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Press release from PR Newswire

Morningstar, Inc. Reports Third-Quarter 2013 Financial Results

Wednesday, October 23, 2013

Morningstar, Inc. Reports Third-Quarter 2013 Financial Results

16:08 EDT Wednesday, October 23, 2013

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 Relations22 W. Washington StreetChicago, 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 StatementsThis 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 MeasuresTo 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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