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Margaret Kirch Cohenmargaret.cohen@morningstar.com
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Morningstar, Inc. Reports First Quarter 2005 Financial Results

The decline in cash provided by operating activities in the first quarter of 2005 compared with the same period in 2004 was primarily due to an increase in the annual bonus payment made during the quarter.  In the first quarter of 2005, Morningstar paid annual bonuses of approximately $18.0 million, compared with bonus payments of approximately $11.0 million in the first quarter of 2004. The higher bonuses were the result of strong 2004 operating performance and a special bonus paid to Morningstar’s analyst team in connection with the ramp-up of its independent equity research business. In addition, in the first quarter of 2005 the company made income tax payments of $3.7 million. In the first quarter of 2004, the company did not make any significant income tax payments because of the net operating loss carryforwards available from prior years.

As of March 31, 2005, Morningstar had cash, cash equivalents, and investments of $84.1 million, compared with $95.5 million as of Dec. 31, 2004, and $70.9 million as of March 31, 2004.

Our Business Segment Performance
Individual Investor Segment: The largest product in this segment is paid Premium membership service for Morningstar.com®, the company’s Web site for investors. This segment also includes independent equity research on more than 1,500 companies and several print and online publications focusing on stocks and mutual funds.

  • Revenue was $15.5 million in the first quarter of 2005, a 48% increase from $10.5 million in the first quarter of 2004. 
  • Operating income was $4.0 million in the first quarter of 2005, a 260% increase from $1.1 million in the first quarter of 2004.
  • Operating margin was 25.8% in the first quarter of 2005, compared with 10.6% in the first quarter of 2004.
  • Subscriptions for Morningstar.com Premium membership service increased to 138,364 as of March 31, 2005, compared with 124,294 as of March 31, 2004.

Advisor Segment: The largest products in this segment are Morningstar Advisor Workstation, a Web-based investment planning system, and Principia®, a CD-ROM-based investment research product. This segment also includes Morningstar Managed PortfoliosSM, an asset management service consisting of portfolios of mutual funds offered exclusively through financial advisors.

  • Revenue was $16.5 million in the first quarter of 2005, a 20% increase from $13.7 million in the same period in 2004.  
  • Operating income was $4.0 million in the first quarter of 2005, an increase of 19% compared with $3.4 million in the first quarter of 2004. 
  • Operating margin was 24.4% in the first quarter of 2005, compared with 24.6% in the first quarter of 2004.
  • Assets under management in the Morningstar Managed Portfolios service totaled $1.0 billion as of March 31, 2005, compared with $586.4 million as of March 31, 2004.
  • Advisor Workstation licenses increased to 89,557 as of March 31, 2005, compared with 60,825 as of March 31, 2004. Principia subscriptions declined to 48,366 as of March 31, 2005, compared with 49,492 as of March 31, 2004.

Institutional Segment: The key products and services in the Institutional business segment are Morningstar DirectSM, a set of Web-based research tools that provide access to Morningstar’s proprietary statistics; Licensed DataSM, a set of investment data spanning eight core databases, available as an electronic data feed; Investment Consulting, which helps clients create and maintain investment portfolios; and Morningstar® Retirement Manager(SM), a suite of services for retirement plan participants.

  • Revenue was $22.3 million in the first quarter of 2005, a 21% increase from $18.5 million in the first quarter of 2004.
  • Operating income was $5.0 million in the first quarter of 2005, an increase of 31% from $3.8 million in the same period in 2004.
  • Operating margin was 22.3% in the first quarter of 2005, compared with 20.5% in the first quarter of 2004.
  • Morningstar Direct had 797 licenses as of March 31, 2005, compared with 775 as of Dec. 31, 2004. Morningstar will begin reporting year-over-year comparisons for Morningstar Direct when it announces second quarter 2005 results.
  • Assets under management for managed retirement accounts offered through Morningstar Retirement Manager were $151.1 million as of March 31, 2005, compared with $38.2 million as of March 31, 2004.
  • Exchange-traded funds that are based on the Morningstar Indexes and offered by a third party had assets totaling approximately $356 million as of March 31, 2005.

Corporate Items and Eliminations: Corporate Items and Eliminations include stock-based compensation expense, capitalized internal product development costs and related amortization, and amortization related to intangible assets. In the first quarter of 2005, Corporate Items and Eliminations reduced the company’s operating income by $6.1 million, compared with $1.6 million in the first quarter of 2004. The increase of $4.5 million is primarily due to the $2.8 million increase in stock-based compensation expense, a $0.9 million reduction in capitalized internal product development costs, and a $0.7 million increase in depreciation and amortization. The latter increase mainly reflects Morningstar’s current estimate of amortization expense associated with intangible assets resulting from the VARDS acquisition.

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