Morningstar, Inc. · NASDAQ:MORN
Morningstar — Shareholder Meeting (May 2013)
81 slides from Morningstar's shareholder meeting presentation, May 14, 2013
Slide 1: Morningstar 2013 Shareholders' Meeting
~ Morningstar 2013 Shareholders’ Meeting
Slide 2: Call to Order and Introductions
Call to Order and Introductions Business of Annual Meeting Management Presentations Break Questions and Answers
Slide 3: Please carefully read the legal disclaimer above
Please carefully read the legal disclaimer above. Please refer to the slides at the end of this presentation for reconciliations of non-GAAP financial measures to the applicable GAAP measures.
Slide 4: Morningstar Update
Morningstar Update Joe Mansueto Chairman and Chief Executive Officer
Slide 5: My talk today will cover five major areas
My talk today will cover five major areas: · Company overview · 2012 highlights · Industry landscape · Growth strategies · Major initiatives for 2013
Slide 6: Our mission is to create great products that help investors reach their financial goals
Our mission is to create great products that help investors reach their financial goals. We take this mission very seriously, and it informs everything we do as a company. We think our focus on the investor is a key differentiator. For me, our mission is our true north. This is a mission that inspir
Slide 7: Morningstar has a global reach; operations in 27 countries
Morningstar is a company with a global reach; we have operations in 27 countries around the world. We recently acquired the remaining 76% ownership stake in Morningstar Sweden AB, where we’ve had a joint venture since 1998.
Slide 8: Core customer segments
We want to leverage our strengths and focus on the customer segments where we can deliver the most value. Our core client segments are Advisor, Asset Management, Retirement, and Individual Investor. The Advisor client segment is where we have the most penetration.
Slide 9: Morningstar's five largest products in 2012
This slide shows Morningstar’s five largest products in 2012: Morningstar Data, Morningstar Advisor Workstation, Morningstar Direct, Investment Advisory Services, and Morningstar.com.
Slide 10: Integrated story of what we do
We’ve been putting more emphasis on collaboration. This chart is an integrated story of what we do here at Morningstar. At the very base of this pyramid is our data, the foundation of our business. Then we add value through our software tools, manipulating the data. We do investor education, and the
Slide 11: 2012 Highlights: Accomplishments
2012 Highlights: Accomplishments
Slide 12: Next-generation software screenshot
This screenshot shows a working version of our next-generation software, which is more intuitive and easy to use. We made good progress in 2012 toward our goal of transitioning our core research platforms for institutions and advisors to this new software. This will be a multi-year process, but much
Slide 13: Morningstar Direct institutional research platform
Morningstar Direct, our institutional research platform, has been a key growth driver over the past 10 years.
Slide 14: Global fund analyst ratings coverage
This was a key area of focus in 2012, and our global fund analysts produced qualitative ratings for 3,425 funds by the end of the year, an increase of more than 40% compared with 2011. We also launched Analyst Ratings and Global Fund Reports for alternative funds as well as analyst coverage of indus
Slide 15: Analysts on WSJ Best on the Street list
We were gratified to see so many of our analysts listed on The Wall Street Journal’s Best on the Street 2013 Analysts’ Survey. Morningstar had the greatest number of ranked analysts overall out of 72 firms with winners. We had 12 analysts included on the list for 13 mentions, which is an impressive
Slide 16: Fundamental equity and market data expansion
In 2012, we also made progress expanding our fundamental equity and market data businesses. We now cover 32,500 global equities with comprehensive fundamental histories. We had a number of key client wins. Microsoft, for example, is using our fundamental equity and real-time pricing data in 35 marke
Slide 17: Gamma research on the value of financial planning
On the research front, one of the most interesting papers we published last year was an effort to quantify the value of financial planning. We call this Gamma, the third letter of the Greek alphabet. Investors work hard on Alpha (finding the best managers) and Beta (asset allocation). We also believ
Slide 18: Morningstar Managed Portfolios
Morningstar Managed Portfolios, is a fee-based discretionary asset management service that includes a series of mutual fund, ETF, and stock portfolios tailored to meet specific investment time horizons and risk levels. It was a strong contributor to revenue growth and finished the year with $4.7 bil
Slide 19: Retirement business growth
The retirement business was also a bright spot. Our managed retirement account service grew 26% to $25.1 billion in assets, with more than 756,000 client accounts. We recently introduced the next-generation version of Morningstar Retirement Manager, our advice and managed account platform for 401(k)
Slide 20: Schwab Retirement Plan Services managed accounts
Schwab Retirement Plan Services, which provides 401(k) services to approximately 1.6 million workers saving through company retirement plans, recently announced the addition of Morningstar Associates, LLC (Morningstar) as a managed account provider for Schwab Index Advantage, which is a 401(k) progr
Slide 21: Three small divestitures
During the year, we completed three small divestitures to sharpen our focus: · We sold our Australian financial trade publications and events business to Sterling Publishing. These came with our Aspect Huntley acquisition, where the objective was to acquire an equity database for Australia and New Z
Slide 22: 2012 Challenges
2012 Challenges
Slide 23: Large client moved portfolios in-house
As we’ve previously disclosed, one of our large clients began managing several fund-of-funds portfolios in-house in April 2012, and another client changed the scope of services we provide. The first set of portfolios represented $12.9 billion of assets as of March 31, 2012. The second case — where w
Slide 24: Investment Management segment positives
On the positive side, though, other parts of the IM segment did well. Morningstar Managed Portfolios was a strong contributor to revenue growth and finished the year with $4.7 billion in assets. The retirement business was also a bright spot. Total assets under management and advisement increased 26
Slide 25: Investment industry challenges
As I mentioned earlier, the investment industry continues to face challenges as assets flow to passive and fixed-income products. Low interest rates and investor uncertainty also continue to put pressure on margins, and our clients remain cautious about spending. For us, this means longer sales cycl
Slide 26: Uncertain business environment survey
Here’s another example that illustrates the uncertain business environment. Wickware Communications recently surveyed 68 financial firms and found that while most of them expect healthy asset growth in 2013, they’re planning to increase their marketing budgets at a much lower rate.
Slide 27: Declining traffic on financial websites
Traffic declined across most of the major financial websites last year. The Google Investing Index (which measures web searches on investing terms) was down about 15% on average. Volatile returns and uncertainty about the economy and the election kept investors on the sidelines. Meanwhile, the popul
Slide 28: Morningstar.com Premium Memberships decline
We saw another small decline in the number of Morningstar.com Premium Memberships in 2012. The total was down about 5% year over year because of fewer unique users and trial subscriptions.
Slide 29: Industry Landscape
Industry Landscape
Slide 30: Financial data and analysis market size
The Financial data and analysis market is sizeable. Burton-Taylor International Consulting estimates that spending totaled $25.5 billion in 2012—a slight increase from 2011.
Slide 31: Largest market segments
The largest segments within this market are Asset Management, Equity Sales and Trading, Fixed Income, and Advisor.
Slide 32: Asset Management market and major players
Let’s take a closer look at some Burton-Taylor numbers on the Asset Management side. Burton-Taylor estimates global spending of $5.6 billion, and here are some of the major players.
Slide 33: Advisor Market segment size
Burton-Taylor estimates a total market size of $1.9 billion for the Advisor Market segment. There are a number of major players here including Morningstar. I’d like to point out that while there are some much larger players within our industry, our strategy is not to go head-to-head with these large
Slide 34: Key growth strategies
Next I’ll turn to our key growth strategies, which we refined during 2012.
Slide 35: Five strategic objectives simplified
For several years, we’ve talked about five strategic objectives: improving our three platforms (Direct, Morningstar Advisor Workstation, and Morningstar.com); creating a premier global database; building thought leadership; becoming a global leader in funds of funds; and expanding internationally. N
Slide 36: Five strategic objectives simplified
For several years, we’ve talked about five strategic objectives: improving our three platforms (Direct, Morningstar Advisor Workstation, and Morningstar.com); creating a premier global database; building thought leadership; becoming a global leader in funds of funds; and expanding internationally. N
Slide 37: Three focused objectives
We also refined the wording a bit and are focusing on these three objectives: · Develop the next-generation software for our investment research platforms, with an elegant and intuitive user experience for our customers; · Deliver the most effective investment data, research, and ratings to help inv
Slide 38: Strategy applied to four client segments
This slide is a summary of our strategy in a nutshell. Our strategy is to take the core capabilities and objectives and apply them to four primary client segments: · Advisor (including independent financial advisors as well as those affiliated with broker-dealers, other intermediaries, and wealth ma
Slide 39: Key initiatives for 2013
Now let me turn to a few of our key initiatives for 2013.
Slide 40: Three key themes for 2013 initiatives
We’ve grouped our 2013 initiatives into three key themes: · Growth Through Focus · Build for Scale / Invest in the Future · Customer-Centric Approach
Slide 41: Growth Through Focus
Now I’ll cover each of the three themes in a bit more detail. First, we plan to continue streamlining and rationalizing, which makes it easier for clients to understand our offerings and lowers our costs for production and client support. Our goal is to have fewer, better products. As I mentioned, w
Slide 42: Growth Through Focus
Now I’ll cover each of the three themes in a bit more detail. First, we plan to continue streamlining and rationalizing, which makes it easier for clients to understand our offerings and lowers our costs for production and client support. Our goal is to have fewer, better products. As I mentioned, w
Slide 43: First next-generation software modules
The first three modules we plan to introduce with our next-generation software are manager research, equities, and real-time market data.
Slide 44: Simplifying technology infrastructure
We’ve been doing a lot of work to simplify and strengthen our technology infrastructure. None of this is glamorous work, but it’s critical to scaling our business. Some key areas of focus are: · Consolidating products and technology platforms · Improving resilience · Improving user experience · Work
Slide 45: Making Morningstar a great employer
We’re continuing our efforts to make Morningstar a great employer. We’re proud to have been named to several “best places to work” lists. We continually evaluate our work environment—pay, training, orientation, reward systems, and much more. We also survey employees regularly and measure ourselves a
Slide 46: Becoming more client-focused
As part of our efforts to become more client-focused, we spent time last year reviewing our organizational structure. In the past, we’ve had a very product-based sales organization. We had about 25 sales teams at Morningstar and they were all calling on clients. It wasn’t always the best experience
Slide 47: Global sales structure by customer segment
As a result, we decided to move from product-focused sales teams to a more global sales structure based on customer segments. We think this will help us bring more relevant solutions to our clients and understand their businesses better.
Slide 48: Organizational changes supporting client-centric structure
We’re making some other organizational changes to support our client-centric sales structure. We’ve created a new area called Client Solutions, led by Kunal Kapoor (who formerly ran our Data division). This group combines responsibilities that were previously located elsewhere. The goal is to build
Slide 49: Building Morningstar's economic moat
Our stock analysts evaluate each company’s economic “moat”—another term for sustainable competitive advantage. Just as we favor companies with wide moats, we try to build Morningstar’s moat. We invest to strengthen the three sources of our moat: · Our brand is our largest asset and is based on a rep
Slide 50: Financial Highlights
Financial Highlights Scott Cooley Chief Financial Officer
Slide 51: My talk today will cover three main areas
My talk today will cover three main areas: · 2012 Highlights · First-Quarter 2013 · Capital Allocation
Slide 52: 2012 Highlights
2012 Highlights
Slide 53: Three key metrics
We have three key metrics that we use to measure our results, and two of the three improved in 2012. Revenue was up about 4% to $658 million and operating income was up 9% to $138 million. Free cash flow was down 18% to $116 million, reflecting lower cash provided by operating activities and higher
Slide 54: Long-term revenue history
Taking a longer-term view of revenue over our 29-year history, we’ve had a consistent history of solid revenue growth, except for small dips in 2009 and 1995. Over the past five years, we’ve compounded revenue at about 9% per year, on average.
Slide 55: Compound annual revenue growth rate
Over the past 10 years, our compound annual revenue growth rate is about 20%.
Slide 56: Five largest products by revenue
Our five largest products based on revenue—Morningstar Data, Morningstar Advisor Workstation, Morningstar Direct, Investment Advisory Services (previously Investment Consulting), and Morningstar.com—made up 63.9% of consolidated revenue in 2012. Morningstar Direct was again the strongest growth driv
Slide 57: Investment Information segment
Revenue for our Investment Information segment, which accounts for about 80% of consolidated revenue, increased by 5.8% in 2012. Morningstar Direct, Morningstar Data, and Morningstar Advisor Workstation were the main contributors to revenue growth in 2012, partially offset by lower revenue for Morni
Slide 58: Investment Management segment
Investment Management segment revenue was down 1.7% in 2012, mainly because of lower revenue for Investment Advisor Services. Operating income decreased by a larger percentage, reflecting the high-margin nature of the lost business that affected this segment.
Slide 59: International revenue
Revenue from international operations has been fairly consistent over the past few years as a percentage of total revenue. More than half of our international revenue came from Europe, with most of the remainder from Australia and Canada. Divested businesses contributed $1.0 million to 2011 revenue
Slide 60: Organic growth rates
We’ve had organic growth rates in the single-digit range for the past six quarters. Organic growth rose to 8.1% in the fourth quarter of 2012 and dropped slightly to 6.1% in the first quarter of 2013. We had some ongoing challenges in our Investment Advisory business, but that was offset by strong g
Slide 61: Renewal rates for contract-based products
We didn’t see a significant change in renewal or retention rates in 2012; both of them were within the same range as 2011 levels. For contract-based products and services (such as Morningstar Data, Investment Advisory Services, Morningstar Direct, and Morningstar Advisor Workstation), we estimate th
Slide 62: Retention rates for subscription products
In 2012, we estimate that our retention rate for subscription-based products, such as Principia, Morningstar.com’s Premium Membership service, and print and online newsletters, was between 65% and 70%, within the same range as 2011.
Slide 63: Operating margin
Our operating margin increased by one percentage point in 2012. Lower bonus expense as a percentage of revenue had a favorable effect on margins of 1.3 percentage points for the year.
Slide 64: Operating expenses
Most of our operating expense categories had minimal increases in 2012. Cost of goods sold was up 7.3%, mainly reflecting the effect of additional headcount and higher production expense (mainly from data purchases).
Slide 65: Free cash flow
Free cash flow decreased $25.7 million in 2012. Cash provided by operating activities was down $19.0 million in 2012, reflecting the negative cash flow effect of changes in operating assets and liabilities, a $9.3 million increase in cash paid for taxes, and a $5.3 million increase in bonuses paid i
Slide 66: Cash and investments, no bank debt
We had about $321.4 million in cash, cash equivalents, and investments as of December 31, 2012 and no bank debt.
Slide 67: First-Quarter 2013
First-Quarter 2013
Slide 68: First-quarter 2013 key metrics
Here’s a snapshot of our key metrics in the first quarter of 2013. Revenue increased about 5%, operating income was up 33.4%, and free increased to $17.6 million. Normally we wouldn’t see such a strong increase in operating income on single-digit revenue growth. However, last year’s first quarter in
Slide 69: First-quarter 2013 expenses
We maintained strong expense controls in the first quarter of 2013, and most of our key operating expenses declined year over year. However, development expense rose slightly, and depreciation and amortization rose 11% primarily related to amortization of software development costs and increased cap
Slide 70: Cash balance and deferred revenue
Our cash balance increased slightly during the first quarter; we had cash, cash equivalents, and investments of $328.3 million as of March 31, 2013. Deferred revenue rose about 11% during the first quarter.
Slide 71: Capital Allocation
Capital Allocation
Slide 72: Free cash flow and acquisition spending
This graph shows our free cash flow and acquisition spending over the past five years. We used a significant portion of our free cash flow to make acquisitions over the previous several years, but did not make any acquisitions in 2011 or 2012.
Slide 73: Uses of cash
We try to use our cash balance in ways that will maximize returns over the long term. In addition to maintaining a strong balance sheet, there are several other potential areas we could deploy cash. We like to live within our means and use our cash flow to enhance the company’s value by making acqui
Slide 74: Cash returned to shareholders in 2012
We returned a total of $277.3 million to shareholders in 2012, reflecting $251.8 million in stock repurchases and $25.5 in dividends paid.
Slide 75: Shares outstanding decline from repurchases
Because of our repurchase activity in 2012, shares outstanding declined about 7%. So each share of Morningstar now has a proportionately greater interest in the company than it did at the beginning of the 2012.
Slide 76: Dividends paid
We paid five dividends in 2012, as we advanced our January payment to December given the pending rise in tax rates. As I mentioned a few minutes ago, we increased our quarterly dividend to 12.5 cents per share for our fifth dividend in 2012, and we’ve paid out about $5.8 million in dividends so far
Slide 77: Non-GAAP reconciliations
These slides reconciles the organic growth rates shown earlier (a non-GAAP measure) to consolidated revenue. We also provide a reconciliation of cash provided by operating activities to free cash flow.
Slide 78: Non-GAAP reconciliations
These slides reconciles the organic growth rates shown earlier (a non-GAAP measure) to consolidated revenue. We also provide a reconciliation of cash provided by operating activities to free cash flow.
Slide 79: Non-GAAP reconciliations
These slides reconciles the organic growth rates shown earlier (a non-GAAP measure) to consolidated revenue. We also provide a reconciliation of cash provided by operating activities to free cash flow.
Slide 80: Non-GAAP reconciliations
These slides reconciles the organic growth rates shown earlier (a non-GAAP measure) to consolidated revenue. We also provide a reconciliation of cash provided by operating activities to free cash flow.
Slide 81: Morningstar
MORNINGSTAR”