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MORN > SEC Filings for MORN > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for MORNINGSTAR, INC.



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q, 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:

•general industry conditions and competition, including current global financial uncertainty;
•the impact of market volatility on revenue from asset-based fees;
•damage to our reputation resulting from claims made about possible conflicts of interest;
•liability for any losses that result from an actual or claimed breach of our fiduciary duties;
•financial services industry consolidation;
•liability related to the storage of personal information about our users;
•a prolonged outage of our database and network facilities;
•challenges faced by our non-U.S. operations; and
•the availability of free or low-cost investment information.

A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2011. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.

All dollar and percentage comparisons, which are often accompanied by words such as "increase," "decrease," "grew," "declined," "was up," "was down," "was flat," or "was similar" refer to a comparison with the same period in the prior year unless otherwise stated.

Table of Contents

Understanding our Company

Our Business

Our mission is to create great products that help investors reach their financial goals. We offer an extensive line of data, software, and research products for individual investors, financial advisors, and institutional clients. We also offer investment management services for advisors, institutions, and retirement plan participants. Many of our products are sold through subscriptions or license agreements. As a result, we typically generate recurring revenue.

Our company has two operating segments: The Investment Information segment includes all of our data, software, and research products and services. These products and services are typically sold through subscriptions or license agreements. The Investment Management segment includes all of our asset management operations, which are registered investment advisors and earn more than half of their revenue from asset-based fees.

Over our 28-year history, we have focused primarily on organic growth by introducing new products and services and expanding our existing products. From 2006 through 2010, we also completed 24 acquisitions to support our five key growth strategies, which are:

• Enhance our position in each of our key market segments by focusing on our three major Internet-based platforms;

• Create a premier global investment database;

• Continue building thought leadership in independent investment research;

• Become a global leader in fund-of-funds investment management; and

• Expand our international brand presence, products, and services.

While we may make additional acquisitions to support these growth strategies, our primary focus is on integrating previous acquisitions and driving excellence throughout our organization.

Industry Overview

We monitor developments in the economic and financial information industry to help inform our company strategy, product development plans, and marketing initiatives.

Global markets rallied in the third quarter as investors responded favorably to both the actions of the world's central banks and the release of several positive economic indicators, including data suggesting signs of revival in the long-suffering U.S. housing market. The Federal Reserve began another round of monetary easing and extended its commitment to keep short-term interest rates near zero through mid-2015; and the European Central Bank moved more aggressively to address the continent's debt crisis. The Morningstar U.S. Market Index, a broad market benchmark, gained 6.2% in the quarter amid growing confidence in a sustainable-if somewhat muted-economic recovery, and the Global Ex-U.S. Index advanced to an even greater extent, posting a 7.6% gain over the same period.

U.S. mutual fund assets stood at $12.6 trillion as of August 31, 2012, based on data from the Investment Company Institute (ICI), up almost $1 trillion from December 31, 2011. Based on Morningstar's estimated asset flow data, investors added $16.5 billion to long-term open-end funds in September as inflows of $29.9 billion into taxable-bond funds outpaced redemptions of $16.8 billion from U.S.-stock funds at a rate of nearly 2 to 1. September was the 17th consecutive month of outflows for U.S.-stock funds and further evidence of investors' preference for the perceived safety of fixed income over equities.

Assets in exchange-traded funds (ETFs) rose to $1.2 trillion as of August 31, 2012, compared with $1.0 trillion as of August 31, 2011, based on data from the
ICI. In September, $18 billion flowed into U.S.-equity ETFs, an amount, as noted above, nearly equal to that lost by open-end U.S.-equity funds during the month.

While we've seen positive momentum in the markets and some signs of economic growth in the third quarter, overall we believe business conditions in the financial services industry remain challenging. Firms continue to be cautious about spending against a backdrop of worldwide economic and political uncertainty. Further, the historically low interest-rate environment has put significant pressure on the margins of many firms, most notably those in the variable annuity space. These difficult business conditions created headwinds for our results this quarter, and will continue to influence our operations going forward.

Table of Contents

Three and Nine Months Ended September 30, 2012 vs. Three and Nine Months Ended

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