Morningstar, Inc. Reports First-Quarter 2014 Financial Results - KALB-TV News Channel 5 & CBS 2

Morningstar, Inc. Reports First-Quarter 2014 Financial Results

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SOURCE Morningstar, Inc.

CHICAGO, April 23, 2014 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its first-quarter 2014 financial results. The company reported consolidated revenue of $181.2 million, a 7.3% increase from $168.9 million in the first quarter of 2013. Consolidated operating income was $38.5 million, down 5.0% from $40.6 million in the same period a year ago. Net income was $26.4 million, or 58 cents per diluted share, in the first quarter of 2014, compared with $29.6 million, or 63 cents per diluted share, in the first quarter of 2013.

Excluding acquisitions and a slight negative effect from foreign currency translations, revenue rose 6.9% in the first quarter of 2014. Revenue excluding acquisitions 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, "Organic revenue growth picked up slightly in the first quarter of 2014, and we continued investing in our existing business as well as in a number of promising initiatives. We hired about 200 new employees year over year, including for product and technology roles in the United States as well as data analysts based in India. While these investments added to our operating expense for the quarter, we see many opportunities to build shareholder value over the long term."  

Financial Highlights
Revenue and Key Operating Metrics

  • Investment information revenue was $141.3 million, a 4.6% increase from $135.1 million in the first quarter of 2013. Morningstar Data, Morningstar Direct, and Morningstar Advisor Workstation were the main contributors to revenue growth. These positive results were partially offset by a $2.3 million revenue decline for Principia. The company has been migrating Principia clients to Morningstar Advisor Workstation and other Morningstar products and expects to continue supporting clients using Principia until the end of 2014.  
  • Investment management revenue was $39.9 million, an 18.1% increase from $33.8 million in the first quarter of 2013. Retirement Solutions and Morningstar Managed Portfolios were the main contributors to revenue growth, and revenue for Investment Advisory services was up slightly versus the same period of 2013.
  • Consolidated operating income was $38.5 million in the first quarter of 2014, a 5.0% decrease from the same period in 2013. Operating expense rose $14.3 million, or 11.2%, in the first quarter of 2014, mainly because of higher salary and other compensation-related expense from additional headcount.
  • Operating margin was 21.3% in the first quarter of 2014, down from 24.0% in the same period in 2013.

Cash Flow and Balance Sheet

  • Morningstar generated negative free cash flow of $8.9 million in the first quarter of 2014, reflecting positive cash provided by operating activities of $11.9 million less $20.8 million of cash used for capital expenditures. 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. The company made bonus payments of $39.8 million in the first quarter of 2014, compared with $36.6 million in the first quarter of 2013. Morningstar typically pays annual bonuses in the first quarter. As a result, first-quarter operating cash flow tends to be lower compared with subsequent quarters.
  • As of March 31, 2014, cash, cash equivalents, and investments totaled $264.0 million, compared with $298.6 million as of Dec. 31, 2013. Of the $700 million authorized under its share repurchase program, Morningstar had purchased a total of 7.4 million shares for $471.5 million as of March 31, 2014. In the first quarter of 2014, Morningstar repurchased approximately 280,000 shares for $21.7 million.
  • On April 1, 2014, the company used approximately $28 million in cash to acquire ByAllAccounts, Inc., a provider of innovative data aggregation technology for financial applications, to enhance many of its key solutions across core customer groups, particularly offerings that support an advisor's workflow.
  • The company expects to pay approximately $7.6 million for its regular quarterly dividend on April 30, 2014.

Comparability of Year-Over-Year Results
Several items affected the comparability of first-quarter 2014 results versus the same period in 2013:

  • Morningstar moved to a more centralized organizational structure in 2013. As a result, approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. For the first quarter of 2014 compared with the same period in 2013, changes related to the company's more centralized organizational structure added approximately $7 million of compensation expense to cost of revenue. At the same time, these changes reduced compensation expense in the sales and marketing and general and administrative expense categories by approximately $4 million and $3 million, respectively.
  • As a result of a change in accounting estimate involving revenue recognition for certain investment management contracts with minimum fee features, Morningstar recognized an additional $1.7 million of investment management revenue in the first quarter of 2014 that will not recur in future quarters.
  • During the first quarter of 2014, commission expense rose $2.9 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. The company continues to amortize the prepaid commission balance from the previous commission structure and expensed an additional $2.7 million of commission cost in the quarter. Morningstar expects to incur additional commission expense for the next several quarters because of this change.

Operating Highlights

  • Licenses for Morningstar Direct rose 15.5% to 8,858.
  • Assets under management and advisement for Retirement Solutions were approximately $68.0 billion as of March 31, 2014, versus $51.9 billion as of March 31, 2013. Assets under management and advisement for Morningstar Managed Portfolios were approximately $7.8 billion as of March 31, 2014, compared with $5.3 billion as of March 31, 2013. Both product lines benefited from strong market performance and asset inflows.
  • Companies that offer variable annuities have continued to face difficult market conditions, which has prompted some of Morningstar's clients to begin managing their fund-of-funds portfolios in-house instead of using outside subadvisors. Because of this trend, Investment Advisory assets under advisement as of March 31, 2014 were $12.0 billion lower versus the same date in 2013.

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.

Annual Shareholders' Meeting
Investors are invited to attend Morningstar's annual meeting at 9 a.m. Central Time on Tuesday, May 13, 2014, at its corporate headquarters at 22 W. Washington Street in Chicago. If you would like to attend, please register at http://corporate.morningstar.com/US/asp/meetingregistration.aspx.

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 456,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 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 had approximately $164 billion in assets under advisement and management as of March 31, 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 current global financial uncertainty, trends in the mutual fund industry, and continued growth in passively managed investment vehicles; the impact 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: 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.

©2014 Morningstar, Inc. All Rights Reserved.

MORN-E

Contacts:
Media: Carling Spelhaug, +1 312-696-6150 or carling.spelhaug@morningstar.com
Margaret Kirch Cohen, +1 312-696-6383 or margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com  

 

 


Morningstar, Inc. and Subsidiaries





Unaudited Condensed Consolidated Statements of Income













Three months ended March 31

(in thousands, except per share amounts)


2014


2013


change

















Revenue


$  181,165


$  168,856


7.3%

Operating expense(1)(2):








Cost of revenue


75,714


61,650


22.8%


Sales and marketing


28,428


27,980


1.6%


General and administrative


26,104


27,327


(4.5%)


Depreciation and amortization


12,387


11,339


9.2%


   Total operating expense


142,633


128,296


11.2%

Operating income 


38,532


40,560


(5.0%)

Operating margin


21.3%


24.0%


(2.7)pp









Non-operating income (expense):








Interest income, net


585


741


(21.1%)


Other income, net


280


204


37.3%


     Non-operating income, net


865


945


(8.5%)









Income before income taxes and equity in net income

of unconsolidated entities








39,397


41,505


(5.1%)

Equity in net income of unconsolidated entities


599


497


20.5%

Income tax expense


13,650


12,427


9.8%

Consolidated net income   


26,346


29,575


(10.9%)

Net loss attributable to noncontrolling interests


30


43


(30.2%)

Net income attributable to Morningstar, Inc.


$   26,376


$   29,618


(10.9%)









Net income per share attributable to Morningstar, Inc.:








Basic


$        0.59


$       0.64


(7.8%)


Diluted


$        0.58


$       0.63


(7.9%)

Weighted average shares outstanding:








Basic


44,777


46,406


(3.5%)


Diluted


45,093


46,814


(3.7%)












Three months ended March 31




2014


2013


change

(1) Includes stock-based compensation expense of:








Cost of revenue


$      1,762


$     1,701


3.6%


Sales and marketing


497


512


(2.9%)


General and administrative


1,680


1,570


7.0%


   Total stock-based compensation expense


$      3,939


$     3,783


4.1%









(2) Morningstar moved to a more centralized organizational structure in 2013. As a result, approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. For the first quarter of 2014 compared with the same period in 2013, changes related to the company's more centralized organizational structure added approximately $7 million of compensation expense to cost of revenue. At the same time, these changes reduced compensation expense in the sales and marketing and general and administrative expense categories by approximately $4 million and $3 million, respectively.


NMF - Not meaningful, pp - percentage points

 

 

Morningstar, Inc. and Subsidiaries


Operating Expense as a Percentage of Revenue (Unaudited)












Three months ended March 31




2014


2013


change









Revenue


100.0%


100.0%


-

Operating expense1:








Cost of revenue


41.8%


36.5%


5.3pp


Sales and marketing


15.7%


16.6%


(0.9)pp


General and administrative


14.4%


16.2%


(1.8)pp


Depreciation and amortization


6.8%


6.7%


0.1pp


   Total operating expense2


78.7%


76.0%


2.7pp

Operating margin


21.3%


24.0%


(2.7)pp












Three months ended March 31




2014


2013


change

(1) Includes stock-based compensation expense of:






Cost of revenue


1.0%


1.0%


-


Sales and marketing


0.3%


0.3%


-


General and administrative


0.9%


0.9%


-


   Total stock-based compensation expense2


2.2%


2.2%


-









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





 

 

Morningstar, Inc. and Subsidiaries





Unaudited Condensed Consolidated Statements of Cash Flows














Three months ended March 31

($000)


2014


2013







Operating activities





Consolidated net income


$   26,346


$   29,575

Adjustments to reconcile consolidated net income to net cash





flows from operating activities:






Depreciation and amortization


12,387


11,339


Stock-based compensation expense


3,939


3,783


Other, net


(4,048)


(5,475)

Changes in operating assets and liabilities, net of 





effects of acquisitions and dispositions


(26,740)


(12,549)


          Cash provided by operating activities


11,884


26,673

Investing activities





Purchases of investments


(1,697)


(3,694)

Proceeds from maturities and sales of investments 


73,712


61,152

Capital expenditures


(20,793)


(9,118)

Other, net


260


892


        Cash provided by investing activities


51,482


49,232

Financing activities





Proceeds from stock-option exercises


1,278


2,088

Employee taxes withheld for restricted stock units


(7)


(82)

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






573


1,587

Common shares repurchased


(21,697)


(15,240)

Dividends paid


(7,644)


-

Other, net


(5)


(3)


       Cash used for financing activities


(27,502)


(11,650)

Effect of exchange rate changes on cash and cash equivalents

609


(3,252)

Net increase in cash and cash equivalents


36,473


61,003

Cash and cash equivalents-Beginning of period


168,160


163,889

Cash and cash equivalents-End of period


$ 204,633


$ 224,892

 

Morningstar, Inc. and Subsidiaries





Unaudited Condensed Consolidated Balance Sheets










March 31


December 31

($000)


2014


2013







Assets





Current assets:






Cash and cash equivalents


$    204,633


$        168,160


Investments


59,340


130,407


Accounts receivable, net


131,464


114,131


Deferred tax asset, net


4,381


3,892


Income tax receivable, net


-


3,942


Other


25,124


26,361


          Total current assets


424,942


446,893







Property, equipment, and capitalized software, net


107,438


104,986

Investments in unconsolidated entities


39,176


38,714

Goodwill


327,936


326,450

Intangible assets, net


98,947


103,909

Other assets


8,978


9,716


Total assets


$ 1,007,417


$     1,030,668







Liabilities and equity





Current liabilities:






Accounts payable and accrued liabilities


$      39,790


$          42,131


Accrued compensation


41,718


71,403


Deferred revenue


159,591


149,225


Income taxes payable


2,267


-


Other


4,491


6,786


          Total current liabilities


247,857


269,545







Accrued compensation


7,495


8,193

Deferred tax liability, net


21,743


23,755

Other long-term liabilities


33,605


37,885


Total liabilities


310,700


339,378


Total equity


696,717


691,290


Total liabilities and equity


$ 1,007,417


$     1,030,668

 

 

Morningstar, Inc. and Subsidiaries







Supplemental Data (Unaudited)


















As of March 31





2014


2013


% change









Our business







Morningstar.com Premium Membership subscriptions (U.S.)


123,777


124,138


(0.3%)

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


7,945,324


7,607,716


4.4%

U.S. Advisor Workstation and Morningstar Office licenses 


167,207


163,141


2.5%

Principia subscriptions 


12,006


25,652


(53.2%)

Morningstar Direct licenses


8,858


7,6711


15.5%

Assets under advisement and management (approximate)








Investment Advisory services


$84.7 bil


$96.7 bil


(12.4%)


Retirement Solutions


$68.0 bil


$51.9 bil


31.0%


Morningstar Managed Portfolios


$7.8 bil


$5.3 bil


47.2%


Ibbotson Australia


$3.2 bil


$3.2 bil


0.0%









Our employees (approximate)







Worldwide headcount 


3,645


3,445


5.8%

Number of worldwide equity and credit analysts


170


150


13.3%

Number of worldwide fund analysts 


110


105


4.8%









(1) Revised to reflect a minor calculation change.























Three months ended March 31




2014


2013


% change

Average assets under management and advisement


$161.5 bil


$153.3 bil


5.3%

Number of new commercial mortgage-based securities (CMBS) new-issue ratings completed


9


10


(10.0%)

Rated balance for CMBS new-issue ratings


$5.6 bil


$5.4 bil


3.7%






















Three months ended March 31

($000)




2014


2013

Revenue








Investment information




$      141,270


$       135,085


Investment management




39,895


33,771


Consolidated revenue




$      181,165


$       168,856










Revenue-U.S.




$      129,952


$       121,413


Revenue-International




$        51,213


$         47,443






























Three months ended March 31

($000)




2014


2013

Effective tax rate







Income before income taxes and equity in net income of unconsolidated entities










$        39,397


$         41,505

Equity in net income of unconsolidated entities




599


497

Net loss attributable to noncontrolling interests




30


43


Total




$        40,026


$         42,045

Income tax expense




$        13,650


$         12,427

Effective tax rate




34.1%


29.6%

 

 

Morningstar, Inc. and Subsidiaries

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

















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












Three months ended March 31

($000)


2014


2013


% change









Consolidated revenue 


$ 181,165


$ 168,856


7.3%

Less: divestitures


-


-


NMF

Less: acquisitions


(1,477)


-


NMF

Unfavorable effect of foreign currency translations


806


-


NMF

Revenue excluding acquisitions, divestitures, and foreign currency translations








$ 180,494


$ 168,856


6.9%

















Reconciliation from international revenue to international revenue excluding divestitures, acquisitions, and foreign currency translations (international organic revenue):












Three months ended March 31

($000)


2014


2013


% change









International revenue 


$   51,213


$   47,443


7.9%

Less: divestitures


-


-


NMF

Less: acquisitions


(1,477)


-


NMF

Unfavorable effect of foreign currency translations


806


-


NMF

International revenue excluding acquisitions, divestitures, and foreign currency translations






$   50,542


$   47,443


6.5%

















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












Three months ended March 31

($000)


2014


2013


% change









Cash provided by operating activities


$   11,884


$   26,673


(55.4%)

Less: Capital expenditures


(20,793)


(9,118)


128.0%

Free cash flow


$   (8,909)


$   17,555


(150.7%)

 

 

©2012 PR Newswire. All Rights Reserved.

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