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WIKI ANALYSIS
Morningstar, Inc. is an independent provider of investment research to individuals, financial advisors, and institutional clients. It provides a wide range of Internet-, software-, and print-based products for investors, as well as asset management services for advisors, institutions, and retirement plan participants. Morningstar's divisions are segmented by customer base: Institutional, Advisor, and Individual. Institutional combines all of Morningstar's data with advanced research tools and platforms that help monitor their clients' investments. Advisor sells asset management programs and enterprise licenses to independent financial advisors worldwide so they can advise their clients. Individual cedes access of its equity research reports to retail investors via its website Morningstar.com, obtaining fees on both a membership and advertising space basis[1].
While its clientele faltered in FY2008 to the 2008 financial crisis, Morningstar's revenue grew 15% ($502 million) over the previous year as a result of substantial technology and media development[2]. However, spillovers from the downturn resulted in mediocre sales and renewals, stagnant Internet advertising, and a decrease in assets under advisement. All these slowed the pace of revenue growth, which had been 28% over the previous ten years on a compounded annual basis[3].
Business Overview
Founded in 1984 and headquartered in Chicago, Illinois, Morningstar delivers investment research to institutional clients, advisors, and individuals through a variety of platforms. Originally a financial technology firm, it has made great strides to grow outside its niche and penetrate the investment advisement business, a key move being the acquisition of Ibbotson Associates[4]. Through significant investments in database upgrades and acquisitions, a continuously expanding client base, and an adherence to improving its core skills of research and technology, Morningstar has witnessed compounded annual returns of 29% from FY2004 to FY2008[5]. Their product and database expansion is due to the acquisition and assimilation of smaller information providers outside its coverage universe, which have augmented Morningstar's depth within the financial industry and its presence around the world. As of December 31, 2008, Morningstar operates in 19 countries, employing 270 investment research professionals worldwide who cover over 24,000 stocks, 8,400 hedge funds , and 2,600 ETFs[6]. It also serves 6.5 million individual investors, 260,000 financial advisors, and 3,300 institutional clients[7].
Business and Financial Metrics
Morningstar's balance sheet came out of FY2008 with negligible debt and $300 million in cash, a 15% increase over the previous year[8]. The company demonstrated resistance to the economic turmoil in FY2008, with revenue increasing 15% to $502 million, operating income growing 19% to $139.1 million, and net income rising 25% to $92.5 million[9]. Of this revenue, 95% was organic and the other 5% could be attributed to six minor, yet strategic, buyouts totaling $105 million[10]. The acquisitions of InvestData and Hemscott allowed Morningstar to expand its international coverage database and increase its revenue abroad 35% to $121.4 million; 24% of total revenue (as opposed to 21% in FY2007) is now international[11].
Of the FY2008 revenue, 55% came from its Institutional segment, 25% from its Advisor segment, and 21% from its Individual segment[12]. Each of Morningstar's three segments posted YoY revenue gains in FY2008, with Institutional's revenue surging 20%. This segment was mainly driven by the Investment Consulting business, which launched a range of asset allocation systems that allowed investors to incorporate alternative investments into their traditional asset classes, and accounted for 15.5% of Morningstar's consolidated revenue for the year[13]. However, Investment Consulting has since struggled; assets under advisement after 2Q09 had decreased 43% over 2Q08 as a result of the liquidation of many of their clients' funds[14].
| Financial Data for Morningstar in millions | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 |
| Revenue | 502.5 | 435.1 | 315.2 | 227.1 | 179.7 | 139.5 |
| Operating Income | 139.1 | 117.3 | 77.5 | 46.5 | 17.7 | (10.8) |
| Free Cash Flow | 103.9 | 101.0 | 94.0 | 41.0 | 25.1 | 21.1 |
| Investment Consulting's Assets Under Advisement | 66,200 | 97,500 | 55,000 |
Business Segments
Although Morningstar's segments are Institutional, Advisor, and Individual, the firm announced plans to change its segment reporting to Investment Information and Investment Management some time in 2009[15].
Institutional Segment (55% of revenue in FY2008)
As of December 31, 2008, the Institutional Segment serves approximately 3,300 clients, including banks, brokerage firms, insurance companies, and mutual funds, 33% of them based outside the U.S.. Their institutional products are based on a contract term of one to three years. Some of their flagship services include:
Licensed Data: An electronic feed providing all of Morningstar's investment data.
Investment Consulting: An investment monitor for fund of funds, mutual funds, and variable annuities that can be bifurcated into Morningstar Associates and Ibbotson Associates, the latter being Morningstar's biggest acquisition to date ($83 million in 2006).
Morningstar Direct: A Web-based institutional research platform with advanced research tools on all the securities in Morningstar's global database[17].
Advisor Segment (25% of revenue in FY2008)
Advisor focuses on products and services for financial advisors who provide guidance to individual investors. Most of these products can be integrated with the advisor's back-office technology and resources to provide customized portfolio planning and reports. Products sold or licensed in this area include:
Morningstar Advisor Workstation: A Web-based investment planning system licensed to over 190,000 as of December 31, 2008. This product is the biggest source of revenue for the Advisor Segment.
Principia:A CD-ROM-based research and planning software. Principia witnessed a 12% in the number of subscriptions in FY2008, as many of Morningstar's clients migrated from Principia to Morningstar Advisor Workstation as part of the secular trend away from CD-ROM-based services.
Morningstar Managed Portfolios: Fee-based turn asset management programs, offered through Morningstar Investment Services (MIS), that construct a range of portfolios tailored to the specific investment time horizons and risk levels of its client advisors.
Individual Segment (21% of revenue in FY2008)
Through Morningstar.com, investors can access Morningstar's equity research analytics through the Premium Membership service. Morningstar also offers print and online publications focusing on stocks, mutual funds, personal finance, and other investing topics. Through these services it reaches over 6.5 million investors globally, as of December 31, 2008[18].
Trends and Forces
The Cyclicality of the Financial Data and Investment Consulting Industry Makes Morningstar Susceptible to Market Swings
When the economy is growing rapidly, demand for the information systems offered by Morningstar increases; conversely, when the economy is contracting, firms look for ways to rein in costs, and Morningstar's fee-based model is vulnerable. For example, Morningstar's Investment Consulting's revenue correlates closely with the performance of the assets it advises, so the 32% decline in Morningstar's assets under advisement (from $97.5 billion to $66.2 billion) in FY2008 offset the launch of 14 new fund-of-funds and minor acquisitions Morningstar made during the year. This resulted in a meager 4% increase[19] for the segment. Similarly, many retirement plan participants delegate management of their portfolios to Morningstar Managed Portfolio, allowing the firm to accrue fees from the managed retirement accounts. As a result of the market downturn, assets under management (AUM) for MMP fell 27% in FY2008 (to $1.6 billion)[20].
Consolidation in the Financial Services Industry Creates Cost Synergies, One of Which is Investment Research
As a result of the 2008 financial crisis, there was heavy restructuring in the financial services industry. Many either collapsed and were bought out at fire-sale prices, or consolidated to form bigger conglomerates. As a result, certain subscription-based services such as investment research are now redundant and a cost synergy for the client firms. As contracts expire, the number of outstanding subscribers decrease, and firms in financial services look for other ways to cut costs. In his 2Q09 letter to shareholders, CEO Joe Masueto stated that organic growth had slowed 7% for the quarter, a main reason being the non-renewal of research contracts with certain firms[21].
Secular Trends in Media Distribution Pose Problems for Morningstar's Individual and Advisor Segments
Although Morningstar's business model offers multiple media platforms to investors, the trend towards electronic dissemination of information poses risks to certain products in its Individual and Advisor segments. Its Principia product is distributed via CD-ROM, and a lot of Individual's research is distributed through print-based publications. Principia witnessed a 12% drop in the number of subscriptions in FY2008, as many of Morningstar's clients migrated from Principia to Morningstar Advisor Workstation as part of the secular trend away from CD-ROM-based services[22]. Exposure to these types of media could compel Morningstar to alter its business model.
Competition
Because of Morningstar's diverse set of products and services, it faces different competitors across each division. Many of these rivals are more specialized, focusing on either a particular product or particular customer base, while other have significantly greater resources, which allows them to respond quickly to and implement new technologies. Increased consolidation in the financial information industry has allowed the bigger players to gain market share at the expense of smaller providers like Morningstar. However, no one company offers similar product solutions on all three of Morningstar's segments.
- Bloomberg L.P. A privately-held worldwide information services, news, and media corporation that competes with Morningstar's Institutional and Individual segments. In the realm of financial data services, its biggest product is the Bloomberg terminal, an all-inclusive, subscription-based platform[23].
- Thomson Reuters The result of a recent merger between the Thomson Corporation and the Reuters Group, this company provides electronically delivered information services and competes with Morningstar's Institutional and Advisor segments.[24]
- FactSet Research Systems (FDS) A financial data and analysis products provider offering a single online platform that aggregates information from over 200 information databases and competes with Morningstar's Institutional segment. All of its clients are in the Financial Services industry, with the vast majority involved in investment management.
Some minor players include personal finance and investing portals such as Yahoo! Finance and MSN Money, asset management leasers such as Zephyr Associates and Wilshire Associates, and financial research publishers such as Standard & Poor's (a subsidiary of McGraw-Hill Companies (MHP).
References
- ↑ “Morningstar-Full Description,” Reuters
- ↑ MORN 2008, Annual Report, pg. 61
- ↑ MORN 2008, 10-K
- ↑ MORN 2008, Annual Report, pg. 38
- ↑ MORN 2008, Annual Report, pg. 2
- ↑ MORN 2008, 10-K pg. 2
- ↑ MORN 2008, 10-K pg. 2
- ↑ MORN 2008, Annual Report, pg. 79
- ↑ MORN 2008, Annual Report, pg. 1
- ↑ MORN 2008, Annual Report, pg. 2
- ↑ MORN 2008, 10-K
- ↑ MORN 2008, Annual Report, pg. 4
- ↑ MORN 2008, 10-K pg. 12
- ↑ Yahoo! Finance "Morningstar, Inc. Reports Second-Quarter 2009 Financial Results"
- ↑ MORN 2008, 10-K pg. 6
- ↑ MORN 2008, 10-K
- ↑ MORN 2008, 10-K
- ↑ MORN 2008, 10-K
- ↑ 2008, 10-K
- ↑ MORN 2008, 10-K pg. 3
- ↑ Yahoo! Finance "Morningstar, Inc. Reports Second-Quarter 2009 Financial Results"
- ↑ MORN 2008, Annual Report, pg. 8
- ↑ Google Finance's Coverage of Bloomberg
- ↑ Google Finances Coverage of Thomson Reuters
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