Last week, Chicago-based independent research, data and analytics firm, Morningstar, Inc. (MORN) reported flat performance for the 1st Qtr of 2016 with net income slipping to $28.7 mln or 67 cents per diluted share compared to $29.7 mln or 67 cents per diluted share in the first quarter of 2015.
1st Qtr 2016 Performance
Revenue for the first quarter of 2016 rose 1.2% to $192.1 mln from $189.8 mln in the first quarter of 2015. This reflected strength in the Morningstar Direct and Morningstar Data product lines which rose 7.7% and 10.5%, respectively. The firm’s investment management business, on the other hand, fell 0.8%, while their credit ratings business plunged over 60% with only 5 commercial mortgage backed securities issues rated in the 1st Qtr of 2016 versus over 13 deals rated during the same time last year.
Total Operating Expenses rose 3.1% in the first quarter of 2016 to $149.8 mln from $145.3 mln in the first quarter of 2015. This pushed 1st Qtr operating income down 5.0% to $42.3 mln from $44.5 mln during the same quarter last year. Consequently, the firm’s operating margin slipped to 22% in the first quarter of 2016 from 23.5% in the first quarter of 2016.
Morningstar’s free cash flow for the first quarter of 2016 was negative $2.1 million, reflecting cash provided by operating activities of $11.4 million and capital expenditures of $13.5 million, a decrease of $22.7 million in free cash flow compared with the same period in 2015. The decrease in free cash flow was largely driven by the timing of income tax payments.
Joe Mansueto, chairman and chief executive officer of Morningstar, explained that despite the firm’s flat performance, they continued to roll out key new product initiatives. “In the first quarter, we introduced the Morningstar Sustainability Rating to help investors evaluate funds based on environmental, social, and governance, or ESG, factors. This effort continues our tradition of innovative research centered on good stewardship, low costs, and more transparency for investors.”
Our Take
Clearly, the stock market didn’t like Morningstar’s flat 1st Qtr 2016 performance when compared to last year’s first quarter (the company’s share price fell 2.93 points or -3.36% to close at $84.27 on Friday). However, we feel that Morningstar fared significantly better than many other research firms during the first three months of this year – particularly sell-side investment banks and other independent research firms heavily reliant on equity commission trading to be compensated for their research.
This is partly due to the fact that firms receiving cash subscriptions like Morningstar fare better during periods where equity commissions fall than firms that get paid with commissions. However, the second reason Morningstar was able to hang in there during the first quarter is because the firm has built an extremely diversified revenue stream, combining the sale of research, data, and analytics, plus businesses where they generate revenue from asset management, index licensing and credit ratings. Consequently, when some businesses stumble (like Morningstar’s credit ratings business did during the 1st Qtr), other businesses will make up for it.