Business Context and Reporting Period
Company: Morningstar, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Morningstar is a leading provider of independent investment research, data, software, and asset management services. The company operates through two segments: Investment Information (data, software, research) and Investment Management (asset management, consulting, retirement advice). It serves approximately 7.4 million individual investors, 245,000 financial advisors, and 4,200 institutional clients globally.
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Revenue | $478.996 million | $502.457 million | $435.107 million |
| Operating Income | $125.320 million | $139.119 million | $117.254 million |
| Net Income (Attributable to Morningstar) | $82.456 million | $92.532 million | $73.922 million |
| Diluted EPS | $1.66 | $1.88 | $1.53 |
| Operating Margin | 26.2% | 27.7% | 26.9% |
| Free Cash Flow | $83.810 million | $103.927 million | $101.022 million |
| Cash, Cash Equivalents, and Investments | $342.553 million | $297.577 million | $258.588 million |
| Total Assets | $919.583 million | $803.940 million | $649.307 million |
| Deferred Revenue | $127.114 million | $130.270 million | $129.302 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 4.7% to $479.0 million. This was the second consecutive year of revenue decline in company history. The decrease was driven by lower organic revenue, partially offset by $29.6 million in revenue from acquisitions.
- Segment Performance:
- Investment Information: Revenue declined 1.0% to $386.6 million. Declines in investment research (due to the end of the Global Analyst Research Settlement) and Morningstar.com (advertising and subscriptions) were offset by growth in Licensed Data and Morningstar Direct.
- Investment Management: Revenue declined 17.4% to $92.4 million, primarily due to two major client non-renewals in Investment Consulting representing approximately $17 million in 2008 revenue.
- Operating Income: Decreased 9.9% to $125.3 million. While the company reduced costs (notably a $28.9 million reduction in bonus expense), this was offset by $9.5 million in unanticipated operating expenses related to stock option tax adjustments and IRS deposit penalties.
- Acquisitions: Completed six acquisitions in 2009 for approximately $74.2 million, including Logical Information Machines, Inc. ($53.5 million) and C.P.M.S. Computerized Portfolio Management Services Inc. ($13.9 million).
Guidance, Outlook, Risks, and Unusual Items
- Guidance: Morningstar does not provide earnings guidance or hold one-on-one meetings with analysts. Management evaluates performance based on revenue, operating income, and free cash flow.
- Unusual Items:
- Stock Option Tax Adjustment: Recorded a $6.1 million operating expense to adjust the tax treatment of certain stock options originally considered incentive stock options (ISOs) to non-qualified stock options (NQSOs).
- IRS Penalties: Recorded a $3.4 million operating expense for penalties related to the timing of tax deposits on stock option exercises.
- Global Analyst Research Settlement (GARS): The settlement period expired in July 2009, resulting in a $9.4 million decline in equity research revenue compared to 2008.
- Risks and Contingencies:
- Legal Proceedings: Ongoing investigation by the New York Attorney General's Office regarding Morningstar Associates, LLC. No reserves established. Pending lawsuits from Business Logic Holding Corporation and Online News Link LLC.
- Market Conditions: Continued pressure on client budgets and industry consolidation following the 2008 financial crisis.
- Concentration: The five largest products accounted for 61% of consolidated revenue in 2009.
Investor Verification Checklist
- Revenue Sustainability: Verify the replacement rate for revenue lost from the expiration of the Global Analyst Research Settlement and the two major Investment Consulting non-renewals.
- Acquisition Integration: Assess the integration progress and revenue contribution of the six 2009 acquisitions, particularly Logical Information Machines, Inc.
- Cost Structure: Confirm the permanence of cost reductions (e.g., bonus plan changes, 401(k) match suspension) and the impact of the $9.5 million in one-time tax-related expenses on future profitability.
- Legal Exposure: Monitor the status of the New York Attorney General's investigation and the Business Logic trade secret lawsuit for potential financial impact.
- International Growth: Evaluate the trend of non-U.S. revenue, which increased to 27.0% of consolidated revenue in 2009, and associated currency translation risks.