Business Context and Reporting Period
Company: Morningstar, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: February 6, 2015
Purpose: Regulation FD Disclosure containing responses to investor questions regarding competitive advantages, capital expenditures, and deferred revenue trends.
Key Financial Metrics
The filing provides specific historical data regarding capital expenditures and capitalized software development but does not report current period revenue, profit, cash flow, or debt levels.
| Item ($ millions) | 2011 | 2012 | 2013 | Nine Months Ended Sept 30, 2014 |
|---|---|---|---|---|
| Capitalized Software Development | 5.3 | 8.5 | 8.1 | 13.6 |
| Total Capital Expenditures | 23.3 | 30.0 | 33.6 | 42.8 |
Revenue Growth Context: Total revenue increased approximately 55% from 2009 to September 2014 (approx. 9% CAGR). Approximately 80% of revenues are recurring and subscription-based.
Material Changes and Explanations
- Capital Expenditures: Capital spending increased significantly in 2013 and 2014 compared to historical levels. The 2014 figure includes approximately $11 million in payments made in early 2014 for work completed in 2013. Increases are also driven by ongoing software platform upgrades, hardware investments for U.S. and non-U.S. operations, and office build-outs.
- Deferred Revenue: Deferred revenue has remained stagnant despite revenue growth. Management attributes this to:
- Growth in the unbilled portion of accounts receivable (from 19% in 2009 to 26% in 2014) due to billing cycles and asset-based fees.
- A shift from up-front annual invoices to quarterly and monthly invoicing.
- Migration of subscribers from legacy products (Principia) to new platforms (Morningstar Advisor Workstation).
- Strength of the U.S. dollar reducing the translated value of non-U.S. deferred revenue.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Advisor Software: Competitive advantage relies on proprietary research (200+ analysts, 500k+ investments) and integrations with third-party apps (Redtail, eMoney, Schwab). Recent acquisition of ByAllAccounts enhances data aggregation for "held away" assets.
- Retirement Solutions: Positioned as the only provider offering a full range of scalable solutions (managed accounts, custom target-date funds, fiduciary services). Recent acquisition of HelloWallet aims to incorporate holistic advice.
- Capital Expenditures: The company expects to continue making capital expenditures but provides no specific projections for future levels.
Risks and Contingencies:
- Liability for breaches of fiduciary duties or pending litigation.
- Failure to differentiate products or keep pace with technological change.
- Operational risks including database outages and disruptions in electronic delivery systems.
- Liability related to storage of personal user information.
- Market volatility impacting asset-based fees and competition from passively managed vehicles.
- Regulatory changes and challenges in offshore operations (China and India).
Investor Verification Checklist
- Verify the impact of the ByAllAccounts and HelloWallet acquisitions on future revenue streams and integration timelines.
- Monitor the trend of unbilled accounts receivable to understand the divergence between revenue growth and deferred revenue balances.
- Assess the sustainability of high capital expenditure levels once current software upgrade and infrastructure projects are completed.
- Review pending litigation details and potential financial exposure regarding fiduciary duties and data storage liabilities.
- Track the migration rate of legacy Principia subscribers to Morningstar Advisor Workstation to gauge the long-term effect on billing cycles.