MORNINGSTAR, INC. CHICAGO, Oct. 22, 2014 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2014 financial results. The company reported consolidated revenue of $193.1 million, an 11.3% increase from $173.5 million in the third quarter of 2013. Consolidated operating income was $45.3 million, an increase of 1.5% compared with $44.6 million in the same period a year ago. Net income was $30.2 million, or 67 cents per diluted share, compared with $31.5 million, or 68 cents per diluted share, in the third quarter of 2013.
Excluding acquisitions, divestitures, and the effect of foreign currency translations, revenue rose 9.3% in the third quarter of 2014. 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. Organic revenue rose 9.3%, led by strong results from Morningstar Direct and Morningstar Credit Ratings. Our retirement business is growing nicely and reached a milestone--we now have more than 1 million managed retirement accounts in the United States."
He added, "During the quarter, we published several signature thought leadership reports, including our annual target-date industry research, and introduced a classification system to help investors identify, compare, and analyze strategic beta exchange-traded products, a new and growing breed of investment vehicles."
Financial Highlights
Revenue and Key Operating Metrics
-- Investment information revenue was $152.3 million, an 11.0% increase
from $137.2 million in the third quarter of 2013. Morningstar Direct(SM)
and Morningstar Credit Ratings (the company's structured credit research
and ratings business) were the main contributors to revenue growth.
Morningstar® Advisor Workstation(SM) (including Morningstar Office(SM))
was also a positive contributor to revenue growth, which was offset by
lower revenue for Morningstar® Principia®. The company is in the
process of migrating clients from Principia to Morningstar Advisor
Workstation and other Morningstar products.
-- Investment management revenue was $40.9 million, a 12.7% increase from
$36.3 million in the third quarter of 2013, driven by strong results for
Morningstar® Managed Portfolios(SM) and Retirement Solutions. Slightly
lower revenue for Investment Advisory services partially offset the
increase.
-- Operating margin was 23.4% in the third quarter of 2014, down from 25.7%
in the same period in 2013. Higher compensation expense, including
salaries for new hires and increased sales commissions, as well as
additional operating expense from recent acquisitions, were the primary
drivers of the margin decline.
Cash Flow and Balance Sheet
-- Consolidated free cash flow was negative $3.4 million in the third
quarter of 2014, reflecting cash provided by operating activities of
$8.6 million less $12.0 million of cash used for capital expenditures.
Free cash flow was down from $38.0 million in the third quarter of 2013
largely because of the $61.0 million payment for the previously
announced litigation settlement with Business Logic. 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, 2014, cash, cash equivalents, and investments totaled
$227.8 million, compared with $298.6 million as of Dec. 31, 2013.
Morningstar had $30.0 million of short-term debt as of Sept. 30, 2014.
-- In the third quarter of 2014, Morningstar repurchased approximately
134,000 shares for $9.1 million. Of the $700 million authorized under
its share repurchase program, Morningstar had purchased a total of 7.7
million shares for $495.6 million as of Sept. 30, 2014.
-- The company expects to pay approximately $7.6 million for its regular
quarterly dividend on Oct. 31, 2014.
Comparability of Year-Over-Year Results
Certain items affected the comparability of the company's 2014 results versus the same periods in 2013:
-- The company's third-quarter results included $2.8 million in revenue and
approximately $5.5 million of incremental operating expense from
acquisitions.
-- During the third quarter of 2014, commission expense rose $1.8 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.
-- During the second quarter of 2014, Morningstar recorded a non-recurring
expense of $61.0 million--approximately $38.2 million after taxes, or 85
cents per share--in connection with the Business Logic litigation
settlement, which is included in the company's results for the nine
months ended Sept. 30, 2014.
Operating Highlights
-- Licenses for Morningstar Direct rose 17.0% to 9,648.
-- Assets under management and advisement for Morningstar Managed
Portfolios were approximately $8.8 billion as of Sept. 30, 2014,
compared with $6.6 billion as of Sept. 30, 2013. Assets under management
and advisement for Retirement Solutions were approximately $76.7 billion
as of Sept. 30, 2014, versus $59.5 billion as of Sept. 30, 2013. Both
product lines benefited from asset inflows and positive market
performance.
-- Investment Advisory assets under advisement as of Sept. 30, 2014 were
$25.7 billion lower versus the same date in 2013, reflecting the ongoing
effect of clients moving to in-house management for fund-of-funds
portfolios in the variable annuity industry.
-- Morningstar had approximately 3,800 employees worldwide as of Sept. 30,
2014, compared with 3,490 as of Sept. 30, 2013, reflecting the addition
of product and technology roles in the United States, data analysts in
India, and the ByAllAccounts and HelloWallet acquisitions.
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 479,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 13 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 investment advisory subsidiaries and had approximately $169 billion in assets under advisement and management as of Sept. 30, 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 global financial uncertainty, trends in the mutual fund industry, and continued growth in passively managed investment vehicles; the effect 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: consolidated revenue excluding acquisitions, divestitures, and the effect of foreign currency translations (organic revenue) and free cash flow. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Morningstar presents consolidated revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) because the company believes this non-GAAP measure helps investors better compare period-over-period results.
In addition, 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 about free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables.
For more information about these non-GAAP measures, please see the reconciliations 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: 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 September 30 Nine months ended September 30
(in thousands, except per share
amounts) 2014 2013 change 2014 (2) 2013 change
------------------------------- ---- ---- ------ ---- ---- ------
Revenue $193,106 $173,482 11.3% $563,656 $517,766 8.9%
Operating expense(1):
Cost of revenue 80,142 72,422 10.7% 237,243 198,499 19.5%
Sales and marketing 26,761 22,774 17.5% 83,138 78,789 5.5%
General and administrative 26,384 22,416 17.7% 82,926 77,863 6.5%
Depreciation and amortization 14,558 11,257 29.3% 40,336 33,858 19.1%
Litigation settlement - - - 61,000 - -
Total operating expense 147,845 128,869 14.7% 504,643 389,009 29.7%
Operating income 45,261 44,613 1.5% 59,013 128,757 (54.2%)
Operating margin 23.4% 25.7% (2.3)pp 10.5% 24.9% (14.4)pp
Non-operating income (expense):
Interest income, net 515 630 (18.3%) 1,734 2,035 (14.8%)
Other income (expense), net (813) 141 NMF 4,731 2,792 69.4%
Non-operating income (expense), net (298) 771 NMF 6,465 4,827 33.9%
Income before income taxes and
equity in net income
of unconsolidated entities 44,963 45,384 (0.9%) 65,478 133,584 (51.0%)
Equity in net income of
unconsolidated entities 337 315 7.0% 1,433 1,172 22.3%
Income tax expense 15,149 14,265 6.2% 20,188 42,647 (52.7%)
------ ------ ------ ------
Consolidated net income 30,151 31,434 (4.1%) 46,723 92,109 (49.3%)
Net loss attributable to
noncontrolling interests 29 29 0.0% 64 93 (31.2%)
Net income attributable to
Morningstar, Inc. $30,180 $31,463 (4.1%) $46,787 $92,202 (49.3%)
======= ======= ======= =======
Net income per share attributable
to Morningstar, Inc.:
Basic $0.67 $0.68 (1.5%) $1.04 $1.99 (47.7%)
Diluted $0.67 $0.68 (1.5%) $1.04 $1.98 (47.5%)
Weighted average shares
outstanding:
Basic 44,734 46,080 (2.9%) 44,763 46,293 (3.3%)
Diluted 44,889 46,519 (3.5%) 44,990 46,635 (3.5%)
Three months ended September 30 Nine months ended September 30
2014 2013 change 2014 2013 change
---- ---- ------ ---- ---- ------
(1) Includes stock-based
compensation expense of:
Cost of revenue $2,177 $1,471 48.0% $5,829 $4,863 19.9%
Sales and marketing 607 456 33.1% 1,634 1,490 9.7%
General and administrative 2,167 1,489 45.5% 5,790 4,800 20.6%
Total stock-based compensation
expense $4,951 $3,416 44.9% $13,253 $11,153 18.8%
(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 nine
months of 2014 as compared with
the same period in 2013, changes
related to our more centralized
organizational structure added
approximately $14 million of
compensation expense to cost of
revenue and reduced the
compensation expense in our sales
and marketing and general and
administrative expense categories
by approximately $8 million and
$6 million, respectively.
NMF -Not meaningful, pp -
percentage points
Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue (Unaudited)
Three months ended September 30 Nine months ended September 30
2014 2013 change 2014 2013 change
---- ---- ------ ---- ---- ------
Revenue 100.0% 100.0% - 100.0% 100.0% -
Operating expense(1):
Cost of revenue 41.5% 41.7% (0.2)pp 42.1% 38.3% 3.8pp
Sales and marketing 13.9% 13.1% 0.8pp 14.7% 15.2% (0.5)pp
General and administrative 13.7% 12.9% 0.8pp 14.7% 15.0% (0.3)pp
Depreciation and amortization 7.5% 6.5% 1.0pp 7.2% 6.5% 0.7pp
Litigation settlement 0.0% 0.0% - 10.8% 0.0% 10.8pp
Total operating expense(2) 76.6% 74.3% 2.3pp 89.5% 75.1% 14.4pp
Operating margin 23.4% 25.7% (2.3)pp 10.5% 24.9% (14.4)pp
==== ==== ==== ====
Three months ended September 30 Nine months ended September 30
2014 2013 change 2014 2013 change
---- ---- ------ ---- ---- ------
(1) Includes stock-based compensation
expense of:
Cost of revenue 1.1% 0.8% 0.3pp 1.0% 0.9% 0.1pp
Sales and marketing 0.3% 0.3% - 0.3% 0.3% -
General and administrative 1.1% 0.9% 0.2pp 1.0% 0.9% 0.1pp
Total stock-based compensation
expense(2) 2.6% 2.0% 0.6pp 2.4% 2.2% 0.2pp
(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) 2014 2013 2014 2013
----- ---- ---- ---- ----
Operating activities
Consolidated net income $30,151 $31,434 $46,723 $92,109
Adjustments to reconcile
consolidated net income to
net cash flows from operating
activities:
Depreciation and amortization 14,558 11,257 40,336 33,858
Stock-based compensation expense 4,951 3,416 13,253 11,153
Other, net (2,562) (3,172) (14,405) (10,473)
Changes in operating assets and
liabilities, net of
effects of acquisitions and
dispositions (38,498) 4,143 (10,619) 5,566
Cash provided by operating
activities 8,600 47,078 75,288 132,213
Investing activities
Purchases of investments (2,897) (31,525) (10,612) (113,824)
Proceeds from maturities and sales
of investments 7,621 12,471 103,120 108,599
Capital expenditures (11,957) (9,069) (42,756) (27,950)
Acquisitions, net of cash acquired - 46 (64,447) (11,079)
Proceeds from sale of a business,
net - - - 957
Purchase of equity and cost method
investments - (1,842) - (2,751)
Other, net (30) (4) 229 432
--- --- --- ---
Cash used for investing activities (7,263) (29,923) (14,466) (45,616)
Financing activities
Proceeds from stock-option
exercises 1,694 362 3,766 3,172
Employee taxes withheld for
restricted stock units (119) (119) (5,122) (5,276)
Excess tax benefits from stock-
option exercises
and vesting of restricted stock
units 1,032 251 2,945 4,093
Common shares repurchased (5,380) (8,857) (42,100) (62,794)
Dividends paid (7,603) (5,768) (22,912) (11,657)
Proceeds from short-term debt 30,000 - 30,000 -
Other, net (23) (4) (9) (54)
--- --- --- ---
Cash provided by (used for)
financing activities 19,601 (14,135) (33,432) (72,516)
Effect of exchange rate changes on
cash and cash equivalents (7,874) 4,129 (6,232) (1,011)
------ ----- ------ ------
Net increase in cash and cash
equivalents 13,064 7,149 21,158 13,070
Cash and cash equivalents-
Beginning of period 176,254 169,810 168,160 163,889
------- ------- ------- -------
Cash and cash equivalents-End of
period $189,318 $176,959 $189,318 $176,959
======== ======== ======== ========
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
September 30 December 31
($000) 2014 2013
----- ---- ----
Assets
Current assets:
Cash and cash equivalents $189,318 $168,160
Investments 38,490 130,407
Accounts receivable, net 124,966 114,131
Deferred tax asset, net 7,524 3,892
Income tax receivable, net 4,427 3,942
Other 23,619 26,361
Total current assets 388,344 446,893
Property, equipment, and capitalized
software, net 112,584 104,986
Investments in unconsolidated entities 30,428 38,714
Goodwill 378,969 326,450
Intangible assets, net 103,443 103,909
Other assets 6,407 9,716
Total assets $1,020,175 $1,030,668
Liabilities and equity
Current liabilities:
Accounts payable and accrued
liabilities $38,495 $42,131
Accrued compensation 67,692 71,403
Deferred revenue 150,051 149,225
Short-term debt 30,017 -
Other 4,632 6,786
Total current liabilities 290,887 269,545
Accrued compensation 6,905 8,193
Deferred tax liability, net 17,565 23,755
Other long-term liabilities 34,299 37,885
------ ------
Total liabilities 349,656 339,378
Total equity 670,519 691,290
Total liabilities and equity $1,020,175 $1,030,668
Morningstar, Inc. and Subsidiaries
Supplemental Data (Unaudited)
As of September 30
2014 2013 % change
---- ---- --------
Our business
Morningstar.com Premium Membership
subscriptions (U.S.) 122,275 123,656 (1.1%)
Registered users for Morningstar.com
(U.S. ) 8,097,864 7,765,424 4.3%
Advisor Workstation clients (U.S.) 171 159 (2) 7.5%
Morningstar Office licenses (U.S.) 4,188 4,003 (2) 4.6%
Principia subscriptions 10,054 21,612 (53.5%)
Morningstar Direct licenses 9,648 8,247 (1) 17.0%
Assets under advisement and management
(approximate)
Investment
Advisory
services $80.9 bil $106.6 bil (24.1%)
Retirement
Solutions $76.7 bil $59.5 bil 28.9%
Morningstar
Managed
Portfolios $8.8 bil $6.6 bil 33.3%
Ibbotson
Australia $3.1 bil $3.1 bil 0.0%
Our employees (approximate)
Worldwide headcount 3,800 3,490 8.9%
Number of equity and credit analysts 170 155 9.7%
Number of manager research analysts 100 105 (4.8%)
(1) Revised to reflect a minor calculation
change.
(2) Beginning in the second quarter of 2014, we
changed our reporting to show the number of
enterprise clients for Morningstar Advisor
Workstation instead of the number of
individual licenses. We believe this is a more
meaningful indicator of underlying business
trends because per-user pricing varies
significantly depending on the scope of the
license. We also began disclosing the number
of licenses for Morningstar Office as a
separate line item.
Three months ended September Nine months ended September
30 30
2014 2013 2014 2013
---- ---- ---- ----
Average assets under management and
advisement $169.2 bil $170.9 bil $167.3 bil $166.3 bil
Number of commercial mortgage-backed
securities (CMBS) new-issue ratings
completed 19 7 34 28
Rated balance for CMBS new-issue ratings $13.5 bil $3.8 bil $24.0 bil $16.8 bil
Three months ended September Nine months ended September
30 30
($000) 2014 2013 2014 2013
--------------------------------- ---- ---- ---- ----
Revenue
Investment
information $152,252 $137,216 $443,049 $412,332
Investment
management 40,854 36,266 120,607 105,434
Consolidated
revenue $193,106 $173,482 $563,656 $517,766
Revenue-U.S. $141,276 $124,998 $407,681 $372,746
Revenue-
International $51,830 $48,484 $155,975 $145,020
Three months ended September 30 Nine months ended September
30
($000) 2014 2013 2014 2013
----- ---- ---- ---- ----
Effective tax rate
Income before income taxes and equity in
net income of
unconsolidated entities $44,963 $45,384 $65,478 $133,584
Equity in net income of unconsolidated
entities 337 315 1,433 1,172
Net loss attributable to noncontrolling
interests 29 29 64 93
Total $45,329 $45,728 $66,975 $134,849
Income tax expense $15,149 $14,265 $20,188 $42,647
Effective tax rate 33.4% 31.2% 30.1% 31.6%
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) 2014 2013 % change 2014 2013 % change
----- ---- ---- -------- ---- ---- --------
Consolidated revenue $193,106 $173,482 11.3% $563,656 $517,766 8.9%
Less: divestitures - - NMF - - NMF
Less: acquisitions (2,752) - NMF (6,823) - NMF
Favorable effect of foreign currency
translations (683) - NMF (762) - NMF
Revenue excluding acquisitions,
divestitures, and
foreign currency translations $189,671 $173,482 9.3% $556,071 $517,766 7.4%
Three months ended September 30 Nine months ended September 30
2014 2013 % change 2014 2013 % change
---- ---- -------- ---- ---- --------
Cash provided by operating activities $8,600 $47,078 (81.7%) $75,288 $132,213 (43.1%)
Less: Capital expenditures (11,957) (9,069) 31.8% (42,756) (27,950) 53.0%
Free cash flow $(3,357) $38,009 (108.8%) $32,532 $104,263 (68.8%)
======= ======= ======= ========
The following table summarizes the change in operating expense:
Three months ended September 30 Nine months ended September 30
($000) 2014 2013 $ change 2014 2013 $ change
----- ---- ---- -------- ---- ---- --------
Total operating expense $147,845 $128,869 $18,976 $504,643 $389,009 $115,634
Acquisitions 5,500 10,390
Unfavorable effect of foreign
currency translations 961 1,517
Litigation settlement - 61,000
All other changes in operating
expense 12,515 42,727
Total $18,976 $115,634
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SOURCE Morningstar, Inc.
