Business Context and Reporting Period
This Form 8-K is a Current Report filed by Morningstar, Inc. on April 6, 2007. The filing serves as a Regulation FD disclosure, providing written responses to investor inquiries received through April 3, 2007. The content primarily addresses operational metrics, segment performance, and strategic updates related to the fourth quarter of 2006 and full-year 2006 results.
Key Financial Metrics and Operational Data
The filing provides specific operational metrics rather than consolidated financial statements. Key data points include:
- Individual Segment: Average quarterly revenue per premium subscriber was approximately $35 in Q4 2006. Online advertising represented about 12% of the Individual segment's full-year revenue.
- Advisor Segment: Average revenue per Advisor Workstation license was approximately $280 in 2006 (up from $260 in 2005). The average fee for Morningstar Managed Portfolios remained consistent at around 40 basis points.
- Institutional Segment: Licensed Data accounted for approximately 23% of segment revenue in Q4 2006 and 26% for the full year. Asset-based fees comprised slightly more than 10% of consolidated revenue in 2006.
- Acquisitions: Morningstar incurred approximately $0.9 million in product implementation expenses for Advice by Ibbotson in Q4 2006. A one-time cash tax benefit of $9.9 million was realized in 2006 related to the Ibbotson acquisition.
- Unconsolidated Entities: Morningstar Japan KK recorded a gain of approximately $2.8 million on the sale of subsidiary shares in 2006, with Morningstar's share of the gain being approximately $990,000.
Material Changes and Performance Trends
Several material trends and changes were highlighted in the investor Q&A:
- Revenue Growth: Revenue from the Global Analyst Research Settlement increased both sequentially and year-over-year in Q4 2006. Morningstar Direct licenses grew by 37%, driven by expanded sales in Europe and non-U.S. markets.
- Product Mix: The Principia business maintained revenue levels despite subscriber attrition by increasing sales of higher-priced advanced modules and phasing out discount programs. The newsletter business grew at a lower rate than the Individual segment overall in Q4 2006, excluding new products from the Aspect Huntley acquisition.
- Fee Structures: Morningstar introduced "Select Stock Baskets" with higher fees, expecting the average basis-point fee for managed portfolios to trend upward over time. Ibbotson's asset-based fees are generally lower than core Morningstar fees due to differences in service levels.
- Portfolio Performance: In 2006, 22 of 26 asset allocation portfolios in the Managed Portfolios line beat their benchmarks. For the new ETF line, 8 of 10 portfolios outperformed benchmarks for the year.
Guidance, Outlook, and Risks
Management provided the following commentary on future outlook and risks:
- Forward-Looking Statements: The filing includes a Safe Harbor statement noting that actual results may differ materially from projections due to known and unknown risks.
- Strategic Outlook: Management expects asset-based fees to continue increasing as a percentage of revenue, though the business will remain largely subscription-based. The company is actively pursuing opportunities for equity research outside the Global Analyst Research Settlement.
- Acquisition Integration: The company has completed the vast majority of integration work for Ibbotson and has reaped most expected cost synergies. No further tax benefits are expected from this acquisition.
- Regulatory Matters: The SEC has dropped its investigation into Morningstar's retirement plan consulting business. The Department of Labor has requested additional documents, and discussions with the New York Attorney General's office are ongoing, though not characterized as an expansion of the review.
- Corporate Changes: The company is searching for a new CFO to replace Martha Dustin Boudos, who will remain in the role during the transition. Executive 10b5-1 trading plans have been updated for 2007.
Investor Verification Checklist
- Verify the status of ongoing regulatory reviews by the Department of Labor and New York Attorney General as referenced in the 10-K.
- Monitor the timeline and outcome of the CFO search process.
- Track the growth of asset-based fees versus subscription revenue to confirm the stated trend of increasing asset-based percentages.
- Review upcoming 10-Q filings for detailed financial results regarding the S&P Mutual Fund Data Business acquisition, as specific revenue breakdowns were not disclosed in this filing.
- Confirm the sustainability of Principia revenue levels given the noted subscriber attrition and reliance on module upselling.