Business Context and Reporting Period
Company: Morningstar, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 5, 2010
Reporting Period: The filing contains a "Regulation FD Disclosure" consisting of answers to investor questions received through November 3, 2010. It provides operational updates and financial metrics as of September 30, 2010.
Key Financial Metrics
The filing does not provide a full income statement or balance sheet for the period. However, it discloses the following specific metrics:
- Assets Under Management (Retirement): As of September 30, 2010, total assets in managed retirement accounts were $17.8 billion (up from $14.6 billion in 2009). This includes $16.0 billion for "Advice by Ibbotson" and $1.8 billion for "Morningstar Retirement Manager."
- Revenue Mix (Morningstar.com): Premium subscriptions generate approximately 70% of the site's revenue, with internet advertising accounting for the remaining 30%.
- International Revenue: International operations accounted for 29% of total revenue in the most recent quarter.
- Shareholder Returns: The Board authorized a $100 million share repurchase program and a regular quarterly dividend of $0.05 per share, commencing in Q1 2011.
- Balance Sheet Composition: The corporate securities portfolio has an average maturity and duration of approximately one year, consisting primarily of high-rated municipals and AA-rated corporate bonds.
Material Changes and Operational Updates
Product and Service Launches:
- Launched a Premium service for Canadian investors and a BlackBerry mobile application.
- Completed Chilean and Mexican fund databases and established new Asian data centers in Hong Kong and Tokyo.
- Expanded fund analyst coverage to over 1,000 rated funds in Europe and Asia.
- Introduced "Report Studio" within Morningstar Office and began commercial launch of Morningstar QuoteSpeed 2.0.
Acquisitions and Integration:
- Integrated Logical Information Machines (LIM) with new data delivery warehouses and APIs.
- Acquired Realpoint (May 2010) to develop a residential mortgage-backed security (RMBS) platform.
- Acquired three investment consulting firms since mid-2009: Intech (Australia), Old Broad Street Research (UK), and Seeds Group (France).
- Increased ownership in Morningstar Denmark to 100%.
Retention and Renewals:
- Subscription Retention: Improved slightly in 2010 after declining in 2009 (55-60%); historically ranges between 60-65%.
- Contract Renewals: Renewal rates improved in 2010 to 90% or better for most products, recovering from lows of 80-85% in 2009 and 90-95% in 2008.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Pricing Strategy: Management anticipates moderate annual price increases for Premium memberships driven by continuous enhancements in data depth and functionality. Advertising pricing remains cyclical and dependent on external economic factors.
- Growth Areas: Significant focus on ETFs, alternative investments (hedge funds), and international expansion (Latin America). The company aims for international revenue to eventually approach 50% of total revenue.
- Technology Investment: The programming and technology team has grown to approximately 820 professionals (up from 230 at IPO in 2005), with half located in offshore centers in China and India.
- Capital Allocation: Management believes the company has sufficient resources to continue internal reinvestment and external acquisitions while paying a dividend.
Risks and Contingencies:
- Regulatory: Ongoing analysis of the Dodd-Frank Act, specifically Title IX regarding credit rating agencies and corporate governance. Potential opportunities exist in European regulations (Retail Distribution Review, UCITS IV).
- Market Conditions: Risks include global financial uncertainty, market volatility impacting asset-based fees, and industry consolidation which can lead to contract losses or user count declines.
- Operational: Risks of prolonged database outages, reputation damage from conflict of interest claims, and the availability of free investment information.
Investor Verification Checklist
- Verify the impact of the new $0.05 quarterly dividend and $100 million buyback program on future free cash flow projections.
- Monitor the 29% international revenue contribution and the success of new operations in Brazil, Chile, and Mexico.
- Track the renewal rate trends for contract-based products to ensure the 2010 improvement (90%+) is sustained.
- Assess the integration progress of recent acquisitions (Realpoint, Seeds Group, Old Broad Street) and their contribution to the Investment Management segment.
- Review the "Advice by Ibbotson" enrollment rate (currently <10% of eligible assets) for signs of acceleration in the retirement market.