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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar, Inc. Reports Third-Quarter 2014 Financial Results

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CHICAGO, Oct. 22, 2014—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2014 financial results. The company reported consolidated revenue of $193.1 million, an 11.3% increase from $173.5 million in the third quarter of 2013. Consolidated operating income was $45.3 million, an increase of 1.5% compared with $44.6 million in the same period a year ago. Net income was $30.2 million, or 67 cents per diluted share, compared with $31.5 million, or 68 cents per diluted share, in the third quarter of 2013.

Excluding acquisitions, divestitures, and the effect of foreign currency translations, revenue rose 9.3% in the third quarter of 2014. Revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) is a non-GAAP measure. The accompanying financial tables contain a reconciliation to consolidated revenue.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We had a good quarter. Organic revenue rose 9.3%, led by strong results from Morningstar Direct and Morningstar Credit Ratings. Our retirement business is growing nicely and reached a milestone—we now have more than 1 million managed retirement accounts in the United States.”

He added, “During the quarter, we published several signature thought leadership reports, including our annual target-date industry research, and introduced a classification system to help investors identify, compare, and analyze strategic beta exchange-traded products, a new and growing breed of investment vehicles.”

Financial Highlights
Revenue and Key Operating Metrics
• Investment information revenue was $152.3 million, an 11.0% increase from $137.2 million in the third quarter of 2013. Morningstar DirectSM and Morningstar Credit Ratings (the company’s structured credit research and ratings business) were the main contributors to revenue growth. Morningstar® Advisor WorkstationSM (including Morningstar OfficeSM) was also a positive contributor to revenue growth, which was offset by lower revenue for Morningstar® Principia®. The company is in the process of migrating clients from Principia to Morningstar Advisor Workstation and other Morningstar products.
• Investment management revenue was $40.9 million, a 12.7% increase from $36.3 million in the third quarter of 2013, driven by strong results for Morningstar® Managed PortfoliosSM and Retirement Solutions. Slightly lower revenue for Investment Advisory services partially offset the increase.
• Operating margin was 23.4% in the third quarter of 2014, down from 25.7% in the same period in 2013. Higher compensation expense, including salaries for new hires and increased sales commissions, as well as additional operating expense from recent acquisitions, were the primary drivers of the margin decline.

Cash Flow and Balance Sheet
• Consolidated free cash flow was negative $3.4 million in the third quarter of 2014, reflecting cash provided by operating activities of $8.6 million less $12.0 million of cash used for capital expenditures. Free cash flow was down from $38.0 million in the third quarter of 2013 largely because of the $61.0 million payment for the previously announced litigation settlement with Business Logic. 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, 2014, cash, cash equivalents, and investments totaled $227.8 million, compared with $298.6 million as of Dec. 31, 2013. Morningstar had $30.0 million of short-term debt as of Sept. 30, 2014.
• In the third quarter of 2014, Morningstar repurchased approximately 134,000 shares for $9.1 million. Of the $700 million authorized under its share repurchase program, Morningstar had purchased a total of 7.7 million shares for $495.6 million as of Sept. 30, 2014.
• The company expects to pay approximately $7.6 million for its regular quarterly dividend on Oct. 31, 2014.

Comparability of Year-Over-Year Results
Certain items affected the comparability of the company’s 2014 results versus the same periods in 2013:
• The company’s third-quarter results included $2.8 million in revenue and approximately $5.5 million of incremental operating expense from acquisitions.
• During the third quarter of 2014, commission expense rose $1.8 million compared with the prior-year period, mainly because of a change to the company’s sales commission structure that requires a different accounting treatment. Morningstar now expenses sales commissions as incurred instead of amortizing them over the term of the underlying contracts.
• During the second quarter of 2014, Morningstar recorded a non-recurring expense of $61.0 million—approximately $38.2 million after taxes, or 85 cents per share—in connection with the Business Logic litigation settlement, which is included in the company’s results for the nine months ended Sept. 30, 2014.

Operating Highlights
• Licenses for Morningstar Direct rose 17.0% to 9,648.
• Assets under management and advisement for Morningstar Managed Portfolios were approximately $8.8 billion as of Sept. 30, 2014, compared with $6.6 billion as of Sept. 30, 2013. Assets under management and advisement for Retirement Solutions were approximately $76.7 billion as of Sept. 30, 2014, versus $59.5 billion as of Sept. 30, 2013. Both product lines benefited from asset inflows and positive market performance.
• Investment Advisory assets under advisement as of Sept. 30, 2014 were $25.7 billion lower versus the same date in 2013, reflecting the ongoing effect of clients moving to in-house management for fund-of-funds portfolios in the variable annuity industry.
• Morningstar had approximately 3,800 employees worldwide as of Sept. 30, 2014, compared with 3,490 as of Sept. 30, 2013, reflecting the addition of product and technology roles in the United States, data analysts in India, and the ByAllAccounts and HelloWallet acquisitions.

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 questions about Morningstar’s business to investors@morningstar.com or write to the company at:

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 individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 479,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 13 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 investment advisory subsidiaries and had approximately $169 billion in assets under advisement and management as of Sept. 30, 2014. The company has operations in 27 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, liability for any losses that result from an actual or claimed breach of our fiduciary duties; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy; a prolonged outage of our database and network facilities; any failures or disruptions in our electronic delivery systems and the Internet; liability and/or damage to our reputation as a result of some of our pending litigation; liability related to the storage of personal information about our users; general industry conditions and competition, including global financial uncertainty, trends in the mutual fund industry, and continued growth in passively managed investment vehicles; the effect of market volatility on revenue from asset-based fees; failing to maintain and protect our brand, independence, and reputation; changes in laws applicable to our investment advisory or credit rating operations, compliance failures, or regulatory action; and challenges faced by our non-U.S. operations, including the concentration of development work at our offshore facilities in China and India. A more complete description of these risks and uncertainties can be found in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2013. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expected. 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 U.S. Securities and Exchange Commission: consolidated revenue excluding acquisitions, divestitures, and the effect of foreign currency translations (organic revenue) and free cash flow. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Morningstar presents consolidated revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) because the company believes this non-GAAP measure helps investors better compare period-over-period results.

In addition, 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 about free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables.

For more information about these non-GAAP measures, please see the reconciliations 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.


©2014 Morningstar, Inc. All Rights Reserved.


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