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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar, Inc. Reports Third-Quarter 2011 Financial Results
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CHICAGO, Oct. 26, 2011—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2011 financial results. The company reported consolidated revenue of $160.1 million in the third quarter of 2011, a 14.5% increase from $139.8 million in the third quarter of 2010. Consolidated operating income was $33.9 million in the third quarter of 2011, an increase of 12.3% compared with $30.2 million in the same period a year ago. Net income was $21.4 million, or 42 cents per diluted share, compared with $24.7 million, or 49 cents per diluted share, in the third quarter of 2010. The company’s 2010 third-quarter earnings included an after-tax gain of $3.2 million, or 7 cents per share, related to increasing its ownership interest in Morningstar Denmark.

Excluding acquisitions and the effect of foreign currency translations, revenue rose 11.2%. Third-quarter results included $0.9 million in revenue from acquisitions. Foreign currency translations had a favorable effect of $3.7 million. 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 nine months of 2011, revenue was $472.8 million, an increase of 17.0% compared with $404.2 million in the same period in 2010. Revenue for the first nine months of the year included $15.0 million from acquisitions and $9.9 million from foreign currency translations. Excluding acquisitions and foreign currency translations, revenue rose 10.8%. Consolidated operating income increased 17.5% to $104.3 million in the first nine months of 2011, compared with $88.8 million in the first nine months of 2010. Net income was $70.4 million, or $1.37 per diluted share, in the first nine months of 2011, compared with $62.9 million, or $1.24 per diluted share, in the same period in 2010.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “Organic revenue rose about 11% during the third quarter, which is consistent with the growth trends we’ve had throughout the year. Investment Consulting and Morningstar Direct were the primary growth drivers in the quarter, followed by Integrated Web Tools and Structured Credit Ratings. However, operating expense rose because of higher compensation costs, including bonus expense.

“During the quarter, we held our second annual ETF Invest conference in Chicago, with very strong attendance. We aim to be the leading provider of ETF data and research, and we also announced plans to research and rank ETF managed portfolios. Within our Investment Management division, we added several new strategies to the Morningstar Managed Portfolios offering. And, we added sophisticated asset allocation functionality to the Morningstar Direct research platform for institutional investors.”

Mansueto added, “I’m also pleased to announce that we’ve hired Greg Goff to be our chief technology officer. Greg joins us from The Nielsen Company, where he served as senior vice president of global platform technology. He has experience managing large data sets and integrating diverse platforms, and we’re thrilled to have him on board.”

Key Business Drivers
Morningstar has two operating segments: Investment Information and Investment Management. The Investment Information segment includes all of the company’s data, software, and research products and services. These products and services are typically sold through subscriptions or license agreements. The Investment Management segment includes all of the company’s asset management operations, which earn more than 60% of their revenue from asset-based fees.

Revenue: In the third quarter of 2011, revenue in the Investment Information segment was $125.8 million, an increase of $13.7 million, or 12.3%, including $0.9 million from acquisitions. Revenue in the Investment Management segment was $34.2 million, an increase of $6.5 million, or 23.4%.

Revenue from international operations was $47.3 million in the third quarter of 2011, an increase of 18.5% from the same period a year ago. Foreign currency translations contributed $3.7 million to international revenue. Excluding foreign currency translations, international revenue rose 9.3%.

For the first nine months of 2011, international revenue increased $25.8 million, or 22.9%, including $5.6 million from acquisitions. Foreign currency translations had a favorable effect of $9.9 million. 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 $33.9 million in the third quarter of 2011, a 12.3% increase from the same period in 2010. Operating expense rose $16.5 million, or 15.1%. The company completed seven acquisitions in 2010. Because of the timing of these acquisitions, results for both periods in 2011 include operating expense that did not exist in the same periods in 2010.

Approximately half of the increase in total operating expense was due to higher salaries, reflecting salary increases made in July, and, to a lesser extent, additional headcount. The headcount growth includes about 30 employees hired in July in the United States as part of the Morningstar Development Program, a two-year rotational training program for entry-level college graduates.

Incentive compensation and employee benefits costs represented approximately 35%, or $5.7 million, of the overall operating expense increase. Higher depreciation and amortization contributed an additional $1.1 million to the operating expense increase in the third quarter of 2011, partly from recent acquisitions. In the third quarter, the company capitalized $1.6 million of operating expense, primarily for software development within the LIM commodity data business, Structured Credit Ratings, and Morningstar Direct.

Morningstar had approximately 3,395 employees worldwide as of Sept. 30, 2011, compared with 3,165 as of Sept. 30, 2010. Headcount was higher year over year mainly because of continued hiring in the company’s development centers in China and India, as well as in the United States.

The company’s operating margin was 21.2% in the third quarter of 2011, a slight decrease compared with the same period in 2010. The margin decline primarily reflects higher employee benefits expense as a percentage of revenue. Capitalized operating expense contributed 1.0 percentage point to the margin in the third quarter, partially offsetting the decrease. In the first nine months of 2011, operating margin was 22.1%, a slight increase compared with 22.0% in the first nine months of 2010.

Non-Operating Income (Expense): In the third quarter of 2010, the company acquired an additional 75% ownership interest in Morningstar Denmark, increasing its ownership to 100%. In conjunction with this acquisition, the company recorded a non-cash gain of $5.1 million and related non-cash income tax expense of $1.9 million. The gain, net of tax, increased net income by $3.2 million, or 7 cents per diluted share, in the quarter, and 6 cents per diluted share in the year-to-date period of 2010. This gain did not recur in 2011.

Effective Tax Rate: Morningstar’s effective tax rate in the third quarter of 2011 was 36.6%, an increase of 4.0 percentage points compared with the prior-year period. In the third quarter of 2010, the company’s effective tax rate was 32.6%, which includes a benefit related to non-U.S. income taxes. Year to date, the company’s effective tax rate was 33.6%, a decrease of 0.9 percentage points. The year-to-date effective tax rate primarily reflects the positive effect of higher estimated tax benefits and incentives, most of which relate to prior years.

Free Cash Flow: Morningstar generated free cash flow of $38.9 million in the third quarter of 2011, reflecting cash provided by operating activities of $45.2 million and approximately $6.3 million of capital expenditures.

Cash provided by operating activities rose $9.9 million, reflecting a positive cash flow effect primarily generated from higher accrued bonus and income tax liabilities, as well as changes in other operating assets and liabilities. Capital expenditures were $2.4 million higher in the quarter.

In the first nine months of 2011, Morningstar generated free cash flow of $91.6 million, reflecting cash provided by operating activities of $106.3 million and capital expenditures of $14.7 million. Cash provided by operating activities in the first nine months of 2011 increased $26.0 million, reflecting the positive effect of changes in operating assets and liabilities and higher net income (adjusted for non-cash items), partially offset by a $16.1 million increase in bonuses paid in the first quarter of 2011.

Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.

As of Sept. 30, 2011, Morningstar had cash, cash equivalents, and investments of $433.0 million, compared with $365.4 million as of Dec. 31, 2010. In the third quarter of 2011, the company used $28.4 million of cash for its stock repurchase program. Of the $100 million authorized under the program, Morningstar has purchased 646,682 shares for $35.9 million as of Sept. 30, 2011. On Oct. 31, 2011, the company expects to pay approximately $2.5 million for its regular quarterly dividend. It expects to make capital expenditures of approximately $3 million to $5 million in the fourth quarter of 2011.

Business Segment Performance
Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor WorkstationSM (including Morningstar Office); Morningstar.com®, including Premium Memberships and Internet advertising sales; and Morningstar DirectSM.
• Revenue was $125.8 million in the third quarter of 2011, up 12.3% from $112.1 million in the third quarter of 2010.
• Acquisitions contributed revenue of $0.9 million in the third quarter of 2011.
• Morningstar Direct, Integrated Web Tools, and Structured Credit Ratings drove most of the revenue increase. Morningstar Advisor Workstation (including Morningstar Office) and Licensed Data also contributed to the increase. Licenses for Morningstar Direct rose 30% to 5,726. Premium Membership subscriptions for Morningstar.com fell 4.3%. Principia subscriptions were down 5.8% to 31,318, and Advisor Workstation licenses rose slightly to 155,833.
• Operating income was $31.4 million in the third quarter of 2011, compared with $32.8 million in the same period in 2010. Operating expense in this segment rose $15.1 million, or 19.1%, with approximately 80% of the increase from compensation-related expense, including higher salaries, employee benefits, bonus, and commission expense.
• Operating margin was 25.0% in the third quarter of 2011 versus 29.3% in the prior-year period. The margin decline primarily reflects higher salary, benefits, and bonus expense as a percentage of revenue.

Investment Management Segment: The largest products in this segment based on revenue are Investment Consulting; Retirement Solutions, including Advice by Ibbotson® and Morningstar® Retirement ManagerSM; and Morningstar® Managed PortfoliosSM.
• Revenue was $34.2 million in the third quarter of 2011, a 23.4% increase from $27.8 million in the same period in 2010.
• Investment Consulting was the primary driver of the segment revenue growth. Retirement Solutions and Morningstar Managed Portfolios also made positive contributions, but to a lesser extent.
• Assets under advisement and management for Investment Consulting were $128.1 billion as of Sept. 30, 2011, up 21.2% compared with $105.7 billion as of Sept. 30, 2010. The increase reflects additional assets for an existing client’s fund-of-funds program for which Morningstar now receives asset-based fees. Assets under advisement and management for Retirement Solutions rose to $36.3 billion as of Sept. 30, 2011, versus $31.6 billion as of Sept. 30, 2010. Assets under management for Morningstar Managed Portfolios increased to $2.8 billion as of Sept. 30, 2011, compared with $2.5 billion as of Sept. 30, 2010.
• Operating income was $18.1 million in the third quarter of 2011, an increase of 33.6% compared with the third quarter of 2010. Operating expense in the segment was $16.1 million, an increase of $1.9 million, or 13.7%, primarily reflecting higher operating expense for operations outside of the United States as well as higher compensation expense and professional fees in the United States.
• Operating margin was 52.7% in the third quarter of 2011 versus 48.7% in the prior-year period. The higher margin mainly reflects lower salary, bonus, and commission expense as a percentage of revenue.

Intangible Amortization and Corporate Depreciation Expense: Intangible amortization, which represents the majority of the expense in this category, was $6.9 million in the third quarter of 2011, an increase of $0.7 million compared with the same period in 2010. Corporate depreciation expense was $1.9 million in the third quarter, essentially unchanged from the prior-year period.

Corporate Unallocated: This category includes costs related to corporate functions, including general management, information technology used to support corporate systems, legal, finance, human resources, marketing, and corporate communications. Costs in this category were $6.8 million in the quarter, a decrease of $1.3 million, or 15.7%, because the company capitalized $1.6 million of operating expense in the quarter for software development. Lower professional fees also contributed to the decrease, but to a lesser extent.

Investor Communication
Morningstar encourages all interested parties—including securities analysts, current shareholders, potential shareholders, and others—to submit questions in writing. Investors and others may send an e-mail to investors@morningstar.com, contact the company via fax at 312-696-6009, or write to Morningstar at the following address:

Morningstar, Inc.
Investor Relations
22 W. Washington Street
Chicago, IL 60602

Morningstar will make written responses to selected inquiries available to all investors at the same time in Form 8-Ks furnished to the Securities and Exchange Commission, generally on the first Friday of every month.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 330,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $167 billion in assets under advisement and management as of Sept. 30, 2011. The company has operations in 26 countries.

Caution Concerning Forward-Looking Statements
This press release contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue." These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, general industry conditions and competition, including ongoing economic weakness and uncertainty; the effect of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; the increasing concentration of data and development work carried out at our offshore facilities in China and India; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to successfully integrate acquisitions; challenges faced by our non-U.S. operations; and a prolonged outage of our database and network facilities. A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2010. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.

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 its business. Free cash flow should not be considered an alternative to any measure required to be reported 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.

All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,”or “was similar” refer to a comparison with the same period in the previous year unless otherwise stated.

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©2011 Morningstar, Inc. All rights reserved.

MORN-E

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