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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar, Inc. Reports Second-Quarter 2007 Financial Results
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CHICAGO, Aug. 2, 2007—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its second-quarter 2007 financial results. The company reported consolidated revenue of $109.7 million in the second quarter of 2007, a 44% increase from revenue of $76.3 million in the second quarter of 2006. Morningstar’s second-quarter results included $13.0 million in revenue from acquisitions completed during the previous 12 months. Consolidated operating income was $28.4 million in the second quarter of 2007, an increase of 63%, compared with $17.5 million in the second quarter of 2006. Morningstar’s net income was $18.3 million in the second quarter of 2007, or 38 cents per diluted share, compared with $11.2 million, or 24 cents per diluted share, in the second quarter of 2006.

Morningstar acquired Standard & Poor’s mutual fund data business on March 16, 2007, and the second- quarter results include revenue from this new business. Excluding acquisitions and the impact of foreign currency translations, Morningstar’s revenue increased approximately 26% in the second quarter of 2007. Foreign currency translations had a positive impact of $0.6 million in the quarter. Revenue excluding acquisitions and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.

In the first six months of 2007, revenue increased $58.8 million, or 40%, to $205.1 million, compared with $146.3 million in the same period a year ago. Revenue for the first half of the year included $25.2 million from acquisitions. Consolidated operating income increased 43% to $52.5 million in the first six months of 2007, compared with $36.7 million in the first half of 2006. Net income was $34.1 million, or 71 cents per diluted share, in the first half of 2007, compared with $24.6 million, or 53 cents per diluted share, in the same period in 2006.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We had a strong quarter with solid organic growth as well as growth from acquisitions. This was the first full quarter to include our acquisition of Standard & Poor’s global fund data business. We’ve completed our integration of S&P data, and more than 500 publications and Web sites around the world regularly use Morningstar as their source of investment information.

“From a product standpoint, our Investment Consulting business, including funds-of-funds investment management—one of our key growth strategies—continues to drive our revenue growth. We now have more than $81 billion in assets under advisement, nearly double last year’s level. Advisor Workstation was the second-largest contributor to our organic revenue increase, followed by Licensed Data, Morningstar.com, and Morningstar Direct. Finally, after we acquired S&P’s fund data business and paid our annual bonuses in the first quarter, we still ended the quarter with nearly $161 million in cash and investments.”

Key Business Drivers
Revenue: In the second quarter of 2007, revenue in the Individual segment grew 25% compared with the second quarter of 2006; 12 percentage points of this increase came from acquisitions. Revenue in the Advisor segment rose 24%, with 7 percentage points of the increase coming from acquisitions. Institutional segment revenue increased 68%, of which 26 percentage points came from acquisitions.

Revenue from international operations was $23.1 million in the second quarter of 2007, an increase of 143% from the same period a year ago. International revenue included $10.8 million from acquisitions, primarily from the acquisition of Standard & Poor’s fund data business. Excluding the impact of acquisitions and foreign currency translations, international revenue grew approximately 23% in the second quarter of 2007, compared with the prior-year period. For the first six months of 2007, international revenue rose 116% compared with the prior-year period, primarily because of the acquisitions of Standard & Poor’s fund data business and Aspect Huntley. International revenue excluding acquisitions and foreign currency translations is a non-GAAP measure; the accompanying financial tables contain a reconciliation to international revenue.

Operating Income: Consolidated operating income was $28.4 million in the second quarter of 2007, a 63% increase from the same period in 2006. Operating expense rose $22.4 million, or 38%, in the second quarter of 2007, with more than half of the increase coming from higher compensation costs. Compensation-related expense, excluding bonuses, rose $8.6 million, with the majority of the increase coming from acquired businesses. Bonus expense increased $3.8 million in the quarter. Another major contributor to the higher operating expense was an increase in general and administrative expense related to temporary transition costs associated with the newly acquired Standard & Poor’s operations, primarily in Europe. Worldwide headcount grew to approximately 1,620 employees as of June 30, 2007, compared with 1,270 as of June 30, 2006. This growth primarily reflects employees from acquisitions and continued hiring in the company’s development center in China.

Because of the timing of acquisitions made during the past 12 months, Morningstar had additional expenses in the second quarter of 2007 that did not exist in the same period in 2006. These expenses include amortization of intangible assets related to acquisitions, which contributed $1.5 million to the operating expense increase in the quarter.

The company’s operating margin was 25.9% in the second quarter of 2007, compared with 22.9% in the same period in 2006. In the first six months of 2007, operating margin was 25.6%, compared with 25.1% in the first six months of 2006. For the first half of 2007, operating margin was affected by lower margins in some acquired businesses as well as temporary transition costs related to the acquired Standard & Poor’s operations.

Free Cash Flow: Morningstar generated free cash flow of $32.2 million in the second quarter of 2007, reflecting cash provided by operating activities of $36.1 million and capital expenditures of approximately $3.9 million. Cash flow from operations increased $6.6 million, primarily from the positive impact of net income (adjusted for non-cash items) and increases in accrued expenses. Strong cash collections also contributed to the growth in second-quarter cash flow from operations. A $13.8 million increase in income tax payments partially offset these positive cash flow items. In 2006, cash flow from operations reflected a $13.0 million cash tax benefit received from the Ibbotson acquisition, which resulted in lower tax payments. Because this was a one-time benefit in 2006, income tax payments increased in 2007. Capital expenditures in the quarter increased $2.7 million primarily because of expenses related to office space build-outs in several locations.

In the first six months of 2007, Morningstar generated free cash flow of $38.6 million, reflecting cash provided by operating activities of $44.5 million and capital expenditures of $5.9 million. Cash flow from operations in the first six months of 2007 increased by $5.1 million, primarily because of the increase in net income (adjusted for non-cash items) and increases in accrued expenses, partially offset by higher income tax and bonus payments. Bonuses paid in the first half of 2007 were $12.8 million higher than in the prior-year period because of strong company performance and incremental bonuses for businesses acquired during 2006. Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash provided by or used for operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.

As of June 30, 2007, Morningstar had cash, cash equivalents, and investments of $160.8 million, compared with $121.8 million as of March 31, 2007, and $163.8 million as of Dec. 31, 2006.

Business Segment Performance
Individual Segment: The largest product in this segment based on revenue is the company’s U.S.-based Web site for individual investors, Morningstar.com®. The Individual segment also includes Morningstar® Equity Research and several print and online publications.

  • Revenue was $24.2 million in the second quarter of 2007, a 25% increase from $19.4 million in the second quarter of 2006.
  • Acquisitions contributed revenue of $2.4 million to the Individual segment in the second quarter, the majority of which was from Aspect Huntley.
  • Morningstar.com, including Premium Membership and Internet advertising sales, drove most of the increase in organic revenue. Equity Research also contributed to the revenue growth. Morningstar retained all six of its contracts for independent equity research associated with the Global Analyst Research Settlement. Most of these contracts, which typically come up for renewal in the second quarter, cover the fourth year of the five-year settlement period.
  • Operating income was $6.5 million in the second quarter of 2007, a 4% increase from $6.2 million in the prior-year period. Operating expense increased in 2007, primarily because of the Aspect Huntley acquisition and higher bonus expense.
  • Operating margin was 26.7% in the second quarter of 2007, compared with 32.1% in the second quarter of 2006. Approximately half of the margin decrease was due to the Aspect Huntley acquisition and the remainder was driven by higher compensation expense as a percentage of revenue.

Advisor Segment: The largest products in this segment based on revenue are Morningstar® Advisor WorkstationSM, Morningstar® Principia®, and Morningstar® Managed PortfoliosSM.

  • Revenue was $30.2 million in the second quarter of 2007, a 24% increase from $24.3 million in the same period in 2006.
  • Acquisitions contributed revenue of $1.7 million to the Advisor segment in the second quarter, the majority of which reflects new revenue from Standard & Poor’s fund data business.
  • Morningstar Advisor Workstation drove most of the growth in organic revenue. Total licenses for Morningstar Advisor Workstation in the United States increased to 163,813 as of June 30, 2007, compared with 127,057 in the prior-year period. Morningstar Managed Portfolios was the second-largest contributor to the Advisor segment’s revenue increase. The Financial Communications business, which includes advisor presentation materials (acquired from Ibbotson), the annual Morningstar Investment Conference held in the second quarter, as well as the newly launched Morningstar Advisor magazine, also made a meaningful contribution to revenue growth.
  • Operating income was $8.0 million in the second quarter of 2007, an increase of 26% compared with $6.4 million in the second quarter of 2006.
  • Operating margin was 26.6% in the second quarter of 2007, compared with 26.3% in the second quarter of 2006.

Institutional Segment: The largest products and services in this segment based on revenue are Investment Consulting, Licensed DataSM, Retirement Advice (including Advice by Ibbotson® and Morningstar® Retirement ManagerSM ), Licensed Tools and Content, Morningstar DirectSM, Investment ProfilesTM and Guides, and Morningstar EnCorr®.

  • Revenue was $57.6 million in the second quarter of 2007, a 68% increase from $34.3 million in the second quarter of 2006.
  • Acquisitions contributed revenue of $8.9 million to the Institutional segment in the second quarter, primarily from the acquisition of Standard & Poor’s fund data business.
  • Investment Consulting was the primary contributor to revenue growth, and Licensed Data and Morningstar Direct also made meaningful contributions to organic revenue growth.
  • Operating income was $17.9 million in the second quarter of 2007, more than double from $7.3 million in the same period in 2006.
  • Operating margin was 31.0% in the second quarter of 2007, compared with 21.3% in the prior-year period. The majority of the increase was driven by growth in higher-margin services, such as Investment Consulting, but was partially offset by the impact of the Standard & Poor’s fund data business and Aspect Huntley acquisitions.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in the United States and in major international markets. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 250,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 16 countries and minority ownership positions in companies based in three other countries.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This press release contains forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.

Other factors that could materially affect actual results, levels of activity, performance, or achievements can be found in Morningstar’s filings with the Securities and Exchange Commission, including Morningstar’s Annual Report on Form 10-K for the year ended Dec. 31, 2006. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this press release reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.

Non-GAAP Financial Measures
To supplement Morningstar’s consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission: free cash flow, consolidated revenue excluding acquisitions and foreign currency translations (organic revenue), and international revenue excluding acquisitions and foreign currency translations. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after Morningstar spends money to operate its business. Morningstar uses free cash flow to evaluate the performance of its business. Free cash flow should not be considered an alternative to any measure of performance as promulgated under GAAP (such as cash provided by (used for) operating, investing, and financing activities). For more information on free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables. Morningstar presents consolidated revenue excluding acquisitions and foreign currency translations (organic revenue) and international revenue excluding acquisitions and foreign currency translations because the company believes these non-GAAP measures help investors better compare period-to-period results. For more information, please see the reconciliation provided in the accompanying financial tables.
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© 2007 Morningstar, Inc. All rights reserved.

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