EX-99.1 2 a07-28119_1ex99d1.htm EX-99.1

Exhibit 99.1

 

News Release

 

 

 

225 West Wacker Drive

Telephone:

+1 312 696-6000

Chicago

Facsimile:

+1 312 696-6009

 

Illinois 60606

 

 

 

Contact:

 

Media: Margaret Kirch Cohen, 312-696-6383, margaret.cohen@morningstar.com

 

Investors may submit questions to investors@morningstar.com or by fax to 312-696-6009.

 

FOR IMMEDIATE RELEASE

 

Morningstar, Inc. Reports Third-Quarter 2007 Financial Results

 

CHICAGO, Nov. 1, 2007—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2007 financial results. The company reported consolidated revenue of $111.9 million in the third quarter of 2007, a 37% increase from revenue of $81.8 million in the third quarter of 2006. Morningstar’s third-quarter results included $10.2 million in revenue from acquisitions completed during the previous 12 months. Consolidated operating income was $31.4 million in the third quarter of 2007, an increase of 53%, compared with $20.5 million in the third quarter of 2006. Morningstar’s net income was $19.9 million in the third quarter of 2007, or 41 cents per diluted share, compared with $13.5 million, or 29 cents per diluted share, in the third quarter of 2006.

 

Morningstar’s third-quarter results include revenue from previous acquisitions, including the mutual fund data business acquired from Standard & Poor’s on March 16, 2007. Excluding acquisitions and the impact of foreign currency translations, Morningstar’s revenue increased approximately 23% in the third quarter of 2007. Foreign currency translations had a positive impact of $0.9 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 nine months of 2007, revenue increased $88.9 million, or 39%, to $317.0 million, compared with $228.1 million in the same period a year ago. Revenue for the first nine months of the year included $35.4 million from acquisitions. Consolidated operating income increased 47% to $83.9 million in the first nine months of 2007, compared with $57.2 million in the prior-year period. Net income was $53.9 million, or $1.13 per diluted share, in the first nine months of 2007, compared with $38.2 million, or 82 cents per diluted share, in the same period in 2006.

 

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We’re pleased with our results this quarter. Our key products continue to perform well, with Investment Consulting contributing the most

 

1


 

to revenue growth. Assets under advisement for Investment Consulting rose to $91.4 billion, up from $47.6 billion a year ago. Morningstar Advisor Workstation was the second largest contributor to revenue growth during the quarter, followed by Licensed Data, Morningstar Direct, and Morningstar.com.”

 

Mansueto added, “Our operations outside the United States grew substantially. We’re now much more diversified geographically, with more than 20% of our revenue base coming from outside the United States. It’s also worth noting that our third-quarter operating margin grew 3 percentage points year over year, reflecting the fundamental health of our business and our ability to leverage our core assets of proprietary investment research and data. Continued growth in our Institutional segment, as well as contributions from some acquired operations, helped drive our operating margin increase.”

 

Key Business Drivers

 

Revenue:  In the third quarter of 2007, revenue in the Institutional segment grew 58% compared with the third quarter of 2006; 21 percentage points of this increase came from acquisitions. Revenue in the Advisor segment rose 20%, of which 6 percentage points came from acquisitions. Individual segment revenue rose 16%, with 3 percentage points of this increase coming from acquisitions.

 

Revenue from international operations was $24.9 million in the third quarter of 2007, an increase of 102% from the same period a year ago. International revenue included $8.6 million from acquisitions, primarily from Standard & Poor’s fund data business. Excluding the impact of acquisitions and foreign currency translations, international revenue grew approximately 25% in the third quarter of 2007, compared with the prior-year period. For the first nine months of 2007, international revenue rose 110%, with the majority of the increase coming from acquisitions. 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 $31.4 million in the third quarter of 2007, a 53% increase from the same period in 2006. Operating expense rose $19.1 million, or 31%, in the third quarter of 2007. Because of the timing of acquisitions made during the past 12 months, Morningstar had additional expenses in the third 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 an additional $1.5 million to operating expense in the quarter.

 

Compensation-related expense, excluding bonuses, increased $8.3 million, with the majority of the increase coming from additional headcount. Bonus expense increased $3.7 million in the quarter. Another key contributor to the higher operating expense was an increase in general and administrative expense

 

2


 

related to temporary transition costs and professional fees associated with the fund data operations acquired from Standard & Poor’s, primarily in Europe. The company also recorded $0.9 million in expense related to the settlement of litigation in Australia. Worldwide headcount grew to approximately 1,680 employees as of Sept. 30, 2007, compared with 1,400 as of Sept. 30, 2006. This growth primarily reflects employees from acquisitions, hiring in the United States, and continued hiring in the company’s development center in China.

 

The company’s operating margin was 28.1% in the third quarter of 2007, compared with 25.1% in the same period in 2006. In the first nine months of 2007, operating margin was 26.5%, compared with 25.1% in the first nine months of 2006.

 

Free Cash Flow:  Morningstar generated free cash flow of $24.9 million in the third quarter of 2007, reflecting cash provided by operating activities of $28.4 million and capital expenditures of $3.5 million. Despite the increase in net income, cash flow from operations decreased because of a $5.7 million change in deferred revenue related to product renewals. Morningstar frequently invoices sales and collects cash in advance of providing services or fulfilling client subscriptions. Deferred revenue declined relative to second-quarter 2007 levels because of the timing of subscriptions and license renewals in the third quarter. Morningstar experienced a similar trend in the third quarter of 2006, but to a lesser degree. Significantly higher income tax payments also offset the positive cash flow impact of the increase in net income. In 2006, cash flow from operations reflected a $13.0 million cash tax benefit 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. The payment related to the Australian litigation also reduced cash flow from operations in the third quarter of 2007.

 

Capital expenditures in the quarter increased $2.6 million mainly because of spending for office space build-outs in several locations. The company expects capital expenditures to be significantly higher in 2008 than in previous years primarily because of spending for its new corporate headquarters in Chicago.

 

In the first nine months of 2007, Morningstar generated free cash flow of $63.5 million, reflecting cash provided by operating activities of $72.9 million and capital expenditures of $9.4 million. Cash flow from operations in the first nine months of 2007 increased $3.9 million, lagging the increase in net income because of higher payments for bonuses, income taxes, and the Australian litigation. Bonuses paid in the first nine months of 2007 were $12.3 million higher than in the prior-year period because of strong company performance and incremental bonuses for businesses acquired during 2006. Income tax

 

3


 

payments were $18.0 million higher than in the prior-year period. In 2006, cash flow from operations reflected a $13.0 million cash tax benefit related to the Ibbotson acquisition. 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, 2007, Morningstar had cash, cash equivalents, and investments of $193.1 million, compared with $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 $23.7 million in the third quarter of 2007, a 16% increase from $20.4 million in the third quarter of 2006.

 

•                  Acquisitions contributed revenue of $0.7 million to the Individual segment in the third quarter, all of which came from Aspect Huntley.

 

•                  Morningstar.com, including Premium Membership and Internet advertising sales, was the main contributor to the increase in organic revenue. Newsletters and Equity Research also contributed to the revenue growth.

 

•                  During the quarter, the company launched a new section on Morningstar.com that features equity option data and information.

 

•                  Operating income was $6.2 million in the third quarter of 2007, a 12% increase from $5.5 million in the prior-year period. Operating expense increased in 2007, primarily because of the Aspect Huntley acquisition and higher compensation expense.

 

•                  Operating margin was 26.1% in the third quarter of 2007, compared with 27.0% in the third quarter of 2006. The margin decline was mainly due to the Aspect Huntley acquisition.

 

4


 

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

 

•                  Revenue was $29.3 million in the third quarter of 2007, a 20% increase from $24.4 million in the same period in 2006. In the third quarter of 2006, Advisor segment results included one-time revenue of $1.3 million related to eliminating a redundant license following the merger of two clients.

 

•                  Acquisitions contributed revenue of $1.4 million to the Advisor segment in the third quarter, primarily from the acquisition of 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 173,877 as of Sept. 30, 2007, compared with 121,179 in the prior-year period. Part of this growth reflects changes in the scope of some contracts. In 2007, a few clients who previously held tools-only contracts converted their agreements to full-site licenses. For full-site licenses, Morningstar includes all affiliated advisors who have access to the site in the total license count. By contrast, for tools-only contracts, Morningstar includes a smaller number of advisors in the total based on actual usage.

 

•                  Principia subscriptions grew to 49,303 as of Sept. 30, 2007, compared with 48,944 in the prior-year period, in large part because of the introduction of two new modules, Presentations & Education and Asset Allocation.

 

•                  During the quarter, the company launched Morningstar Site Builder, a software package that investment companies can customize to integrate Morningstar tools and reports into their advisor Web sites. Morningstar also introduced a local version of Advisor Workstation Office Edition in the United Kingdom.

 

•                  Operating income was $8.7 million in the third quarter of 2007, an increase of 12% compared with $7.7 million in the third quarter of 2006.

 

•                  Operating margin was 29.5% in the third quarter of 2007, compared with 31.6% in the third quarter of 2006. This segment’s operating margin was 3.8 percentage points higher in the third quarter of 2006 because of the $1.3 million in one-time revenue related to eliminating a redundant license following the merger of two clients.

 

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), the institutional Workstation product acquired from Standard & Poor’s, Licensed Tools and Content, and Morningstar DirectSM.

 

•                  Revenue was $60.8 million in the third quarter of 2007, a 58% increase from $38.6 million in the third quarter of 2006.

 

•                  Acquisitions contributed revenue of $8.1 million to the Institutional segment in the third quarter, primarily from the acquisition of Standard & Poor’s fund data business.

 

•                  Investment Consulting was the largest contributor to revenue growth. Licensed Data and Morningstar Direct also made meaningful contributions to organic revenue growth.

 

•                  Operating income was $20.7 million in the third quarter of 2007, versus $9.7 million in the same period in 2006. Operating expense grew in this segment, but at a much lower rate than the revenue increase.

 

•                  Operating margin was 34.0% in the third quarter of 2007, compared with 25.0% in the prior-year period. The majority of the increase was driven by growth in higher-margin services, such as Investment Consulting, as well as the fund data business acquired from Standard & Poor’s.

 

5


 

Important Note: Beginning in early 2008, when Morningstar releases its year-end 2007 financial results, the company will issue its press release after the market closes as opposed to before the market opens. Morningstar is making this change to give investors more time to review its results before the market opens.

 

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 260,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 18 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.

 

###

 

© 2007 Morningstar, Inc. All rights reserved.

 

6


 

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

(in thousands, except per share amounts)

 

2007

 

2006

 

change

 

2007

 

2006

 

change

 

Revenue

 

$

111,859

 

$

81,821

 

36.7

%

$

316,991

 

$

228,138

 

38.9

%

Operating expense(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

28,674

 

22,389

 

28.1

%

83,549

 

63,114

 

32.4

%

Development

 

9,010

 

7,876

 

14.4

%

26,199

 

21,273

 

23.2

%

Sales and marketing

 

17,132

 

12,971

 

32.1

%

50,332

 

36,511

 

37.9

%

General and administrative

 

19,936

 

13,781

 

44.7

%

57,150

 

39,606

 

44.3

%

Depreciation and amortization

 

5,662

 

4,267

 

32.7

%

15,843

 

10,440

 

51.8

%

Total operating expense

 

80,414

 

61,284

 

31.2

%

233,073

 

170,944

 

36.3

%

Operating income

 

31,445

 

20,537

 

53.1

%

83,918

 

57,194

 

46.7

%

Operating margin

 

28.1

%

25.1

%

 

 

26.5

%

25.1

%

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

1,812

 

1,169

 

55.0

%

4,998

 

3,086

 

62.0

%

Other income (expense), net

 

408

 

(31

)

NM

F

103

 

(343

)

NM

F

Non-operating income, net

 

2,220

 

1,138

 

95.1

%

5,101

 

2,743

 

86.0

%

Income before income taxes, equity in net income of unconsolidated entities, and cumulative effect of accounting change

 

33,665

 

21,675

 

55.3

%

89,019

 

59,937

 

48.5

%

Income tax expense

 

14,229

 

9,228

 

54.2

%

36,516

 

24,450

 

49.3

%

Equity in net income of unconsolidated entities

 

417

 

1,100

 

(62.1

)%

1,409

 

2,405

 

(41.4

)%

Income before cumulative effect of accounting change

 

19,853

 

13,547

 

46.5

%

53,912

 

37,892

 

42.3

%

Cumulative effect of accounting change, net of income tax expense of $171(2)

 

—

 

—

 

—

 

—

 

259

 

NM

F

Net income

 

$

19,853

 

$

13,547

 

46.5

%

$

53,912

 

$

38,151

 

41.3

%

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share before cumulative effect of accounting change

 

$

0.46

 

$

0.33

 

39.4

%

$

1.26

 

$

0.93

 

35.5

%

Cumulative per share effect of accounting change

 

—

 

—

 

—

 

—

 

—

 

—

 

Basic net income per share

 

$

0.46

 

$

0.33

 

39.4

%

$

1.26

 

$

0.93

 

35.5

%

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share before cumulative effect of accounting change

 

$

0.41

 

$

0.29

 

41.4

%

$

1.13

 

$

0.81

 

39.5

%

Cumulative per share effect of accounting change

 

—

 

—

 

—

 

—

 

0.01

 

NM

F

Diluted net income per share

 

$

0.41

 

$

0.29

 

41.4

%

$

1.13

 

$

0.82

 

37.8

%

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

43,393

 

41,448

 

 

 

42,889

 

40,913

 

 

 

Diluted

 

48,232

 

46,578

 

 

 

47,919

 

46,598

 

 

 

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

(1) Includes stock-based compensation expense of:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

408

 

$

302

 

$

1,259

 

$

859

 

Development

 

302

 

141

 

926

 

386

 

Sales and marketing

 

327

 

152

 

1,038

 

415

 

General and administrative

 

1,560

 

1,663

 

4,911

 

4,611

 

Total stock-based compensation expense

 

$

2,597

 

$

2,258

 

$

8,134

 

$

6,271

 

 

(2) Relates to adoption of Statement of Financial Accounting Standards No. 123(R).

 

NMF — Not meaningful, pp — percentage points

 

7


 

Morningstar, Inc. and Subsidiaries

Operating Expense as a Percentage of Revenue

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

 

 

2007

 

2006

 

change

 

2007

 

2006

 

change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

100.0

%

100.0

%

—

 

100.0

%

100.0

%

—

 

Operating expense(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

25.6

%

27.4

%

(1.8

)pp

26.4

%

27.7

%

(1.3

)pp

Development

 

8.1

%

9.6

%

(1.5

)pp

8.3

%

9.3

%

(1.0

)pp

Sales and marketing

 

15.3

%

15.9

%

(0.6

)pp

15.9

%

16.0

%

(0.1

)pp

General and administrative

 

17.8

%

16.8

%

1.0

 pp

18.0

%

17.4

%

0.6

 pp

Depreciation and amortization

 

5.1

%

5.2

%

(0.1

)pp

5.0

%

4.6

%

0.4

 pp

Total operating expense(2)

 

71.9

%

74.9

%

(3.0

)pp

73.5

%

74.9

%

(1.4

)pp

Operating margin

 

28.1

%

25.1

%

3.0

 pp

26.5

%

25.1

%

1.4

 pp

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

 

 

2007

 

2006

 

change

 

2007

 

2006

 

change

 

(1) Includes stock-based compensation expense of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

0.4

%

0.4

%

—

 

0.4

%

0.4

%

—

 

Development

 

0.3

%

0.2

%

0.1

 pp

0.3

%

0.2

%

0.1

 pp

Sales and marketing

 

0.3

%

0.2

%

0.1

 pp

0.3

%

0.2

%

0.1

 pp

General and administrative

 

1.4

%

2.0

%

(0.6

)pp

1.5

%

2.0

%

(0.5

)pp

Total stock-based compensation
expense(2)

 

2.3

%

2.8

%

(0.5

)pp

2.6

%

2.7

%

(0.1

)pp

 

(2) Sum of percentages may not equal total because of rounding.

 

8


 

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

19,853

 

$

13,547

 

$

53,912

 

$

38,151

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

 

—

 

—

 

—

 

(259

)

Depreciation and amortization

 

5,662

 

4,267

 

15,843

 

10,440

 

Deferred income tax expense (benefit)

 

2,134

 

(1,593

)

436

 

(2,310

)

Stock-based compensation expense

 

2,597

 

2,258

 

8,134

 

6,271

 

Equity in net income of unconsolidated entities

 

(417

)

(1,100

)

(1,409

)

(2,405

)

Excess tax benefits from stock option exercises and vesting of restricted stock units

 

(6,264

)

(2,312

)

(13,275

)

(8,820

)

Other, net

 

(63

)

(192

)

(112

)

624

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(1,522

)

383

 

(6,978

)

(2,375

)

Other assets

 

(1,010

)

665

 

(141

)

1,120

 

Accounts payable and accrued liabilities

 

(2,530

)

(228

)

698

 

(473

)

Accrued compensation

 

14,128

 

9,605

 

1,237

 

2,431

 

Deferred revenue

 

(10,517

)

(4,836

)

2,872

 

3,589

 

Income taxes payable

 

6,563

 

9,228

 

13,766

 

22,695

 

Other liabilities

 

(234

)

(94

)

(2,107

)

348

 

Cash provided by operating activities

 

28,380

 

29,598

 

72,876

 

69,027

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchases of investments

 

(49,978

)

(19,586

)

(90,221

)

(57,369

)

Proceeds from sale of investments

 

9,144

 

4,785

 

51,364

 

65,239

 

Capital expenditures

 

(3,466

)

(853

)

(9,354

)

(2,876

)

Acquisitions, net of cash acquired

 

(5,252

)

(30,496

)

(60,315

)

(116,859

)

Other, net

 

—

 

(14

)

(3

)

(308

)

Cash used for investing activities

 

(49,552

)

(46,164

)

(108,529

)

(112,173

)

Financing activities

 

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

5,890

 

2,365

 

11,576

 

13,212

 

Excess tax benefits from stock option exercises and vesting of restricted stock units

 

6,264

 

2,312

 

13,275

 

8,820

 

Cash provided by financing activities

 

12,154

 

4,677

 

24,851

 

22,032

 

Effect of exchange rate changes on cash and cash equivalents

 

458

 

(189

)

1,080

 

(72

)

Net decrease in cash and cash equivalents

 

(8,560

)

(12,078

)

(9,722

)

(21,186

)

Cash and cash equivalents — Beginning of period

 

94,978

 

83,259

 

96,140

 

92,367

 

Cash and cash equivalents — End of period

 

$

86,418

 

$

71,181

 

$

86,418

 

$

71,181

 

 

Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

2007

 

2006

 

Cash provided by operating activities

 

$

28,380

 

$

29,598

 

$

72,876

 

$

69,027

 

Less: Capital expenditures

 

(3,466

)

(853

)

(9,354

)

(2,876

)

Free cash flow

 

$

24,914

 

$

28,745

 

$

63,522

 

$

66,151

 

 

9


 

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

($000)

 

2007

 

2006

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

86,418

 

$

96,140

 

Investments

 

106,729

 

67,611

 

Accounts receivable, net

 

80,268

 

65,176

 

Other

 

12,460

 

8,557

 

Total current assets

 

285,875

 

237,484

 

 

 

 

 

 

 

Property and equipment, net

 

18,909

 

15,869

 

Investments in unconsolidated entities

 

19,490

 

18,659

 

Goodwill

 

124,304

 

86,680

 

Intangible assets, net

 

98,904

 

72,841

 

Deferred tax asset, net

 

15,521

 

13,789

 

Other assets

 

2,169

 

2,516

 

Total assets

 

$

565,172

 

$

447,838

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

21,936

 

$

21,014

 

Accrued compensation

 

45,955

 

40,856

 

Income tax payable

 

2,207

 

1,620

 

Deferred revenue

 

123,576

 

100,525

 

Deferred tax liability, net

 

—

 

1,266

 

Other

 

1,572

 

2,182

 

Total current liabilities

 

195,246

 

167,463

 

 

 

 

 

 

 

Accrued compensation

 

10,697

 

7,591

 

Other long-term liabilities

 

3,044

 

3,361

 

Total liabilities

 

208,987

 

178,415

 

Total shareholders’ equity

 

356,185

 

269,423

 

Total liabilities and shareholders’ equity

 

$

565,172

 

$

447,838

 

 

10


 

Morningstar, Inc. and Subsidiaries

Segment Information

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

change

 

2007

 

2006

 

change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual

 

$

23,667

 

$

20,389

 

16.1

%

$

71,897

 

$

58,892

 

22.1

%

Advisor

 

29,336

 

24,397

 

20.2

%

85,522

 

70,468

 

21.4

%

Institutional

 

60,845

 

38,569

 

57.8

%

165,751

 

103,437

 

60.2

%

Eliminations

 

(1,989

)

(1,534

)

29.7

%

(6,179

)

(4,659

)

32.6

%

Consolidated revenue

 

$

111,859

 

$

81,821

 

36.7

%

$

316,991

 

$

228,138

 

38.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue—U.S.

 

$

87,006

 

$

69,517

 

25.2

%

$

253,405

 

$

197,879

 

28.1

%

Revenue—International

 

$

24,853

 

$

12,304

 

102.0

%

$

63,586

 

$

30,259

 

110.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue—U.S. (percentage of consolidated revenue)

 

77.8

%

85.0

%

(7.2

)pp

79.9

%

86.7

%

(6.8

)pp

Revenue—International (percentage of consolidated revenue)

 

22.2

%

15.0

%

7.2

 pp

20.1

%

13.3

%

6.8

 pp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual

 

$

6,187

 

$

5,509

 

12.3

%

$

17,980

 

$

17,293

 

4.0

%

Advisor

 

8,668

 

7,719

 

12.3

%

23,558

 

20,196

 

16.6

%

Institutional

 

20,676

 

9,661

 

114.0

%

53,467

 

25,674

 

108.3

%

Corporate items and eliminations

 

(4,086

)

(2,352

)

73.7

%

(11,087

)

(5,969

)

85.7

%

Consolidated operating income

 

$

31,445

 

$

20,537

 

53.1

%

$

83,918

 

$

57,194

 

46.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual

 

26.1

%

27.0

%

(0.9

)pp

25.0

%

29.4

%

(4.4

)pp

Advisor

 

29.5

%

31.6

%

(2.1

)pp

27.5

%

28.7

%

(1.2

)pp

Institutional

 

34.0

%

25.0

%

9.0

 pp

32.3

%

24.8

%

7.5

 pp

Consolidated operating margin

 

28.1

%

25.1

%

3.0

 pp

26.5

%

25.1

%

1.4

 pp

 

(1) Includes stock-based compensation expense allocated to each segment.

 

11


 

Morningstar, Inc. and Subsidiaries

Supplemental Data

 

 

 

As of September 30
2007

 

2006

 

% change

 

Our employees

 

 

 

 

 

 

 

Worldwide headcount (approximate)

 

1,680

 

1,400

 

20.0

%

Number of U.S. stock analysts

 

93

 

92

 

1.1

%

Number of worldwide stock analysts

 

117

 

97

 

20.6

%

Number of U.S. fund analysts

 

27

 

28

 

(3.6

)%

Number of worldwide fund analysts

 

65

 

51

 

27.5

%

 

 

 

 

 

 

 

 

Our business

 

 

 

 

 

 

 

Morningstar.com Premium subscriptions

 

177,045

 

161,001

 

10.0

%

Registered users for Morningstar.com (U.S.)

 

5,227,250

 

4,794,976

 

9.0

%

U.S. Advisor Workstation licenses

 

173,877

 

121,179

 

43.5

%

Principia subscriptions

 

49,303

 

48,944

 

0.7

%

Morningstar Direct licenses

 

1,908

 

1,212

 

57.4

%

Assets under management for Morningstar Managed Portfolios

 

$2.2 bil

 

$1.6 bil

 

37.5

%

Assets under management for managed retirement accounts

 

$12.8 bil

 

$7.2 bil

 

77.8

%

Morningstar Associates

 

$975.9 mil

 

$513.7 mil

 

90.0

%

Ibbotson Associates

 

$11.8 bil

 

$6.7 bil

 

76.1

%

Assets under advisement for Investment Consulting

 

$91.4 bil

 

$47.6 bil

 

92.0

%

Morningstar Associates

 

$54.5 bil

 

$35.0 bil

 

55.7

%

Ibbotson Associates

 

$36.9 bil

 

$12.6 bil

 

192.9

%

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

2007

 

2006

 

Effective income tax expense rate

 

 

 

 

 

 

 

 

 

Income before income taxes, equity in net income of unconsolidated entities, and cumulative effect of accounting change

 

$

33,665

 

$

21,675

 

$

89,019

 

$

59,937

 

Equity in net income of unconsolidated entities

 

417

 

1,100

 

1,409

 

2,405

 

Total

 

$

34,082

 

$

22,775

 

$

90,428

 

$

62,342

 

Income tax expense

 

$

14,229

 

$

9,228

 

$

36,516

 

$

24,450

 

Effective income tax expense rate

 

41.7

%

40.5

%

40.4

%

39.2

%

 

12


 

Morningstar, Inc. and Subsidiaries

Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures

 

Reconciliation from consolidated revenue to revenue excluding acquisitions and foreign currency translations (organic revenue):

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

% change

 

2007

 

2006

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated revenue

 

$

111,859

 

$

81,821

 

36.7

%

$

316,991

 

$

228,138

 

38.9

%

Less: acquisitions

 

(10,208

)

—

 

NM

F

(35,364

)

—

 

NM

F

Less: impact of foreign currency

 

(875

)

—

 

NM

F

(1,824

)

—

 

NM

F

Revenue excluding acquisitions and foreign currency translations

 

$

100,776

 

$

81,821

 

23.2

%

$

279,803

 

$

228,138

 

22.6

%

 

Reconciliation from international revenue to international revenue excluding acquisitions and foreign currency translations:

 

 

 

Three months ended September 30

 

Nine months ended September 30

 

($000)

 

2007

 

2006

 

% change

 

2007

 

2006

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International revenue

 

$

24,853

 

$

12,304

 

102.0

%

$

63,586

 

$

30,259

 

110.1

%

Less: acquisitions

 

(8,556

)

—

 

NM

F

(24,531

)

—

 

NM

F

Less: impact of foreign currency

 

(875

)

—

 

NM

F

(1,824

)

—

 

NM

F

International revenue excluding acquisitions and foreign currency translations

 

$

15,422

 

$

12,304

 

25.3

%

$

37,231

 

$

30,259

 

23.0

%

 

Revenue from Acquisitions

 

Morningstar includes acquired businesses in its financial results from the date of acquisition. As a result, revenue from acquisitions represents incremental revenue (compared with the same periods in 2006) from the following acquisitions, which occurred in 2006 and 2007:

 

Acquisition

 

2007 Revenue from Acquisitions

Ibbotson Associates, Inc.

 

January 1 through February 28, 2007

Aspect Huntley Pty Limited

 

January 1 through July 24, 2007

Hedge fund and separate account database division of InvestorForce, Inc.

 

January 1 through July 31, 2007

Standard & Poor’s fund data business

 

March 16 through September 30, 2007

 

13