy not to comment about our acquisition pipeline.
8.
Have you noticed a down-tick in external
growth opportunities as we get at least some movement towards extending the
Bush tax cuts? I recall in the past youve noted entrepreneurs of certain
businesses had an impetus to sell ahead of potential tax changes?
As
mentioned above, its our policy not to comment about our acquisition pipeline.
9.
Do you approach regions (Asia vs. Europe) or
nations (China vs. India vs. Australia vs. Germany vs. etc) differently when
you consider whether youd build-or-buy particular capabilities within those
markets? For instance, do you view China which is a fairly nascent market for
financial services broadly given its consensus potential as a better
4
place to grow organically versus a more
developed market where it may make more sense to acquire?
Were
always refining our strategy for expanding into new markets, but we havent
adopted the specific framework youve laid out. In general, we evaluate
potential acquisition opportunities on their own merits and would be open to
the right opportunity in a variety of regions.
Operating
Expense
10.
What
percentage of your overall expense base is in the form of all forms of
compensation over time? How has this changed as a percentage of revenues over
time?
Compensation-related
expense (including salaries, benefits, bonus, and stock-based compensation)
accounts for about two-thirds of our total operating expense. This total hasnt
significantly changed over the past few years.
11.
Do you
plan to re-implement the full 401(k) match starting in 2011? What else is
left from the expense reduction initiatives undertaken during the height of the
crisis that may not be reflected in the expense run-rate? Can you possibly
quantify these expenses on an annual basis from 2005 through 2008?
We plan to
partially restore matching contributions to employee retirement plans starting
in January. Were increasing the maximum 401(k) match to 5.25% (a match of
75% percent of employee contributions up to 7% of salary), compared with
historical level of 7%. While our bonus expense remains lower than previous
levels, the majority of the other expenses we reduced in 2009 have been
restored. We havent reported a breakdown of these expenses in 2005 through
2008, but the table below summarizes the major reductions we made in 2009:
Category
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Change from 2008 ($mil)
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Bonus expense
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$
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(28.9)
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401(k) match
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(6.6)
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Travel, telephone, training, and conferences
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(4.5)
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Advertising and marketing
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(4.3)
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Capital Allocation
12.
Can you
provide a bit more detail on your recently announced capital allocation
initiatives? Specifically, do you plan to grow your dividend with earnings
and/or peg the payment to a given payout ratio? With regard to the buyback, do
you plan to be a regular purchaser of your shares or an opportunistic one?
Were
planning an initial dividend of 5 cents per quarter throughout 2011. Because of
the current uncertainty about dividend tax rates, we decided to start with a
relatively small dividend. Our board of directors has the discretion to
determine future dividend amounts.
The board
also authorized a $100 million stock repurchase program. We anticipate making
share repurchases when Morningstars shares are trading at a discount to our
estimate of their intrinsic value.
13.
With the
share repurchase authorization in place, you certainly have more flexibility to
return cash to shareholders should external growth opportunities not
materialize. Do you view the buyback as a way to offset share-based
compensation dilution over time or is the strategy to affect tangible
share-count reduction? Will it be more episodic to the extent that M&A
opportunities dont materialize and thus youd be more likely to buyback a
greater magnitude of stock?
5
We look at
the share repurchase another way of investing our cash balance by purchasing an
asset we know well. We believe we can generate better returns by buying back
shares when our stock is priced at a discount than we could by keeping all of
our cash in bank deposits or short-term securities, particularly when
prevailing interest rates are so low. The share repurchase should also be
accretive as it reduces the tangible share count. Regarding the last part of
your question, please see our response to question #12.
Capital
Structure
14.
How do
you view your capital structure? I can understand given the inherent earnings
leverage in your operating model why you wouldnt necessarily want to burden or
risk placing substantial amounts of debt on your balance sheet. However, in light of the low rate environment
would you completely rule out some debt issuance to optimize your cost of
capital, particularly if the right potential deal came along? Certainly with
your recurring cash flows you could handle a modest amount of debt.
Historically,
weve operated with little to no long-term debt and like having the financial
flexibility that comes with a conservative balance sheet. We wouldnt
necessarily rule out issuing some debt for the right opportunity, though.
Management
Ownership
15.
Why did Mr. Mansueto
cancel his divestiture plan? Was this to provide flexibility to monetize a
portion of his equity ahead of potentially higher tax rates through a potential
offering? Any other reason? As it looks increasingly likely the Bush tax cuts
will be extended, will Mr. Mansueto resume this plan?
Joe
initiated the plan to diversify his holdings beyond Morningstar
stock. After reviewing his finances over the summer, he concluded that he
had enough assets outside Morningstar stock and decided to cancel his sales
plan. Its possible that he may initiate another plan in the future, though.
Separately,
Joe may also gift some shares for charitable purposes going forward.
16.
Joe
Mansueto recently cancelled his automatic stock-sales program for the time
being. Is it fair to say this was driven by the fact that his ownership stake
was nearing 50% or was the decision driven by other factors?
Please see
our response to the previous question.
Investment
Management Division
17.
I
wondered if its possible to get a bit more detail on the departure of Patrick
Reinkemeyer with the allowance that Im sure its difficult to discuss
individual management changes. Previously, it seemed that the separation of the
services/management of Ibbotson and Morningstar Associates was important, but
now Peng Chen is going to head up investment management globally. Are these
consulting/asset management units going to be more consolidated globally? Does
this change reflect any change in these businesses or how they are going to be
managed? In the past the company noted that Mr. Reinkemeyer had structured
Morningstar Associates to have fewer but deeper customer relationships than
Ibbotson, for instance. Is his departure reflecting a change in that strategy?
Was his departure voluntary? His severance package seems quite generous
($2.2mm), was that already part of his contract or was it an agreement reached
upon his departure? Why is the number so large?
6
When we
acquired Ibbotson in 2006, it was our first major acquisition in the investment
management and consulting space, and it made sense to operate the businesses
separately. Since that time, weve acquired several other firms and expanded
our business organically outside the United States. We think the time is right
to bring the people and strengths of all of our investment management units
together under one leader so were able to deliver a more powerful, integrated
solution to our clients. By operating as a unified team, our clients around the
globe will benefit from a broader, deeper, and more flexible suite of
investment management services.
We plan to
look for more opportunities to build the best offerings for our clients by
leveraging the strengths of each part of the combined organization. Ibbotson is
an asset allocation expert and has a long history of providing cutting-edge
research. Morningstar Associates is known for its manager search, selection,
and investment expertise. Going forward, we will be able to leverage the
strengths of each group to offer the best solution for our clients.
Patrick
has done a great job leading Morningstar Associates. He was not asked to leave.
Were sorry to see him go, and were glad he will be working for us as an
advisor during a transition period.
His
departure doesnt reflect a change in Morningstar Associates client strategy,
although our client mix may evolve over time as we continue evaluating the
combined capabilities of all of our investment management operations.
We believe
his severance package was fair, given his long tenure, contributions to
Morningstar, and the value of the non-compete provisions included in the agreement.
18.
Can you
provide more color on exactly which plan providers you are partnered with for
the Retirement Manager product? Without naming names, possibly by stating xx of
the top yy providers by asset size/beneficiaries?
Based on
Plan Sponsor
magazines list of Top 10 Recordkeepers of
2009, we have relationships with three of the top 10 providers based on total
recordkeeping assets and four of the top 10 providers based on total
recordkeeping participants through Morningstar Retirement Manager. We also have
additional relationships with major plan providers through the Advice by
Ibbotson platform.
19.
Can you
elaborate on what a partial discretion portfolio is? How would this work exactly?
A partial
discretion portfolio is one where the client has at least partial control over
implementing portfolio allocations and investments. For example, we may
recommend a particular asset allocation, but the client has discretion over how
to implement it.
20.
Ive
noticed a substantial compression in the fee realization rate in the Investment
Management segment over the past few quarters. I understand not all fees in
that segments are based on asset levels and also the timing of the 3Q rally
could have impacted mandates that price off prior quarter end asset levels. Can
you elaborate on what is going on here? If its the timing dynamic would you
expect that to snap back somewhat in 4Q? Can you remind us what percentage of
fees in this segment is asset-based versus contract based as the mix of assets
has changed?
Overall,
about two-thirds of the fees in this segment are variable; the remaining
one-third is fixed. There are a couple of factors to take into account
regarding fee realization. First, many of the contracts are based on average
assets during the quarter, so it can take a while for realized fees to catch up
to higher asset levels. Also, much of the asset growth reflects a new
fund-of-funds
7
program we
began in May 2010 for an existing client. The incremental revenue
associated with this program is relatively low.
21.
What
percentage of your Investment Management segment asset-based fees are priced on
daily NAV, monthly end of period AUM, quarterly end of period AUM, or
otherwise?
The
majority of Ibbotsons contracts (probably 85%) are priced based on monthly or
quarterly average NAVs. The remaining 15% are split evenly between a
period-end balance (quarterly or monthly) and a daily NAV calculation. For
Morningstar Associates, most of the contracts are priced based on average
monthly or daily asset balance. Some of our other operations, such as
Morningstar Investment Services and Ibbotson Australia, calculate their fees
based on daily NAVs.
22.
What
percentage of the investment consulting business current run rate revenue comes
from outside the U.S.?
About 12%
of the consulting run rate revenue is from outside the United States.
23.
Do you
plan to grow the sales and marketing force for investment consulting? What is
the proportion of the 15 professionals domiciled outside the U.S? Generally,
what is the background for these individuals, i.e. what prior experience do
they have that makes them at good at this function?
We dont
have any near-term plans to expand the sales and marketing team in this area.
We currently have a total of more than 20 sales and marketing professionals
associated with all of our Investment Consulting operations (including OBSR in
the UK and Seeds Finance in France), with approximately half of them based
outside the United States. In addition, we have a team of about 10 strategic
account managers who are responsible for managing our largest client
relationships across Morningstar.
Within
Investment Consulting, the sales and marketing employees typically have a
product development background and extensive experience within the investment
industry. Our sales process is highly customized and focuses on solving the
specific investment issues facing prospective clients. We generally start by
working with the client in a collaborative manner to understand their needs and
how our asset allocation, portfolio construction, or other consulting services
can help their clients achieve better outcomes. In many cases, we already have
established relationships with potential Investment Consulting clients through
our data and software divisions, so were starting from an existing client
relationship rather than prospecting for completely new clients.
24.
How many
aggregate clients do you have in investment consulting? How does this break down between Morningstar
and Ibbotson? What is the average
contract length and what proportion of contracts do you have up for renewal
over the next twelve months?
We have
roughly 250 clients total for Investment Consulting, including our clients for
Morningstar Associates, Ibbotson Associates, OBSR (UK), Seeds Finance
(France), and Ibbotson Australia. In the United States, approximately 60% of
our clients have services through Ibbotson Associates and the remaining 40%
work with Morningstar Associates. Our average contract length is approximately
30 months, and slightly more than half of our contracts are up for renewal over
the next 12 months.
25.
How is
the asset-based portion of the most recent $35 billion fund of funds mandate
pricedis it average daily AUA? Was the entirety of the assets earning fees for
all of 3Q10?
8
The fee is
calculated based on average monthly net assets under management. All of the
assets in the fund-of-funds program generated asset-based fees during the whole
third quarter.
26.
Can you clarify your past comments that a
plan sponsor can actually offload some of their fiduciary duty to the ultimate
plan beneficiaries by deploying the retirement advice product and steering
clients your managed service offering?
If a plan
fiduciary selects Morningstars managed account services, the plan fiduciary is
not liable for the underlying investment decisions made by Morningstar. This
can be of value to the employer and is one of the significant benefits to the
selection of a managed account program.
Investment
Information Segment
27.
Can you provide the annual revenue ($
amount) for the Investment Information segment for the years 2003, 2004, and
2005?
We changed
to our current operating structure in 2009 and reported segment revenue
reflecting the new operating segments going back to 2006. We havent reported
revenue for the new segments going back to the years you mentioned.
28.
Can you provide how much in quarterly
revenue in 2007 and 2008 for the Investment Information segment was driven by
acquisitions? Trying to examine organic growth in that segment.
Sure, here
you go.
|
|
2007
|
|
2008
|
|
($mil)
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Investment Information segment revenue
|
|
$
|
72.5
|
|
$
|
83.4
|
|
$
|
84.3
|
|
$
|
87.2
|
|
$
|
96.5
|
|
$
|
101.6
|
|
$
|
97.1
|
|
$
|
95.5
|
|
Less: revenue from acquisitions
|
|
(7.9
|
)
|
(13.0
|
)
|
(10.2
|
)
|
(8.9
|
)
|
(11.1
|
)
|
(4.9
|
)
|
(4.7
|
)
|
(6.4
|
)
|
Investment information segment revenue excluding
acquisitions
|
|
$
|
64.5
|
|
$
|
70.4
|
|
$
|
74.1
|
|
$
|
78.3
|
|
$
|
85.4
|
|
$
|
96.7
|
|
$
|
92.3
|
|
$
|
89.1
|
|
Licensed
Data
29.
What is the composition of your licensed
data client set by institution?
About 40%
of our revenue base in Licensed Data is from asset management firms, followed
by broker-dealers, insurance firms, redistributors and, to a lesser extent,
media outlets and institutional consultants.
30.
Was the large jump in licensed data revenue
in 2007 all organic? Could you quantify
the impact from an acquisition if thats the case?
Of the
$21.5 million increase in Licensed Data revenue in 2007, about $9.5 million was
organic and $12.0 million was from acquisitions, primarily from the fund data
business we acquired from Standard & Poors.
31.
What type of underlying data capabilities
came with the Realpoint acquisition broadly across fixed income? I know youve
mentioned it in the past and it fits with mantra but looking for color on the
opportunities to build a database for fixed income assets, particularly as it
relates to municipals? Can you update us in this vein to your current sub-asset
coverage (corporates, munis, structured, etc) for bonds more generally? My
understanding given the historically OTC nature of the fixed income market
prior to the
9
advent of TRACE which brought at least some
price transparency, the broker-dealer channels and their tributaries control a
lot of the data related to fixed income price, trading, etc? Is this an impediment to building a robust
dataset in this respect?
Realpoint
has some proprietary data, primarily related to commercial mortgage-backed
securities. We dont currently have any plans to build our own fixed-income
database in other areas such as municipal bonds. As you mentioned, the lack of
transparency and available data in the fixed-income market is one impediment;
the large number of bonds issued (particularly in the municipal area) is
another.
Morningstar.com
32.
What are prospective plans to open up more
premium content local sites? Anything
specific in the product pipeline?
We
recently launched a Premium site in Canada. We dont have any near-term plans
to start up additional Premium sites.
33.
Do you believe you have pushed too hard on
your website premium subscriber base? How do you internally determine the
optimal annual price increase?
No. We
believe that Premium membership on Morningstar.com is an exceptional value for
the price. Although our strategy is to keep the price low enough to reach a
wide audience, we believe we could charge significantly more to reflect the
value of our proprietary analyst research, reports, and tools. We generally
make price increases that are higher than inflation to reflect this value and
consider a variety of data to determine pricing, including customers response
to previous price increases.
Morningstar
Advisor Workstation
34.
Understanding the environment remains
fragile, however given the enhanced functionality and technological
differentiation of the Workstation 2.0 product, why would you not attempt to
incrementally ratchet up price relative to the prior product? Is it more driven
by the current weak economic outlook? With turnkey asset management providers
increasing their emphasis on their products, are you noticing competition
increasing in this area as other firms attempt to capitalized on the same
demographic trends? It seems your market share takeaway opportunity given you
already serve 1 out of 4 FAs may be more limited relative to the past, so I am
curious what your thoughts on growth are from a FA perspective. Is it about
capturing a greater proportion of managed assets from the FAs you already
serve? Typically vast enhancements to the technology, usability, and
functionality for other investment related software platforms have enabled
other firms to push down price increases.
Typically
theres an expectation that products offered under a Software as a Service
model include ongoing improvements in order to help justify the recurring
annual fee. Thus with respect to Morningstar Advisor Workstation, our clients
expect that they will receive enhancements to user experience, functionality,
and technology on a regular basis. While the 2.0 version of AWS represents one
of our more significant improvements, we generally regard it as ongoing
evolution of the product to ensure the product stays relevant and consistent
with current technology and usability expectations.
That said,
our overall product strategy is to implement small price increases in our
products each year. Generally weve been successful with this approach because
we can point to ongoing enhancements to our products. So while 2.0 is not an
event that in itself creates a price increase opportunity, we do view it as one
element that contributes to our strategy of small annual increases to our
prices.
10
35.
How are you planning to go about broadening
the middle- and back-office functionality on the Workstation product? Would you
build your own processing platform or partner with an existing provider?
We are
leveraging much of the functionality we acquired from our acquisition of
Financial Computer Support, Inc. in September 2008. The company offered
a leading position in portfolio management software with its dbCAM+ portfolio
management system. Were also developing additional portfolio management
capabilities including import infrastructure, import interfaces, and end-user
functionality.
36.
Can you elaborate a bit for a non-user about
Workstation and Principias functionality when it comes to risk management in
terms of position or asset class limits, Value at Risk, or any other measures?
Obviously would emphasize diversification but wondering what safeguards or
capabilities exist for the FA to manage their clients investment risk. Do the
products examine client assets from a household or account level?
Both
products include a variety of tools that financial advisors can use for risk
management. Some of the standard risk measures we include are Morningstar Risk,
a measure of historical downside volatility; Modern Portfolio Theory
statistics; and volatility measures such as standard deviation and bear market
rankings.
With both
products, financial advisors can use the Portfolio Snapshot tool to communicate
a comprehensive picture of a portfolios risk profile including asset
allocation, style diversification, sector weightings, and performance. The
Stock Intersection tool compiles the underlying holdings of each of the
positions in a clients portfolio to determine actual exposure to individual
stocks and can help identify risky levels of concentration. The Portfolio X-Ray
tool summarizes the underlying holdings, sector exposure, and investment style
of a portfolio, which all contribute to its risk profile.
Morningstar
Advisor Workstation automatically pulls in client and account data from
third-party portfolio accounting and planning platforms. It includes a
householding feature that allows advisors to group and organize imported
portfolios that belong together.
Advisor
Workstations Planning Module includes a risk-tolerance questionnaire that
helps advisors construct suitable portfolios for each client. A clients risk
profile is automatically matched with an appropriate asset allocation model.
Firms can modify the risk-tolerance questionnaire or Morningstars standard
asset allocation models to meet their investment policies.
Morningstar
Principia includes a risk assessment feature that helps advisors determine
risk-appropriate asset mixes and identify portfolio and market risks to address
client concerns during short-term performance fluctuations. Advisors can also
use the Risk/Reward Scatterplot to identify which portfolio holdings are incurring
more risk than reward. Principias Asset Allocation module helps advisors
determine the optimal portfolio for a given risk level.
37.
What are the primary countries in which the
Workstation product is also generating revenue? How does the different wealth
management model, more oriented towards fee-based private banking versus the
traditional American wire-house commission based model, impact your market
opportunity, competition, pricing, or otherwise?
The
majority of our revenue base for Morningstar Advisor Workstation is in the
United States, but we also generate revenue from Canada, Australia, the United
Kingdom, Italy, and a few countries in Asia.
The
wealth-management models outside of the United States may lead clients to focus
on different types of tools, but we dont believe that our market opportunity
is necessarily smaller
11
because of
this. In general, the high-level requirements are the same, but financial
advisors in some non-U.S. markets may have different levels of experience with
managing investments. In the United Kingdom, for example, its common for
independent advisers to focus more on model portfolios and spend less time
selecting investments for their clients. To meet these needs, weve developed
simplified reports and tools. One example is Portfolio Builder, which guides
financial advisors through a defined step-by-step process to create portfolio
proposals for clients.
38.
Is it possible to provide an annual time
series back to 2002/2003 of Advisor Workstation licenses, broken out by U.S.
and International? Basically Im attempting to reconcile the total annual
revenue dollars divided by reported U.S. Workstation licenses - I notice a
large dip in revenue per user in the years 2004 and 2005 before coming back up
in 2006 and then growing in the subsequent years. Can you reconcile this or
provide some color what might be happening here?
The
supplemental information we report reflects U.S. Advisor Workstation licenses,
which weve shown in the table below:
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010 (as
of 9/30)
|
|
U.S. Advisor Workstation licenses (as of 12/31)
|
|
32,408
|
|
80,235
|
|
109,461
|
|
144,578
|
|
150,505
|
|
151,874
|
|
148,392
|
|
154,403
|
|
The
decline in revenue per user youre noticing partly reflects rapid license
growth in 2004 and 2005. If you calculate revenue per user based on year-end
licenses and full-year revenue number, the larger denominator will give you a
lower result in years when we experienced rapid growth.
Morningstar
Equity Research
39.
What traction have you had recently on
monetizing equity research and through what channels are you having particular
success?
We added
approximately 40 new equity research clients in 2010 and added our research to
several major platforms, including Thomson Reuters, FactSet, Hoovers, and
Nasdaq. Were having particular success with the buy-side segment. We also have
a growing enterprise business in this area. Finally, weve signed numerous new
clients in Europe and Asia in 2010.
40.
Can you provide some color on how the client
composition in terms of size has changed over the past few years regarding
institutional equity research? The crux of what Id like you to address is do
you feel due to MORNs breadth of research that you are moving up-market and
gaining share with larger asset managers/institutions more broadly that can
consolidate their third-party research expenditure to extract value and
leverage within their own operating budget? Or has the trend been the opposite?
Any color across different client types would be very helpful.
Yes, we
have seen an evolution of our client base in the past few years and have added
contracts with several large asset management firms. The investments weve made
in the breadth and depth of our equity research have helped us move up-market
as well as increase our average selling price.
Credit
Ratings & Research
41.
Do you eventually hope to monetize the data
feeds of credit ratings currently being provided for free, assuming based on
some type of initial branding push? What do you estimate is the addressable
market for non-issuer paid credit research?
12
We provide
our summary credit ratings for free on Morningstar.com, but the underlying data
and analysis is only available for subscribers to our institutional research
service. We do plan to monetize our credit ratings and research, and weve
already 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 beginning in the third quarter of 2010.
We dont
have an exact number for the addressable market for non-issuer paid credit
research, but we believe its at least several hundred million dollars in size.
13
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: December 3, 2010
|
|
/s/ Scott Cooley
|
|
Name:
|
Scott Cooley
|
|
Title:
|
Chief Financial Officer
|
14
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