Business Context and Reporting Period
This Form 8-K Current Report was filed by Morningstar, Inc. on January 6, 2012. The filing serves as a Regulation FD disclosure, providing written responses to investor questions received through January 5, 2012. The company operates in the financial information and investment management software sector.
Key Financial Metrics and Operational Data
- Revenue Base: The company reported a total revenue base of $607.5 million for the trailing twelve months ending September 30, 2011, compared to $227 million in 2005.
- Customer Concentration: Less than 10% of the company-wide book of business as of September 30, 2011, originated from large sell-side firms (e.g., BAC, JPM, MS, GS).
- Deferred Revenue: Growth in deferred revenue has moderated recently, which management cites as an indication of customer caution.
- Historical Growth: The company achieved a roughly 15% CAGR over the past five years, which has slowed to the 8% range over the past three years.
- Market Size: Management estimates the total market for financial information spending exceeds $20 billion.
Material Changes and Market Conditions
Management noted signs of caution and cost pressures among clients, particularly institutional clients who have become cautious regarding budgeting and spending. While the company has lower exposure to sell-side firms than competitors, it acknowledged that market uncertainty and regulatory issues are putting pressure on new business growth and, to a lesser extent, client renewals. The company is currently publishing credit ratings on approximately 130 European firms.
Guidance, Outlook, and Risks
Outlook and Strategy: Morningstar does not provide specific revenue guidance based on assumed growth rates. Instead, forecasts are derived from a bottom-up process based on individual product expectations. Management identifies ample long-term growth opportunities in software platforms, credit ratings, investment management, and managed retirement accounts.
Expense Management: The company is scrutinizing spending plans for 2012 and has identified options to reduce expense growth, including cutting back on headcount growth, travel, and marketing spending if market uncertainty worsens.
Risks and Contingencies:
- Regulatory: If Morningstar expands its credit rating offerings in Europe to require registration, it would be subject to direct oversight by the European Securities and Markets Authority (ESMA).
- Operational: Risks include market volatility affecting asset-based fees, reputation damage from conflict of interest claims, and reliance on offshore facilities in China and India.
- Forward-Looking Statements: Actual results may vary significantly due to general industry conditions, competition, and economic weakness.
Investor Verification Checklist
- Verify the specific impact of the moderated deferred revenue growth on future cash flow and contract renewals.
- Confirm the extent of cost-cutting measures implemented in the 2012 budget regarding headcount and marketing.
- Monitor the regulatory status of Morningstar's credit ratings in Europe and any potential requirement to register with ESMA.
- Assess the company's exposure to large sell-side firms relative to competitors, given the reported headcount declines in that sector.
- Review the Annual Report on Form 10-K for the year ended December 31, 2010, for a complete description of risks.