February 20, 2009 / 12:11 AM / 11 years ago

UPDATE 3-Morningstar earnings are lower, cost cuts eyed

* Q4 EPS 39 cents vs 43 cents estimate

* Revenue growth slows on costs, asset-based fee decline (Adds details on plans for cost cutting)

By Svea Herbst-Bayliss

BOSTON, Feb 19 (Reuters) - Morningstar Inc (MORN.O) reported lower-than-expected fourth-quarter profit on Thursday as lower assets under advisement fell and higher costs led to slower revenue growth at the research company.

The Chicago-based company, best known for its system of rating mutual fund performance, posted net income of $19.3 million, or 39 cents a share, down 3.7 percent from $20.0 million, or 41 cents a share, a year ago.

Analysts, on average, had expected earnings of 43 cents a share, according to Reuters Estimates. Morningstar does not give guidance to analysts.

Revenue rose modestly to $119.3 million from $118.1 million and the company’s chief executive and founder blamed turbulent financial markets for slower revenue growth.

“We grew in the quarter but just barely,” Joe Mansueto, who runs the company he founded as a student in Chicago, said in an interview. He noted that roughly 13 percent of the company’s revenue is tied to asset-based fees which means the market’s decline had a negative impact.

Assets under advisement fell about 32 percent to roughly $66 billion, Mansueto said.

When equity markets tumbled dramatically in the fourth quarter, some of Morningstar’s clients, including many large financial services firms, suffered.

“Our key customers were hit hard and as budgets are reined in that affects us too,” Mansueto said.

At the same time, Morningstar’s own expenses rose as the company made several acquisitions, expanding its workforce to 2,375 from 1,720 at the end of December 2007.

To cut costs, Morningstar plans to trim bonus payments, has scrapped merit raises and suspended matching employees’ contributions to 401(k) retirement accounts.

So far, the company has not announced any company-wide layoffs. Many asset management firms, including Fidelity Investments, Putnam Investments and State Street Corp, have announced broad job cuts as the companies face shrinking assets.

Despite difficult financial markets, Mansueto said the company’s core business is resilient as investors and advisers rely on Morningstar products to make investment decisions.

Morningstar developers are working on expanding content and making the products more intuitive, Mansueto said, adding that, traditionally, the company has grown organically.

At the same time, Mansueto said he was still on the lookout for potential acquisitions, even after the company announced six small takeovers last year.

“I would love to add a fixed income data base,” he said, adding however that there was no time frame for any such moves.

“This year, we might do zero acquisitions,” he said.

Even after spending $105 million on acquisitions, Mansueto said Morningstar’s balance sheet is strong and that the company has no bank debt.

Morningstar’s share price has dropped 7.86 percent so far this year, far less than some publicly traded asset management or financial companies. The stock fell 18 cents to close at $32.53 on Nasdaq. (Reporting by Svea Herbst-Bayliss; editing by Richard Chang and Andre Grenon)

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