Morningstar, Inc. · NASDAQ:MORN
Morningstar — Investor Day (May 2007)
55 slides from Morningstar's investor day presentation, May 22, 2007
Slide 1: seo
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Slide 2: Forward-looking statements
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 3: Overview – Joe Mansueto
Overview Joe Mansueto Chairman and Chief Executive Officer
Slide 4: Expanding reach with three audiences
We’ve continued to expand our reach with our three audiences: individuals, financial advisors, and institutions.
Slide 5: Strong year in 2006
We had a strong year in 2006. Revenue increased 39%, operating income 67%, and free cash flow more than doubled. There were a few drivers behind the big increase in free cash flow including lower tax payments from the $13 million tax benefit related to the Ibbotson acquisition and higher accrued com
Slide 6: Morningstar growth relative to the industry
Here you can see Morningstar’s growth relative to the industry. We’ve continued to generate strong top-line growth, and in fact grew at about four times the industry overall in 2006. Industry spending on economic and financial data has been growing at about 10% per year over the past few years. Our
Slide 7: New product launches across segments
In the Advisor segment, we launched a number of new components for Morningstar Advisor Workstation, including a Portfolio Builder module, a Global Hypothetical Illustrator tool, and Retirement Income Strategist. In our Institutional segment, we introduced an upgraded version of Morningstar Direct, a
Slide 8: Acquisitions
Acquisitions
Slide 9: Four key acquisitions in 2006 and 2007
Historically, most of our revenue increases have been driven by organic growth. However, we made four key acquisitions in 2006 and early 2007: Ibbotson Associates, Aspect Huntley, the hedge fund and separate account database division of InvestorForce, and most recently we purchased Standard & Poor’s
Slide 10: Ibbotson Associates acquisition
We completed our acquisition of Ibbotson Associates in March 2006. Some of the major products we added with this purchase include the Stocks, Bonds, Bills, and Inflation yearbook, financial advisor software, a significant consulting and retirement advice business, and the EnCorr institutional softwa
Slide 11: Aspect Huntley acquisition
Aspect Huntley is the leading equity analysis and information firm in Australia, and it also publishes investment newsletters and magazines for investors in that market. This acquisition was appealing to us partly because Australia has a very active investor population, both in stocks and mutual fun
Slide 12: InvestorForce database coverage
With InvestorForce, the real value-add was database coverage. This purchase allowed us to make a large step up in the number of hedge funds and separate accounts we cover. We added about 3,000 hedge funds and 1,500 separate accounts.
Slide 13: S&P mutual fund data business acquisition
And in March of this year, we completed our acquisition of S&P’s mutual fund data business. This acquisition will help us expand our reach outside of the United States, and also continue building out our competitive advantage — or what we call our ‘moat’ — by expanding our database coverage.
Slide 14: European marketing campaign examples
Here are some examples from the marketing campaign we ran in Europe to promote the benefits of the acquisition. As I mentioned, we see great potential to extend our brand in Europe and other markets with this acquisition.
Slide 15: Integration milestones
These are some of the major milestones for the integration. We’ve already finished re-branding the product sites, marketing sites, and client interfaces. We’re now in the process of integrating S&P’s data with ours and plan to roll this out to clients over the next couple of months. S&P had a U.S. d
Slide 16: Data Coverage and Quality
Data Coverage and Quality
Slide 17: Business model and core databases
Most of you are probably familiar with Morningstar’s business model, which is based on leveraging the fixed investments we make in our databases and core skills. We have a total of 10 core databases and now have extensive data on more than 230,000 securities and investment vehicles.
Slide 18: Data quality measurement
Data quality is extremely important to us. We measure our data quality in three key dimensions: accuracy, timeliness, and completeness. Each individual measurement provides a different angle on our data quality. We balance our approach to ensure we don’t sacrifice one dimension in pursuit of another
Slide 19: Growth Strategies
Growth Strategies
Slide 20: Initiatives for three platforms
Here are some of the major initiatives we’re targeting for each of our three platforms. For Morningstar.com, we plan to continue upgrading the site’s content, speed, and relevance to a wide range of investors. We’re also looking at the possibility of rolling out Premium services outside the United S
Slide 21: First growth strategy: flagship platforms
Our first growth strategy is to build a leadership position in each market segment by driving the growth of our three flagship Internet platforms: Morningstar.com for the individual market, Morningstar Advisor Workstation for the advisor segment, and Morningstar Direct in the institutional segment.
Slide 22: Second growth strategy: funds of funds
Our second growth strategy is to leverage our expertise in analyzing managed investment products to become a global leader in funds of funds. It’s difficult for investors to choose investments and combine them into well-constructed portfolios. Because the number of choices can be daunting, funds of
Slide 23: Third growth strategy: new products
Over the past 20+ years, we’ve driven our growth by continuing to develop new products to better meet investors’ needs. Today, we’re focusing our efforts on three key areas: hedge funds, equity research, and retirement income.
Slide 24: Fourth growth strategy: international expansion
Our fourth growth strategy is continuing to expand our international brand presence, products, and services. We made major steps toward this goal through our acquisition of Aspect Huntley and, more recently, S&P’s mutual fund data business. Our international revenue has steadily increased and made u
Slide 25: Globalizing operations
We’ve made much progress in recent years in globalizing our operations. We have operations in more than 16 countries around the world and minority ownership positions in another three countries. We recently added an operation in Singapore and an office in Frankfurt through our acquisition of S&P’s m
Slide 26: Martha Dustin Boudos, CFO
Martha Dustin Boudos Chief Financial Officer
Slide 27: Income statement overview
First, let’s start with a quick overview of our income statement. Our revenue increased nearly 39% over 2005. We generated revenue growth in two ways: organic growth (which is the increase in revenue excluding the impact of acquisitions made during 2006 and foreign currency) and the additional reven
Slide 28: Individual segment
We had about $81 million in revenue in our Individual segment in 2006, which translates into about 26% of total revenue. We currently reach about 5.2 million individual investors worldwide, out of an estimated market size of about 182 million.
Slide 29: Advisor segment
Our Advisor segment generated about $95 million in revenue last year, or 30% of total revenue. Here we currently reach 210,000 financial advisors out of an estimated market size of about 840,000 advisors.
Slide 30: Institutional segment
The institutional segment was the largest contributor to revenue growth in 2006, both through organic growth and the addition of Ibbotson revenue. We had $146 million of revenue here, or 46% of our total revenue base. We also significantly expanded the number of client relationships in 2006. We curr
Slide 31: Revenue growth
Revenue was up 39% in 2006, continuing the trend we’ve had of strong revenue growth over our more than 20-year history.
Slide 32: Organic revenue
The bulk of our revenue was organic revenue, which made up 88% of our revenue last year. The main drivers of organic revenue growth were Investment Consulting and Advisor Workstation. In 2006 acquisitions were a much bigger part of our revenue than in previous years.
Slide 33: Recurring revenue
An important characteristic of our business is that we have substantial recurring revenue: revenue from subscriptions or licenses that we renew. We track and report on this through this breakdown of walk-in, renewal, and new revenue. Walk-in revenue reflects revenue that we expect to recognize from
Slide 34: Retention and renewal metrics
In 2005, we began reporting two new metrics to help give investors insight into our success in retaining business. We show these as ranges because calculating retention rates is more of an art than a science. For products we sell through subscriptions (such as Morningstar.com, Principia, and newslet
Slide 35: Diversified revenue base
Another important characteristic of Morningstar is our diversified revenue base, although there have been some changes in the composition of our revenue over time. Our Institutional segment now represents nearly half of our revenue, in part because of our acquisition of Ibbotson and because of the s
Slide 36: Operating income
Our second key measure of financial performance is operating income. We’ve seen this increase as revenue growth has exceeded growth in expenses. In 2006, operating income was $77.5 million, a 67% increase from 2005. This is another key aspect of our business because we’re able to leverage the invest
Slide 37: Free cash flow
Free cash flow is the third metric we look at to evaluate our financial performance. We define free cash flow as cash from operating activities less the cash we use for capital expenditures. Our business doesn’t require a lot of capital investment. Our capital expenditures were equivalent to about 1
Slide 38: Strong balance sheet
We continue to have a strong balance sheet behind our operations. At the end of 2006 we had $164 million in cash, cash equivalents, and investments, and we don’t have any external debt. Deferred revenue remains an important part of our strong balance sheet. Because of our business model, we often co
Slide 39: First quarter 2007 results
Our revenue increased 36% in the first quarter of 2007. This includes additional revenue from acquisitions as well as an organic growth rate of about 18%. The two largest revenue drivers were Investment Consulting and Morningstar Advisor Workstation. Morningstar.com and Licensed Data also made impor
Slide 40: Cash after S&P acquisition and bonuses
We paid $52.0 million in March 2007 to acquire Standard & Poor’s mutual fund data business (reflecting a purchase price of $55 million, subject to post-closing adjustments, less cash acquired of $3.0 million). We also made $35.3 million of annual bonus payments in the first quarter of 2007. After th
Slide 41: Don Phillips, Managing Director
Don Phillips Managing Director
Slide 42: Multi-level research approach
Our research approach is based on multiple levels of detail, which we can then offer to our three market segments. Starting at the broadest level, we have tools and research focusing on market monitoring, moving down to portfolio assembly, fund research, and stock research. This integrated research
Slide 43: Morningstar Style Box for three segments
Here’s an example of how one of our research tools can be tailored to the needs of three market segments. The Morningstar Style Box is a widely used tool that we’ve adapted with different layers of complexity. At the most basic level for individual investors, the style box can be used to understand
Slide 44: Investor Returns: October 2006
Investor Returns: October 2006 “
Slide 45: Total returns versus investor returns
The standard method of calculating total returns is based on a time-weighted calculation that assumes the investor buys the fund at the beginning of the period and holds it for the entire period. In contrast, investor returns are based on a money-weighted calculation that accounts for all purchases
Slide 46: Good fund creating a bad investor experience
Let me give you an example of how a good fund can create a bad experience. On paper, this is a winning, wonderful fund. But most investors fared much worse. Investors piled in after great performance in 1999 and subsequently lost money. As a result, the typical investor actually lost money in this f
Slide 47: Fund with investor return near total return
Here the investor return was much closer to the total return. As you can see, this fund’s net inflows and outflows were relatively stable from year to year, and investors had a much more positive experience. This shows that keeping investors on board for the long run is much more important than simp
Slide 48: Success ratio of largest fund companies
We did some additional research to compare investor returns and total returns for the largest fund companies. We found that fund companies with a higher “success ratio,” which reflects investor returns relative to total returns, also were the most successful in gathering investor access. Fund compan
Slide 49: Opportunity to improve investor experience
We see a substantial opportunity to improve the investor experience. Investors are not doing as well with mutual funds and other investments as they could be. By providing education and tools to help them achieve better results, we can create a win/win scenario for investors, financial advisors, and
Slide 50: Opportunities for Improving the Investor Experience
Opportunities for Improving the Investor Experience
Slide 51: Fundamental investment analysis
Fundamental investment analysis has always been a cornerstone of our approach. We now have a large staff of securities analysts focusing on a broad range of investments. In our view, bottom-up securities research is the building block of good portfolio construction, especially when it’s done with a
Slide 52: Ibbotson asset allocation expertise
As Joe mentioned earlier, Ibbotson’s expertise in asset allocation has been a nice complement to our bottom-up research. We’re applying this research in many different areas today. Lifetime financial advice is a concept that Ibbotson has pioneered. A younger worker early in his or her career typical
Slide 53: Helping investors build better portfolios
We’re focusing our efforts on helping investors build better portfolios. By applying our expertise in fund research and portfolio analysis, we can help investors build better-diversified portfolios with lower volatility.
Slide 54: Research initiatives preview
Finally, here’s a preview of some of the research initiatives we’re currently working on. We have many initiatives in the pipeline, and look forward to continuing our efforts to help investors.
Slide 55: seo
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