MORNINGSTAR, INC. 
By CHICAGO, April 23, 2014 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its first-quarter 2014 financial results. The company reported consolidated revenue of $181.2 million, a 7.3% increase from $168.9 million in the first quarter of 2013. Consolidated operating income was $38.5 million, down 5.0% from $40.6 million in the same period a year ago. Net income was $26.4 million, or 58 cents per diluted share, in the first quarter of 2014, compared with $29.6 million, or 63 cents per diluted share, in the first quarter of 2013.
Excluding acquisitions and a slight negative effect from foreign currency translations, revenue rose 6.9% in the first quarter of 2014. Revenue excluding acquisitions 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, "Organic revenue growth picked up slightly in the first quarter of 2014, and we continued investing in our existing business as well as in a number of promising initiatives. We hired about 200 new employees year over year, including for product and technology roles in the United States as well as data analysts based in India. While these investments added to our operating expense for the quarter, we see many opportunities to build shareholder value over the long term."
Financial Highlights
Revenue and Key Operating Metrics
-- Investment information revenue was $141.3 million, a 4.6% increase from
$135.1 million in the first quarter of 2013. Morningstar Data,
Morningstar Direct, and Morningstar Advisor Workstation were the main
contributors to revenue growth. These positive results were partially
offset by a $2.3 million revenue decline for Principia. The company has
been migrating Principia clients to Morningstar Advisor Workstation and
other Morningstar products and expects to continue supporting clients
using Principia until the end of 2014.
-- Investment management revenue was $39.9 million, an 18.1% increase from
$33.8 million in the first quarter of 2013. Retirement Solutions and
Morningstar Managed Portfolios were the main contributors to revenue
growth, and revenue for Investment Advisory services was up slightly
versus the same period of 2013.
-- Consolidated operating income was $38.5 million in the first quarter of
2014, a 5.0% decrease from the same period in 2013. Operating expense
rose $14.3 million, or 11.2%, in the first quarter of 2014, mainly
because of higher salary and other compensation-related expense from
additional headcount.
-- Operating margin was 21.3% in the first quarter of 2014, down from 24.0%
in the same period in 2013.
Cash Flow and Balance Sheet
-- Morningstar generated negative free cash flow of $8.9 million in the
first quarter of 2014, reflecting positive cash provided by operating
activities of $11.9 million less $20.8 million of cash used for 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. The company
made bonus payments of $39.8 million in the first quarter of 2014,
compared with $36.6 million in the first quarter of 2013. 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.
-- As of March 31, 2014, cash, cash equivalents, and investments totaled
$264.0 million, compared with $298.6 million as of Dec. 31, 2013. Of the
$700 million authorized under its share repurchase program, Morningstar
had purchased a total of 7.4 million shares for $471.5 million as of
March 31, 2014. In the first quarter of 2014, Morningstar repurchased
approximately 280,000 shares for $21.7 million.
-- On April 1, 2014, the company used approximately $28 million in cash to
acquire ByAllAccounts, Inc., a provider of innovative data aggregation
technology for financial applications, to enhance many of its key
solutions across core customer groups, particularly offerings that
support an advisor's workflow.
-- The company expects to pay approximately $7.6 million for its regular
quarterly dividend on April 30, 2014.
Comparability of Year-Over-Year Results
Several items affected the comparability of first-quarter 2014 results versus the same period in 2013:
-- Morningstar moved to a more centralized organizational structure in
2013. As a result, approximately 180 net positions shifted from the
general and administrative and sales and marketing categories to cost of
revenue. For the first quarter of 2014 compared with the same period in
2013, changes related to the company's more centralized organizational
structure added approximately $7 million of compensation expense to cost
of revenue. At the same time, these changes reduced compensation expense
in the sales and marketing and general and administrative expense
categories by approximately $4 million and $3 million, respectively.
-- As a result of a change in accounting estimate involving revenue
recognition for certain investment management contracts with minimum fee
features, Morningstar recognized an additional $1.7 million of
investment management revenue in the first quarter of 2014 that will not
recur in future quarters.
-- During the first quarter of 2014, commission expense rose $2.9 million
compared with the prior-year period, mainly because of a change to the
company's sales commission structure that requires a different
accounting treatment. Morningstar now expenses sales commissions as
incurred instead of amortizing them over the term of the underlying
contracts. The company continues to amortize the prepaid commission
balance from the previous commission structure and expensed an
additional $2.7 million of commission cost in the quarter. Morningstar
expects to incur additional commission expense for the next several
quarters because of this change.
Operating Highlights
-- Licenses for Morningstar Direct rose 15.5% to 8,858.
-- Assets under management and advisement for Retirement Solutions were
approximately $68.0 billion as of March 31, 2014, versus $51.9 billion
as of March 31, 2013. Assets under management and advisement for
Morningstar Managed Portfolios were approximately $7.8 billion as of
March 31, 2014, compared with $5.3 billion as of March 31, 2013. Both
product lines benefited from strong market performance and asset
inflows.
-- Companies that offer variable annuities have continued to face difficult
market conditions, which has prompted some of Morningstar's clients to
begin managing their fund-of-funds portfolios in-house instead of using
outside subadvisors. Because of this trend, Investment Advisory assets
under advisement as of March 31, 2014 were $12.0 billion lower versus
the same date in 2013.
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.
Annual Shareholders' Meeting
Investors are invited to attend Morningstar's annual meeting at 9 a.m. Central Time on Tuesday, May 13, 2014, at its corporate headquarters at 22 W. Washington Street in Chicago. If you would like to attend, please register 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 individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 456,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 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 had approximately $164 billion in assets under advisement and management as of March 31, 2014. 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, liability for any losses that result from an actual or claimed breach of our fiduciary duties; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy; a prolonged outage of our database and network facilities; any failures or disruptions in our electronic delivery systems and the Internet; liability and/or damage to our reputation as a result of some of our pending litigation; liability related to the storage of personal information about our users; general industry conditions and competition, including current global financial uncertainty, trends in the mutual fund industry, and continued growth in passively managed investment vehicles; the impact of market volatility on revenue from asset-based fees; failing to maintain and protect our brand, independence, and reputation; changes in laws applicable to our investment advisory or credit rating operations, compliance failures, or regulatory action; and challenges faced by our non-U.S. operations, including the concentration of development work at our offshore facilities in China and India. 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, 2013. 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.
©2014 Morningstar, Inc. All Rights Reserved.
MORN-E
Contacts:
Media: Carling Spelhaug, +1 312-696-6150 or carling.spelhaug@morningstar.com
Margaret Kirch Cohen, +1 312-696-6383 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) 2014 2013 change
--------------------- ---- ---- ------
Revenue $181,165 $168,856 7.3%
Operating expense(1)(2):
Cost of revenue 75,714 61,650 22.8%
Sales and marketing 28,428 27,980 1.6%
General and
administrative 26,104 27,327 (4.5%)
Depreciation and
amortization 12,387 11,339 9.2%
Total operating expense 142,633 128,296 11.2%
------- -------
Operating income 38,532 40,560 (5.0%)
Operating margin 21.3% 24.0% (2.7)pp
Non-operating income
(expense):
Interest income, net 585 741 (21.1%)
Other income, net 280 204 37.3%
---
Non-operating income,
net 865 945 (8.5%)
--- ---
Income before income
taxes and equity in net
income
of unconsolidated
entities
39,397 41,505 (5.1%)
Equity in net income of
unconsolidated entities 599 497 20.5%
Income tax expense 13,650 12,427 9.8%
------ ------
Consolidated net income 26,346 29,575 (10.9%)
Net loss attributable to
noncontrolling
interests 30 43 (30.2%)
Net income attributable
to Morningstar, Inc. $26,376 $29,618 (10.9%)
======= =======
Net income per share
attributable to
Morningstar, Inc.:
Basic $0.59 $0.64 (7.8%)
Diluted $0.58 $0.63 (7.9%)
Weighted average shares
outstanding:
Basic 44,777 46,406 (3.5%)
Diluted 45,093 46,814 (3.7%)
Three months ended
March 31
2014 2013 change
---- ---- ------
(1) Includes stock-
based compensation
expense of:
Cost of revenue $1,762 $1,701 3.6%
Sales and marketing 497 512 (2.9%)
General and
administrative 1,680 1,570 7.0%
Total stock-based
compensation expense $3,939 $3,783 4.1%
====== ======
(2) Morningstar moved to a
more centralized
organizational structure in
2013. As a result,
approximately 180 net
positions shifted from the
general and administrative
and sales and marketing
categories to cost of
revenue. For the first
quarter of 2014 compared
with the same period in
2013, changes related to
the company's more
centralized organizational
structure added
approximately $7 million of
compensation expense to
cost of revenue. At the
same time, these changes
reduced compensation
expense in the sales and
marketing and general and
administrative expense
categories by approximately
$4 million and $3 million,
respectively.
NMF -Not meaningful, pp -
percentage points
Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue (Unaudited)
Three months ended
March 31
2014 2013 change
---- ---- ------
Revenue 100.0% 100.0% -
Operating expense(1):
Cost of revenue 41.8% 36.5% 5.3pp
Sales and marketing 15.7% 16.6% (0.9)pp
General and administrative 14.4% 16.2% (1.8)pp
Depreciation and
amortization 6.8% 6.7% 0.1pp
Total operating expense(2) 78.7% 76.0% 2.7pp
---- ----
Operating margin 21.3% 24.0% (2.7)pp
==== ====
Three months ended
March 31
2014 2013 change
---- ---- ------
(1) Includes stock-based compensation
expense of:
Cost of revenue 1.0% 1.0% -
Sales and marketing 0.3% 0.3% -
General and administrative 0.9% 0.9% -
Total stock-based
compensation expense(2) 2.2% 2.2% -
=== ===
(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) 2014 2013
----- ---- ----
Operating
activities
Consolidated
net income $26,346 $29,575
Adjustments to
reconcile
consolidated
net income to
net cash
flows from
operating
activities:
Depreciation
and
amortization 12,387 11,339
Stock-based
compensation
expense 3,939 3,783
Other, net (4,048) (5,475)
Changes in
operating
assets and
liabilities,
net of
effects of
acquisitions
and
dispositions (26,740) (12,549)
Cash provided
by operating
activities 11,884 26,673
Investing
activities
Purchases of
investments (1,697) (3,694)
Proceeds from
maturities
and sales of
investments 73,712 61,152
Capital
expenditures (20,793) (9,118)
Other, net 260 892
--- ---
Cash provided
by investing
activities 51,482 49,232
Financing
activities
Proceeds from
stock-option
exercises 1,278 2,088
Employee taxes
withheld for
restricted
stock units (7) (82)
Excess tax
benefits from
stock-option
exercises
and vesting
of restricted
stock units
573 1,587
Common shares
repurchased (21,697) (15,240)
Dividends paid (7,644) -
Other, net (5) (3)
--- ---
Cash used for
financing
activities (27,502) (11,650)
Effect of
exchange rate
changes on
cash and cash
equivalents 609 (3,252)
--- ------
Net increase
in cash and
cash
equivalents 36,473 61,003
Cash and cash
equivalents-
Beginning of
period 168,160 163,889
------- -------
Cash and cash
equivalents-
End of period $204,633 $224,892
======== ========
Morningstar, Inc. and
Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
March 31 December 31
($000) 2014 2013
----- ---- ----
Assets
Current assets:
Cash and cash equivalents $204,633 $168,160
Investments 59,340 130,407
Accounts receivable, net 131,464 114,131
Deferred tax asset, net 4,381 3,892
Income tax receivable, net - 3,942
Other 25,124 26,361
------ ------
Total current assets 424,942 446,893
Property, equipment, and
capitalized software, net 107,438 104,986
Investments in unconsolidated
entities 39,176 38,714
Goodwill 327,936 326,450
Intangible assets, net 98,947 103,909
Other assets 8,978 9,716
Total assets $1,007,417 $1,030,668
======== ==========
Liabilities and equity
Current liabilities:
Accounts payable and accrued
liabilities $39,790 $42,131
Accrued compensation 41,718 71,403
Deferred revenue 159,591 149,225
Income taxes payable 2,267 -
Other 4,491 6,786
----- -----
Total current liabilities 247,857 269,545
Accrued compensation 7,495 8,193
Deferred tax liability, net 21,743 23,755
Other long-term liabilities 33,605 37,885
------ ------
Total liabilities 310,700 339,378
Total equity 696,717 691,290
Total liabilities and equity $1,007,417 $1,030,668
======== ==========
Morningstar, Inc.
and Subsidiaries
Supplemental Data
(Unaudited)
As of March 31
2014 2013 % change
---- ---- --------
Our business
Morningstar.com
Premium Membership
subscriptions
(U.S.) 123,777 124,138 (0.3%)
Registered users for
Morningstar.com
(U.S.) 7,945,324 7,607,716 4.4%
U.S. Advisor
Workstation and
Morningstar Office
licenses 167,207 163,141 2.5%
Principia
subscriptions 12,006 25,652 (53.2%)
Morningstar Direct
licenses 8,858 7,671(1) 15.5%
Assets under
advisement and
management
(approximate)
Investment Advisory
services $84.7 bil $96.7 bil (12.4%)
Retirement Solutions $68.0 bil $51.9 bil 31.0%
Morningstar Managed
Portfolios $7.8 bil $5.3 bil 47.2%
Ibbotson Australia $3.2 bil $3.2 bil 0.0%
Our employees
(approximate)
Worldwide headcount 3,645 3,445 5.8%
Number of worldwide
equity and credit
analysts 170 150 13.3%
Number of worldwide
fund analysts 110 105 4.8%
(1) Revised to reflect a minor
calculation change.
Three months ended March 31
2014 2013 % change
---- ---- --------
Average assets under
management and
advisement $161.5 bil $153.3 bil 5.3%
Number of new
commercial
mortgage-based
securities (CMBS)
new-issue ratings
completed 9 10 (10.0%)
Rated balance for
CMBS new-issue
ratings $5.6 bil $5.4 bil 3.7%
Three months ended March 31
($000) 2014 2013
----- ---- ----
Revenue
Investment
information $141,270 $135,085
Investment
management 39,895 33,771
Consolidated revenue $181,165 $168,856
======== ========
Revenue-U.S. $129,952 $121,413
Revenue-
International $51,213 $47,443
Three months ended March 31
($000) 2014 2013
----- ---- ----
Effective tax rate
Income before income
taxes and equity in
net income of
unconsolidated
entities
$39,397 $41,505
Equity in net income
of unconsolidated
entities 599 497
Net loss
attributable to
noncontrolling
interests 30 43
Total $40,026 $42,045
======= =======
Income tax expense $13,650 $12,427
Effective tax rate 34.1% 29.6%
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
March 31
($000) 2014 2013 % change
----- ---- ---- --------
Consolidated
revenue $181,165 $168,856 7.3%
Less:
divestitures - - NMF
Less:
acquisitions (1,477) - NMF
Unfavorable
effect
of
foreign
currency
translations 806 - NMF
Revenue
excluding
acquisitions,
divestitures,
and
foreign
currency
translations
$180,494 $168,856 6.9%
======== ======
Reconciliation from international revenue to
international revenue excluding divestitures,
acquisitions, and foreign currency
translations (international organic revenue):
Three months ended
March 31
($000) 2014 2013 % change
----- ---- ---- --------
International
revenue $51,213 $47,443 7.9%
Less:
divestitures - - NMF
Less:
acquisitions (1,477) - NMF
Unfavorable
effect
of
foreign
currency
translations 806 - NMF
International
revenue
excluding
acquisitions,
divestitures,
and
foreign
currency
translations
$50,542 $47,443 6.5%
======= =======
Reconciliation from cash provided by operating
activities to free cash flow (a non-GAAP
measure):
Three months ended
March 31
($000) 2014 2013 % change
----- ---- ---- --------
Cash
provided
by
operating
activities $11,884 $26,673 (55.4%)
Less:
Capital
expenditures (20,793) (9,118) 128.0%
Free
cash
flow $(8,909) $17,555 (150.7%)
======= =======
SOURCE Morningstar, Inc.
