Business Context and Reporting Period
This Form 8-K, filed on October 6, 2006, by Morningstar, Inc., serves as a Regulation FD disclosure containing responses to investor inquiries received through October 5, 2006. The filing details operational metrics, segment performance, and strategic initiatives for the first half of 2006 and full-year 2005, following recent acquisitions including Ibbotson Associates (March 2006) and Aspect Huntley (July 2006).
Key Financial Metrics and Segment Performance
- Individual Segment: Print publications accounted for approximately 26% of segment revenue in the first half of 2006, down from 27% in the first half of 2005. U.S. online advertising revenue grew approximately 23% year-over-year for the first six months of 2006.
- Institutional Segment: Licensed Data revenue grew 19.2% in full-year 2005, slightly trailing the overall segment growth of 22.4%. The segment includes significant revenue from Investment Consulting, Retirement Advice, and Licensed Tools and Content.
- Top Products (2005 Revenue): The five largest products generated annual revenues ranging from $32.4 million (Licensed Data) to $21.9 million (Investment Consulting).
- Ibbotson Associates: Q2 2006 revenue was $6.8 million, showing variability due to seasonality (e.g., annual yearbook sales in Q1) and the integration of revenue recognition policies.
- Market Context: The total economic and financial data market was estimated at $16.4 billion in 2004.
Note: The filing does not provide consolidated revenue, profit, cash flow, debt, or liquidity figures for the current period. Specific product margins are not disclosed.
Material Changes and Operational Updates
- Acquisitions: The Individual segment now includes revenue from Ibbotson publications (e.g., Stocks, Bonds, Bills, and Inflation) and Aspect Huntley newsletters (Your Money Weekly, Smaller Companies Guide). The Institutional segment now includes Investor Force's separate account and hedge fund database division.
- Revenue Recognition: Post-acquisition, Ibbotson follows Morningstar's revenue recognition policies, recognizing consulting revenue over service periods and subscription revenue over the term.
- Product Mix: Print publication growth is mixed; mature titles show lower growth, while reprints and new launches show strong growth. Online ad sales are primarily CPM-based with rates moving in line with demand.
Outlook, Risks, and Management Commentary
- Independent Equity Research: Contracts with investment banks under the Global Analyst Research Settlement expire in July 2009. Banks are not required to continue purchasing independent research after this date. Morningstar hopes to retain a portion of this business but cannot predict the volume. This revenue stream was significant in 2005 but is not currently disclosed as a specific dollar amount.
- Hedge Fund Database: Morningstar currently reports on about two dozen hedge funds out of a tracked universe of 6,000. There are no definitive plans or timetables for publishing reports on the entire universe or implementing star ratings for hedge funds.
- Asset Management: Fee-based businesses (Managed Portfolios, Investment Consulting, Managed Retirement Accounts) utilize asset-based fees. Decision-makers vary by product, ranging from financial advisors to institutional executives.
- Forward-Looking Statements: The filing includes a Safe Harbor statement noting that actual results may differ materially due to risks and uncertainties, including the potential loss of independent research revenue post-2009.
Investor Verification Checklist
- Verify the specific revenue contribution of the Independent Equity Research business and the risk of revenue loss after the July 2009 settlement expiration.
- Confirm the integration progress and revenue stabilization of Ibbotson Associates following the March 2006 acquisition.
- Monitor the growth trajectory of the Licensed Data business relative to the broader Institutional segment.
- Assess the sustainability of the 23% growth rate in U.S. online advertising revenue.
- Review the strategic roadmap for the hedge fund database, specifically regarding the scope of analyst reports and potential star ratings.