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Margaret Kirch Cohenmargaret.cohen@morningstar.com
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Nadine Youssefnadine.youssef@morningstar.com
Morningstar, Inc. Reports Second-Quarter 2011 Financial Results

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CHICAGO, July 27, 2011—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its second-quarter 2011 financial results. The company reported consolidated revenue of $161.0 million in the second quarter of 2011, an increase of 18.3% from $136.1 million in the second quarter of 2010. Consolidated operating income was $38.6 million in the second quarter of 2011, an increase of 39.5% compared with $27.7 million in the same period a year ago. Net income was $26.5 million, or 52 cents per diluted share, compared with $18.0 million, or 36 cents per diluted share, in the second quarter of 2010.

Excluding acquisitions and the effect of foreign currency translations, revenue increased 11.2%. Second-quarter results included $5.1 million in revenue from acquisitions. Foreign currency translations had a favorable effect of $4.6 million. 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 2011, revenue was $312.8 million, an increase of 18.3% compared with $264.4 million in the same period in 2010. Revenue for the first half of the year included $14.1 million from acquisitions and a $6.3 million benefit from foreign currency translations.

Consolidated operating income rose 20.1% to $70.4 million in the first six months of 2011, compared with $58.6 million in the first half of 2010. Net income was $49.0 million, or 96 cents per diluted share, in the first half of 2011, compared with $38.2 million, or 76 cents per diluted share, in the same period in 2010.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, “Organic revenue rose about 11%, reflecting growth across all of our major product lines. Leading the growth were Morningstar Direct—our institutional research platform—and Investment Consulting. It’s also worth noting that within our credit ratings business, we had strong revenue growth from new issue rating assignments in the commercial mortgage-backed securities market.”

He added, “In June we held our annual investment conference in Chicago, with record attendance. We also announced our plans to launch forward-looking analyst-driven global fund ratings and a uniform approach for global fund research reports later this year. During the quarter, we also expanded our Wealth Forecasting Engine to clients in the United Kingdom and launched a website for fund investors in Chile.”

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 2011, revenue in the Investment Information segment was $128.1 million, an increase of $19.1 million, or 17.5%, compared with the second quarter of 2010 including $4.5 million from acquisitions. Revenue in the Investment Management segment rose 21.5% to $32.9 million, an increase of $5.8 million, including $0.6 million from acquisitions.

Revenue from international operations was $47.6 million in the second quarter of 2011, an increase of 28.2% from the same period a year ago. International revenue included $2.1 million from acquisitions. Foreign currency translations contributed $4.6 million to international revenue. Excluding acquisitions and foreign currency translations, international revenue increased 10.3%.

For the first six months of 2011, international revenue increased $18.4 million, or 25.3%, including $5.6 million in revenue from acquisitions. Foreign currency translations had a favorable impact of $6.3 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 $38.6 million in the second quarter of 2011, a 39.5% increase from the same period in 2010. Operating expense rose $14.0 million, or 12.9%. Incremental operating expense from businesses acquired since the first quarter of 2010 represented approximately $3.6 million, or 25%, of the operating expense increase. The company completed seven acquisitions in 2010. Because of the timing of these acquisitions, the second-quarter and year-to-date results in 2011 include operating expense that did not exist in the comparable periods in 2010.

Approximately 60% of the growth in total operating expense was due to higher salaries, reflecting additional headcount from acquisitions and filling open positions, as well as salary increases made in the third quarter of 2010.

Incentive compensation and employee benefit costs represented approximately 11% of the overall operating expense increase. Bonus expense rose $2.0 million compared with the prior-year period, a portion of which relates to acquisitions. Higher matching contributions to the company’s 401(k) plan in the United States represented approximately $0.6 million of the increase. Lower healthcare benefit costs and sales commissions partially offset these increases. In the second quarter of 2010, the company had some unusually high medical claims that did not recur in the second quarter of 2011. Sales commission expense also declined because changes to the company’s U.S. sales commission structure made in 2010 had a greater effect on prior-year period results.

Higher depreciation and amortization contributed $1.3 million to the operating expense increase in the second quarter of 2011, primarily from recent acquisitions.

Morningstar had approximately 3,300 employees worldwide as of June 30, 2011, compared with 2,965 as of June 30, 2010. Headcount rose year over year mainly because of continued hiring in the company’s development centers in China and India. Morningstar hired about 30 employees in the United States in July 2011 as part of the Morningstar Development Program, a two-year rotational training program for entry-level college graduates, and expects to continue hiring in the second half of the year. In addition, the company expects to make salary increases in the third quarter of 2011.

The company’s operating margin was 24.0% in the second quarter of 2011, up from 20.3% in the same period in 2010. Approximately half of the margin improvement reflects lower healthcare benefits and commission expense as a percentage of revenue. In the first six months of 2011, operating margin was 22.5%, compared with 22.2% in the first six months of 2010.

Effective Tax Rate: Morningstar’s effective tax rate in the second quarter of 2011 was 32.5%, a decrease of 3.7 percentage points compared with the prior-year period. Year to date, the company’s effective tax rate was 32.2% compared with 35.7% in the first half of 2010. In the second quarter of 2011, the company increased its estimate of U.S. cash tax benefits by $1.1 million related to prior years. This adjustment represents 2.8 percentage points of the decline in the effective tax rate in the quarter and 1.5 percentage points in the year-to-date period. This higher-than-expected income tax benefit contributed approximately 2 cents to earnings per share in the second-quarter and first-half periods. The year-to-date effective tax rate also reflects the positive effect of certain deferred income tax benefits recorded in the first quarter of 2011.

Free Cash Flow: Morningstar generated free cash flow of $43.4 million in the second quarter of 2011, reflecting cash provided by operating activities of $46.8 million and $3.4 million of capital expenditures.

Cash provided by operating activities increased $16.2 million, reflecting higher net income (adjusted for non-cash items), a positive cash flow effect generated from accounts receivable, and the timing of income tax payments. Capital expenditures rose $1.2 million in the quarter.

In the first six months of 2011, Morningstar generated free cash flow of $52.7 million, reflecting cash provided by operating activities of $61.1 million and capital expenditures of $8.4 million. Cash provided by operating activities in the first six months of 2011 increased $16.1 million, reflecting higher net income (adjusted for non-cash items), partially offset by a $16.1 million increase in bonuses paid in the first quarter of 2011. Capital expenditures rose $4.6 million, primarily reflecting payments for the company’s new development center in China.

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, 2011, Morningstar had cash, cash equivalents, and investments of $430.2 million, compared with $320.4 million as of June 30, 2010. On July 29, 2011, the company expects to pay approximately $2.5 million for its regular quarterly dividend. It expects to make capital expenditures of approximately $8.0 million to $11.0 million in the second half of 2011, primarily for leasehold improvements and computer equipment.

Business Segment Performance
Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor WorkstationSM (including Morningstar Office); Morningstar.com®, including Premium Memberships and Internet advertising sales; and Morningstar DirectSM.
• Revenue was $128.1 million in the second quarter of 2011, a 17.5% increase from $109.0 million in the second quarter of 2010.
• Acquisitions contributed revenue of $4.5 million.
• Morningstar Direct was the largest contributor to the increase in segment revenue; Licensed Data, Internet advertising sales on Morningstar.com, Morningstar Advisor Workstation (primarily Morningstar Office), and credit ratings were also positive contributors. Licenses for Morningstar Direct rose 32.4% to 5,442. Premium Membership subscriptions for Morningstar.com fell 5.1% because of continued weakness in new trials. Principia subscriptions fell 6.9% to 32,335, and Advisor Workstation (including Morningstar Office) licenses rose slightly to 156,258.
• Operating income was $37.1 million in the second quarter of 2011, compared with $30.5 million in the same period in 2010. Operating expense in this segment rose $12.5 million, or 16.0%, partly because of acquisitions. Higher salaries and bonus expense also contributed to the increase.
• Operating margin was 29.0% in the second quarter of 2011 versus 28.0% in the prior-year period. The increase mainly reflects the favorable effect of recent acquisitions. Lower healthcare benefits and commission expense as a percentage of revenue also contributed to the margin improvement, but to a lesser extent.

Investment Management Segment: The largest products in this segment based on revenue are Investment Consulting; Retirement Solutions, including Advice by Ibbotson® and Morningstar® Retirement ManagerSM; and Morningstar® Managed PortfoliosSM.
• Revenue was $32.9 million in the second quarter of 2011, a 21.5% increase from $27.1 million in the same period in 2010.
• Acquisitions contributed revenue of $0.6 million.
• Investment Consulting was the primary driver of the segment revenue growth. Retirement Solutions (formerly Retirement Advice) and Morningstar Managed Portfolios also made positive contributions, but to a lesser extent.
• Assets under advisement and management for Investment Consulting were $141.5 billion as of June 30, 2011, compared with $98.7 billion as of June 30, 2010. Assets under advisement and management rose about 43% year over year, mainly reflecting positive market performance during the past 12 months. Assets under advisement and management for Retirement Solutions rose to $38.4 billion as of June 30, 2011, versus $28.3 billion as of June 30, 2010. Assets under management for Morningstar Managed Portfolios increased to $3.0 billion as of June 30, 2011, compared with $2.2 billion as of June 30, 2010.
• Operating income was $18.5 million in the second quarter of 2011, an increase of 29.1% compared with the second quarter of 2010. Operating expense in the segment was $14.4 million, an increase of $1.7 million, or 13.0%, reflecting higher salaries and bonus expense. Acquisitions also contributed to the higher operating expense, but to a lesser extent.
• Operating margin was 56.2% in the second quarter of 2011 versus 52.9% in the prior-year period. The higher margin reflects lower commission, salary, and healthcare benefits expense as a percentage of revenue, partially offset by the impact of recent acquisitions.

Intangible Amortization and Corporate Depreciation Expense: Morningstar does not allocate expense for
intangible amortization or corporate depreciation to its operating segments. Intangible amortization, which represents the majority of the expense in this category, was $6.6 million in the second quarter of 2011 and $13.1 million in the first half of 2011, an increase of $0.8 million and $1.8 million, respectively, compared with the same periods in 2010. Corporate depreciation expense was $1.9 million in the second quarter and $3.7 million in the first half of the year, essentially unchanged from the prior-year periods.

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 $8.5 million, a decrease of $1.1 million, or 11.2%. The company capitalized $0.4 million of operating expense in the quarter for software development. In the second quarter of 2010, the company expensed $0.5 million to increase a liability for vacant office space. This expense did not recur in the second quarter of 2011.

Investor Communication
Morningstar encourages all interested parties—including securities analysts, current shareholders, potential shareholders, and others—to submit questions in writing. Investors and others may send an e-mail to investors@morningstar.com, contact the company via fax at 312-696-6009, or write to Morningstar at the following address:

Morningstar, Inc.
Investor Relations
22 W. Washington Street
Chicago, IL 60602

Morningstar will make written responses to selected inquiries available to all investors at the same time in Form 8-Ks furnished to the Securities and Exchange Commission, generally on the first Friday of every month.

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 products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 400,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $180 billion in assets under advisement and management as of June 30, 2011. The company has operations in 26 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 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 ongoing economic weakness and uncertainty; the effect 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; the increasing concentration of data and development work carried out at our offshore facilities in China and India; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to successfully integrate acquisitions; challenges faced by our non-U.S. operations; and a prolonged outage of our database and network facilities. 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, 2010. 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.

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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©2011 Morningstar, Inc. All rights reserved.

MORN-E

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