Oct. 29, 2009 (PR Newswire) -- CHICAGO, Oct. 29 /PRNewswire-FirstCall/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today announced its third-quarter 2009 financial results. The company reported consolidated revenue of $120.1 million in the third quarter of 2009, a 4.3% decrease from $125.5 million in the third quarter of 2008. Consolidated operating income was $33.7 million in the third quarter of 2009, a decrease of 1.4% compared with $34.2 million in the same period a year ago. Net income was $22.5 million in the third quarter of 2009, or 45 cents per diluted share, compared with $22.2 million, or 45 cents per diluted share, in the third quarter of 2008.
Excluding acquisitions and the impact of foreign currency translations, revenue declined 10.2% in the third quarter of 2009. Third-quarter results included $9.3 million in revenue from acquisitions. Foreign currency translations had an unfavorable impact of $2.0 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 2009, revenue was $356.4 million, a decline of 7.0% compared with $383.2 million in the same period in 2008. Revenue for the first nine months of the year included $22.0 million from acquisitions, which was partially offset by an unfavorable foreign currency impact of $12.7 million. Consolidated operating income declined 8.5% to $101.0 million in the first nine months of 2009, compared with $110.4 million in the first nine months of 2008. Net income was $68.0 million, or $1.37 per diluted share, in the first nine months of 2009, down from $73.3 million, or $1.49 per diluted share, in the same period in 2008.
Joe Mansueto, chairman and chief executive officer of Morningstar, said, "Our organic revenue declined about 10% year over year, which was in line with the second quarter. The two biggest drivers of the revenue decline were Investment Consulting and the end of the Global Analyst Research Settlement period. We had about $1.5 million in GARS-related revenue during the quarter versus $5.5 million in the same period last year. Foreign currency translations also negatively impacted revenue, but to a lesser extent than in previous quarters. Still, we're pleased with our relative performance considering the tough business environment this year."
Mansueto added, "During the quarter, we added several important enhancements to our latest edition of Morningstar Direct. This is our flagship investment research platform for institutions, a product that is experiencing healthy growth. Our fund research team also introduced target-date fund series ratings and research. This supports one of our key growth strategies, which is to continue building thought leadership in independent investment research. International revenue continues to increase as a percentage of our consolidated revenue, rising about 13%, including about $8.0 million from acquisitions. Operating margin rose slightly in the third quarter, mainly because of cost-savings initiatives implemented earlier this year. We generated free cash flow of $32.5 million during the quarter, ending the period with $362.2 million in cash and investments and no bank debt."
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 operate as registered investment advisors and earn more than half of their revenue from asset-based fees.
Revenue: In the third quarter of 2009, revenue in the Investment Information segment was $95.4 million, a decline of 1.7% compared with the third quarter of 2008; approximately $7.6 million of this revenue came from acquisitions. Revenue in the Investment Management segment was down 13.2% to $24.7 million, with approximately $1.7 million from acquisitions. Investment Consulting was the main factor behind the decrease, primarily because, as previously disclosed, two clients did not renew their contracts in the fall of 2008 and May 2009, respectively. Assets under advisement declined to $68.2 billion as of Sept. 30, 2009 from $85.2 billion as of Sept. 30, 2008.
Revenue from international operations was $34.5 million in the third quarter of 2009, an increase of 12.9% from the same period a year ago. International revenue included $7.9 million from acquisitions, which was slightly offset by a $2.0 million negative impact from foreign currency translations. Excluding acquisitions and foreign currency translations, international revenue declined 6.4% in the third quarter.
For the first nine months of 2009, international revenue was $93.4 million, including $16.7 million in revenue from acquisitions. Foreign currency translations had an unfavorable impact of $12.7 million. Excluding acquisitions and foreign currency translations, international revenue declined 4.5% from the same period a year ago. 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 $33.7 million in the third quarter of 2009, a 1.4% decrease from the same period in 2008. Operating expense declined $4.9 million, or 5.4%, in the third quarter of 2009 as the positive impact of cost-savings initiatives was partially offset by incremental expense from recent acquisitions.
Bonus expense decreased $8.0 million in the quarter because Morningstar made changes to its 2009 bonus plan as part of its efforts to better align its cost structure with revenue in the challenging business environment. The significant reduction in bonus expense also reflects a slowdown in 2009 financial performance compared with 2008. Earlier this year, the company suspended matching contributions to its 401(k) plan in the United States, further reducing operating expense by approximately $1.3 million. Morningstar had approximately 2,490 employees worldwide as of Sept. 30, 2009, compared with 2,510 as of June 30, 2009, and 2,250 as of Sept. 30, 2008. Headcount grew year over year because the company added approximately 170 employees through acquisitions and also continued hiring for its development center in China.
The company also reduced discretionary spending in travel, advertising, marketing, and data purchases to align costs with the lower revenue. In addition, the company revised the preliminary purchase price allocations related to recent acquisitions during the quarter, resulting in a $1.7 million reduction of previously recorded intangible amortization expense. Partially offsetting these reductions were additional costs related to acquisitions. Morningstar completed five acquisitions in the second half of 2008 and four acquisitions in the first nine months of 2009. Because of the timing of these acquisitions, third-quarter 2009 results include operating expense that did not exist in the third quarter of 2008. In addition, Morningstar recorded an expense of $2.4 million to increase its liability for vacant office space, primarily for the former Ibbotson headquarters. The company is anticipating lower sublease income and expects it will take more time to find a tenant than previously estimated.
The company's operating margin was 28.0% in the third quarter of 2009, compared with 27.2% in the same period in 2008. Operating margin rose slightly in the third quarter, primarily because of the favorable impact of cost-savings initiatives.
In the first nine months of 2009, operating margin was 28.3%, compared with 28.8% in the first nine months of 2008. The margin decline is the result of a $3.5 million operating expense recorded in the second quarter of 2009 for estimated penalties related to the timing of deposits for taxes withheld on stock option exercises, partially offset by cost-savings initiatives.
Effective Tax Rate: Morningstar's effective tax rate was approximately 35% in the quarter and year-to-date periods, a decrease of 2.4 percentage points and 1.2 percentage points, respectively, compared with the prior-year periods. The lower effective tax rate reflects the use of $2.1 million in tax credits from previous years, favorably impacting the tax rate by approximately 6 percentage points in the quarter and 2 percentage points year to date. The 2009 year-to-date effective tax rate also reflects the favorable effect of reversing approximately $2.2 million in reserves for uncertain tax positions, of which $1.4 million occurred in the first quarter. These items were partially offset by the impact of the non-deductible deposit penalty expense, which increased the year-to-date effective tax rate by approximately 1.3 percentage points, and the impact of foreign taxes.
Free Cash Flow: Morningstar generated free cash flow of $32.5 million in the third quarter of 2009, reflecting cash provided by operating activities of $36.1 million and $3.5 million of capital expenditures. Cash flow from operating activities decreased $13.1 million in the third quarter of 2009, compared with the prior-year period. A lower cash flow benefit from accrued compensation and income taxes contributed to the decline in operating cash flow. In the third quarter of 2008, operating cash flow included a $2.1 million benefit from tenant improvement allowances related to the construction of the company's new corporate headquarters. This benefit did not recur in the third quarter of 2009. These items were partially offset by the impact of excess tax benefits. Excess tax benefits have a positive impact on cash provided by financing activities with an equal, but offsetting, impact on cash from operations. Excess tax benefits declined $3.5 million in the quarter, primarily reflecting lower average stock prices when employees exercised stock options and a reduction in the number of options exercised.
Capital expenditures decreased $8.4 million for the quarter and $19.0 million for the first nine months of the year. Capital expenditures were higher in 2008 mainly because of the timing of payments for construction of Morningstar's new corporate headquarters.
In the first nine months of 2009, Morningstar generated free cash flow of $57.0 million, reflecting cash provided by operating activities of $67.3 million and capital expenditures of $10.3 million. Cash flow from operations in the first nine months of 2009 decreased $31.1 million from the prior-year period, reflecting lower cash flow benefits from accrued compensation and income taxes, a reduction in tenant improvement allowances of $11.8 million, and a $9.6 million increase in bonuses paid in the first quarter of 2009. These items were partially offset by the impact of excess tax benefits, which declined $16.3 million in the year-to-date period.
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, 2009, Morningstar had cash, cash equivalents, and investments of $362.2 million, compared with $309.6 million as of Sept. 30, 2008, and $297.6 million as of Dec. 31, 2008.
Business Segment Performance
Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor Workstation(SM); Morningstar.com®, including Premium memberships and Internet advertising sales; and Morningstar Direct(SM).
-- Revenue was $95.4 million in the third quarter of 2009, down 1.7% from
$97.1 million in the third quarter of 2008. Acquisitions contributed
revenue of $7.6 million to the Investment Information segment in the
third quarter of 2009, offsetting the revenue decline by 7.9 percentage
points.
-- The Global Analyst Research Settlement (GARS) expired in late July 2009.
Revenue associated with GARS was $1.5 million in the third quarter of
2009, compared with $5.5 million in the same period a year ago.
Morningstar has entered into new equity research contracts with two of
the banks that were clients under GARS; however, these contracts only
represent about 10% of the previous annual GARS revenue. The company is
also continuing to provide broad equity coverage to individual
investors, financial advisors, and institutions through a variety of
other channels.
-- The U.S. version of Morningstar.com, which includes Internet advertising
sales and Premium membership subscriptions, was the second largest
factor behind the revenue decline in this segment. Premium subscriptions
for Morningstar.com in the United States fell 13% to 155,200. Lower
revenue from Principia also contributed to the decline, with
subscriptions down about 14% to 37,365. These declines were partially
offset by revenue growth for Morningstar Direct, with licenses
increasing 17% to 3,329. Advisor Workstation licenses were essentially
flat year over year at 153,603.
-- Operating income was $33.3 million in the third quarter of 2009,
compared with $33.6 million in the same period in 2008. Operating
expense in this segment decreased $1.4 million, or 2.2%, primarily
because of the bonus expense reduction, partially offset by additional
costs from acquisitions.
-- Operating margin was 34.9% in the third quarter of 2009, compared with
34.6% in the prior-year period, as the impact of lower bonus expense as
a percentage of revenue was offset by additional expense from recent
acquisitions.
Investment Management Segment: The largest products in this segment based on revenue are Investment Consulting; Retirement Advice, including Advice by Ibbotson® and Morningstar® Retirement Manager(SM); and Morningstar® Managed Portfolios(SM).
-- Revenue was $24.7 million in the third quarter of 2009, a 13.2% decrease
from $28.4 million in the same period in 2008.
