Exhibit 99.1
| News Release |
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| 22 West Washington Street | Telephone: | +1 312 696-6000 |
| Chicago | Facsimile: | +1 312 696-6009 |
| Illinois 60602 |
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Contact:
Media: Margaret Kirch Cohen, 312-696-6383 or margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com or by fax to 312-696-6009.
FOR IMMEDIATE RELEASE
Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2008 Financial Results
CHICAGO, Feb. 19, 2009—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its fourth-quarter and full-year 2008 financial results. The company reported consolidated revenue of $119.3 million in the fourth quarter of 2008, a 1.0% increase from revenue of $118.1 million in the fourth quarter of 2007. Consolidated operating income was $28.7 million in the fourth quarter of 2008, a decrease of 13.9% compared with $33.3 million in the same period a year ago. Morningstar’s net income was $19.3 million in the fourth quarter of 2008, or 39 cents per diluted share, compared with $20.0 million, or 41 cents per diluted share, in the fourth quarter of 2007. Morningstar’s fourth-quarter results included $6.4 million in revenue from acquisitions completed in 2008.
Excluding acquisitions and the impact of foreign currency translations, Morningstar’s revenue declined approximately 1.3% in the fourth quarter of 2008, compared with the prior-year period. Foreign currency translations had a negative impact of $3.8 million in the quarter. Revenue excluding acquisitions and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.
For the year ended Dec. 31, 2008, revenue increased 15.5% to $502.5 million, compared with $435.1 million in 2007. Consolidated operating income increased 18.6% to $139.1 million in 2008. Net income was $92.5 million, or $1.88 per diluted share, in 2008, compared with $73.9 million, or $1.53 per diluted share, in 2007. Revenue for the full year included $27.1 million from acquisitions.
1
Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We had a good year overall, but our revenue growth slowed significantly in the fourth quarter. About 13% of our revenue is tied to asset-based fees, so the severe market downturn had a negative impact. Because many of our clients have been cutting back on spending, new business and renewals in other parts of the company also suffered in the latter part of the year.”
He added, “Looking at our results for the full year, our revenue grew to more than $502 million in 2008, and operating income rose 18.6% to $139 million. We generated free cash flow of $104 million, and maintained a healthy balance sheet with nearly $300 million in cash and investments and no bank debt. However, our organic revenue growth decelerated during the year and dipped below zero in the fourth quarter, largely because of lower revenue from our Investment Consulting business.
“Because the current economic environment is so uncertain, we’ve taken steps to reduce our cost structure in 2009—mainly by reducing employee benefit costs and bonus expense. We’re continuing to invest in our business, though, and believe we’ll be well-positioned when conditions improve.”
Mansueto outlined some of the company’s key accomplishments and challenges in 2008:
Accomplishments
· We completed six acquisitions, four of which were outside the United States. We invested $105.4 million for these acquisitions, which represent approximately $40 million in annualized revenue.
· We continued to invest in our global investment databases, with significantly improved stock data coverage as well as new mutual fund databases in several markets outside the United States. We also expanded our business to include global real-time price data from UK-based Tenfore Systems Limited, a strategic acquisition. We now provide data on more than 300,000 investments, up from about 265,000 a year ago.
· We made numerous enhancements to our major product platforms, including a new home page and site relaunch for Morningstar.com; a new ETF module for Principia; a new Alternative Investment Edition for Morningstar Direct; and several new managed portfolios through Morningstar Investment Services. Total licenses for Morningstar Direct and Morningstar Advisor Workstation grew 33% and 8%, respectively, compared with the prior year.
· Our Ibbotson Associates unit entered into 14 new funds-of-funds relationships across a variety of client types and strategies, which will help support future growth.
· We created a new organizational structure, effective Jan. 1, 2009, that will help us further globalize our operations and better align the business with our key growth strategies. We issued a separate press release today that contains more information about the new structure and changes to our operating segments.
2
· International revenue rose 35% to $121.4 million and represented 24.2% of consolidated revenue in 2008—3.6 percentage points more than in 2007.
Challenges
· The market downturn has been severe and has hit many of our clients in the financial services industry hard. Because of the difficult economic environment, we’ve also experienced slower growth in new business, increased pressure on renewal spending, and cutbacks on Internet advertising. This challenging environment has persisted into the first quarter of 2009.
· We’ve seen a sharp drop in asset-based fees because of the global market downturn, mainly in our Investment Consulting business. In addition, during 2008, one of our Investment Consulting clients informed us that it was not planning to renew its contract. As a result, assets under advisement for Morningstar Associates declined more than the market for the year. Also, in the first quarter of 2009, we did not reach an agreement on renewal terms with another consulting client. Combined, these contracts represented about $17 million of revenue in 2008.
· The independent equity research we’re providing to six banks under the terms of the Global Analyst Research Settlement made up about 4% of our consolidated revenue in 2008. After the settlement period expires in July 2009, these banks will no longer be required to provide independent investment research to their clients. We don’t know how much of this business we’ll retain after the settlement period expires, and we expect this research revenue to decline significantly.
Key Business Drivers
Revenue: In the fourth quarter of 2008, revenue in the Institutional segment grew 0.8% to $65.1 million compared with the fourth quarter of 2007; approximately $5.4 million of this revenue came from acquisitions. Revenue in the Advisor segment increased 1.4% to $30.6 million, with $0.6 million of the revenue coming from acquisitions. Revenue in the Individual segment rose 0.4% to $25.5 million, with $0.4 million of the revenue coming from acquisitions.
Compared with the third quarter of 2008, fourth-quarter organic revenue declined $3.9 million, or 3.2%, mainly because of lower revenue from Investment Consulting.
Revenue from international operations was $27.9 million in the fourth quarter of 2008, a 6.8% increase from the same period a year ago. International revenue included $3.9 million from acquisitions. Foreign currency translations had a negative impact of $3.8 million on international revenue in the fourth quarter. Excluding the impact of acquisitions and foreign currency translations, international revenue grew approximately 6.2% in the fourth quarter of 2008.
For the full year, international revenue rose 35.4%, with about 60% of the increase coming from acquisitions. International revenue excluding acquisitions and foreign currency translations is a non-GAAP measure; the accompanying financial tables contain a reconciliation to international revenue.
3
In 2008, Morningstar’s five largest products by revenue were Licensed DataSM, Investment Consulting, Morningstar® Advisor WorkstationSM, Morningstar.com®, and Principia®.
Operating Income: Consolidated operating income was $28.7 million in the fourth quarter of 2008, a decrease of 13.9% from the same period in 2007. Operating expense rose $5.8 million, or 6.8%, in the fourth quarter of 2008.
Compensation-related expense, excluding bonuses, increased $3.5 million, mainly because of higher worldwide headcount. Bonus expense decreased $2.9 million in the quarter, primarily because operating income grew at a lower rate in 2008 compared with the previous year. Worldwide headcount grew to approximately 2,375 employees as of Dec. 31, 2008, compared with 1,720 as of Dec. 31, 2007, with approximately 340 employees added from acquisitions. Higher lease expense for the company’s new corporate headquarters and other global offices also added to operating expense in the quarter. Amortization expense rose $1.3 million to $4.6 million because of recent acquisitions, but lower company-wide general and administrative expense partially offset this cost.
The company’s operating margin was 24.1% in the fourth quarter of 2008, compared with 28.2% in the same period in 2007. For the full year, operating margin was 27.7%, compared with 26.9% in 2007. To better align the company’s operating expense with revenue in this challenging business environment, Morningstar has taken a number of steps to reduce costs. While cost reductions began in 2008, the largest cutbacks were effective Jan. 1, 2009. Morningstar is changing its bonus plan in 2009 to reduce bonus expense, which is its single largest discretionary cost. The company also suspended matching contributions to its 401(k) program in the United States, suspended salary increases, and postponed most new hiring. The company is also cutting expenses in other areas such as travel. In addition, a portion of lease costs recorded in 2008 will not recur because the company will no longer incur lease costs for both its new and former corporate headquarters in Chicago.
Effective Tax Rate: The company’s effective tax rate in the fourth quarter of 2008 was 33.3%, a decrease of 9.1 percentage points compared with the prior-year period. For the year, Morningstar’s effective tax rate was 35.9%, a decrease of 5.0 percentage points compared with 2007. The decrease in the 2008 fourth- quarter and year-to-date periods reflects the favorable, but variable, benefit from incentive stock-option transactions and a decrease in the company’s U.S. state tax rate following a 2007 change in state tax law. These reductions were partially offset by an increase in liabilities for certain tax positions in the company’s U.S. and non-U.S. operations.
4
Free Cash Flow: Morningstar generated free cash flow of $34.9 million in the fourth quarter of 2008, reflecting cash provided by operating activities of $54.1 million and capital expenditures of $19.2 million. Free cash flow decreased by $2.6 million, compared with the prior-year period, mainly because of $17.2 million in additional capital expenditures offset by a $14.6 million increase in cash from operations. For the year ended Dec. 31, 2008, Morningstar generated free cash flow of $103.9 million, reflecting cash provided by operating activities of $152.4 million and capital expenditures of $48.5 million. Free cash flow for the full year increased $2.9 million compared with 2007 because of a $40.1 million increase in cash from operations, which was offset by a $37.2 million increase in capital expenditures.
Cash provided by operating activities rose in 2008 compared with 2007, partly because of the lower impact of excess tax benefits primarily related to stock option exercises. Excess tax benefits have a positive impact on cash provided by financing activities with an equal, but offsetting, impact on cash from operations. Excess tax benefits declined $15.7 million in the quarter and $6.9 million in the year reflecting lower average stock prices on the exercise dates. The year-over-year increase in cash provided by operating activities also benefited from tenant improvement allowances, which rose $4.6 million in the quarter and $15.9 million in the year.
Capital expenditures increased $17.2 million for the quarter and $37.2 million for the year mainly because of spending for office space build-outs in several locations. Capital expenditures were significantly higher in 2008 than in previous years mainly because of Morningstar’s new corporate headquarters.
Free cash flow is a non-GAAP measure; the accompanying financial tables include 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 Dec. 31, 2008, Morningstar had cash, cash equivalents, and investments of $297.6 million, compared with $258.6 million as of Dec. 31, 2007. During the first quarter of 2009, Morningstar expects to make annual bonus payments of approximately $60 million, which includes $50 million in 2008 bonus expense plus $10 million in deferred payments from the previous year. During 2009, the company anticipates making capital expenditures of $15 million primarily for leasehold improvements and computer equipment.
5
Business Segment Performance
Institutional Segment: The largest products and services in this segment based on revenue are Licensed DataSM, Investment Consulting, Morningstar DirectSM, and Retirement Advice (including Advice by Ibbotson® and Morningstar® Retirement ManagerSM ).
· Revenue was $65.1 million in the fourth quarter of 2008, a slight increase compared with $64.6 million in the fourth quarter of 2007.
· Acquisitions contributed revenue of $5.4 million to the Institutional segment in the fourth quarter. Excluding acquisitions, Institutional segment revenue declined approximately 7.6% in the fourth quarter of 2008.
· Investment Consulting revenue declines offset growth in other Institutional products. The company provided advisory services on approximately $66.2 billion in assets, including $29.6 billion from Morningstar Associates and $36.6 billion from Ibbotson Associates, as of Dec. 31, 2008, compared with approximately $97.5 billion as of Dec. 31, 2007. During 2008, the U.S. stock market fell about 37% and Morningstar’s total assets under advisement fell 32%. Since Sept. 30, 2008, the company’s assets under advisement have declined 22%.
· Morningstar Direct and Licensed Data both had significant revenue increases for the year. Morningstar Direct licenses grew to 2,961 as of Dec. 31, 2008, a 32.8% increase over the prior year.
· Operating income was $18.4 million in the fourth quarter of 2008, compared with $23.2 million in the same period in 2007. Operating expense in this segment increased $5.3 million, or 12.8%, almost entirely because of additional costs from acquisitions.
· Operating margin was 28.3% in the fourth quarter of 2008, compared with 35.9% in the prior-year period. About one-third of the margin decrease came from acquisitions. The remaining margin decrease was the result of revenue declining at a faster rate than operating expense. This business segment has high fixed costs that tend to increase or decrease at a slower rate than revenue.
Advisor Segment: The largest products in this segment based on revenue are Morningstar® Advisor WorkstationSM, Morningstar® Principia®, and Morningstar® Managed PortfoliosSM.
· Revenue was $30.6 million in the fourth quarter of 2008, a 1.4% increase from $30.2 million in the same period in 2007.
· Acquisitions contributed revenue of $0.6 million to the Advisor segment in the fourth quarter. Excluding acquisitions, Advisor segment revenue declined approximately 1%.
· Morningstar Advisor Workstation revenue continued to grow, but growth was offset by declines in Managed Portfolios and Principia. Total licenses for Morningstar Advisor Workstation grew to 190,267 as of Dec. 31, 2008, an 8.3% increase compared with the prior year.
· The number of Principia subscriptions declined to 43,019 as of Dec. 31, 2008, compared with 48,900 as of Dec. 31, 2007.
· Operating income was $8.5 million in the fourth quarter of 2008, an increase of 4.4% compared with the fourth quarter of 2007. Operating expense in the segment increased $0.1 million, or 0.3%.
· Operating margin was 27.6% in the fourth quarter of 2008, compared with 26.8% in the prior-year period.
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Individual Segment: The largest product in this segment based on revenue is Morningstar.com®, the company’s Web site for individual investors. The Individual segment also includes Morningstar® Equity Research and several print and online publications.
· Revenue was $25.5 million in the fourth quarter of 2008, compared with $25.4 million in the fourth quarter of 2007.
· Acquisitions contributed revenue of $0.4 million to the Individual segment in the fourth quarter. Excluding acquisitions, Individual segment revenue declined approximately 1%.
· Morningstar Equity Research and Morningstar.com revenue grew slightly in the quarter, but this growth was offset by a decline in newsletter revenue. Morningstar Equity Research primarily includes revenue related to the Global Analyst Research Settlement. Morningstar.com Premium subscriptions declined to 177,518 as of Dec. 31, 2008, compared with 180,366 as of Dec. 31, 2007, because weak market conditions affected subscriber growth and new trials.
· Operating income was $6.7 million in the fourth quarter of 2008, a 16.7% increase compared with the prior-year period. Operating expense in the segment decreased $0.9 million, or 4.3%.
· Operating margin was 26.3% in the fourth quarter of 2008, compared with 22.7% in the fourth quarter of 2007.
Investor Communication: Morningstar encourages all interested parties—including securities analysts, current shareholders, potential shareholders, and others—to submit questions in writing. Investors and others may send an e-mail to investors@morningstar.com, contact the company via fax at 312-696-6009, or write to Morningstar at the following address:
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.
Investors are invited to attend Morningstar’s annual meeting at 9 a.m. on Tuesday, May 19, 2009, at its corporate headquarters at 22 W. Washington Street in Chicago. If you are interested in attending, please send an e-mail to investors@morningstar.com.
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 Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 300,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 19 countries and minority ownership positions in companies based in three other countries.
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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 discussed not to occur or to differ significantly from what we expected. For us, these risks and uncertainties include, among others, general industry conditions and competition, including the global financial crisis that began in 2007; the impact of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; financial services industry consolidation; a prolonged outage of our database and network facilities; challenges faced by our non-U.S. operations; and the availability of free or low-cost investment information. A more complete description of these risks and uncertainties can be found in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2007. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expected. We do not undertake to update our forward-looking statements as a result of new information or future events.
Non-GAAP Financial Measures
To supplement Morningstar’s consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission: free cash flow, consolidated revenue excluding acquisitions and foreign currency translations (organic revenue), and international revenue excluding acquisitions and foreign currency translations. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after Morningstar spends money to operate its business. Morningstar uses free cash flow to evaluate the performance of its business. Free cash flow should not be considered an alternative to any measure of performance as promulgated 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.
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©2009 Morningstar, Inc. All rights reserved.
8
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
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| Three months ended December 31 |
| Year ended December 31 |
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(in thousands, except per share amounts) |
| 2008 |
| 2007 |
| change |
| 2008 |
| 2007 |
| change |
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Revenue |
| $ | 119,271 |
| $ | 118,116 |
| 1.0% |
| $ | 502,457 |
| $ | 435,107 |
| 15.5% |
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Operating expense(1): |
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Cost of goods sold |
| 31,155 |
| 30,228 |
| 3.1% |
| 130,085 |
| 113,777 |
| 14.3% |
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Development |
| 10,153 |
| 8,917 |
| 13.9% |
| 40,340 |
| 35,116 |
| 14.9% |
| ||||||||
Sales and marketing |
| 19,104 |
| 18,503 |
| 3.2% |
| 81,651 |
| 68,835 |
| 18.6% |
| ||||||||
General and administrative |
| 22,874 |
| 21,718 |
| 5.3% |
| 85,266 |
| 78,868 |
| 8.1% |
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Depreciation and amortization |
| 7,297 |
| 5,414 |
| 34.8% |
| 25,996 |
| 21,257 |
| 22.3% |
| ||||||||
Total operating expense |
| 90,583 |
| 84,780 |
| 6.8% |
| 363,338 |
| 317,853 |
| 14.3% |
| ||||||||
Operating income |
| 28,688 |
| 33,336 |
| (13.9% | ) | 139,119 |
| 117,254 |
| 18.6% |
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Operating margin |
| 24.1% |
| 28.2% |
| (4.1) pp |
| 27.7% |
| 26.9% |
| 0.8 pp |
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Non-operating income (expense): |
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Interest income, net |
| 1,219 |
| 2,136 |
| (42.9% | ) | 5,687 |
| 7,134 |
| (20.3% | ) | ||||||||
Other expense, net |
| (1,257 | ) | (1,008 | ) | 24.7% |
| (1,832 | ) | (905 | ) | 102.4% |
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Non-operating income (expense), net |
| (38 | ) | 1,128 |
| (103.4% | ) | 3,855 |
| 6,229 |
| (38.1% | ) | ||||||||
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Income before income taxes and equity in net income of unconsolidated entities |
| 28,650 |
| 34,464 |
| (16.9% | ) | 142,974 |
| 123,483 |
| 15.8% |
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Income tax expense |
| 9,636 |
| 14,739 |
| (34.6% | ) | 51,763 |
| 51,255 |
| 1.0% |
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Equity in net income of unconsolidated entities |
| 256 |
| 285 |
| (10.2% | ) | 1,321 |
| 1,694 |
| (22.0% | ) | ||||||||
Net income |
| $ | 19,270 |
| $ | 20,010 |
| (3.7% | ) | $ | 92,532 |
| $ | 73,922 |
| 25.2% |
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Net income per share: |
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Basic |
| $ | 0.41 |
| $ | 0.45 |
| (8.9% | ) | $ | 2.01 |
| $ | 1.71 |
| 17.5% |
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Diluted |
| $ | 0.39 |
| $ | 0.41 |
| (4.9% | ) | $ | 1.88 |
| $ | 1.53 |
| 22.9% |
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Weighted average common shares outstanding: |
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Basic |
| 46,902 |
| 44,188 |
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| 46,139 |
| 43,216 |
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Diluted |
| 49,124 |
| 48,757 |
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| 49,213 |
| 48,165 |
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| Three months ended December 31 |
| Year ended December 31 |
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| 2008 |
| 2007 |
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| 2008 |
| 2007 |
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(1) Includes stock-based compensation expense of: |
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Cost of goods sold |
| $ | 547 |
| $ | 447 |
|
|
| $ | 2,058 |
| $ | 1,706 |
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| ||||
Development |
| 355 |
| 330 |
|
|
| 1,402 |
| 1,256 |
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Sales and marketing |
| 359 |
| 359 |
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|
| 1,449 |
| 1,397 |
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General and administrative |
| 1,489 |
| 1,708 |
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| 6,372 |
| 6,619 |
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Total stock-based compensation expense |
| $ | 2,750 |
| $ | 2,844 |
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| $ | 11,281 |
| $ | 10,978 |
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NMF — Not meaningful, pp — percentage points
9
Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue
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| Three months ended December 31 |
| Year ended December 31 |
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| 2008 |
| 2007 |
| change |
| 2008 |
| 2007 |
| change |
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Revenue |
| 100.0% |
| 100.0% |
| — |
| 100.0% |
| 100.0% |
| — |
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Operating expense(1): |
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Cost of goods sold |
| 26.1% |
| 25.6% |
| 0.5 pp |
| 25.9% |
| 26.1% |
| (0.2) pp |
|
Development |
| 8.5% |
| 7.5% |
| 1.0 pp |
| 8.0% |
| 8.1% |
| (0.1) pp |
|
Sales and marketing |
| 16.0% |
| 15.7% |
| 0.3 pp |
| 16.3% |
| 15.8% |
| 0.5 pp |
|
General and administrative |
| 19.2% |
| 18.4% |
| 0.8 pp |
| 17.0% |
| 18.1% |
| (1.1) pp |
|
Depreciation and amortization |
| 6.1% |
| 4.6% |
| 1.5 pp |
| 5.2% |
| 4.9% |
| 0.3 pp |
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Total operating expense(2) |
| 75.9% |
| 71.8% |
| 4.1 pp |
| 72.3% |
| 73.1% |
| (0.8) pp |
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Operating margin |
| 24.1% |
| 28.2% |
| (4.1) pp |
| 27.7% |
| 26.9% |
| 0.8 pp |
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| Three months ended December 31 |
| Year ended December 31 |
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| 2008 |
| 2007 |
| change |
| 2008 |
| 2007 |
| change |
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(1) Includes stock-based compensation expense of: |
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Cost of goods sold |
| 0.5% |
| 0.4% |
| 0.1 pp |
| 0.4% |
| 0.4% |
| — |
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Development |
| 0.3% |
| 0.3% |
| — |
| 0.3% |
| 0.3% |
| — |
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Sales and marketing |
| 0.3% |
| 0.3% |
| — |
| 0.3% |
| 0.3% |
| — |
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General and administrative |
| 1.2% |
| 1.4% |
| (0.2) pp |
| 1.3% |
| 1.5% |
| (0.2) pp |
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Total stock-based compensation expense(2) |
| 2.3% |
| 2.4% |
| (0.1) pp |
| 2.2% |
| 2.5% |
| (0.3) pp |
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(2) Sum of percentages may not equal total because of rounding. |
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10
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
| ||||||||
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||
($000) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating activities |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 19,270 |
| $ | 20,010 |
| $ | 92,532 |
| $ | 73,922 |
|
Adjustments to reconcile net income to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 7,297 |
| 5,414 |
| 25,996 |
| 21,257 |
| ||||
Deferred income tax expense (benefit) |
| 7,959 |
| (1,484 | ) | 9,241 |
| (1,048 | ) | ||||
Stock-based compensation expense |
| 2,750 |
| 2,844 |
| 11,281 |
| 10,978 |
| ||||
Equity in net income of unconsolidated entities |
| (256 | ) | (285 | ) | (1,321 | ) | (1,694 | ) | ||||
Excess tax benefits from stock option exercises and vesting of restricted stock units |
| (1,488 | ) | (17,153 | ) | (23,531 | ) | (30,428 | ) | ||||
Other, net |
| 1,785 |
| (360 | ) | 1,366 |
| (472 | ) | ||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
| (479 | ) | (4,745 | ) | (658 | ) | (11,723 | ) | ||||
Other assets |
| 5,033 |
| (3,395 | ) | 1,573 |
| (3,536 | ) | ||||
Accounts payable and accrued liabilities |
| 1,580 |
| (60 | ) | 3,008 |
| 638 |
| ||||
Accrued compensation |
| 12,188 |
| 21,881 |
| (2,333 | ) | 23,118 |
| ||||
Deferred revenue |
| 40 |
| 5,529 |
| (1,595 | ) | 8,401 |
| ||||
Income taxes payable |
| (5,029 | ) | 11,463 |
| 22,078 |
| 25,229 |
| ||||
Deferred rent |
| 4,947 |
| 338 |
| 16,346 |
| 380 |
| ||||
Other liabilities |
| (1,515 | ) | (505 | ) | (1,537 | ) | (2,654 | ) | ||||
Cash provided by operating activities |
| 54,082 |
| 39,492 |
| 152,446 |
| 112,368 |
| ||||
Investing activities |
|
|
|
|
|
|
|
|
| ||||
Purchases of investments |
| (62,256 | ) | (69,472 | ) | (134,117 | ) | (159,693 | ) | ||||
Proceeds from sale of investments |
| 13,379 |
| 77,349 |
| 109,172 |
| 128,713 |
| ||||
Capital expenditures |
| (19,229 | ) | (1,992 | ) | (48,519 | ) | (11,346 | ) | ||||
Acquisitions, net of cash acquired |
| (49,429 | ) | (193 | ) | (105,410 | ) | (60,508 | ) | ||||
Other, net |
| (250 | ) | (1 | ) | (250 | ) | (4 | ) | ||||
Cash provided by (used for) investing activities |
| (117,785 | ) | 5,691 |
| (179,124 | ) | (102,838 | ) | ||||
Financing activities |
|
|
|
|
|
|
|
|
| ||||
Proceeds from stock option exercises |
| 6,146 |
| 10,461 |
| 23,428 |
| 22,037 |
| ||||
Excess tax benefits from stock option exercises and vesting of restricted stock units |
| 1,488 |
| 17,153 |
| 23,531 |
| 30,428 |
| ||||
Other, net |
| 674 |
| — |
| 671 |
| — |
| ||||
Cash provided by financing activities |
| 8,308 |
| 27,614 |
| 47,630 |
| 52,465 |
| ||||
Effect of exchange rate changes on cash and cash equivalents |
| (4,329 | ) | 361 |
| (6,637 | ) | 1,441 |
| ||||
Net increase (decrease) in cash and cash equivalents |
| (59,724) |
| 73,158 |
| 14,315 |
| 63,436 |
| ||||
Cash and cash equivalents — Beginning of period |
| 233,615 |
| 86,418 |
| 159,576 |
| 96,140 |
| ||||
Cash and cash equivalents — End of period |
| $ | 173,891 |
| $ | 159,576 |
| $ | 173,891 |
| $ | 159,576 |
|
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure): | |||||||||||||
|
|
|
|
|
| ||||||||
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||
($000) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Cash provided by operating activities |
| $ | 54,082 |
| $ | 39,492 |
| $ | 152,446 |
| $ | 112,368 |
|
Less: Capital expenditures |
| (19,229 | ) | (1,992 | ) | (48,519 | ) | (11,346 | ) | ||||
Free cash flow |
| $ | 34,853 |
| $ | 37,500 |
| $ | 103,927 |
| $ | 101,022 |
|
11
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
|
|
|
|
|
| ||
|
| December 31, |
| December 31, |
| ||
($000) |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 173,891 |
| $ | 159,576 |
|
Investments |
| 123,686 |
| 99,012 |
| ||
Accounts receivable, net |
| 89,537 |
| 86,812 |
| ||
Deferred tax asset, net |
| 3,538 |
| — |
| ||
Income tax receivable |
| 9,193 |
| 8,998 |
| ||
Other |
| 13,891 |
| 13,163 |
| ||
Total current assets |
| 413,736 |
| 367,561 |
| ||
|
|
|
|
|
| ||
Property and equipment, net |
| 58,822 |
| 19,108 |
| ||
Investments in unconsolidated entities |
| 20,404 |
| 19,855 |
| ||
Goodwill |
| 187,242 |
| 128,141 |
| ||
Intangible assets, net |
| 119,812 |
| 95,767 |
| ||
Deferred tax asset, net |
| — |
| 15,658 |
| ||
Other assets |
| 3,924 |
| 3,217 |
| ||
Total assets |
| $ | 803,940 |
| $ | 649,307 |
|
|
|
|
|
|
| ||
Liabilities and shareholders’ equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable and accrued liabilities |
| $ | 30,071 |
| $ | 22,325 |
|
Accrued compensation |
| 73,012 |
| 64,709 |
| ||
Deferred revenue |
| 130,270 |
| 129,302 |
| ||
Deferred tax liability, net |
| — |
| 557 |
| ||
Other |
| 88 |
| 945 |
| ||
Total current liabilities |
| 233,441 |
| 217,838 |
| ||
|
| �� |
|
|
| ||
Accrued compensation |
| 3,611 |
| 13,913 |
| ||
Deferred tax liability, net |
| 7,531 |
| — |
| ||
Other long-term liabilities |
| 23,825 |
| 9,253 |
| ||
Total liabilities |
| 268,408 |
| 241,004 |
| ||
Total shareholders’ equity |
| 535,532 |
| 408,303 |
| ||
Total liabilities and shareholders’ equity |
| $ | 803,940 |
| $ | 649,307 |
|
12
Morningstar, Inc. and Subsidiaries
Segment Information
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||||||
($000) |
| 2008 |
| 2007 |
| change |
| 2008 |
| 2007 |
| change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Individual |
| $ | 25,511 |
| $ | 25,402 |
| 0.4% |
| $ | 107,630 |
| $ | 97,299 |
| 10.6% |
|
Advisor |
| 30,640 |
| 30,217 |
| 1.4% |
| 127,598 |
| 115,739 |
| 10.2% |
| ||||
Institutional |
| 65,074 |
| 64,578 |
| 0.8% |
| 276,792 |
| 230,329 |
| 20.2% |
| ||||
Eliminations |
| (1,954 | ) | (2,081 | ) | (6.1% | ) | (9,563 | ) | (8,260 | ) | 15.8% |
| ||||
Consolidated revenue |
| $ | 119,271 |
| $ | 118,116 |
| 1.0% |
| $ | 502,457 |
| $ | 435,107 |
| 15.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue— U.S. |
| $ | 91,400 |
| $ | 92,022 |
| (0.7% | ) | $ | 381,021 |
| $ | 345,427 |
| 10.3% |
|
Revenue—International |
| $ | 27,871 |
| $ | 26,094 |
| 6.8% |
| $ | 121,436 |
| $ | 89,680 |
| 35.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue—U.S. (percentage of consolidated revenue) |
| 76.6% |
| 77.9% |
| (1.3) pp |
| 75.8% |
| 79.4% |
| (3.6) pp |
| ||||
Revenue—International (percentage of consolidated revenue) |
| 23.4% |
| 22.1% |
| 1.3 pp |
| 24.2% |
| 20.6% |
| 3.6 pp |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Individual |
| $ | 6,719 |
| $ | 5,758 |
| 16.7% |
| $ | 27,762 |
| $ | 23,738 |
| 17.0% |
|
Advisor |
| 8,471 |
| 8,111 |
| 4.4% |
| 36,798 |
| 31,669 |
| 16.2% |
| ||||
Institutional |
| 18,396 |
| 23,189 |
| (20.7% | ) | 91,679 |
| 76,656 |
| 19.6% |
| ||||
Corporate items and eliminations |
| (4,898 | ) | (3,722 | ) | 31.6% |
| (17,120 | ) | (14,809 | ) | 15.6% |
| ||||
Consolidated operating income |
| $ | 28,688 |
| $ | 33,336 |
| (13.9% | ) | $ | 139,119 |
| $ | 117,254 |
| 18.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating margin(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Individual |
| 26.3% |
| 22.7% |
| 3.6 pp |
| 25.8% |
| 24.4% |
| 1.4 pp |
| ||||
Advisor |
| 27.6% |
| 26.8% |
| 0.8 pp |
| 28.8% |
| 27.4% |
| 1.4 pp |
| ||||
Institutional |
| 28.3% |
| 35.9% |
| (7.6) pp |
| 33.1% |
| 33.3% |
| (0.2) pp |
| ||||
Consolidated operating margin |
| 24.1% |
| 28.2% |
| (4.1) pp |
| 27.7% |
| 26.9% |
| 0.8 pp |
| ||||
(1) Includes stock-based compensation expense allocated to each segment.
Top Five Products (Segment) |
| Revenue |
| % of |
| |
Year Ended December 31, 2008 |
| ($000) |
| Revenue |
| |
Licensed Data (Institutional) |
| $ | 78,329 |
| 15.6% |
|
Investment Consulting (Institutional) |
| 77,757 |
| 15.5% |
| |
Advisor Workstation (Advisor) |
| 66,675 |
| 13.3% |
| |
Morningstar.com (Individual) |
| 43,274 |
| 8.6% |
| |
Principia (Advisor) |
| 27,791 |
| 5.5% |
| |
Top Five Products (Segment) |
| Revenue |
| % of |
| |
Year Ended December 31, 2007 |
| ($000) |
| Revenue |
| |
Investment Consulting (Institutional) |
| $ | 75,595 |
| 17.4% |
|
Licensed Data (Institutional) |
| 59,207 |
| 13.6% |
| |
Advisor Workstation (Advisor) |
| 54,980 |
| 12.6% |
| |
Morningstar.com (Individual) |
| 37,630 |
| 8.6% |
| |
Principia (Advisor) |
| 28,760 |
| 6.6% |
| |
13
Morningstar, Inc. and Subsidiaries
Supplemental Data
|
|
|
| As of December 31 |
|
|
| ||
|
|
|
| 2008 |
| 2007 |
| % change |
|
Our employees |
|
|
|
|
|
|
|
|
|
Worldwide headcount (approximate) |
|
|
| 2,375 |
| 1,720 |
| 38.1% |
|
Number of U.S. stock analysts |
|
|
| 102 |
| 96 |
| 6.3% |
|
Number of worldwide stock analysts |
|
|
| 128 |
| 112 |
| 14.3% |
|
Number of U.S. fund analysts |
|
|
| 28 |
| 27 | (1) | 3.7% |
|
Number of worldwide fund analysts |
|
|
| 75 |
| 59 |
| 27.1% |
|
|
|
|
|
|
|
|
|
|
|
Our business |
|
|
|
|
|
|
|
|
|
Morningstar.com Premium subscriptions |
|
|
| 177,518 |
| 180,366 |
| (1.6% | ) |
Registered users for Morningstar.com (U.S.) |
|
|
| 5,692,194 |
| 5,275,276 |
| 7.9% |
|
U.S. Advisor Workstation licenses |
|
|
| 190,267 |
| 175,725 |
| 8.3% |
|
Principia subscriptions |
|
|
| 43,019 |
| 48,900 |
| (12.0% | ) |
Morningstar Direct licenses |
|
|
| 2,961 |
| 2,229 |
| 32.8% |
|
Assets under management for Morningstar Managed Portfolios |
|
|
| $1.6 bil |
| $2.2 bil |
| (27.3% | ) |
Assets under management for managed retirement accounts |
|
|
| $11.0 bil |
| $13.7 bil |
| (19.7% | ) |
Morningstar Associates |
|
|
| $1.0 bil |
| $1.0 bil |
| 0.0% |
|
Ibbotson Associates |
|
|
| $10.0 bil |
| $12.7 bil |
| (21.3% | ) |
Assets under advisement for Investment Consulting |
|
|
| $66.2 bil |
| $97.5 bil |
| (32.1% | ) |
Morningstar Associates |
|
|
| $29.6 bil |
| $56.6 bil |
| (47.7% | ) |
Ibbotson Associates |
|
|
| $36.6 bil |
| $40.9 bil |
| (10.5% | ) |
(1) Revised
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||
($000) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Effective income tax expense rate |
|
|
|
|
|
|
|
|
| ||||
Income before income taxes and equity in net income of unconsolidated entities |
| $ | 28,650 |
| $ | 34,464 |
| $ | 142,974 |
| $ | 123,483 |
|
Equity in net income of unconsolidated entities |
| 256 |
| 285 |
| 1,321 |
| 1,694 |
| ||||
Total |
| $ | 28,906 |
| $ | 34,749 |
| $ | 144,295 |
| $ | 125,177 |
|
Income tax expense |
| $ | 9,636 |
| $ | 14,739 |
| $ | 51,763 |
| $ | 51,255 |
|
Effective income tax expense rate |
| 33.3% |
| 42.4% |
| 35.9% |
| 40.9% |
| ||||
14
Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures
Reconciliation from consolidated revenue to revenue excluding acquisitions and foreign currency translations (organic revenue):
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||||||
($000) |
| 2008 |
| 2007 |
| % change |
| 2008 |
| 2007 |
| % change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidated revenue |
| $ | 119,271 |
| $ | 118,116 |
| 1.0% |
| $ | 502,457 |
| $ | 435,107 |
| 15.5% |
|
Less: acquisitions |
| (6,419 | ) | — |
| NMF |
| (27,125 | ) | — |
| NMF |
| ||||
(Favorable) unfavorable impact of foreign currency |
| 3,787 |
| — |
| NMF |
| (1,850 | ) | — |
| NMF |
| ||||
Revenue excluding acquisitions and foreign currency translations |
| $ | 116,639 |
| $ | 118,116 |
| (1.3% | ) | $ | 473,482 |
| $ | 435,107 |
| 8.8% |
|
Reconciliation from international revenue to international revenue excluding acquisitions and foreign currency translations:
|
| Three months ended December 31 |
| Year ended December 31 |
| ||||||||||||
($000) |
| 2008 |
| 2007 |
| % change |
| 2008 |
| 2007 |
| % change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
International revenue |
| $ | 27,871 |
| $ | 26,094 |
| 6.8% |
| $ | 121,436 |
| $ | 89,680 |
| 35.4% |
|
Less: acquisitions |
| (3,945 | ) | — |
| NMF |
| (19,426 | ) | — |
| NMF |
| ||||
(Favorable) unfavorable impact of foreign currency |
| 3,787 |
| — |
| NMF |
| (1,850 | ) | — |
| NMF |
| ||||
International revenue excluding acquisitions and foreign currency translations |
| $ | 27,713 |
| $ | 26,094 |
| 6.2% |
| $ | 100,160 |
| $ | 89,680 |
| 11.7% |
|
Revenue from Acquisitions
Morningstar includes an acquired operation as part of our revenue from acquisitions for 12 months after we complete the acquisition. After that, we include it as part of our organic revenue. The table below shows the period in which we included each acquired operation in revenue from acquisitions:
Acquisition |
| 2008 Revenue from Acquisitions |
Standard & Poor’s fund data business |
| January 1 through March 15, 2008 |
Hemscott data, media, and investor relations Web site businesses |
| January 9 through December 31, 2008 |
Financial Computer Support, Inc. |
| September 2 through December 31, 2008 |
Fundamental Data Limited |
| October 2 through December 31, 2008 |
10-K Wizard Technology, LLC |
| December 4 through December 31, 2008 |
Tenfore Systems Limited |
| December 17 through December 31, 2008 |
InvestData (Proprietary) Limited |
| December 29 through December 31, 2008 |
15