Morningstar, Inc. · NASDAQ:MORN
Morningstar — Shareholder Meeting (May 2011)
80 slides from Morningstar's shareholder meeting presentation, May 17, 2011
Slide 1: Morningstar 2011 Shareholders' Meeting
Morningstar 2011 Shareholders’ Meeting
Slide 2: Call to Order and Introductions; Business of Annual Meeting
Call to Order and Introductions Business of Annual Meeting Management Presentations Break Questions and Answers
Slide 3: Forward-looking statements and non-GAAP notice
Today’s presentations contain forward-looking statements. All statements made that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our most recent earnings release and our most recent Form 10-Q or 10-K for more in
Slide 4: Morningstar Update
Morningstar Update Joe Mansueto Chairman and Chief Executive Officer
Slide 5: Talk overview: highlights, landscape, initiatives
2010 Highlights Industry Landscape Update on 2010 Initiatives 2011 Initiatives My talk today will cover four major areas: · 2010 highlights · Industry landscape · Follow up on major initiatives from 2010 · Major initiatives for 2011
Slide 6: 3,235 Employees
3,235 Employees Here’s a snapshot of our operations today. We have more than 3,200 employees around the world and have operations in 26 countries.
Slide 7: Our mission
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 frames everything we do as a company.
Slide 8: 7.4 mil Individual Investors
7.4 mil Individual Investors We currently reach about 7.4 million individual investors around the world through our websites and other products.
Slide 9: 270,000 Advisors
270,000 Advisors Another major audience for us is financial advisors. We currently reach about 270,000 advisors globally—about a 10% increase from 2009.
Slide 10: 4,300 Institutions
4,300 Institutions We also have relationships with about 4,300 institutions around the world, primarily through our Investment Consulting and software businesses.
Slide 11: Revenue
Revenue Our business rebounded nicely in 2010, with revenue up 15.9% as the markets steadily improved. We had about $48 million in revenue from acquisitions in 2010, and organic growth also contributed to the increase.
Slide 12: Operating Income
Operating Income However, our operating income was down 2.9% because we restored some of the compensation costs we reduced during the downturn.
Slide 13: Free Cash Flow
Free Cash Flow Free cash flow rose 22.2% to about $109 million in 2010. We’re fortunate to be in a business that generates healthy cash levels and doesn’t require much capital.
Slide 14: Industry Landscape
Industry Landscape
Slide 15: Financial & Economic Industry Forecast
VSS Communications Industry Forecast 2010-2014 $13.3 bil Financial & Economic Industry 2011 Forecast Next I’ll turn to the industry landscape. Veronis Suhler Stevenson estimates that spending on economic and financial information totaled about $13 billion in 2011, so we have a small, 4% share of thi
Slide 16: Credit & Risk Industry Forecast
VSS Communications Industry Forecast 2010-2014 $11.9 bil Credit & Risk Industry 2011 Forecast The credit and risk information industry has an additional $12 billion in total spending, based on Veronis Suhler’s estimates. We had about $555 million in company-wide revenue in 2010, so we’re a small pla
Slide 17: Morningstar U.S. Market Index
Morningstar U.S. Market Index 28.5% 16.8% 9.11% 07 –0.43 –5.52 –8.15 8.64 1.95 –5.43 12.34 19.70 11.06 08 –36.17 –35.95 –31.67 -31.47 -38.73 –36.19 -41.87 -46.28 -39.92 09 11.38 36.05 40.28 21.52 38.94 39.86 44.37 42.05 32.98 YTD 05.10.11 10 14.69 20.61 25.96 12.93 26.46 27.77 12.91 27.67 31.26 10.1
Slide 18: Growth Strategies
Growth Strategies
Slide 19: Focus on three platforms
Growth Strategies Focus on three platforms Next I’ll turn to our five key growth strategies. The first of our five strategies is to focus our product offerings on our three major platforms, which are geared toward individuals, advisors, and institutions. The three platforms are: · Morningstar.com fo
Slide 20: Create premier global database
Growth Strategies Create premier global database Our second major strategy is to create a premier global investment database. Our data is the foundation for all of our products and services, and we continuously invest in both depth and breadth of data coverage.
Slide 21: Build thought leadership
Growth Strategies Build thought leadership We also want to continue building thought leadership in independent investment research. We currently have about 90 fund analysts and 120 equity and credit analysts globally.
Slide 22: Become a global leader in funds of funds
Growth Strategies Become a global leader in funds of funds Our fourth growth strategy is to become a global leader in fund-of-funds investment management. We think assembling and evaluating funds of funds is a natural extension of our expertise in understanding managed investment products. We offer
Slide 23: Expand internationally
Growth Strategies Expand internationally Finally, we’re focusing on expanding our international brand presence, products, and services. Our operations outside of the United States generated $157.1 million in revenue in 2010 compared with $129.2 million in 2009 and represent an increasing percentage
Slide 24: Update on 2010 Initiatives
Update on 2010 Initiatives
Slide 25: Invest in data manufacturing: 390,000 Global Investments
Invest in data manufacturing 390,000 Global Investments We continued to invest aggressively in our data manufacturing capabilities, focusing on quality and process improvements. We currently have comprehensive data on about 390,000 investments globally, as well as real-time market data on an additio
Slide 26: Invest in data manufacturing: quality measurement tools
Measurement Tools Research and Response Audits Process Dashboards Invest in data manufacturing We invest significantly not only in data analysts to keep up with the ever-expanding number of securities, but also in quality control. These efforts are deeply embedded in our data operations and give us
Slide 27: Invest in data manufacturing: Total Cost and Risk
Invest in data manufacturing Total Cost and Risk We added some key data sets, including several proprietary data points that help investors assess total cost and risk for exchange-traded funds (ETFs).
Slide 28: 1,300 Conference Call Transcripts
Invest in data manufacturing 1,300 Conference Call Transcripts We’ve also added conference call transcripts. We’re now transcribing earnings conference calls for about 1,300 companies each quarter and have some of the fastest turnaround times in the industry.
Slide 29: Invest in data manufacturing: Shenzhen facility
Invest in data manufacturing We made a capital investment in a new office space for our facility in Shenzhen, China. We have about 810 employees working from this location.
Slide 30: Invest in development team
Invest in development team 820 2010 Programmers/Tech/Infrastructure We have a large development team that works on enhancing our three major platforms. We significantly expanded this team to about 820 in 2010, a 25% increase from the year before. These folks have been working on a number of key init
Slide 31: Invest in development team: 25% increase
Invest in development team 25% 2010 Programmers/Tech/Infrastructure We have a large development team that works on enhancing our three major platforms. We significantly expanded this team to about 820 in 2010, a 25% increase from the year before. These folks have been working on a number of key init
Slide 32: Expand sales team
Expand sales team 520 2010 Sales and Marketing We’ve also been investing in our sales staff, particularly for key platforms such as Morningstar Office and Morningstar Direct. We now have about 520 sales and marketing employees globally, which is a 30% increase from 2009.
Slide 33: Expand sales team: 30% increase
Expand sales team 30% 2010 Sales and Marketing We’ve also been investing in our sales staff, particularly for key platforms such as Morningstar Office and Morningstar Direct. We now have about 520 sales and marketing employees globally, which is a 30% increase from 2009.
Slide 34: Build out credit ratings and research: 700+ ratings
Build out credit ratings and research 700+ Independent Credit Ratings We began our corporate credit rating business in 2009 and now provide credit ratings on more than 700 companies. Our work in this area leverages the work of our equity analysts, who build discounted cash-flow models that can be us
Slide 35: Build out credit ratings: Realpoint CMBS deals
Build out credit ratings and research 5/16 New CMBS Deals in 2010 Building on our credit ratings initiative, in 2010 we also acquired Realpoint, LLC, a Nationally Recognized Statistical Rating Organization (NRSRO) that specializes in structured finance. We believe there’s strong demand for unbiased
Slide 36: 5/10 New CMBS Deals in Q1 2011
Build out credit ratings and research 5/10 New CMBS Deals in Q1/2011
Slide 37: Globalize consulting capabilities
Globalize consulting capabilities We’ve continued to build our global consulting capabilities. We expanded our UK consulting business through our acquisition of Old Broad Street Research (OBSR) in April 2010, and in July 2010 we purchased Seeds Group, an up-and-coming research and consulting firm in
Slide 38: Major Initiatives for 2011
Major Initiatives for 2011
Slide 39: Transition core products to 4.0 platform
Transition core products to 4.0 platform The technology landscape is rapidly changing, and we’re re-designing our core software platforms to stay ahead of the curve. We plan to introduce major upgrades to Morningstar Office and Morningstar Direct (4.0 versions) and redesign the software architecture
Slide 40: Expand mobile capabilities
Expand mobile capabilities We’re continuing to expand our mobile capabilities for individual investors and advisors. We currently have applications for the iPhone, BlackBerry, and Android platforms. We plan to keep rolling out more mobile applications, including an iPad app for Morningstar.com and a
Slide 41: Expand sales/support teams for Direct and Office
Expand sales/support teams for Direct and Office We’ve seen strong sales momentum with Morningstar Direct and Office, and we want to build on that by expanding our sales and support teams. We’re seeing positive ROIs with these new hires. We need to market these products more aggressively, as well as
Slide 42: Expand portfolio management/back-office capabilities
Expand portfolio management /back-office capabilities We’ve been investing in capabilities for portfolio management, portfolio importing, aggregating performance data, and other back-office functionality. These capabilities feed into our key software platforms for advisors as well as Morningstar.com
Slide 43: Widen moat around managed investment product data
Widen moat around managed investment product data Our managed investment product data is the core of our Licensed Data business. This is a solid business for us that typically has very high renewal rates. We want to continue building out our moat, or sustainable competitive advantage, here by contin
Slide 44: Build out equity data coverage
Build out equity data coverage 30,300 This is currently a smaller area for us, but we have big ambitions and see potential for our equity data business to be much larger. We added fundamental equity data on more about 2,000 companies in 2010 and currently have data coverage on more than 30,000 globa
Slide 45: Harmonize global qualitative fund rating methodologies
Harmonize global qualitative fund rating methodologies We’ve had great success with our qualitative fund ratings in Europe, Asia, and Australia. With OBSR, we’ve added additional capabilities in fund ratings and research for the UK market. We’re focusing on pulling together all of these capabilities
Slide 46: Expand analyst research on industry growth areas
Expand analyst research on industry growth areas CEF Weekly CEF Industry Roundtable: A Discussion of Income CEF executives weigh in on viable opportunities in emerging markets, why some are shying away from muni markets in developed economies, and more. Print Comment Recommend (0) SHARE Like AAA By
Slide 47: Launch residential mortgage-backed securities research
Launch residential mortgage-backed securities research RMBS $1.7 trillion CMBS $820 billion Source: Intex Solutions, Inc. We’re working on this initiative with our Realpoint subsidiary, which we acquired in May 2010. We currently cover commercial mortgage-backed securities (CMBS), but the residentia
Slide 48: Unify Investment Management capabilities/operating platforms
Unify Investment Management capabilities/operating platforms Advisors Institutions International Retirement We recently combined our investment management operations — all of our registered investment advisor operations globally — under one leader, Peng Chen. Peng and his team are working on unifyin
Slide 49: Continue expanding internationally and globalizing operations
Continue expanding internationally and globalizing operations We continued building out our global operations with new locations in Brazil, Chile, and Mexico in 2011. We’re interested in exploring other areas, such as South America, Eastern Europe, and the Middle East. We’re also working on integrat
Slide 50: Further integrate acquisitions
Further integrate acquisitions We’ve made numerous acquisitions over the past several years and acquired a lot of great capabilities. Now, I want to take a step back so we can focus on putting all these capabilities together to maximize our potential. You’ll probably see us complete fewer acquisitio
Slide 51: Continue making Morningstar a great place to work
FORTUNE is a registered trademark of Time Inc. and is used under license. From FORTUNE Magazine, February 7, 2011 © 2011 Time Inc. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of, Licensee. Continue making Morningstar a great place to work We were recently r
Slide 52: [LOGO]
[LOGO] We have 3,200 bright, talented people here and a strong balance sheet. We’re excited about the opportunities we see to expand our business and continue our mission of helping investors in the years ahead. We see many opportunities ahead and feel good about our capabilities. With that, let me
Slide 53: Financial Highlights
Financial Highlights Scott Cooley Chief Financial Officer
Slide 54: 2010 Highlights, First-Quarter 2011, Capital Allocation
2010 Highlights First-Quarter 2011 Capital Allocation My talk today will cover three main areas: · 2010 Highlights · First-Quarter 2011 · Capital Allocation
Slide 55: 2010 Highlights
2010 Highlights
Slide 56: 2010 Key Metrics
2010 Key Metrics Operating Income ($mil) Free Cash Flow* ($mil) Revenue ($mil) $124.7 $121.1 – 2.9% 10 09 $108.6 $88.9 + 22.2% *Free Cash Flow is considered a non-GAAP financial measure under SEC regulations. 10 09 + 15.9% $479.0 $555.4 10 09 We have three key metrics that we use to measure our resu
Slide 57: Revenue 5-Year Compound Annual Growth Rate
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 10 09 Morningstar Revenue 5-YR Compound Annual Growth Rate 19.6% Taking a longer-term view of revenue over our 27-year history, we’ve had a consistent history of solid revenue growth, except for small dips in 2009 and 1995. O
Slide 58: Revenue 10-Year Compound Annual Growth Rate
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 10 09 Morningstar Revenue 10-YR Compound Annual Growth Rate 22.2% The compound annual growth rate over the past 10 years is about 22%.
Slide 59: Investment Information Segment
Investment Information Segment Operating Income ($mil) Share of Consolidated Revenue Revenue ($mil) $138.4 $127.7 –7.7% 09 10 80.1% $386.6 $445.0 +15.1% 09 10 Revenue for our Investment Information segment, which accounts for about 80% of company-wide revenue, increased by 15% in 2010. We had $40.4
Slide 60: Investment Management Segment
Investment Management Segment Operating Income ($mil) Share of Consolidated Revenue Revenue ($mil) $52.9 $56.8 09 10 19.9% $92.4 110.4 +19.5% 09 10 +7.4% Investment Management segment revenue increased 19.5% in 2010. Acquisitions contributed $7.5 million to the segment, and we also had strong organi
Slide 61: Corporate Items
Corporate Items Year ended Dec. 31 ($000) 2010 2009 % change Operating expense excluding stock-based compensation, depreciation and amortization $27,752 $36,372 (23.7%) Stock-based compensation $3,651 $3,924 (7.0%) Depreciation and amortization $32,094 $26,349 21.8% Operating loss ($63,497) ($66,645
Slide 62: Revenue by Region
Australia Japan Europe Asia Canada 07 09 10 06 08 14.0% 20.6% 24.2% 27.0% 28.3% Revenue by Region % of total Revenue from international operations has continued edging up. The majority of our international revenue is from Europe, Australia, and Canada.
Slide 63: Quarterly Organic Revenue Growth
Quarterly Organic Revenue Growth % Q2 Q3 Q4 –1.3 –7.1 –10.9 –10.2 –6.6 –1.6 2.7 6.6 13.3 7.7 12.2 08 Q1 Q2 Q3 Q4 09 Q1 Q2 Q3 Q4 10 11 Q1 10.0 We saw consistent improvement in our quarterly organic revenue growth rates in 2010. Organic revenue growth was 12.2% in the fourth quarter and just a bit bel
Slide 64: Renewal Rates
Renewal Rates 06 95–100% 80–85% 07 08 09 10 90–95% 95–100% 90–95% We were encouraged to see improvements in both renewal and retention rates in 2010, reflecting improved business conditions and healthier sales trends across most of our product lines. For contract-based products and services (such as
Slide 65: Retention Rates
Retention Rates 06 60–65% 55–60% 07 08 09 10 60–65% 95–100% 65–70% In 2010, we estimate that our retention rate for subscription-based products, such as Principia, Morningstar.com Premium Membership service, and print and online newsletters, was on the higher end of the range between 65% and 70%, up
Slide 66: Top Five Products
Top Five Products 2010 Revenue ($000) % Change (Organic) Licensed Data $ 98,186 7.3% Morningstar Advisor Workstation $ 69,321 5.6% Investment Consulting $ 66,114 17.3% Morningstar.com $ 49,673 25.9% Morningstar Direct $ 38,069 27.0% Licensed Data remained our largest product in 2010 because of stron
Slide 67: Significant Operating Leverage
Significant Operating Leverage 07 08 09 10 06 Operating margin % 26.9% 27.6% 26.0% 21.8% 24.6% Because we restored some of the compensation expense we reduced in the market downturn, we saw some compression in our operating margin in 2010. Fundamentally, we still think operating leverage is a core c
Slide 68: Free Cash Flow and capital expenditures
07 08 09 10 06 $93,523 $99,691 $100,820 $88,884 $108,645 ($11,346) ($48,519) ($12,372) ($14,771) ($4,722) $111,037 $149,339 $101,256 $123,416 $98,245 *Free Cash Flow is considered a non-GAAP financial measure under SEC regulations. Free Cash Flow* Capital expenditures Cash provided by operating acti
Slide 69: Solid Balance Sheet
Solid Balance Sheet Consolidated balance sheet data ($000) as of Dec. 31, 2010 Cash, cash equivalents, and investments $365,416 Total assets $1,086,302 Deferred revenue $146,267 Long-term liabilities $52,153 We had about $365 million in cash, cash equivalents, and investments as of December 31, 2010
Slide 70: First-Quarter 2011
First-Quarter 2011
Slide 71: First-Quarter 2011 Key Metrics
First-Quarter 2011 Key Metrics Operating Income ($mil) Free Cash Flow* ($mil) Revenue ($mil) 11 10 $30.9 $31.8 +2.8% *Free Cash Flow is considered a non-GAAP financial measure under SEC regulations. 11 10 $9.3 $12.8 –27.3% 11 10 $128.3 $151.8 +18.3% Here’s a snapshot of our key metrics in the first
Slide 72: First-Quarter 2011 Balance Sheet
First-Quarter 2011 Balance Sheet Consolidated balance sheet data ($000) as of March 31, 2011 Cash, cash equivalents, and investments $385,260 Total assets $1,110,228 Deferred revenue $157,660 Long-term liabilities $50,042 Despite paying out more in bonuses in the first quarter, we had cash, cash equ
Slide 73: Capital Allocation
Capital Allocation
Slide 74: Free Cash Flow and Acquisitions
Free Cash Flow and Acquisitions Acquisition Spending as a % of FCF 06 09 10 07 08 125.5% 60.7% 104.6% 83.5% 94.2% $93.5 $117.3 $99.7 $60.5 $100.8 $105.4 $88.9 $74.2 $108.6 $102.3 ($mil) FCF Acq. This graph shows our free cash flow and acquisition spending over time. Our acquisition spending worked o
Slide 75: Potential Uses of Cash
Potential Uses of Cash Balance sheet strength acquisitions organic expansion dividend stock buyback 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. W
Slide 76: Repurchase Activity to Date
Repurchase Activity to Date Period Total shares purchased Average price per share * Through Dec. 31, 2010 76,218 $49.64 Q1 2011 0 na We repurchased a small number of shares, for a total of about $3.4 million in 2010. We look at stock repurchases like any other investment, and we want to be opportuni
Slide 77: Dividends Paid
Dividends Paid Date Amount Jan. 14, 2011 $2.5 mil April 29, 2011 $2.5 mil We’ve also paid out about $5 million in dividends so far.
Slide 78: Reconciliation of Non-GAAP Measures: Organic Revenue
Organic revenue (illustrated in a previous slide) is considered a non-GAAP measure. The tables below reconcile consolidated revenue with organic revenue (revenue excluding acquisitions and the favorable impact of foreign currency translations): ($000) 2010 Consolidated revenue $ 555,351 Less: acquis
Slide 79: Reconciliation of Non-GAAP Measure: Organic Revenue by Quarter
Reconciliation of Non-GAAP Measure with the Nearest Comparable GAAP Measure Organic revenue (illustrated in a previous slide) is considered a non-GAAP measure. Reconciliation from consolidated revenue to revenue excluding acquisitions and foreign currency translations (organic revenue) 2008 2009 201
Slide 80: Reconciliation of Non-GAAP Measures: Free Cash Flow
Reconciliation of Non-GAAP Measures with the Nearest Comparable GAAP Measure Free Cash Flow (illustrated in a previous slide) is considered a non-GAAP measure. The tables below reconcile cash provided by operating activities with free cash flow: Three months ended March 31 ($000) 2011 Cash provided