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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar, Inc. Reports Second-Quarter 2010 Financial Results

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CHICAGO, July 28, 2010—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent
investment research, today announced its second-quarter 2010 financial results. The company reported
consolidated revenue of $136.1 million in the second quarter of 2010, a 13.9% increase from $119.5 million in the second quarter of 2009. Consolidated operating income was $27.7 million, a decrease of 15.4% compared with $32.7 million in the same period a year ago. Net income was $18.0 million, or 36 cents per diluted share, compared with $20.5 million, or 41 cents per diluted share, in the second quarter of 2009.

Excluding acquisitions and the impact of foreign currency translations, revenue increased 2.7%. Second-quarter results included $12.7 million in revenue from acquisitions as well as a $0.7 million benefit from foreign currency translations. Revenue excluding acquisitions and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.

In the first six months of 2010, revenue was $264.4 million, an increase of 11.9% compared with $236.3 million in the same period in 2009. Revenue for the first half of the year included $22.4 million from acquisitions as well as a favorable impact from foreign currency translations of $4.4 million.

Consolidated operating income declined 12.9% to $58.6 million in the first six months of 2010, compared with $67.3 million in the first half of 2009. Net income was $38.2 million, or 76 cents per diluted share, in the first half of 2010, compared with $45.5 million, or 92 cents per diluted share, in the same period in 2009.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “Organic revenue rose slightly during the quarter, moving into positive growth territory for the first time in nearly two years. We’re encouraged by this trend, particularly because our revenue improved despite the loss of business from the Global Analyst Research Settlement, which ended last summer. Our Investment Information and Investment Management segments both had positive revenue growth. Internet advertising sales for Morningstar.com drove our revenue increase for the quarter, followed by Morningstar Direct, our web-based institutional research platform, and Retirement Advice. Morningstar Direct had its best quarter so far for new licenses globally.”

He added, “During the second quarter we completed three key acquisitions—Realpoint, a Nationally Recognized Statistical Ratings Organization in the United States that specializes in structured finance; OBSR, a premier fund research, ratings, and investment consulting services firm in the UK; and Aegis Equities Research, a leading provider of equity research in Australia.

“On the negative side, our operating margin declined significantly to 20.3% in the second quarter, from 27.3% in the same period last year, mainly because we made a decision to increase our employee bonus expense in 2010 after making substantial reductions in 2009. The loss of revenue from GARS also had a negative effect on margins. In addition, sales commission expense was higher, we began phasing back in some benefits we temporarily suspended last year, and we had some unusually high medical claims during the quarter. We’re continuing to keep a close eye on discretionary spending, with the goal of improving margins.”

Key Business Drivers
Morningstar has two operating segments: Investment Information and Investment Management. The Investment Information segment includes all of the company’s 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 the company’s asset management operations, which earn more than half of their revenue from asset-based fees.

Revenue: In the second quarter of 2010, revenue in the Investment Information segment was $109.0 million, an increase of $11.3 million, or 11.5%, including $9.9 million from acquisitions. Higher revenue in the software and data product lines more than offset the loss of $5.4 million in equity research revenue associated with the Global Analyst Research Settlement, which ended in July 2009. Revenue in the Investment Management segment was $27.1 million, an increase of $5.3 million, including $2.8 million from acquisitions.

Revenue from international operations was $37.1 million in the second quarter of 2010, an increase of 22.7% from the same period a year ago. International revenue included $5.1 million from acquisitions. Foreign currency translations had a favorable impact of $0.7 million on international revenue in the second quarter. Excluding acquisitions and foreign currency translations, international revenue increased 3.5%.

For the first six months of 2010, international revenue increased $14.0 million, or 23.7%, including $9.2 million in revenue from acquisitions. Foreign currency translations had a favorable impact of $4.4 million. International revenue excluding acquisitions and foreign currency translations is a non-GAAP measure; the accompanying financial tables contain a reconciliation to international revenue.

Operating Income: Consolidated operating income was $27.7 million in the second quarter of 2010, a 15.4% decrease from the same period in 2009. Operating expense rose $21.6 million, or 24.8%. Incremental operating expense from businesses acquired since the first quarter of 2009 represented approximately half of the increase. The company completed six acquisitions in the last nine months of 2009 and four in the first six months of 2010. Because of the timing of these acquisitions, the second-quarter and year-to-date results include operating expense that did not exist in the comparable periods in 2009.

Higher incentive compensation and employee benefit costs represented approximately half of the overall operating expense increase. Bonus expense rose $5.4 million compared with the prior-year period. In the second quarter of 2009, the company reduced its bonus expense as part of its efforts to better align its cost structure with revenue in the challenging business environment. In 2010, the company partially restored the bonus expense. Acquisitions also contributed to the increase in bonus expense in the second quarter, but to a lesser extent. Sales commissions were $2.5 million higher, partly reflecting improved sales activity. The company also recognized more expense in the quarter because of a change in its sales commission structure. Under its new commission plan, the company now records the entire expense in the quarter versus over the term of the client contract. The company’s healthcare benefit costs were $1.4 million higher in the second quarter of 2010 because of unusually high medical claims. In addition, in 2010, Morningstar began phasing in some of the benefits it temporarily suspended in 2009. The company partially reinstated matching contributions to its 401(k) plan in the United States, representing approximately $0.8 million of expense in the quarter.

Higher travel, professional, and legal fees, partly related to acquisitions, also contributed to the operating expense increase in the second quarter of 2010. Operating expense in the quarter also includes a $0.5 million expense related to vacant office space from the equity research and data business acquired from C.P.M.S. Computerized Portfolio Management Services Inc. in Canada.

In the second quarter of 2009, Morningstar recorded a $3.5 million operating expense for estimated penalties related to the timing of deposits for taxes withheld on stock option exercises from 2006 through 2009. This expense did not recur in 2010.

Morningstar’s operating margin was 20.3% in the second quarter of 2010, down from 27.3% in the same period in 2009. In the first six months of 2010, operating margin was 22.2%, compared with 28.5% in the first six months of 2009. The margin decline mainly reflects higher bonus, sales commissions, and employee benefits as a percentage of revenue. In the second quarter of 2009, the deposit penalty decreased the margin by approximately 3 percentage points.

Morningstar had approximately 2,965 employees worldwide as of June 30, 2010, compared with 2,510 as of June 30, 2009. Headcount grew year over year mainly because of acquisitions and continued hiring in the company’s development centers in China and India. In July 2010, Morningstar hired about 45 employees in the United States as part of the Morningstar Development Program, a two-year rotational training program for entry-level college graduates. Also in July, the company made some compensation increases after keeping salary levels flat for nearly all employees in 2009.

Effective Tax Rate: Morningstar’s effective tax rate in the second quarter of 2010 was 36.2%, a decrease of 4.4 percentage points compared with 40.6% in the prior-year period. The effective tax rate in the second quarter of 2009 included 3.7 percentage points related to the $3.5 million expense associated with the timing of deposits of taxes withheld on stock option exercises. Although this expense reduced pre-tax income, it was not tax deductible, resulting in an increase in the effective tax rate in the second quarter of 2009. The company’s effective tax rate for the first half of 2010 increased slightly to 35.7% from 35.2% in the prior-year period.

Free Cash Flow: Morningstar generated free cash flow of $28.4 million in the second quarter of 2010, a
decrease of $9.0 million compared with free cash flow of $37.4 million in the second quarter of 2009. Second-quarter 2010 free cash flow reflects cash provided by operating activities of $30.6 million and approximately $2.2 million of capital expenditures. Cash provided by operating activities decreased $9.0 million in the quarter, reflecting a $4.3 million increase in cash paid for income taxes and a reduction in cash flow generated from accounts receivable and other operating assets and liabilities. These items, which reduced cash flow from operations, were partially offset by an increase in net income adjusted for non-cash items. Capital expenditures were $2.2 million in the second quarter of 2010, primarily for computer hardware and software and, to a lesser extent, leasehold improvements.

In the first six months of 2010, Morningstar generated free cash flow of $41.2 million, reflecting cash provided by operating activities of $45.0 million and capital expenditures of $3.8 million. Cash provided by operating activities in the first six months of 2010 increased $13.7 million, reflecting a $37.5 million decrease in bonuses paid in the first quarter of 2010. The cash flow impact of a lower bonus payment was partially offset by an increase of $12.2 million in cash paid for income taxes in the first half of the year. Also, the company made a payment of $4.9 million to one former and two current executives related to adjusting the tax treatment of certain stock options originally considered incentive stock options. The company recorded the related operating expense in the fourth quarter of 2009.

Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.

As of June 30, 2010, Morningstar had cash, cash equivalents, and investments of $320.4 million, compared with $342.6 million as of Dec. 31, 2009. The company used approximately $22.5 million of cash and investments to complete two acquisitions in July 2010. It expects to make capital expenditures of approximately $14 million to $16 million in the second half of 2010, including spending for its new office space in China.

Business Segment Performance
Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor WorkstationSM; Morningstar.com®, including Premium Memberships and Internet advertising sales; and Morningstar DirectSM.
• Revenue was $109.0 million in the second quarter of 2010, an 11.5% increase from $97.7 million in the second quarter of 2009.
• Acquisitions contributed revenue of $9.9 million in the second quarter of 2010.
• The majority of the revenue increase came from Internet advertising sales on Morningstar.com; Morningstar Direct; and Equity Research, including revenue from two former Global Analyst Research Settlement clients. Licenses for Morningstar Direct rose 29.6% to 4,109, with particularly strong growth outside the United States. Premium Membership subscriptions for Morningstar.com fell 10.9%. Principia subscriptions fell 9.5% to 34,715, and Advisor Workstation licenses rose slightly to 154,226.
• Revenue in the second quarter of 2009 included $5.4 million related to the Global Analyst Research Settlement, which ended in July 2009.
• Operating income was $30.5 million in the second quarter of 2010, compared with $37.2 million in the same period in 2009. Operating expense in this segment increased $18.0 million, or 29.7%, partly because of acquisitions. Higher bonuses, sales commissions, and employee benefits expense also contributed to the increase.
• Operating margin was 28.0% in the second quarter of 2010 versus 38.1% in the prior-year period. The decrease mainly reflects higher compensation, bonus, and commission expense as a percentage of revenue.

Investment Management Segment: The largest products in this segment based on revenue are Investment Consulting; Retirement Advice, including Advice by Ibbotson® and Morningstar® Retirement ManagerSM; and Morningstar® Managed PortfoliosSM.
• Revenue was $27.1 million in the second quarter of 2010, a 24.2% increase from $21.8 million in the same period in 2009.
• Acquisitions contributed revenue of $2.8 million in the second quarter.
• Retirement Advice was the primary driver of the segment revenue increase. Morningstar Managed Portfolios and Investment Consulting also contributed to the increase, but to a lesser extent. As previously disclosed, Investment Consulting results for the second quarter of 2009 included revenue related to a contract that was not renewed in May 2009.
• Total assets under advisement for Investment Consulting rose approximately 63% to $91.2 billion, from $56.1 billion as of June 30, 2009. About $31.0 billion of the assets reflects a new fund-of-funds program that began in May 2010 for an existing Morningstar Associates client. Previously, Morningstar created model portfolios for the same client, so the increase in assets represents incremental growth for an existing revenue stream. Assets under advisement for Ibbotson Associates rose 6.2%. Assets under management for Retirement Advice were $16.1 billion as of June 30, 2010, versus $12.5 billion as of June 30, 2009. Assets under management for Morningstar Managed Portfolios were $2.2 billion as of June 30, 2010, compared with $1.7 billion as of June 30, 2009.
• Operating income was $14.3 million in the second quarter of 2010, an increase of 9.6% compared with the second quarter of 2009. Operating expense in the segment was $12.7 million, an increase of $4.0 million, or 46.0%, reflecting incremental expense from acquisitions as well as higher bonus and sales commission expense.
• Operating margin was 52.9% in the second quarter of 2010 versus 59.9% in the prior-year period. The margin decline mainly reflects higher bonus and sales commission expense as a percentage of revenue. Acquisitions also contributed to the margin decline, but to a lesser extent.

Intangible Amortization and Corporate Depreciation Expense: Morningstar does not allocate expense for
intangible amortization or corporate depreciation to its operating segments. Expense for these categories was $7.6 million in the second quarter and $14.9 million in the first half of 2010, a slight increase compared with the same periods in 2009. The increase in both periods reflects additional amortization expense for acquisitions that occurred since the first quarter of 2009.

Corporate Unallocated: This category includes costs related to corporate functions, including general management, information technology used to support corporate systems, legal, finance, human resources, marketing, and corporate communications. Costs in this category were $9.6 million, a decrease of $0.5 million, or 4.8%.

In the second quarter of 2009, this category included a $3.5 million operating expense for estimated penalties related to the timing of deposits for taxes withheld on stock option exercises from 2006 through 2009. This expense did not recur in 2010. This expense decline was partially offset by higher bonus and other compensation-related expense, professional and legal fees, and a $0.5 million expense for vacant office space related to the C.P.M.S. acquisition in the second quarter of 2010.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 360,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 21 countries.

Caution Concerning Forward-Looking Statements
This press release 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 discussed not to occur or to differ significantly from what we expected. 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; 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 filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2009. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expected. We do not undertake to update our forward-looking statements as a result of new information or future events.

Non-GAAP Financial Measures
To supplement Morningstar’s consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission: free cash flow, consolidated revenue excluding acquisitions and foreign currency translations (organic revenue), and international revenue excluding acquisitions and foreign currency translations. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after Morningstar spends money to operate its business. Morningstar uses free cash flow to evaluate its business. Free cash flow should not be considered an alternative to any measure required to be reported under GAAP (such as cash provided by (used for) operating, investing, and financing activities). For more information on free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables. Morningstar presents consolidated revenue excluding acquisitions and foreign currency translations (organic revenue) and international revenue excluding acquisitions and foreign currency translations because the company believes these non-GAAP measures help investors better compare period-to-period results. For more information, please see the reconciliation provided in the accompanying financial tables.

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

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©2010 Morningstar, Inc. All rights reserved.
MORN-E

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