Morningstar, Inc. Reports First-Quarter 2013 Financial Results

CHICAGO, April 24, 2013 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its first-quarter 2013 financial results. The company reported consolidated revenue of $168.9 million in the first quarter of 2013, a 5.0% increase from $160.8 million in the first quarter of 2012. Consolidated operating income was $40.6 million in the first quarter of 2013, an increase of 33.4% compared with $30.4 million in the same period a year ago. Net income was $29.6 million, or 63 cents per diluted share, in the first quarter of 2013, compared with $20.1 million, or 40 cents per diluted share, in the first quarter of 2012.

Excluding acquisitions, divestitures, and foreign currency translations, revenue rose 6.1% in the first quarter of 2013. Revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, "We had a good quarter, despite continuing challenges in the industry. Organic revenue rose 6%, mainly driven by Morningstar Direct, Morningstar Data, and our Structured Credit Ratings and Research business. In addition, our Retirement Solutions and Managed Portfolios businesses had strong sales and benefited from market performance. Operating margin rose 5.1 percentage points in the first quarter, primarily because of higher revenue and strong expense control."

He added, "We made some organizational changes this month to move from a product-focused sales organization to a more global sales structure based on our core client segments. In January, Jim Tanner, former CEO of Wall Street On Demand (now Markit On Demand), joined our executive team. We unified our global business development and sales teams under Jim. We also made other organizational changes to better support our new sales structure. We believe these changes, which are a natural evolution of our growth as a company, will help us get closer to our clients and bring them relevant Morningstar solutions."

International Operations: Revenue from international operations was $47.4 million in the first quarter of 2013, an increase of 2.5% from the same period a year ago. Foreign currency translations reduced international revenue by $0.4 million. In addition, Morningstar's 2012 results included revenue of $1.1 million from business the company divested in 2012 that did not recur in 2013. Excluding acquisitions, divestitures, and foreign currency translations, international revenue rose 5.9% in the first quarter. International revenue excluding acquisitions, divestitures, 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 $40.6 million in the first quarter of 2013, a 33.4% increase from the same period in 2012. Operating expense fell $2.1 million, or 1.6%, in the first quarter of 2013.

The company's first-quarter 2012 results included expense of about $1.6 million related to an impairment charge for one of Morningstar's smaller products and a litigation settlement. These expenses did not recur in 2013. Lower bonus expense and employee benefit costs, which declined $1.8 million, or approximately 8.9%, in the first quarter of 2013, also contributed to the decrease in operating expense.

Operating margin was 24.0% in the first quarter of 2013, up from 18.9% in the same period in 2012. Lower compensation expense, including bonus expense, as a percentage of revenue contributed approximately 3.5 percentage points to the margin improvement.

Morningstar had approximately 3,445 employees worldwide as of March 31, 2013, compared with 3,495 employees as of Dec. 31, 2012 and 3,520 employees as of March 31, 2012. Headcount is lower because the company closed its Delhi office in the first quarter and consolidated its India operations in Mumbai, and continues to be cautious about filling open positions.

Effective Tax Rate: Morningstar's effective tax rate in the first quarter of 2013 was 29.6%, compared with 36.4% in the same period in 2012. The decrease primarily reflects adjustments to certain deferred income tax benefits and reductions in valuation allowances.

Free Cash Flow: Morningstar generated positive free cash flow of $17.6 million in the first quarter of 2013, reflecting cash provided by operating activities of $26.7 million and $9.1 million of capital expenditures.

Free cash flow increased by $20.9 million compared with the first quarter of 2012. Cash provided by operating activities rose $21.0 million, primarily because of higher net income adjusted for non-cash items and, to a lesser extent, a $6.2 million decrease in bonus payments during the quarter. The company made bonus payments of $36.6 million in the first quarter of 2013, compared with $42.8 million in the first quarter of 2012. Morningstar typically pays annual bonuses in the first quarter. As a result, first-quarter operating cash flow tends to be lower compared with subsequent quarters.

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 March 31, 2013, Morningstar had cash, cash equivalents, and investments of $328.3 million, compared with $321.4 million as of Dec. 31, 2012. In the first three months of 2013, the company used $15.2 million of cash for its share repurchase program. Of the $500 million authorized under the program, Morningstar has purchased 5.2 million shares for $311.5 million as of March 31, 2013. On April 30, 2013, the company expects to pay approximately $5.8 million for its regular quarterly dividend.

Operating Segment Performance

Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Data; Morningstar® Advisor WorkstationSM (including Morningstar Office); Morningstar DirectSM; and Morningstar.com®, including Premium Memberships and Internet advertising sales.

  • Revenue was $136.2 million in the first quarter of 2013, up 7.3% from $126.9 million in the prior-year period.
  • Morningstar Direct, Morningstar Data, and Structured Credit Ratings and Research were the major contributors to organic revenue growth. Licenses for Morningstar Direct rose 19.8% to 7,736. Revenue for the Structured Credit Ratings and Research business rose because of a significant increase in commercial mortgage-backed securities (CMBS) new-issue ratings.
  • Revenue for Morningstar.com was up slightly because of higher advertising sales, partially offset by lower revenue from paid Premium Membership subscriptions, which fell 3.5% to 124,138.
  • Operating income was $41.5 million in the first quarter of 2013, compared with $28.7 million in the same period in 2012. Operating expense in this segment decreased $3.5 million, or 3.6%, primarily because of lower bonus, salary expense, and employee benefit costs.
  • Operating margin was 30.4% in the first quarter of 2013 versus 22.6% in the prior-year period. The margin improvement mainly reflects lower salary, bonus, and employee benefit expense as a percentage of revenue.

Investment Management Segment: The largest products in this segment based on revenue are Investment Advisory Services; Retirement Solutions, including Advice by Ibbotson® and Morningstar® Retirement ManagerSM; and Morningstar® Managed PortfoliosSM.

  • Revenue was $32.7 million in the first quarter of 2013, a 3.4% decrease from $33.8 million in the same period in 2012. The main reason for the revenue decline was the previously announced loss of business from a large client in the Investment Management segment that began managing several fund-of-funds portfolios in-house in April 2012. The loss of revenue from this client was offset by higher revenue for Retirement Solutions and Morningstar Managed Portfolios. The variable annuity industry, which accounted for approximately 10% of Investment Management segment revenue in the first quarter of 2013 and 15% of segment revenue in 2012, continues to face challenges. Accordingly, Morningstar expects that there will be further pressure on revenue from clients in this area.
  • Assets under advisement and management for Investment Advisory Services were $96.7 billion as of March 31, 2013, compared with $147.9 billion as of March 31, 2012, a decrease of $51.2 billion, or 34.6%. Assets now managed in-house by the client described above represented $12.9 billion, or 8.7%, of the company's Investment Advisory Services assets under advisement and management as of March 31, 2012. In addition, a change in the scope of services Morningstar provides to an existing client during the fourth quarter of 2012 lowered assets under advisement by $46.9 billion. These two portfolios represented $59.8 billion, or 40.4%, of Morningstar's Investment Advisory Services assets under advisement and management as of March 31, 2012. Excluding these effects, assets under advisement and management rose 9.8%, primarily reflecting market performance and asset inflows.
  • Assets under management and advisement for Retirement Solutions were $51.9 billion as of March 31, 2013, versus $38.5 billion as of March 31, 2012. Assets under management and advisement for Morningstar Managed Portfolios were $5.3 billion as of March 31, 2013, compared with $3.6 billion as of March 31, 2012.
  • Operating income was $16.4 million in the first quarter of 2013, a decrease of 5.0% compared with the first quarter of 2012. Operating expense in the segment was $16.2 million, a decrease of $0.3 million compared with the first quarter of 2012. Operating margin was 50.3% in the first quarter of 2013 versus 51.1% in the prior-year period.

Intangible Amortization and Corporate Depreciation Expense: Morningstar does not allocate expense for intangible amortization or corporate depreciation to its operating segments. Intangible amortization, which represents the majority of the expense in this category, was $5.6 million in the first quarter of 2013, a decrease of $0.5 million compared with the same period in 2012. Corporate depreciation expense was $3.3 million in the first quarter, an increase of $1.5 million compared with the same period in 2012.

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. It also includes capitalization of internal product development costs. Costs in this category were $8.4 million, an increase of $0.7 million, or 9.0%. Corporate unallocated in the first quarter of 2012 included about $1.6 million of expense for an impairment charge for one of the company's smaller products and a litigation settlement. The expense and charge did not recur in 2013. In addition, the company capitalized $1.6 million and $1.7 million of expense for software development in the first quarters of 2013 and 2012, respectively.

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 email to investors@morningstar.com or write to Morningstar at:

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 Shareholders' Meeting

Investors are invited to attend Morningstar's annual meeting at 9 a.m. on Tuesday, May 14, 2013, at its corporate headquarters at 22 W. Washington Street in Chicago. If you are interested in attending, please fill out the registration form at http://corporate.morningstar.com/US/asp/meetingregistration.aspx.

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 products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 422,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 9 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has approximately $157 billion in assets under advisement and management as of March 31, 2013. The company has operations in 27 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 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 filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2012. 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.

©2013 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.

 

 

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income









Three months ended March 31

(in thousands, except per share amounts)


2013


2012


change









Revenue


$                                         168,856


$ 160,759


5.0%

Operating expense1:








Cost of goods sold


48,010


50,316


(4.6%)


Development


13,640


13,365


2.1%


Sales and marketing


27,980


28,326


(1.2%)


General and administrative


27,327


28,178


(3.0%)


Depreciation and amortization


11,339


10,175


11.4%


   Total operating expense


128,296


130,360


(1.6%)

Operating income 


40,560


30,399


33.4%

Operating margin


24.0%


18.9%


5.1pp









Non-operating income (expense), net:








Interest income, net


741


869


(14.7%)


Other income (expense), net


204


(210)


NMF


     Non-operating income, net


945


659


43.4%









Income before income taxes and equity in net income of unconsolidated entities


41,505


31,058


33.6%

Income tax expense


12,427


11,511


8.0%

Equity in net income of unconsolidated entities


497


566


(12.2%)

Consolidated net income   


29,575


20,113


47.0%

Net loss attributable to noncontrolling interests


43


24


79.2%

Net income attributable to Morningstar, Inc.


$                                           29,618


$   20,137


47.1%









Net income per share attributable to Morningstar, Inc.:








Basic


$                                               0.64


$       0.40


60.0%


Diluted


$                                               0.63


$       0.40


57.5%

Weighted average common shares outstanding:








Basic


46,406


49,938


(7.1%)


Diluted


46,814


50,758


(7.8%)












Three months ended March 31






2013


2012



(1) Includes stock-based compensation expense of:








Cost of goods sold


$                                             1,203


$     1,089




Development


498


499




Sales and marketing


512


479




General and administrative


1,570


1,799




   Total stock-based compensation expense


$                                             3,783


$     3,866











NMF — Not meaningful, pp — percentage points




 

Morningstar, Inc. and Subsidiaries




Operating Expense as a Percentage of Revenue













Three months ended March 31




2013


2012


change









Revenue


100.0%


100.0%


-

Operating expense1:








Cost of goods sold


28.4%


31.3%


(2.9)pp


Development


8.1%


8.3%


(0.2)pp


Sales and marketing


16.6%


17.6%


(1.0)pp


General and administrative


16.2%


17.5%


(1.3)pp


Depreciation and amortization


6.7%


6.3%


0.4pp


   Total operating expense2


76.0%


81.1%


(5.1)pp

Operating margin


24.0%


18.9%


5.1pp












Three months ended March 31




2013


2012


change

(1) Includes stock-based compensation expense of:








Cost of goods sold


0.7%


0.7%


-


Development


0.3%


0.3%


-


Sales and marketing


0.3%


0.3%


-


General and administrative


0.9%


1.1%


(0.2)pp


   Total stock-based compensation expense2


2.2%


2.4%


(0.2)pp









(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 March 31

($000)


2013


2012







Operating activities





Consolidated net income


$       29,575


$       20,113

Adjustments to reconcile consolidated net income to net cash flows from operating activities:






Depreciation and amortization


11,339


10,175


Deferred income taxes


(2,934)


(1,453)


Stock-based compensation expense


3,783


3,866


Equity in net income of unconsolidated entities


(497)


(566)


Excess tax benefits from stock-option exercises and vesting of restricted stock units 


(1,587)


(3,313)


Other, net


(457)


835

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:






Accounts receivable


(5,906)


(7,439)


Other assets


(6,575)


(3,758)


Accounts payable and accrued liabilities


400


703


Accrued compensation


(31,812)


(35,168)


Deferred revenue


17,769


14,165


Income taxes - current


14,487


7,369


Deferred rent


(461)


716


Other liabilities


(451)


(621)


          Cash provided by operating activities


26,673


5,624

Investing activities





Purchases of investments


(3,694)


(86,796)

Proceeds from maturities and sales of investments 


61,152


80,551

Capital expenditures


(9,118)


(8,994)

Purchase of equity and cost method investments


-


(6,750)

Other, net


892


9


        Cash provided by (used for) investing activities


49,232


(21,980)

Financing activities





Proceeds from stock-option exercises, net


2,006


3,906

Excess tax benefits from stock-option exercises and vesting of restricted stock units


1,587


3,313

Common shares repurchased


(15,240)


(23,033)

Dividends paid


-


(5,012)

Other, net


(3)


(17)


       Cash used for financing activities


(11,650)


(20,843)

Effect of exchange rate changes on cash and cash equivalents


(3,252)


2,110

Net increase (decrease) in cash and cash equivalents


61,003


(35,089)

Cash and cash equivalents—Beginning of period


163,889


200,437

Cash and cash equivalents—End of period


$     224,892


$     165,348







Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):










Three months ended March 31

($000)


2013


2012







Cash provided by operating activities


$       26,673


$         5,624

Less: Capital expenditures


(9,118)


(8,994)

Free cash flow


$       17,555


$       (3,370)

 

Morningstar, Inc. and Subsidiaries



Unaudited Condensed Consolidated Balance Sheets











March 31


December 31

($000)


2013


2012







Assets





Current assets:






Cash and cash equivalents


$        224,892


$        163,889


Investments


103,436


157,529


Accounts receivable, net


117,744


114,361


Deferred tax asset, net


3,343


3,741


Income tax receivable, net


2,672


14,267


Other


28,091


20,823


          Total current assets


480,178


474,610







Property, equipment, and capitalized software, net


91,815


84,022

Investments in unconsolidated entities


35,635


35,305

Goodwill


315,784


320,845

Intangible assets, net


109,717


116,732

Other assets


12,420


10,438


Total assets


$     1,045,549


$     1,041,952







Liabilities and equity





Current liabilities:






Accounts payable and accrued liabilities


$          44,777


$          43,777


Accrued compensation


36,139


67,317


Deferred revenue


162,074


146,015


Other


242


256


          Total current liabilities


243,232


257,365







Accrued compensation


8,569


8,281

Deferred tax liability, net


18,332


21,583

Other long-term liabilities


36,294


27,828


Total liabilities


306,427


315,057


Total equity


739,122


726,895


Total liabilities and equity


$     1,045,549


$     1,041,952

 

Morningstar, Inc. and Subsidiaries



Segment Information













Three months ended March 31

($000)


2013


2012


change









Revenue








Investment Information


$ 136,187


$ 126,925


7.3%


Investment Management


32,669


33,834


(3.4%)


Consolidated revenue


$ 168,856


$ 160,759


5.0%










Revenue—U.S.


$ 121,413


$ 114,469


6.1%


Revenue—International


$   47,443


$   46,290


2.5%










Revenue—U.S. (percentage of consolidated revenue)

71.9%


71.2%


0.7pp


Revenue—International (percentage of consolidated revenue)

28.1%


28.8%


(0.7)pp









Operating income (loss)1








Investment Information


$   41,467


$   28,684


44.6%


Investment Management


16,434


17,291


(5.0%)


Intangible amortization and corporate depreciation expense

(8,963)


(7,892)


13.6%


Corporate unallocated


(8,378)


(7,684)


9.0%


Consolidated operating income


$   40,560


$   30,399


33.4%









Operating margin1








Investment Information


30.4%


22.6%


7.8pp


Investment Management


50.3%


51.1%


(0.8)pp


Consolidated operating margin


24.0%


18.9%


5.1pp









(1) Includes stock-based compensation expense allocated to each segment.

Morningstar, Inc. and Subsidiaries








Supplemental Data






















As of March 31






2013


2012


% change










Our employees








Worldwide headcount (approximate)


3,445


3,520


(2.1%)


Number of worldwide equity and credit analysts (approximate)

150


155(1)


(3.2%)


Number of worldwide fund analysts (approximate)

105


100


5.0%












Our business








Investment Information








Morningstar.com Premium Membership subscriptions (U.S.)

124,138


128,697


(3.5%)


Registered users for Morningstar.com (U.S.)


7,607,716


7,046,713


8.0%


U.S. Advisor Workstation and Morningstar Office licenses 

163,141


159,410


2.3%


Principia subscriptions 


25,652


29,604


(13.3%)


Morningstar Direct licenses


7,736


6,460


19.8%












Investment Management








Assets under advisement and management (approximate)






    Investment Advisory Services


$96.7 bil


$147.9 bil


(34.6%)


    Retirement Solutions


$51.9 bil


$38.5 bil


34.8%


    Morningstar Managed Portfolios


$5.3 bil


$3.6 bil(1)


47.2%


    Ibbotson Australia


$3.2 bil


$3.1 bil


3.2%






















(1) Revised












































Three months ended March 31

($000)




2013


2012


Effective tax rate








Income before income taxes and equity in net income
   of 
unconsolidated entities







$   41,505


$    31,058


Equity in net income of unconsolidated entities




497


566


Net loss attributable to noncontrolling interests




43


24


    Total




$     42,045


$    31,648


Income tax expense




$     12,427


$    11,511


Effective tax rate




29.6%


36.4%


Morningstar, Inc. and Subsidiaries

Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures

















Reconciliation from consolidated revenue to revenue excluding divestitures, acquisitions, and foreign currency translations (organic revenue):












Three months ended March 31


($000)


2013


2012


% change









Consolidated revenue 


$ 168,856


$ 160,759


5.0%

Less: divestitures


-


(1,163)


NMF

Less: acquisitions


-


-


n/a

Unfavorable effect of foreign currency translations


440


-


NMF

Revenue excluding acquisitions, divestitures and foreign currency translations


$ 169,296


$ 159,596


6.1%

















Reconciliation from international revenue to international revenue excluding divestitures, acquisitions, and foreign currency translations:












Three months ended March 31


($000)


2013


2012


% change









International revenue 


$   47,443


$   46,290


2.5%

Less: divestitures


-


(1,076)


NMF

Less: acquisitions


-


-


n/a

Unfavorable effect of foreign currency translations


440


-


NMF

International revenue excluding acquisitions, divestitures and foreign currency translations


$   47,883


$   45,214


5.9%

















The following table summarizes the change in operating expense:
















Three months ended March 31


($000)


2013


2012


$ change

Total operating expense


$ 128,296


$ 130,360


$ (2,064)










Favorable effect of foreign currency translations






597


All other changes in operating expense






(2,661)


Total






$ (2,064)

 

 

SOURCE Morningstar, Inc.



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