Business Context and Reporting Period
This Form 8-K Current Report, dated January 2, 2009, serves as a Regulation FD disclosure for Morningstar, Inc. The filing primarily consists of a Q&A session addressing investor inquiries regarding the company's business model, recent acquisitions, revenue composition, and product strategy. The data provided covers historical periods from 2003 through the third quarter of 2008, with specific focus on the impact of the global financial crisis beginning in 2007.
Key Financial Metrics
The filing provides detailed revenue breakdowns but does not disclose specific profit, cash flow, debt, or liquidity figures for the reporting period.
- Consolidated Revenue (YTD through Sept 30, 2008): $383.2 million.
- Organic Revenue (YTD through Sept 30, 2008): $356.8 million (93.1% of total).
- Revenue from Acquisitions (YTD through Sept 30, 2008): $20.7 million (5.4% of total).
- Foreign Currency Impact (YTD through Sept 30, 2008): Negative $5.6 million (1.5% of total).
- International Revenue: Approximately 24% of consolidated revenue for the first nine months of 2008 (up from 14% in 2003).
- Asset-Based Fees: Account for roughly 60% of combined revenue from Investment Consulting, managed retirement portfolios, and Morningstar Managed Portfolios.
- Revenue Mix (Individual Division): Approximately two-thirds from Premium subscriptions and one-third from advertising (as of Q3 2008).
Material Changes and Acquisitions
Morningstar has been active in M&A, completing several acquisitions in late 2008 to expand its data and software capabilities. The filing notes that organic revenue growth has been the primary driver of historical growth, though acquisition contributions have increased recently.
- Recent Acquisitions (2008):
- InvestData (Proprietary) Limited: Completed Dec 29, 2008. Leading provider of fund information in South Africa. Purchase price not disclosed.
- Tenfore Systems Limited: Completed Dec 17, 2008. Global provider of real-time market data. Purchase price approx. $21.0 million USD.
- 10-K Wizard: Completed Dec 4, 2008. Provider of SEC EDGAR filing research. Purchase price $12.5 million.
- Fundamental Data Limited: Completed Oct 2, 2008. Provider of closed-end fund data in the UK. Purchase price approx. $19 million USD.
- Financial Computer Support, Inc.: Completed Sept 2, 2008. Practice management software. Purchase price $4.9 million.
- Anniversary Dates: Hemscott acquisition (Jan 9, 2008) becomes part of organic revenue on Jan 8, 2009. Ibbotson acquisition (March 1, 2006) anniversary was March 1, 2007.
- Market Conditions: The company notes a difficult selling environment in H2 2008 due to the market downturn, resulting in some pricing pressure on renewals and a slight slowdown in incremental user additions for Advisor Workstation.
Guidance, Outlook, and Risks
The company explicitly states it does not provide financial forecasts or guidance. However, management commentary highlights strategic priorities and risk factors.
- Strategic Outlook: Focus remains on long-term value creation and portfolio value rather than near-term financial impact. The company aims to expand its international brand presence and integrate new data capabilities (e.g., real-time quotes via Tenfore) into existing platforms.
- Equity Research: Following the expiration of the Global Analyst Research Settlement in July 2009, Morningstar plans to continue offering equity research as a core component of its products, targeting institutional investors and financial advisors.
- Key Risks:
- Impact of the global financial crisis and market volatility on asset-based fees.
- Reputation damage from claims of conflicts of interest.
- Financial services industry consolidation.
- Prolonged outages of database and network facilities.
- Availability of free or low-cost investment information.
- Contract Renewals: Approximately 20% of institutional contracts (by value) are up for renewal between October 1 and March 31, 2009, with roughly equal amounts in Licensed Data and Investment Consulting.
Investor Verification Checklist
- Verify the integration timeline and revenue contribution of the four acquisitions completed in late 2008 (InvestData, Tenfore, 10-K Wizard, Fundamental Data).
- Monitor the renewal rates and pricing trends for the 20% of institutional contracts coming up for renewal in Q1 2009.
- Assess the impact of the global financial crisis on asset-based fee revenue, which comprises 60% of specific business line revenues.
- Track the migration of financial advisors from the legacy "Principia" product to the web-based "Advisor Workstation" platform.
- Review the company's strategy for sustaining equity research profitability post-July 2009, after the research settlement contracts expire.