MORNINGSTAR,INC. (NASDAQ:MORN) Files An 8-K Regulation FD Disclosure

ME Staff 8-k
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MORNINGSTAR,INC. (NASDAQ:MORN) Files An 8-K Regulation FD Disclosure
Item 7.01. Regulation FD Disclosure.

The following information is included in this Current Report on Form8-K as a result of Morningstar,Inc.’s policy regarding public disclosure of corporate information. Answers to additional inquiries, if any, that comply with this policy are scheduled to become available on November3, 2017.

Caution Concerning Forward-Looking Statements

This current report on Form8-K contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others,

· a prolonged outage of our database, technology-based products and services, or network facilities; and

· challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and India.

Investor Questions and Answers: October6, 2017

We encourage current shareholders, potential shareholders, and other interested parties to send questions to us in writing and make written responses available on a regular basis. The following answers respond to selected questions received through October3, 2017.

If you would like to submit a question, please send an e-mail to [email protected] or write to us at the following address:

Morningstar,Inc.

Investor Relations

22 W. Washington St.

Chicago,IL 60602

Acquisitions

1. In last month’s investor communication you discussed past acquisitions, including HelloWallet which one could probably deem unsuccessful. Can you comment in more detail on the success or otherwise of Logical Information Machines (2011, $50m), ByAllAccounts (2014, $28m), Total Rebalance Expert (2015, undisclosed) and RequiSight (2016, undisclosed)? One former employee I spoke to said that, in his opinion, most if not all of these purchases have fallen well short of expectations. While it is far too early to think about PitchBook as a success/failure, my principle concern is that a meaningful proportion of Morningstar’s future free cash flow will be spent on acquisitions that in aggregate will detract from shareholder value. With that in mind I think it is only fair to ask that management be candid with shareholders in highlighting mistakes, as well as successes.

We prefer organic growth to acquisitions, but we do pursue acquisitions where we see areas of opportunity. Our acquisition strategy is focused on the fit of the products or services, technologies, intellectual property and people with our existing businesses and

strategy. We are return-driven and look for synergies that can be realized upon integration of the acquired business with our key investment areas. While there are exceptions such as PitchBook, where we committed to maintain the separate PitchBook brand and identity after acquisition, we generally fully integrate the acquired business into our company.

While we have not historically disclosed our financial expectations for acquisitions, we view acquisitions as additions to our capability set that will increase the revenue from a broad range of offerings. Our revenue expectations include not only increases in sales of the acquisition’s core business offerings from its integration into our business platform but also added growth from the value-add of new capabilities to our existing products. Since those new capabilities may not be separately priced into the products, the revenue effect and financial impact can be difficult to measure over time as we fully integrate the acquired business.

With respect to the acquisitions you mention, our purchase of Logical Information Machines at the end of 2009 complemented our core data and software businesses and provided us a new distribution channel. The majority of LIM’s clients were and continue to be in the energy and commodities industries, which were new segments for us at the time of acquisition. The LIM business provides an analytical software service that aggregates financial and energy data from numerous sources. Its software lets clients query these multiple data sets simultaneously to support their research, analysis, and trading operations. While LIM was profitable when we acquired it and remains profitable today, its business has not experienced the level of growth we had anticipated as new competitors have entered the market and the protracted weakness and lack of volatility in energy and other commodity prices have negatively affected the budgets of customers.

ByAllAccounts and Total Rebalance Expert (tRx) are part of our ongoing effort to help support the daily workflow needs of our financial advisor clients. ByAllAccounts helped us build aggregation capabilities into certain of our existing advisor software. We’ve also sold the product to several redistributor clients that serve broker/dealers, where it can help registered reps access aggregated client data. tRx added automated, tax-efficient portfolio capabilities to our offerings for financial advisors. With tRx, we have been able to integrate an increasingly important part of the advisor workflow: seamless and automated portfolio rebalancing.

RequiSight, LLC (RightPond) was a provider of business intelligence data and analytics on defined contribution and defined benefit plans for financial services firms. Those capabilities have been a significant contributor to our ability to build tools that will help advisors better navigate the new fiduciary landscape, such as our Best Interest Scorecard.

As we have previously discussed, our management team tracks the performance of our acquisitions, including post mortem analyses that we discuss with our board of directors. While the acquisitions you mention have been relatively immaterial in their effect on our balance sheet, revenue or earnings, we are cognizant that an effective acquisition program should aim to grow long term shareholder value, which we also seek to enhance through our dividend and share buyback programs.

2. HelloWallet was sold for $23.7m in June2017 and generated a gain on sale of $17.5m. The business was valued at $54m in June2014, of which goodwill was $39m. I cannot understand how a gain could occur given there were no goodwill impairments in 2014, 2015 or 2016. Can you explain?

We consulted with our auditors and relied on their guidance in arriving at the accounting treatment for the divestiture. Due tothe integration of certain aspects ofHelloWallet into Morningstar, a single reporting unit,the accounting standards look to the fair value allocation method in attributing goodwill to the divestiture. We attributed $2.4 million of goodwillbased on the sale proceeds ofHelloWalletrelative to the total fair value of Morningstar.

The gain we recorded in June2017 mainly represents the sale proceeds of $23.7 million less $2.4 million of goodwill and the write-off of the remaining net book value of the acquired intangible assets.

Capitalized Software

3. Capitalized software development costs have become a feature of the accounts in the last few years ($28m in 2016) — a change from prior years. I imagine the company has always developed new software for future roll out, so why the change in accounting treatment?

We have maintained a consistent accounting treatment for our capitalized software development costs. The full year amounts for 2016, 2015, and 2014 were $28.2 million, $21.8 million and $18.8 million, respectively. The increases are attributable to higher development activities related to new productsand enhanced features in our existing products. The development activitiesalign with our strategy and stated investment areas.

Capitalized costs for the six months ended June2017 were approximately $23.6 millionversus $12.4 millionfor the same period in 2016 as development trends continue. In 2017,the balance also includes capitalized software development activities related to PitchBook and its new platform.


About MORNINGSTAR,INC. (NASDAQ:MORN)

Morningstar, Inc. is a provider of independent investment research in North America, Europe, Australia and Asia. The Company offers a line of data, software, research and investment management offerings for financial advisors, asset managers, retirement plan providers and sponsors, and individual investors. In addition to its United States-based products and services, the Company offers local versions of its products designed for investors in Asia, Australia, Canada, Europe, Latin America and South Africa. The Company serves approximately 250,000 financial advisors, over 1,300 asset management firms, approximately 30 retirement plan providers, over 300,000 retirement plan sponsors and approximately 10.1 million individual investors. The Company has operations in approximately 30 countries. The Company tracks market data on approximately 20 million exchange-traded equities, derivatives, commodities, currencies and other investments.