Business Context and Reporting Period
This Form 8-K is a Current Report filed by Morningstar, Inc. on September 1, 2006, pursuant to Regulation FD. The document consists of a Q&A session addressing investor inquiries received through August 28, 2006. The company operates in three primary segments: Individual, Advisor, and Institutional. Key operational context includes the ongoing integration of the Ibbotson Associates acquisition and the revenue impact of the Global Analyst Research Settlement.
Key Financial Metrics and Operational Data
The filing provides specific operational metrics and pricing data rather than consolidated financial statements for the period.
- Registered Users: As of June 30, 2006, Morningstar.com had approximately 4.7 million registered users in the United States.
- User Demographics: Average registered user is 46 years old with a household income of $106,000 and a portfolio size of $470,000. Premium members average 53 years old, $144,000 income, and $850,000 portfolio size.
- Revenue Composition (2005): Online advertising comprised approximately 4% of consolidated revenue and 30% of Morningstar.com revenue.
- Licensed Data: Accounted for close to 35% of the Institutional segment revenue in 2005.
- Product Pricing (Q2 2006):
- Advisor Workstation (Enterprise): Average price per user was $230 (vs. $220 in 2005).
- Morningstar Direct: Average selling price was $8,500 (vs. $9,100 in Q1 2006 and $9,900 in 2005).
- Principia: Annualized revenue per subscription is approximately $570.
- Acquisition Costs: $1.1 million in outsourced product implementation expenses were incurred in Q2 2006 related to the Ibbotson "Advice by Ibbotson" service.
Material Changes and Segment Performance
The filing highlights several material developments and segment-specific dynamics:
- Ibbotson Integration: Ibbotson historically operates with lower margins than Morningstar. The company expects margins to converge over time through operating efficiencies and cost savings in general and administrative functions. Amortization of intangible assets from the acquisition is an ongoing expense.
- Global Analyst Research Settlement: This settlement was a significant contributor to revenue growth in 2005 and the first half of 2006. The mandatory period for investment banks to provide independent research expires in July 2009. Morningstar currently serves six of the 12 named banks. The company does not guarantee retention of this business post-settlement.
- Assets Under Advisement: A $4 billion sequential jump in assets under advisement for investment consulting in Q2 2006 was driven by asset growth in funds of funds within existing client relationships.
- Staffing: The company plans to increase its stock analyst headcount from 95 to as many as 100 in 2006. As of July 31, 2006, there were 74 sales/marketing staff in the Advisor segment and 72 in the Institutional segment.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Margin Expansion: Management expects to realize operating leverage as revenue grows faster than costs. They anticipate Ibbotson's margins will move closer to Morningstar's over time.
- Acquisitions: The company remains opportunistic regarding acquisitions, focusing on cultural fit, strong products, and fair pricing. Target areas include international equity data, fixed-income data, and risk analytics.
- Hedge Fund Business: Morningstar is expanding its hedge fund database (currently tracking 3,500 funds, targeting 6,000) and has begun publishing analyst reports. No specific rating system details have been announced yet.
- Forward-Looking Statements: The filing includes a Safe Harbor statement noting that actual results may differ materially due to risks including tax rate variations, disqualifying dispositions of stock options, and non-U.S. subsidiary performance.
- Settlement Uncertainty: There is no guarantee that investment banks will renew contracts for independent equity research after the initial five-year settlement period or before July 2009.
- Legal Matters: The company declined to comment on ongoing subpoenas and investigations by the New York Attorney General, SEC, and Department of Justice, citing policy against commenting on ongoing litigation.
Investor Verification Checklist
- Verify the specific revenue contribution of the Global Analyst Research Settlement in the most recent 10-Q, as the company declined to disclose specific amounts in this filing.
- Monitor the retention rate of the six investment banks currently under the research settlement as the July 2009 expiration approaches.
- Review the 10-K and 10-Q filings for detailed tax rate calculations, as the filing notes significant variability due to stock option dispositions and non-U.S. operations.
- Track the integration progress of Ibbotson, specifically the timeline for margin convergence and the impact of ongoing intangible asset amortization.
- Confirm the status of the regulatory investigations (NY AG/SEC/DOJ) in subsequent filings, as no update was provided in this report.