Business Context and Reporting Period
This Form 8-K is a Current Report filed by Morningstar, Inc. on July 7, 2014, pursuant to Regulation FD. The filing serves to disclose the company's policy on public disclosure of corporate information and includes a Q&A session addressing investor inquiries received through July 2, 2014. The document covers business segments including Morningstar Data, Morningstar.com, Morningstar Direct, and the Structured Credit Business.
Key Financial Metrics
The filing provides specific historical revenue data for the Morningstar Data segment and consolidated revenue for the years 2011 through 2013. It does not provide data on profit, cash flow, margins, debt, or liquidity for the current reporting period.
| ($ in thousands) | 2013 | 2012 | 2011 |
|---|---|---|---|
| Morningstar Data Revenue | $129,262 | $115,273 | $103,996 |
| Consolidated Revenue | $698,266 | $658,288 | $631,400 |
Year-over-Year Growth (2013 vs. 2012):
- Morningstar Data Revenue: 12.1%
- Consolidated Revenue: 6.1%
Year-over-Year Growth (2012 vs. 2011):
- Morningstar Data Revenue: 10.8%
- Consolidated Revenue: 4.3%
Material Changes and Operational Updates
- Morningstar Data Growth: Revenue growth in this segment has outpaced consolidated revenue over the last three years, driven by high renewal rates in managed products data, new client contracts for equity/market data, and incremental business from the July 2013 acquisition of the remaining ownership interest in Morningstar Sweden.
- Structured Credit Business: The company has laid the groundwork for rating Residential Mortgage-Backed Securities (RMBS) by hiring a quantitative analyst, validating a credit model, and publishing new rating criteria. Additionally, the unit has expanded to cover single-family rental securities, completing ratings on the first three transactions in this asset class.
- Morningstar Direct Pricing: The company reports no significant pricing pressure for its institutional research platform. Pricing remains fixed at $17,000 for the first user, $10,500 for the second, and $9,000 for additional users. Value is maintained through continuous feature additions, including asset allocation forecasting and fixed-income data.
- Morningstar.com Metrics: The company does not disclose specific trial-to-paid conversion rates or free-to-paid conversion rates externally, noting that these metrics remain within a narrow range or are not tracked as regular internal performance metrics.
Guidance, Risks, and Contingencies
The filing contains a standard caution regarding forward-looking statements, noting that future performance may differ due to various risks. No specific financial guidance or outlook for the current fiscal year is provided in this document.
Identified Risks and Uncertainties:
- Liability for breaches of fiduciary duties or pending litigation.
- Failure to differentiate products or keep pace with technological changes.
- Operational risks including database outages, internet disruptions, and data storage liabilities.
- Market risks including global financial uncertainty, trends in the mutual fund industry, and the growth of passively managed vehicles.
- Impact of market volatility on asset-based fee revenue.
- Regulatory changes affecting investment advisory or credit rating operations.
- Operational challenges outside the U.S., specifically the concentration of development work in China and India.
Investor Verification Checklist
- Verify the impact of the Morningstar Sweden acquisition on future revenue growth trends.
- Monitor the commercialization progress of the new RMBS and single-family rental securities rating methodologies.
- Assess the sustainability of Morningstar Data's growth rate relative to the broader consolidated revenue.
- Review the company's strategy for maintaining Morningstar Direct's value proposition amidst potential industry-wide pricing pressures.
- Track the status of pending litigation mentioned as a risk factor for reputation and liability.