Morningstar, Inc. Reports Third-Quarter 2013 Financial Results

CHICAGO, Oct. 23, 2013 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2013 financial results. The company reported consolidated revenue of $173.5 million in the third quarter of 2013, a 7.8% increase from $161.0 million in the third quarter of 2012. Consolidated operating income was $44.6 million in the third quarter of 2013, an increase of 11.9% compared with $39.9 million in the same period a year ago. Net income was $31.5 million, or 68 cents per diluted share, in the third quarter of 2013, compared with $27.1 million, or 56 cents per diluted share, in the third quarter of 2012.

Excluding acquisitions, divestitures, and foreign currency translations, revenue rose 8.8% in the third 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 another solid quarter, with organic revenue up nearly 9%. Morningstar Data, Morningstar Direct, Retirement Solutions, and Morningstar Managed Portfolios all had double-digit growth rates and were the main drivers of revenue growth. While these results are encouraging, the investment industry still faces challenges and lingering fallout from the financial crisis."

Financial Highlights

As previously announced, Morningstar now reports its results in a single segment to reflect its shift to a more centralized organizational structure. The company will continue to provide investors with a discussion of revenue for its investment information and investment management product groups as well as international operations.   

  • Investment information revenue was $137.2 million, an increase of 6.9% from the third quarter of 2012. Morningstar® Data and Morningstar Direct(SM) were the largest contributors to revenue growth. Morningstar® Advisor Workstation(SM) (including Morningstar Office(SM)) also contributed to the revenue increase, which was partially offset by lower revenue for Morningstar® Principia®.
  • Investment management revenue was $36.3 million, an increase of 11.4% from $32.6 million in the third quarter of 2012. Revenue for both Retirement Solutions and Morningstar® Managed Portfolios(SM) rose approximately $2.0 million; lower revenue for Investment Advisory services partially offset the increase.
  • Revenue for international operations increased slightly to $48.5 million in the third quarter, compared with $46.9 million in the same period last year. International growth was driven by Europe, including the United Kingdom. Foreign currency translations reduced international revenue by $1.4 million.
  • Consolidated operating income was $44.6 million in the third quarter of 2013, an 11.9% increase from the same period in 2012. Operating expense rose $7.8 million, or 6.4%, in the third quarter of 2013.
  • Operating margin was 25.7% in the third quarter of 2013, up from 24.8% in the same period in 2012.
  • The company's effective tax rate in the third quarter of 2013 was 31.2%, compared with 35.9% in the same period in 2012.
  • Morningstar generated positive free cash flow of $38.0 million in the third quarter of 2013, reflecting cash provided by operating activities of $47.1 million and $9.1 million of capital expenditures. Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.
  • As of Sept. 30, 2013, Morningstar had cash, cash equivalents, and investments of $342.9 million, compared with $321.4 million as of Dec. 31, 2012. Of the $500 million authorized under its share repurchase program, Morningstar has purchased a total of 5.9 million shares for $359.1 million as of Sept. 30, 2013. In the third quarter, Morningstar repurchased approximately 81,000 shares for $6.2 million. The company expects to pay approximately $5.8 million for its regular quarterly dividend on Oct. 31, 2013.

Operating Highlights

  • Licenses for Morningstar Direct rose 17.6% to 8,367.
  • Assets under advisement and management for Investment Advisory services were approximately $106.6 billion as of Sept. 30, 2013, compared with $142.4 billion as of Sept. 30, 2012, a decrease of $35.8 billion, or 25.1%. A change in the scope of services Morningstar provides to an existing client during the fourth quarter of 2012 lowered assets under advisement by $49.1 billion.
  • Assets under management and advisement for Retirement Solutions were approximately $59.5 billion as of Sept. 30, 2013, versus $45.4 billion as of Sept. 30, 2012.
  • Assets under management and advisement for Morningstar Managed Portfolios were approximately $6.6 billion as of Sept. 30, 2013, compared with $4.3 billion as of Sept. 30, 2012.
  • In September, the company launched Morningstar® for iPad®, its most comprehensive mobile offering yet that allows investors to monitor the markets, track their portfolios, and research investments using Morningstar data and analysis.

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 questions about Morningstar's business to investors@morningstar.com or write to the company 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.

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 individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 437,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 10 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 $176 billion in assets under advisement and management as of Sept. 30, 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; liability related to the storage of personal information about our users; a prolonged outage of our database and network facilities; challenges faced by our non-U.S. operations; the availability of free or low-cost investment information; and liability and/or damage to our reputation as a result of some of our currently pending litigation. 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 U.S. 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 September 30


Nine months ended September 30

(in thousands, except per share amounts)


2013


2012


change


2013


2012


change



























Revenue


$  173,482


$  160,952


7.8%


$517,766


$ 487,679


6.2%

Operating expense1:














Cost of revenue2


72,422


60,568


19.6%


198,499


186,143


6.6%


Sales and marketing


22,774


25,732


(11.5%)


78,789


81,431


(3.2%)


General and administrative


22,416


23,966


(6.5%)


77,863


77,090


1.0%


Depreciation and amortization


11,257


10,822


4.0%


33,858


31,616


7.1%


   Total operating expense


128,869


121,088


6.4%


389,009


376,280


3.4%

Operating income 


44,613


39,864


11.9%


128,757


111,399


15.6%

Operating margin


25.7%


24.8%


0.9pp


24.9%


22.8%


2.1pp














Non-operating income (expense):














Interest income, net


630


1,719


(63.4%)


2,035


3,848


(47.1%)


Other income (expense), net


141


161


(12.4%)


2,792


(314)


NMF


     Non-operating income, net


771


1,880


(59.0%)


4,827


3,534


36.6%














Income before income taxes and equity in net income 














of unconsolidated entities


45,384


41,744


8.7%


133,584


114,933


16.2%

Income tax expense


14,265


15,186


(6.1%)


42,647


41,441


2.9%

Equity in net income of unconsolidated entities


315


478


(34.1%)


1,172


1,541


(23.9%)

Consolidated net income   


31,434


27,036


16.3%


92,109


75,033


22.8%

Net loss attributable to noncontrolling interests


29


34


(14.7%)


93


62


50.0%

Net income attributable to Morningstar, Inc.


$    31,463


$    27,070


16.2%


$  92,202


$   75,095


22.8%















Net income per share attributable to Morningstar, Inc.:














Basic


$        0.68


$        0.56


21.4%


$      1.99


$       1.53


30.1%


Diluted


$        0.68


$        0.56


21.4%


$      1.98


$       1.51


31.1%

Weighted average shares outstanding:














Basic


46,080


47,975


(3.9%)


46,293


49,028


(5.6%)


Diluted


46,519


48,481


(4.0%)


46,635


49,664


(6.1%)


















Three months ended September 30

Nine months ended September 30




2013


2012




2013


2012



(1) Includes stock-based compensation expense of:














Cost of revenue


$      1,471


$      1,619




$    4,863


$     4,739




Sales and marketing


456


493




1,490


1,433




General and administrative


1,489


1,882




4,800


5,422




   Total stock-based compensation expense


$      3,416


$      3,994




$  11,153


$   11,594




(2) Morningstar now includes development expense in the cost of revenue category, which the company previously referred to as cost of goods sold. The company has reclassified development expense to include it in cost of revenue for all periods presented.

 

Separately, as a result of Morningstar's recent reorganization (including new positions created, the elimination of roles no longer needed, changes in focus for some existing roles, and the refinement of employee cost categorizations as the company moved to a more centralized structure), approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. These changes did not affect the company's total operating expense or operating income for any of the periods presented.















NMF — Not meaningful, pp — percentage points









 

Morningstar, Inc. and Subsidiaries

Operating Expense as a Percentage of Revenue


















Three months ended September 30


Nine months ended September 30




2013


2012


change


2013


2012


change















Revenue


100.0%


100.0%


-


100.0%


100.0%


-

Operating expense1:














Cost of revenue


41.7%


37.6%


4.1pp


38.3%


38.2%


0.1pp


Sales and marketing


13.1%


16.0%


(2.9)pp


15.2%


16.7%


(1.5)pp


General and administrative


12.9%


14.9%


(2.0)pp


15.0%


15.8%


(0.8)pp


Depreciation and amortization


6.5%


6.7%


(0.2)pp


6.5%


6.5%


-


   Total operating expense2


74.3%


75.2%


(0.9)pp


75.1%


77.2%


(2.1)pp

Operating margin


25.7%


24.8%


0.9pp


24.9%


22.8%


2.1pp


















Three months ended September 30

Nine months ended September 30




2013


2012


change


2013


2012


change

(1) Includes stock-based compensation expense of:












Cost of revenue


0.8%


1.0%


(0.2)pp


0.9%


1.0%


(0.1)pp


Sales and marketing


0.3%


0.3%


-


0.3%


0.3%


-


General and administrative


0.9%


1.2%


(0.3)pp


0.9%


1.1%


(0.2)pp


   Total stock-based compensation expense2


2.0%


2.5%


(0.5)pp


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 September 30


Nine months ended September 30

($000)


2013


2012


2013


2012











Operating activities









Consolidated net income


$           31,434


$         27,036


$        92,109


$        75,033

Adjustments to reconcile consolidated net income to net cash









flows from operating activities:










Depreciation and amortization


11,257


10,822


33,858


31,616


Deferred income taxes


(2,277)


193


(2,315)


492


Stock-based compensation expense


3,416


3,994


11,153


11,594


Equity in net income of unconsolidated entities


(315)


(478)


(1,172)


(1,541)


Excess tax benefits from stock-option exercises










  and vesting of restricted stock units 


(251)


(459)


(4,093)


(5,007)


Holding gain upon acquisition of additional ownership of equity method 










  investments


78


-


(3,635)


-


Other, net


(407)


(130)


742


1,332

Changes in operating assets and liabilities, net of 









effects of acquisitions and dispositions:










Accounts receivable


(1,773)


(2,175)


(1,249)


(6,569)


Other assets


578


89


(2,887)


(3,551)


Accounts payable and accrued liabilities


(3,789)


(4,968)


(3,151)


(4,316)


Accrued compensation


11,177


6,069


(8,404)


(20,851)


Deferred revenue


(5,019)


(4,649)


6,004


7,684


Income taxes - current


3,512


2,695


17,205


7,220


Deferred rent


(401)


(177)


(1,273)


291


Other liabilities


(142)


(335)


(679)


(1,111)


          Cash provided by operating activities


47,078


37,527


132,213


92,316

Investing activities









Purchases of investments


(31,525)


(1,041)


(113,824)


(134,929)

Proceeds from maturities and sales of investments 


12,471


54,827


108,599


216,350

Capital expenditures


(9,069)


(4,954)


(27,950)


(22,876)

Acquisitions, net of cash acquired


46


-


(11,079)


-

Proceeds from sale of a business, net


-


-


957


-

Purchase of equity and cost method investments


(1,842)


(3,554)


(2,751)


(10,304)

Other, net


(4)


(4)


432


(4)


        Cash provided by (used for) investing activities


(29,923)


45,274


(45,616)


48,237

Financing activities









Proceeds from stock-option exercises


362


2,278


3,172


6,752

Employee taxes withheld for restricted stock units


(119)


(299)


(5,276)


(3,992)

Excess tax benefits from stock-option exercises









  and vesting of restricted stock units


251


459


4,093


5,007

Common shares repurchased


(8,857)


(78,259)


(62,794)


(183,698)

Dividends paid


(5,768)


(4,863)


(11,657)


(14,867)

Other, net


(4)


2


(54)


(18)


       Cash used for financing activities


(14,135)


(80,682)


(72,516)


(190,816)

Effect of exchange rate changes on cash and cash equivalents


4,129


2,563


(1,011)


2,007

Net increase (decrease) in cash and cash equivalents


7,149


4,682


13,070


(48,256)

Cash and cash equivalents—Beginning of period


169,810


147,499


163,889


200,437

Cash and cash equivalents—End of period


$         176,959


$       152,181


$      176,959


$      152,181











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

















Three months ended September 30


Nine months ended September 30

($000)


2013


2012


2013


2012











Cash provided by operating activities


$           47,078


$         37,527


$      132,213


$        92,316

Less: Capital expenditures


(9,069)


(4,954)


(27,950)


(22,876)

Free cash flow


$           38,009


$         32,573


$      104,263


$        69,440

 

Morningstar, Inc. and Subsidiaries







Unaudited Condensed Consolidated Balance Sheets


















September 30


December 31

($000)




2013


2012









Assets







Current assets:








Cash and cash equivalents




$        176,959


$        163,889


Investments




165,918


157,529


Accounts receivable, net




113,688


114,361


Deferred tax asset, net




3,155


3,741


Income tax receivable, net




3,451


14,267


Other




26,229


20,823


          Total current assets




489,400


474,610









Property, equipment, and capitalized software, net




99,007


84,022

Investments in unconsolidated entities




38,376


35,305

Goodwill




326,741


320,845

Intangible assets, net




109,269


116,732

Other assets




11,357


10,438


Total assets




$     1,074,150


$     1,041,952









Liabilities and equity







Current liabilities:








Accounts payable and accrued liabilities




$          35,984


$          43,777


Accrued compensation




60,745


67,317


Deferred revenue




151,850


146,015


Other




6,760


256


          Total current liabilities




255,339


257,365









Accrued compensation




8,467


8,281

Deferred tax liability, net




22,188


21,583

Other long-term liabilities




29,680


27,828


Total liabilities




315,674


315,057


Total equity




758,476


726,895


Total liabilities and equity




$     1,074,150


$     1,041,952

Morningstar, Inc. and Subsidiaries

Supplemental Data
















As of September 30








2013


2012


% change

Our employees









Worldwide headcount (approximate)




3,490


3,525


(1.0%)

Number of worldwide equity and credit analysts (approximate)


155


155


0.0%

Number of worldwide fund analysts (approximate)




105


110


(4.5%)











Our business









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


123,656


125,006


(1.1%)

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




7,765,424


7,440,867


4.4%

U.S. Advisor Workstation and Morningstar Office licenses 


165,812


161,957


2.4%

Principia subscriptions 




21,612


27,695


(22.0%)

Morningstar Direct licenses




8,367


7,115


17.6%

Assets under advisement and management (approximate)








Investment Advisory Services




$106.6 bil


$142.4 bil


(25.1%)


Retirement Solutions




$59.5 bil


$45.4 bil


31.1%


Morningstar Managed Portfolios




$6.6 bil


$4.3 bil1


53.5%


Ibbotson Australia




$3.1 bil


$3.1 bil


0.0%





















(1) Revised






















Three months ended September 30


Nine months ended September 30

($000)


2013


2012


2013


2012

Revenue










Investment information


$         137,216


$             128,392


$      412,332


$      388,468


Investment management


36,266


32,560


105,434


99,211


Consolidated revenue


$         173,482


$             160,952


$      517,766


$      487,679













Revenue—U.S.


$         124,998


$             114,021


$      372,746


$      346,442


Revenue—International


$           48,484


$               46,931


$      145,020


$      141,237
























Three months ended September 30


Nine months ended September 30

($000)


2013


2012


2013


2012

Effective tax rate









Income before income taxes and equity in net income of 








unconsolidated entities


$           45,384


$               41,744


$      133,584


$      114,933

Equity in net income of unconsolidated entities


315


478


1,172


1,541

Net loss attributable to noncontrolling interests


29


34


93


62


Total


$           45,728


$               42,256


$      134,849


$      116,536

Income tax expense


$           14,265


$               15,186


$        42,647


$        41,441

Effective tax rate


31.2%


35.9%


31.6%


35.6%

 

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 September 30


Nine months ended September 30

($000)


2013


2012


% change


2013


2012


% change















Consolidated revenue 


$  173,482


$  160,952


7.8%


$  517,766


$  487,679


6.2%

Less: divestitures


-


(1,481)


NMF




(4,144)


NMF

Less: acquisitions


(1,398)


-


NMF


(2,265)


-


NMF

Unfavorable impact of foreign currency translations


1,419


-


NMF


2,608


-


NMF

Revenue excluding acquisitions, divestitures, and 














foreign currency translations


$  173,503


$  159,471


8.8%


$  518,109


$  483,535


7.2%





























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


















Three months ended September 30


Nine months ended September 30

($000)


2013


2012


% change


2013


2012


% change















International revenue 


$    48,484


$    46,931


3.3%


$  145,020


$  141,237


2.7%

Less: divestitures


-


(1,353)


NMF


-


(3,814)


NMF

Less: acquisitions


(1,398)


-


NMF


(2,265)


-


NMF

Unfavorable impact of foreign currency translations


1,419


-


NMF


2,608


-


NMF

International revenue excluding acquisitions, divestitures,













and foreign currency translations


$    48,505


$    45,578


6.4%


$  145,363


$  137,423


5.8%





























The following table summarizes the change in operating expense:




























Three months ended September 30


Nine months ended September 30

($000)


2013


2012


$ change


2013


2012


$ change

Total operating expense


$  128,869


$  121,088


$   7,781


$  389,009


$  376,280


$ 12,729
















Favorable impact of foreign currency translations





(1,347)






(2,659)


All other changes in operating expense






9,128






15,388


Total






$   7,781






$ 12,729

 

SOURCE Morningstar, Inc.



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