Business Context and Reporting Period
This Form 8-K is a current report filed by Morningstar, Inc. on February 5, 2010. The filing serves as a Regulation FD disclosure containing responses to investor questions received through February 3, 2010. The company operates as a provider of investment research, data, and software tools for institutional clients, financial advisors, and individual investors.
Key Financial Metrics and Operational Data
The filing does not provide specific revenue, profit, cash flow, or debt figures for the reporting period. However, it discloses the following operational metrics and pricing structures:
- Contract Renewals: Approximately 20% of institutional contracts (by dollar value) are up for renewal in the first six months of 2010. Of this amount, roughly 25% is for Licensed Data and 10-15% is for Investment Consulting.
- Managed Portfolios Pricing: Fees for mutual fund and ETF portfolios range from 30 to 40 basis points (bps). Select Stock Baskets are priced at 50-55 bps.
- Managed Portfolios Reach: The program reaches approximately 1,900 financial advisors and is supported by seven portfolio managers.
- Retirement Advice Reach: As of September 30, 2009, services reached 20 million retirement plan participants, 149,000 plan sponsors, and 23 plan providers, supported by 15 analysts and investment consultants.
- Equity Research Clients: The company currently serves approximately 75 institutional research clients outside of the research settlement agreements.
Material Changes and Trends
Management noted several shifts in market dynamics compared to the prior period:
- Pricing Power: The company has achieved modest price increases for individual seat licenses and enterprise contracts recently up for renewal. This contrasts with early 2009, when renewals occurred at flat prices or with downward pressure.
- Advisor Market Dynamics: While the total number of U.S. financial advisors was relatively flat from 2004 to 2008, anecdotal evidence suggests a drop in 2009 due to the difficult economic environment and industry consolidation. There is increased movement of advisors leaving large wirehouses to become independent ("breakaway brokers").
- Research Settlement Impact: Following the expiration of the Global Analyst Research Settlement in July 2009, Morningstar remains committed to maintaining broad coverage and has expanded its sales force to meet increased demand from firms with tightening internal research budgets.
Outlook, Risks, and Management Commentary
Strategic Initiatives:
- Credit Ratings: Morningstar plans to produce credit ratings for up to 1,000 companies over the next year, leveraging its equity research expertise and cash-flow modeling.
- Analyst Coverage: The company has no specific plans to increase Wall Street analyst coverage, preferring to focus on long-term business results and attracting long-term shareholders.
Risks and Uncertainties:
- General industry conditions and competition, including the ongoing global financial crisis.
- Impact of market volatility on revenue from asset-based fees.
- Reputation damage from claims of conflicts of interest.
- Financial services industry consolidation.
- Operational risks, including prolonged outages of database and network facilities.
- Availability of free or low-cost investment information.
Investor Verification Checklist
- Verify the actual renewal rates and pricing trends for the first half of 2010 against the management's expectation of modest price increases.
- Monitor the growth of the new corporate credit ratings business and its contribution to revenue.
- Assess the impact of the "breakaway broker" trend on the company's financial advisor seat license sales.
- Review the 2008 Form 10-K for a complete description of the risks cited in this filing.
- Confirm the stability of the 75 institutional equity research clients in the post-settlement environment.