CHICAGO, Feb. 18 /PRNewswire-FirstCall/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today announced its fourth-quarter and full-year 2009
financial results. The company reported consolidated revenue of
$122.6 million in the fourth quarter of 2009, a 2.8% increase from
$119.3 million in the fourth quarter of 2008. Consolidated
operating income was $24.3 million in the fourth quarter of 2009, a
decrease of 15.2% compared with $28.7 million in the same period a
year ago. Net income was $14.4 million in the fourth quarter of
2009, or 29 cents per diluted share, compared with $19.3 million,
or 39 cents per diluted share, in the fourth quarter of 2008.
Results for the fourth quarter of 2009 include a $6.1 million
operating expense related to adjusting the treatment of some stock
options that were originally considered incentive stock options
(ISOs) and should have been considered non-qualified stock options
(NQSOs). This expense, net of related income tax benefits, reduced
net income by approximately $5.0 million, or 10 cents per diluted
share, in the quarter. This expense includes $4.9 million to be
paid in the first quarter of 2010 to one former and two current
executives. The company expects this first-quarter 2010 cash flow
impact to be largely offset by a cash tax benefit in the future. As
of December 2009, all incentive stock options have been exercised,
and the company does not expect this to be a recurring expense.
Excluding acquisitions and the impact of foreign currency
translations, revenue declined 6.6% in the fourth quarter of 2009,
compared with the prior-year period. Fourth-quarter results
included $7.6 million in revenue from acquisitions as well as a
positive effect of $3.7 million 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. For the
year ended Dec. 31, 2009, revenue was $479.0 million, a decline of
4.7% compared with $502.5 million in 2008. Revenue for the year
included $29.6 million from acquisitions, which was partially
offset by an unfavorable foreign currency impact of $9.0 million.
Consolidated operating income declined 9.9% to $125.3 million,
compared with $139.1 million in 2008. Net income was $82.5 million,
or $1.66 per diluted share, in 2009, down from $92.5 million, or
$1.88 per diluted share, in 2008. Joe Mansueto, chairman and chief
executive officer of Morningstar, said, "We had a challenging year.
Our consolidated revenue fell almost 5% to $479 million, which is
only the second time in our 25-year history that we've seen revenue
decline. Organic revenue fell 8.8%. The main reasons were the loss
of two key clients in our Investment Management business, the loss
of revenue from the Global Analyst Research Settlement (GARS), and
lower Internet advertising sales. "Although organic revenue
declined for the year, the trend during the second half of 2009 was
encouraging. Organic revenue fell 10.2% in the third quarter of
2009, but only 6.6% in the fourth quarter. That's impressive in
light of the lost revenue from GARS, which ended in July 2009.
Clients are more engaged in sales discussions, and we feel better
about our prospects for 2010." Mansueto added, "In an environment
where our financial services clients were laying off staff and
drastically cutting expenses, we took action early in the year to
cut our own costs. Still, we kept our staff intact and made
investments for the long-term growth of our business. We're also
pleased with the growth in our cash and investments balance,
despite spending about $74 million for six acquisitions in 2009."
Mansueto outlined some of the company's key accomplishments and
challenges in 2009: Accomplishments -- We completed six
acquisitions, four of which were outside the United States. These
acquisitions represent approximately $38 million in annual revenue.
We increased our ownership interest in Morningstar Korea, making it
one of our majority-owned operations. We also integrated many
capabilities from previous acquisitions. -- We continued investing
in our three key web-based platforms, Morningstar.com, Morningstar
Advisor Workstation, and Morningstar Direct. Licensed Data had
strong renewal rates and ranks as our largest product by revenue.
Morningstar Direct continued its strong growth and now ranks as our
fifth-largest product by revenue. -- We expanded our research
offerings, including the launch of corporate credit ratings on 100
public companies; basic profile reports for NASDAQ-listed
companies; target-date fund series ratings and research reports for
20 of the largest fund series; qualitative research and ratings for
more than 830 European and Asian funds; and a Global Fund Investor
Experience study across 16 countries. -- In our Investment
Management segment, we continued our work in custom target-date
funds and lifetime financial advice and expanded our consulting
services internationally. -- We added database coverage of more
than 75,000 securities and expanded our fundamental data on global
stocks and exchange-traded funds. -- We created a new Enterprise
Data Management business that offers back-office service bureau and
performance reporting operations to financial advisors. Challenges
-- Despite an upturn in the market, revenue declined for the second
time in our history, and operating income fell 10%. Many of our
clients were cutting budgets, reducing staff, and experiencing the
effects of industry consolidation, all of which had a direct impact
on our business. -- We had lower revenue for Investment Consulting
because one client did not renew its contract in the fourth quarter
of 2008 and another client did not renew its contract in May 2009.
-- The independent equity research we provided to six banks under
the terms of the Global Analyst Research Settlement ended in July
2009. As a result, equity research revenue was $9.4 million lower
in 2009 versus 2008. -- Internet advertising sales were down
sharply, Premium Membership subscriptions for Morningstar.com fell
15%, and revenue for Morningstar Principia was down for the year.
-- Our 2009 results include a total of $9.5 million in operating
expense related to two unanticipated matters. We recorded a $6.1
million operating expense related to adjusting the treatment of
some stock options that were originally considered incentive stock
options, and we incurred $3.4 million in operating expense for
penalties related to the timing of deposits for taxes withheld on
stock option exercises from 2006 through 2009. 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 operate as registered investment advisors and earn more than
half of their revenue from asset-based fees. Revenue: In the fourth
quarter of 2009, revenue in the Investment Information segment was
$97.3 million, an increase of $1.8 million, or 1.8%, compared with
the fourth quarter of 2008, including $5.7 million from
acquisitions. Excluding acquisitions, revenue declined year over
year. Investment research was the main factor behind the decrease,
primarily because of the loss of revenue from the Global Analyst
Research Settlement, which ended in July 2009. Revenue in the
Investment Management segment was $25.4 million, an increase of
$1.7 million, or 7.0%. Revenue from acquisitions was $1.9 million,
primarily from Intech Pty Ltd in Australia. Revenue from
international operations was $35.8 million in the fourth quarter of
2009, an increase of 28.4% from the same period a year ago.
International revenue included $6.6 million from acquisitions.
Foreign currency translations had a favorable impact of $3.7
million on international revenue in the fourth quarter. Excluding
acquisitions and foreign currency translations, international
revenue declined 8.7% in the fourth quarter. For the full year,
international revenue was $129.2 million, including $23.4 million
in revenue from acquisitions, partly offset by an unfavorable
impact of $9.0 million from foreign currency translations.
Excluding acquisitions and foreign currency translations,
international revenue declined 5.5% from 2008. International
revenue excluding acquisitions and foreign currency translations is
a non-GAAP measure; the accompanying financial tables contain a
reconciliation to international revenue. In 2009, Morningstar's
five largest products by revenue were Morningstar® Licensed Data,
Morningstar® Advisor Workstation(SM), Investment Consulting,
Morningstar.com®, and Morningstar Direct(SM). Operating Income:
Consolidated operating income was $24.3 million in the fourth
quarter of 2009, a 15.2% decrease from the same period in 2008.
Operating expense increased $7.7 million, or 8.5%, in the fourth
quarter of 2009. Operating expense in the quarter includes $6.1
million related to adjusting the treatment of some stock options
that were originally considered incentive stock options and
incremental expense from recent acquisitions, partially offset by
lower expense from cost-savings initiatives. In 1998, 1999, and
2000, Morningstar granted ISOs to many employees. Upon exercise,
ISOs typically have a favorable tax treatment for the employee
relative to the tax treatment for NQSOs. In 2009, Morningstar
determined that certain ISOs granted to one former and two current
executives should have been treated as NQSOs for the executives'
and Morningstar's tax purposes. Morningstar will pay these three
individuals a total of $4.9 million to compensate them for the
difference in tax treatment. Morningstar also recorded an expense
of $1.2 million in the fourth quarter, primarily for potential
penalties, related to this matter. Costs related to acquisitions
also contributed to the increase in operating expense in the
quarter. The company completed four acquisitions in the fourth
quarter of 2008 and six in 2009. Because of the timing of these
acquisitions, fourth-quarter 2009 results include operating expense
that did not exist in the fourth quarter of 2008. Lower
compensation-related expenses partially offset the expense
increases in the quarter. Bonus expense decreased $5.0 million in
the quarter because Morningstar made changes to its 2009 bonus plan
as part of its efforts to better align its cost structure with
revenue. The significant reduction in bonus expense also reflects a
slowdown in 2009 financial performance compared with 2008. In early
2009, the company suspended matching contributions to its 401(k)
plan in the United States, further reducing operating expense in
the quarter by approximately $1.2 million. Morningstar had
approximately 2,600 employees worldwide as of Dec. 31, 2009,
compared with 2,375 as of Dec. 31, 2008. Headcount grew year over
year because the company added approximately 170 employees through
acquisitions and also continued hiring for its development center
in China. In 2010, Morningstar began phasing in some of the
benefits it temporarily suspended in 2009. The company is now
matching up to 50% of employee contributions to its 401(k) plan in
the United States, compared with a full match before 2009. The
company kept salary levels flat for nearly all employees in 2009,
but expects to make some moderate compensation increases later in
2010. The company also has been hiring for some previously unfilled
positions. The company's operating margin was 19.8% in the fourth
quarter of 2009, down from 24.1% in the same period in 2008. The
$6.1 million operating expense related to adjusting the treatment
of some stock options that were originally considered incentive
stock options had a negative effect of approximately 5 percentage
points on the margin. In 2009, operating margin was 26.2%, compared
with 27.7% in 2008. The margin was negatively affected by a total
of 2 percentage points for $6.1 million of operating expense
related to adjusting the treatment of some incentive stock options
and $3.4 million of operating expense for penalties related to the
timing of deposits for taxes withheld on stock option exercises.
Effective Tax Rate: Morningstar's effective tax rate in the fourth
quarter of 2009 was 40.9%, an increase of 7.6 percentage points
compared with the fourth quarter of 2008. The fourth-quarter income
tax expense includes the effect of adjusting the treatment of some
stock options that were originally considered incentive stock
options. Because only a portion of the expense will be deducted for
tax purposes, the effective tax rate increased by approximately 4
percentage points. An adjustment to previously recorded tax
benefits for disqualifying dispositions also increased the
effective tax rate in the quarter. For the full year, the company's
effective tax rate increased to 36.4% from 35.9% in 2008. In
addition to the effect of adjusting the treatment of stock options
discussed above, the company's effective tax rate in 2009 reflects
the impact of a $3.4 million non-deductible deposit penalty expense
recorded earlier in the year. These items were partially offset by
tax credits primarily from previous years and a net decrease in
reserves for uncertain tax positions. Free Cash Flow: Morningstar
generated free cash flow of $26.7 million in the fourth quarter of
2009, reflecting cash provided by operating activities of $28.8
million and $2.1 million of capital expenditures. Cash flow from
operating activities decreased $25.3 million year over year,
primarily reflecting lower net income adjusted for non-cash items.
Also, operating cash flow in the fourth quarter of 2008 included a
$4.9 million benefit from tenant improvement allowances related to
the construction of the company's new corporate headquarters. This
benefit did not recur in the fourth quarter of 2009. The company
generated free cash flow of $83.8 million in 2009, reflecting cash
provided by operating activities of $96.2 million and capital
expenditures of $12.4 million. Operating cash flow in 2009
decreased $56.2 million from 2008, reflecting lower cash flow
benefits from accrued compensation and income taxes, a reduction in
tenant improvement allowances of $16.3 million, and a $9.6 million
increase in bonuses paid in the first quarter of 2009. Capital
expenditures decreased $17.1 million for the quarter and $36.1
million for the year, compared with the same periods in 2008.
Capital expenditures were higher in 2008 mainly because of the
timing of payments for construction of the company's new corporate
headquarters. 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 Dec. 31, 2009, Morningstar had cash,
cash equivalents, and investments of $342.6 million, compared with
$297.6 million as of Dec. 31, 2008. The company paid approximately
$74 million for acquisitions in 2009. In the first quarter of 2010,
in addition to paying $4.9 million to one former and two current
executives as discussed above, the company expects to make annual
bonus payments of approximately $21 million, a decrease of 64%
compared with the $58.9 million of bonus payments made in the first
quarter of 2009. The company anticipates making capital
expenditures of approximately $16 million during 2010, primarily
for leasehold improvements and computer equipment. 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 $97.3
million in the fourth quarter of 2009, a 1.8% increase from $95.5
million in the fourth quarter of 2008. Acquisitions contributed
$5.7 million, or approximately 6 percentage points, to revenue in
the fourth quarter. -- Excluding acquisitions, revenue declined
year over year. Investment research was the largest factor behind
the lower revenue in this segment, reflecting the loss of revenue
related to the Global Analyst Research Settlement (GARS), which
expired in late July 2009. Revenue associated with GARS in the
fourth quarter of 2008 was $5.8 million. Morningstar has entered
into new equity research contracts with two of the banks that were
clients under GARS; however, these contracts only represent about
10% of the previous annual GARS revenue. The company is also
continuing to provide broad equity coverage to individual
investors, financial advisors, and institutions through a variety
of other channels. -- Lower advisor software revenue was the
second-largest factor behind the revenue decline, primarily because
of weaker results for Principia. Principia subscriptions fell 17%
to 35,844. Revenue from Advisor Workstation declined slightly in
the quarter, with Advisor Workstation licenses declining about 2%
to 148,392. -- Revenue for the U.S. version of Morningstar.com
continued to decline, mainly from a decrease in Internet
advertising revenue and because Premium Membership subscriptions
fell 15% to 150,473. -- Higher revenue from Licensed Data and
Morningstar Direct partially offset these revenue declines.
Licensed Data remains the company's top product by revenue.
Morningstar Direct is now one of the company's top five products by
revenue, and licenses for Morningstar Direct rose 19% to 3,524. --
Operating income was $31.2 million in the fourth quarter of 2009,
compared with $33.3 million in the same period in 2008. Operating
expense in this segment increased $3.8 million, or 6.2%, primarily
because of additional costs from acquisitions, partially offset by
lower bonus expense. -- Operating margin was 32.1% in the fourth
quarter of 2009, compared with 34.9% in the prior-year period, as
additional expense from recent acquisitions was partially offset by
the impact of lower bonus 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 $25.4 million in the fourth quarter of 2009, a 7.0% increase
from $23.7 million in the same period in 2008. Fourth-quarter 2009
revenue from acquisitions was $1.9 million, primarily from Intech
Pty Ltd in Australia. -- Excluding acquisitions, revenue declined
year over year. Retirement Advice was the largest factor behind the
lower revenue in this segment, reflecting several smaller client
losses. Investment Consulting revenue was lower because one client
did not renew its contract when it expired in the fourth quarter of
2008 and another client did not renew its contract in May 2009. The
revenue impact of these client losses was partially offset by
positive market performance. -- Assets under advisement for
Investment Consulting fell to $61.4 billion as of Dec. 31, 2009,
compared with $66.2 billion as of Dec. 31, 2008. The majority of
the asset decline reflects a client non-renewal, partially offset
by net inflows and new client wins for Ibbotson Associates, as well
as positive market performance in 2009. Assets under management for
Retirement Advice were $15.7 billion as of Dec. 31, 2009, compared
with $11.0 billion as of Dec. 31, 2008. Assets under management for
Morningstar Managed Portfolios were $2.1 billion as of Dec. 31,
2009, compared with $1.6 billion as of Dec. 31, 2008. -- Operating
income was $13.6 million in the fourth quarter of 2009, an increase
of 18.4% compared with the fourth quarter of 2008. Operating
expense in the segment decreased $0.4 million, or 3.8%, primarily
because of lower bonus expense. These expense reductions were
partially offset by additional operating expense, mainly from the
Intech acquisition. -- Operating margin was 53.6% in the fourth
quarter of 2009, compared with 48.4% in the prior-year period.
Lower bonus expense as a percentage of revenue was the primary
reason for the margin improvement, but was partly offset by the
Intech acquisition. 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 $7.0 million in the
fourth quarter of 2009, an increase of $1.9 million, or 36.1%,
compared with the fourth quarter of 2008. Intangible amortization
and corporate depreciation expense was $26.3 million in 2009, an
increase of $5.8 million, or 28.2%, compared with 2008. The
increases result from amortization expense from recent acquisitions
and depreciation expense related to the company's new headquarters.
Corporate Unallocated: This category of expense 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 for the fourth quarter of 2009 were $13.5
million, an increase of $2.5 million, or 22.8%, including $6.1
million of operating expense related to adjusting the treatment of
some stock options that were originally considered incentive stock
options. The impact of this expense was partially offset by lower
bonus and other compensation-related expense. For the year,
corporate unallocated costs were $39.8 million, a slight increase
compared with 2008. Corporate unallocated costs included the $6.1
million of operating expense discussed above, $3.4 million of
expense for penalties related to the timing of deposits for taxes
withheld on stock option exercises, and $2.7 million of expense for
vacant office space recorded primarily in the third quarter. These
costs were offset by lower bonus and other compensation-related
expense. Investor Communication Morningstar encourages all
interested parties--including securities analysts, current
shareholders, potential shareholders, and others--to submit
questions in writing. Investors and others may send an e-mail to ,
contact the company via fax at 312-696-6009, or write to
Morningstar at the following address: Morningstar, Inc. Investor
Relations 22 W. Washington Street Chicago, IL 60602 Morningstar
will make written responses to selected inquiries available to all
investors at the same time in Form 8-Ks furnished to the Securities
and Exchange Commission, generally on the first Friday of every
month. Annual Meeting Investors are invited to attend Morningstar's
annual meeting at 9 a.m. on Tuesday, May 18, 2010, at its corporate
headquarters at 22 W. Washington Street in Chicago. If you are
interested in attending, please send an e-mail to . 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 nearly 400,000 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 20 countries and minority ownership positions in companies based
in two other 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, 2008. If any of these risks and
uncertainties materialize, our actual future results may vary
significantly from what we expected. We do not undertake to update
our forward-looking statements as a result of new information or
future events. 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 the performance of its business. Free cash flow should not
be considered an alternative to any measure of performance as
promulgated 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. ©2010
Morningstar, Inc. All rights reserved. MORN-E Morningstar, Inc. and
Subsidiaries Unaudited Condensed Consolidated Statements of Income
(in thousands, Three months ended Year ended except per December 31
December 31 share amounts) 2009 2008 change 2009 2008 change
--------------- ---- ---- ------ ---- ---- ------ Revenue $122,643
$119,271 2.8% $478,996 $502,457 (4.7%) Operating expense: Cost of
goods sold 35,716 31,155 14.6% 128,616 130,085 (1.1%) Development
10,193 10,153 0.4% 38,378 40,340 (4.9%) Sales and marketing 18,496
19,104 (3.2%) 71,772 81,651 (12.1%) General and administrative
25,300 22,874 10.6% 82,949 85,266 (2.7%) Depreciation and
amortization 8,614 7,297 18.0% 31,961 25,996 22.9% ----- -----
------ ------ Total operating expense 98,319 90,583 8.5% 353,676
363,338 (2.7%) ------ ------ ------- ------- Operating income
24,324 28,688 (15.2%) 125,320 139,119 (9.9%) Operating margin 19.8%
24.1% (4.3)pp 26.2% 27.7% (1.5)pp Non-operating income (expense):
Interest income, net 702 1,219 (42.4%) 3,016 5,687 (47.0%) Other
expense, net (1,067) (1,232) (13.4%) (82) (1,435) (94.3%) ------
------ --- ------ Non-operating income (expense), net (365) (13)
NMF 2,934 4,252 (31.0%) ---- --- ----- ----- Income before income
taxes and equity in net income of unconsolidated entities 23,959
28,675 (16.4%) 128,254 143,371 (10.5%) Income tax expense 9,996
9,636 3.7% 47,095 51,763 (9.0%) Equity in net income of
unconsolidated entities 375 256 46.5% 1,165 1,321 (11.8%) --- ---
----- ----- Consolidated net income 14,338 19,295 (25.7%) 82,324
92,929 (11.4%) Net (income) loss attributable to noncontrolling
interests 92 (25) NMF 132 (397) NMF --- --- --- ---- Net income
attributable to Morningstar, Inc. $14,430 $19,270 (25.1%) $82,456
$92,532 (10.9%) ======= ======= ======= ======= Net income per
share attributable to Morningstar, Inc: Basic $0.30 $0.41 (26.8%)
$1.71 $2.01 (14.9%) Diluted $0.29 $0.39 (25.6%) $1.66 $1.88 (11.7%)
Weighted average common shares outstanding: Basic 48,652 46,902
48,112 46,139 Diluted 50,248 49,124 49,793 49,213 NMF - Not
meaningful, pp - percentage points Morningstar, Inc. and
Subsidiaries Operating Expense as a Percentage of Revenue Three
months ended Year ended December 31 December 31 2009 2008 change
2009 2008 change ---- ---- ------ ---- ---- ------ Revenue 100.0%
100.0% - 100.0% 100.0% - Operating expense: Cost of goods sold
29.1% 26.1% 3.0pp 26.9% 25.9% 1.0pp Development 8.3% 8.5% (0.2)pp
8.0% 8.0% - Sales and marketing 15.1% 16.0% (0.9)pp 15.0% 16.3%
(1.3)pp General and administrative 20.6% 19.2% 1.4pp 17.3% 17.0%
0.3pp Depreciation and amortization 7.0% 6.1% 0.9pp 6.7% 5.2% 1.5pp
--- --- --- --- Total operating expense(1) 80.2% 75.9% 4.3pp 73.8%
72.3% 1.5pp ---- ---- ---- ---- Operating margin 19.8% 24.1%
(4.3)pp 26.2% 27.7% (1.5)pp (1) Sum of percentages may not equal
total because of rounding. Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows Three
months ended Year ended December 31 December 31 ($000) 2009 2008
2009 2008 ----- ---- ---- ---- ---- Operating activities
Consolidated net income $14,338 $19,295 $82,324 $92,929 Adjustments
to reconcile net income to net cash flows from operating
activities: Depreciation and amortization 8,614 7,297 31,961 25,996
Deferred income tax expense (benefit) (1,040) 7,959 (1,887) 9,241
Stock-based compensation expense 2,937 2,750 11,593 11,281 Equity
in net income of unconsolidated entities (375) (256) (1,165)
(1,321) Excess tax benefits from stock option exercises and vesting
of restricted stock units (8,043) (1,488) (13,767) (23,531) Other,
net 2,141 1,760 1,515 969 Changes in operating assets and
liabilities, net of effects of acquisitions: Accounts receivable
(1,157) (479) 12,364 (658) Other assets 315 5,033 2,521 1,573
Accounts payable and accrued liabilities (2,494) 1,580 (4,501)
3,008 Accrued compensation 15,065 12,188 (26,729) (2,333) Deferred
revenue 270 40 (8,704) (1,595) Income taxes - current (1,323)
(5,029) 11,676 22,078 Deferred rent 410 4,947 57 16,346 Other
liabilities (809) (1,515) (1,076) (1,537) ---- ------ ------ ------
Cash provided by operating activities 28,849 54,082 96,182 152,446
Investing activities Purchases of investments (65,167) (62,256)
(176,770) (134,117) Proceeds from sale of investments 28,372 13,379
92,851 109,172 Capital expenditures (2,086) (19,229) (12,372)
(48,519) Acquisitions, net of cash acquired (54,860) (49,429)
(74,175) (105,410) Other, net (4,832) (250) (4,209) (250) ------
---- ------ ---- Cash used for investing activities (98,573)
(117,785) (174,675) (179,124) Financing activities Proceeds from
stock option exercises 2,061 6,146 16,439 23,428 Excess tax
benefits from stock option exercises and vesting of restricted
stock units 8,043 1,488 13,767 23,531 Other, net 493 674 188 671
--- --- --- --- Cash provided by financing activities 10,597 8,308
30,394 47,630 Effect of exchange rate changes on cash and cash
equivalents 223 (4,329) 4,704 (6,637) --- ------ ----- ------ Net
increase (decrease) in cash and cash equivalents (58,904) (59,724)
(43,395) 14,315 Cash and cash equivalents - Beginning of period
189,400 233,615 173,891 159,576 ------- ------- ------- -------
Cash and cash equivalents - End of period $130,496 $173,891
$130,496 $173,891 ======== ======== ======== ========
Reconciliation from cash provided by operating activities to free
cash flow (a non-GAAP measure): Three months ended Year ended
December 31 December 31 ($000) 2009 2008 2009 2008 ----- ---- ----
---- ---- Cash provided by operating activities $28,849 $54,082
$96,182 $152,446 Less: Capital expenditures (2,086) (19,229)
(12,372) (48,519) ------ ------- ------- ------- Free cash flow
$26,763 $34,853 $83,810 $103,927 ======= ======= ======= ========
Morningstar, Inc. and Subsidiaries Unaudited Condensed Consolidated
Balance Sheets December 31 December 31 ($000) 2009 2008 ----- ----
---- Assets Current assets: Cash and cash equivalents $130,496
$173,891 Investments 212,057 123,686 Accounts receivable, net
82,330 89,537 Deferred tax asset, net 1,109 3,538 Income tax
receivable, net 5,541 9,193 Other 12,564 13,891 ------ ------ Total
current assets 444,097 413,736 Property and equipment, net 59,828
58,822 Investments in unconsolidated entities 24,079 20,404
Goodwill 249,992 187,242 Intangible assets, net 135,488 119,812
Other assets 6,099 3,924 ----- ----- Total assets $919,583 $803,940
======== ======== Liabilities and equity Current liabilities:
Accounts payable and accrued liabilities $29,901 $30,071 Accrued
compensation 48,902 73,012 Deferred revenue 127,114 130,270 Other
962 88 --- -- Total current liabilities 206,879 233,441 Accrued
compensation 4,739 3,611 Deferred tax liability, net 4,678 7,531
Other long-term liabilities 26,413 23,428 ------ ------ Total
liabilities 242,709 268,011 Total equity 676,874 535,929 -------
------- Total liabilities and equity $919,583 $803,940 ========
======== Morningstar, Inc. and Subsidiaries Segment Information
Three months ended Year ended December 31 December 31 ($000) 2009
2008 change 2009 2008 change ----- ---- ---- ------ ---- ----
------ Revenue Investment Information $97,253 $95,532 1.8% $386,642
$390,693 (1.0%) Investment Management 25,390 23,739 7.0% 92,354
111,764 (17.4%) ------ ------ ------ ------- Consolidated revenue
$122,643 $119,271 2.8% $478,996 $502,457 (4.7%) ======== ========
======== ======== Revenue - U.S. $86,854 $91,400 (5.0%) $349,836
$381,021 (8.2%) Revenue - International $35,789 $27,871 28.4%
$129,160 $121,436 6.4% Revenue-U.S. (percentage of consolidated
revenue) 70.8% 76.6% (5.8)pp 73.0% 75.8% (2.8)pp Revenue-
International (percentage of consolidated revenue) 29.2% 23.4%
5.8pp 27.0% 24.2% 2.8pp Operating income (loss)(1) Investment
Information $31,199 $33,322 (6.4%) $138,576 $138,902 (0.2%)
Investment Management 13,609 11,492 18.4% 52,889 60,396 (12.4%)
Intangible amortization and corporate depreciation expense (6,992)
(5,138) 36.1% (26,349) (20,550) 28.2% Corporate unallocated
(13,492) (10,988) 22.8% (39,796) (39,629) 0.4% ------- -------
------- ------- Consolidated operating income $24,324 $28,688
(15.2%) $125,320 $139,119 (9.9%) ======= ======= ======== ========
Operating margin(1) Investment Information 32.1% 34.9% (2.8)pp
35.8% 35.6% 0.2pp Investment Management 53.6% 48.4% 5.2pp 57.3%
54.0% 3.3pp Consolidated operating margin 19.8% 24.1% (4.3)pp 26.2%
27.7% (1.5)pp (1) Includes stock-based compensation expense
allocated to each segment. Top Five Products (Segment) Revenue % of
Year Ended December 31, 2009 ($000) Revenue
---------------------------- ----- ------- Licensed Data
(Investment Information) $91,524 19.1% Morningstar Advisor
Workstation (Investment Information) 65,673 13.7% Investment
Consulting (Investment Management) 63,748 13.3% Morningstar.com
(Investment Information) 39,454 8.2% Morningtar Direct (Investment
Information) 29,968 6.3% Top Five Products (Segment) Revenue % of
Year Ended December 31, 2008 ($000) Revenue
---------------------------- ----- ------- Licensed Data
(Investment Information) $78,329 15.6% Investment Consulting
(Investment Management) 77,757 15.5% Morningstar Advisor
Workstation (Investment Information) 64,222 12.8% Morningstar.com
(Investment Information) 45,684 9.1% Principia (Investment
Information) 27,791 5.5% Morningstar, Inc. and Subsidiaries
Supplemental Data As of December 31 2009 2008 % change ---- ----
-------- Our employees Worldwide headcount (approximate) 2,600
2,375 9.5% Number of U.S. stock analysts 82 102 (19.6%) Number of
worldwide stock analysts 91 128 (28.9%) Number of U.S. fund
analysts 30 28 7.1% Number of worldwide fund analysts 84 75 12.0%
Our business Investment Information ----------------------
Morningstar.com Premium subscriptions 150,473 177,518 (15.2%)
Registered users for Morningstar.com (U.S.) 6,219,597 5,692,194
9.3% U.S. Advisor Workstation licenses 148,392 151,874 (1) (2.3%)
Principia subscriptions 35,844 43,019 (16.7%) Morningstar Direct
licenses 3,524 2,961 19.0% Investment Management
--------------------- Assets under management for Morningstar
Managed Portfolios $2.1 bil $1.6 bil 31.3% Assets under management
for Intech(2) $3.4 bil - n/a Assets under management for managed
retirement accounts $15.7 bil $11.0 bil 42.7% Morningstar
Associates $1.5 bil $1.0 bil 50.0% Ibbotson Associates $14.2 bil
$10.0 bil 42.0% Assets under advisement for Investment Consulting
$61.4 bil $66.2 bil (7.3%) Morningstar Associates $21.5 bil $29.6
bil (27.4%) Ibbotson Associates $39.9 bil $36.6 bil 9.0% -- (1)
Revised to exclude Site Builder licenses. Beginning in 2009,
Morningstar no longer includes the Site Builder product as part of
Advisor Workstation. The number of Advisor Workstation licenses
reported in 2008 has been adjusted to reflect this change. (2)
Intech (Australia) was acquired on June 30, 2009 and is now doing
business as Ibbotson Associates. Three months ended Year ended
December 31 December 31 ($000) 2009 2008 2009 2008 ----- ---- ----
---- ---- Effective tax rate Income before income taxes and equity
in net income of unconsolidated entities $23,959 $28,675 $128,254
$143,371 Equity in net income of unconsolidated entities 375 256
1,165 1,321 Net (income) loss attributable to noncontrolling
interests 92 (25) 132 (397) --- --- --- ---- Total $24,426 $28,906
$129,551 $144,295 ======= ======= ======== ======== Income tax
expense $9,996 $9,636 $47,095 $51,763 Effective tax rate 40.9%
33.3% 36.4% 35.9% 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 Year ended December 31 December 31
($000) 2009 2008 % change 2009 2008 % change ----- ---- ----
-------- ---- ---- -------- Consolidated revenue $122,643 $119,271
2.8% $478,996 $502,457 (4.7%) Less: acquisitions (7,588) - NMF
(29,590) - NMF (Favorable) Unfavorable impact of foreign currency
(3,710) - NMF 8,987 - NMF ------ ----- ----- ----- Revenue
excluding acquisitions and foreign currency translations $111,345
$119,271 (6.6%) $458,393 $502,457 (8.8%) ======== ======== ========
======== Reconciliation from international revenue to international
revenue excluding acquisitions and foreign currency translations:
Three months ended Year ended December 31 December 31 ($000) 2009
2008 % change 2009 2008 % change ----- ---- ---- -------- ---- ----
-------- International revenue $35,789 $27,871 28.4% $129,160
$121,436 6.4% Less: acquisitions (6,629) - NMF (23,371) - NMF
(Favorable) Unfavorable impact of foreign currency (3,710) - NMF
8,987 - NMF ------ ----- ----- ----- International revenue
excluding acquisitions and foreign currency translations $25,450
$27,871 (8.7%) $114,776 $121,436 (5.5%) ======= ======= ========
======== 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 2009
Revenue from Acquisitions -----------
------------------------------ Hemscott data, media, and investor
relations website businesses January 1 through January 8, 2009
Financial Computer Support, Inc. January 1 through September 1,
2009 Fundamental Data Limited January 1 through October 1, 2009
10-K Wizard Technology, LLC January 1 through December 3, 2009
Tenfore Systems Limited January 1 through December 16, 2009
InvestData (Proprietary) Limited January 1 through December 28,
2009 Global financial filings database business of Global Reports
LLC April 20 through December 31, 2009 Equity research and data
business of C.P.M.S. Computerized Portfolio Management Services
Inc. May 1 through December 31, 2009 Andex Associates, Inc. May 1
through December 31, 2009 Intech Pty Ltd June 30 through December
31, 2009 Morningstar Korea Co., Ltd. September 10 through December
31, 2009 Canadian Investment Awards and Gala December 17 through
December 31, 2009 Logical Information Machines, Inc. (1) - (1)
Logical Information Machines, Inc. was acquired on December 31,
2009 and did not impact 2009 revenue from acquisitions. Contacts:
Media: Margaret Kirch Cohen, 312-696-6383 or Investors may submit
questions to or by fax to 312-696-6009. DATASOURCE: Morningstar,
Inc. CONTACT: Media, Margaret Kirch Cohen, +1-312-696-6383, , or
Investors, , fax, +1-312-696-6009, both of Morningstar, Inc. Web
Site: http://www.morningstar.com/
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