It's been a pretty good few years for the financial services industry, with rising equity markets and loosening credit markets creating favorable conditions for asset managers, brokerages, financial advisors, and the like. Therefore, it's no surprise to see financial information services provider Morningstar (MORN -0.73%) reporting increasing profits. When financial firms make money, they are more likely to purchase information services.

Still, Morningstar does need to execute within highly competitive markets. Here is a look at its recent fourth-quarter results, and an assessment of how it's performing.

Morningstar reports
A brief look at the headline data:

  • Fourth-quarter revenue is $196.4 million, versus analyst estimates of $196.6 million
  • Fourth-quarter adjusted EPS is $0.71, versus analyst estimates of $0.66

While revenue growth of 8.8% came in slightly lower than expected by analysts, Morningstar managed to increase costs by only 8.1% -- leading to an expansion in operating margin of 50 basis points (100 basis points equals 1%).

A look at its operating expenses in the quarter reveals how Morningstar was able to increase profitability:

 

Q4 2014

Change From Q4 2013

Revenue

196,415

8.8%

Cost of Revenue

81,395

11.6%

Sales & Marketing

27,950

12.6%

General & Administrative

25,939

(10.6)%

Depreciation & Amortization

14,550

22.9%

Total Operating Expense

149,834

8.1%

Operating Income

46,581

11.2%

Source: Morningstar, Inc presentations; all figures in thousands of US Dollars unless stated.

In the earnings release, although he did not expressly state it, CEO Joe Mansueto's commentary likely gave hope to investors looking for more margin expansion going forward: "After investing heavily in the business in late 2013 and early 2014 to support our key growth initiatives, we slowed the pace of spending to better balance expense and revenue growth."

Information management
Morningstar broke out revenue in two different product groups -- "Investment Information" and "Investment Management" -- both of which reported good growth in the quarter. Investment information revenue increased 7.5%, to $154 million, in the fourth quarter, while investment management revenue grew 14%, to $37.2 million in the same period.

The full-year revenue breakout is shown below. Incidentally, Morningstar generated 72.5% of 2014 revenue from the U.S. market, so it's very much a play on the U.S. financial services industry.

Source: Morningstar, Inc Presentations; figures in millions.

Within the core investment information product group, management cited strong growth in the quarter from Morningstar Direct and Morningstar Credit Ratings. The former is an investment analysis platform that allows investment professionals to mine information and then create customized reports for clients. For example, it could be used by a wealth management firm to present portfolio information to a client.

If financial firms are flourishing and expanding employment, it's a safe bet that they will be buying more licenses for their workers. Indeed, Morningstar Direct licenses increased by 18.1% in 2014 -- another good sign for the investment industry.

Morningstar Credit Ratings analyzes and rates commercial mortgage-backed securities, or CMBS, and residential mortgage-backed securities, or RMBS. Given that Morningstar's management stated that its Credit Ratings operations were one of the main contributors to growth in the quarter, it's a good sign that lending standards are loosening in the economy at large.

Investment management
Investment management is a somewhat mixed picture. Average assets under management, or AUM, increased 1.3%, to $169.8 billion from last year's fourth quarter. It's a key metric to follow with all investment managers because they generate management and performance fees from AUM.

However, Morningstar reported some mixed results in the quarter. Investment advisory AUM actually fell 3%, to $81 billion in the quarter, as the "business continues to feel the effects of variable annuity clients moving the management of fund-of-funds portfolios in house." However, retirement solutions AUM more than offset the decline by rising 17.1%, to $76.8 billion.

The bottom line
All told, it was a solid quarter for Morningstar, and the company is executing well on its growth plan. There were also some good indicators for the financial services sector within its results, particularly with regard to the environment for CMBS and RMBS issuance. It's very difficult to predict where interest rates and the economy will go, but provided the financial services sector remains in good shape, Morningstar looks set to do well in 2015.