Morningstar, Inc. Reports Second-Quarter 2008 Financial Results

CHICAGO, July 31 /PRNewswire-FirstCall/ -- Morningstar, Inc.
(Nasdaq: MORN), a leading provider of independent investment research, today
announced its second-quarter 2008 financial results. The company reported
consolidated revenue of $132.2 million in the second quarter of 2008, a 20.6%
increase from revenue of $109.7 million in the second quarter of 2007.
Consolidated operating income was $41.6 million in the second quarter of 2008,
an increase of 46.1% compared with $28.4 million in the second quarter of
2007. Morningstar's net income was $28.0 million in the second quarter of
2008, or 57 cents per diluted share, compared with $18.3 million, or 38 cents
per diluted share, in the second quarter of 2007.
The company's second-quarter results include $4.9 million in revenue from
several Hemscott businesses that Morningstar acquired on Jan. 9, 2008. Foreign
currency translations had a positive impact of $3.1 million in the second
quarter. Excluding Hemscott and the impact of foreign currency translations,
Morningstar's revenue increased 13.3% in the second quarter of 2008. Revenue
excluding acquisitions and foreign currency translations is a non-GAAP
measure; the accompanying financial tables contain a reconciliation to
consolidated revenue.
In the first six months of 2008, revenue increased $52.6 million, or
25.6%, to $257.7 million, compared with $205.1 million in the same period a
year ago. Revenue for the first half of the year reflects $16.0 million from
acquisitions, including Hemscott from Jan. 9 through June 30, 2008, and the
fund data business acquired from Standard & Poor's from Jan. 1 through March
15, 2008. Consolidated operating income increased 45.3% to $76.3 million in
the first six months of 2008, compared with $52.5 million in the first half of
2007. Net income was $51.1 million, or $1.04 per diluted share, in the first
half of 2008, compared with $34.1 million, or 71 cents per diluted share, in
the same period in 2007.
"We had a good quarter, with solid revenue growth of 21% compared with
last year," said Joe Mansueto, chairman and chief executive officer of
Morningstar. "Organic revenue grew about 13%, which is lower than previous
levels, but still relatively strong given market conditions. Our Licensed Data
business and Morningstar Advisor Workstation were the two largest contributors
to organic revenue growth during the quarter, reflecting demand from new and
existing customers. Investment Consulting also performed well, with assets
under advisement growing 21.6% to $99.1 billion year over year. Despite recent
market declines, our assets under advisement grew modestly compared with the
first quarter of 2008."
Mansueto added, "Premium membership growth slowed during the quarter for
Morningstar.com, our investment Web site. Although advertising sales remained
strong and Premium subscriptions grew year over year, trial memberships have
been slow this year, resulting in a modest decline in Premium subscriptions in
the second quarter."
"Operating margin grew by 5.5 percentage points to 31.4%, partly because
of lower bonus accruals, which accounted for about half of the margin
increase. Also contributing to the margin improvement were decreases in legal
costs and other general and administrative expenses," Mansueto said. "Our
balance sheet is strong, and we ended the quarter with more than $270 million
in cash and investments. All in all, it was a solid quarter. We remain
cautious because of the tough market environment, but we're continuing to
invest in our business."
Key Business Drivers
Revenue: In the second quarter of 2008, revenue in the Institutional
segment grew 26.6% compared with the second quarter of 2007; 7 percentage
points of this increase came from acquisitions. Revenue in the Advisor segment
rose 12.1%, all of which was organic growth. Individual segment revenue
increased 16.5%, with 3 percentage points from acquisitions.
Revenue from international operations was $32.7 million in the second
quarter of 2008, an increase of 41.3% from the same period a year ago. This
amount includes $3.5 million from the Hemscott acquisition. Excluding the
impact of acquisitions and foreign currency translations, international
revenue increased 12.9% in the second quarter of 2008, compared with the
prior-year period. For the first six months of 2008, international revenue
rose $24.3 million, or 62.6%, compared with the prior-year period, with $12.4
million in revenue from the Hemscott acquisition and the fund data business
acquired from Standard & Poor's. 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 $41.6 million in the
second quarter of 2008, a 46.1% increase from the same period in 2007.
Operating expense rose moderately in the second quarter of 2008, growing
$9.4 million, or 11.6%, with approximately three-fourths of the increase
coming from compensation-related expense.
Compensation-related expense, excluding bonuses, increased $7.9 million,
mainly because of a 27% increase in worldwide headcount year over year and an
increase in sales commission expense. Lower bonus expense partially offset the
increase in these costs. Morningstar had approximately 2,060 employees
worldwide as of June 30, 2008, compared with 1,620 as of June 30, 2007.
Morningstar added approximately 200 employees in India and 60 in Europe as
part of the Hemscott acquisition and has continued hiring in China and the
United States. Shortly after the end of the second quarter, Morningstar hired
50 employees in the United States as part of the Morningstar Development
Program, a two-year rotational training program for entry-level college
graduates.
Other factors contributing to the increase in operating expense in the
quarter include higher lease expense for the company's new corporate
headquarters and offices outside the United States. The company also had
higher marketing expense in Europe in the second quarter as well as additional
amortization expense. These expense increases were partially offset by lower
legal fees and general and administrative costs.
The company's operating margin was 31.4% in the second quarter of 2008,
compared with 25.9% in the same period in 2007, an increase of 5.5 percentage
points. In the first six months of 2008, operating margin was 29.6%, compared
with 25.6% in the first six months of 2007. For the second quarter and first
half of 2008, operating margin increased partly because of lower bonus
expense, legal expense, and other general and administrative expense as a
percentage of revenue. In addition, the company had about $1.6 million in
product implementation expense for Advice by Ibbotson in the first half of
2007 that did not recur in the first six months of 2008.
Effective Tax Rate: The company's effective tax rate in the second
quarter of 2008 was 35.0%, a decrease of 4.6 percentage points compared with
the prior-year period. Incentive stock-option transactions in the second
quarter of 2008 had a favorable impact on the effective tax rate, accounting
for 1.6 percentage points of the decline. The decrease in the 2008 effective
tax rate also reflects a reduction in the company's U.S. state tax rate
related to a 2007 change in state tax law as well as the favorable impact of
lower tax rates outside of the United States.
Free Cash Flow: Morningstar generated free cash flow of $37.1 million in
the second quarter of 2008, reflecting cash provided by operating activities
of $47.7 million and $10.6 million of capital expenditures, primarily related
to the company's new corporate headquarters in Chicago. Cash flow from
operations increased $11.6 million compared with the prior-year period, mainly
because of higher net income adjusted for non-cash items and $5.9 million in
additional deferred rent related to tenant improvement allowances for the new
corporate headquarters. These items were offset by the cash flow impact of
deferred revenue, accounts payable, and other accrued expense.
In the first six months of 2008, Morningstar generated free cash flow of
$31.8 million, reflecting cash provided by operating activities of $49.1
million and capital expenditures of $17.4 million. Cash flow from operations
in the first six months of 2008 increased $4.6 million. Tenant improvement
allowances and net income adjusted for non-cash items all had a favorable
cash-flow impact in the first half of 2008, but this was offset by bonuses
paid in the first quarter of 2008.
Free cash flow is a non-GAAP measure; the accompanying financial tables
contain a reconciliation to cash provided by or used for operating activities.
Morningstar defines free cash flow as cash provided by or used for operating
activities less capital expenditures.
As of June 30, 2008, Morningstar had cash, cash equivalents, and
investments of $271.4 million, compared with $215.7 million as of March 31,
2008, and $258.6 million as of Dec. 31, 2007.
Business Segment Performance
Institutional Segment: The largest products and services in this segment
based on revenue are Investment Consulting, Licensed Data(SM), Morningstar
Direct(SM), Retirement Advice (including Advice by Ibbotson(R) and
Morningstar(R) Retirement Manager(SM) ), and Licensed Tools and Content.
* Revenue was $72.8 million in the second quarter of 2008, a 26.6%
increase from $57.6 million in the second quarter of 2007.
* The Hemscott acquisition contributed revenue of approximately
$4.3 million to the Institutional segment in the second quarter.
* Licensed Data and Morningstar Direct drove most of the revenue growth in
the second quarter. Growth in the Licensed Data business reflects strong
renewal rates and new business. The number of licenses for Morningstar Direct
grew to 2,683 worldwide as of June 30, 2008, compared with 1,684 as of June
30, 2007. Investment Consulting was the third-largest contributor to the
segment's revenue growth.
* Total assets under advisement for Investment Consulting increased to
$99.1 billion, or 21.6%, year over year. However, assets under advisement only
grew modestly compared with the first quarter of 2008 because of negative
market performance. During the quarter, an Investment Consulting client
informed the company that it does not plan to renew its contract in October
2008. Morningstar expects to continue providing other services to this client
and will seek to replace this work with new business. This contract
represented about $11.3 million, or 2%, of consolidated revenue during the
last 12 months.
* Operating income was $26.4 million in the second quarter of 2008, a
47.8% increase from $17.9 million in the same period in 2007. Operating
expense was $46.4 million, a 17.0% increase from $39.7 million in 2007 and
includes operating expense from Hemscott.
* Operating margin improved to 36.2% in the second quarter of 2008,
compared with 31.0% in the prior-year period. Lower bonus expense and general
and administrative expense contributed to the margin improvement, but were
partially offset by additional operating expense from Hemscott.
Advisor Segment: The largest products in this segment based on revenue
are Morningstar(R) Advisor Workstation(SM), Morningstar(R) Principia(R),
Financial Communications, and Morningstar(R) Managed Portfolios(SM).
* Revenue was $33.9 million in the second quarter of 2008, an increase of
12.1% from $30.2 million in the same period a year ago.
* Morningstar Advisor Workstation continued to drive organic revenue
growth. Total licenses for Morningstar Advisor Workstation in the United
States increased to 188,792 as of June 30, 2008, compared with 163,813 as of
June 30, 2007. Growth in Advisor Workstation reflects additional users and
functionality for existing clients as well as new client contracts. The
year-over-year comparisons also reflect the ongoing positive impact of
contract renewals signed in 2007 for expanded functionality and additional
users.
* Morningstar's Financial Communications business, including the annual
Morningstar Investment Conference, also contributed to revenue growth. The
investment conference, which was held in June in Chicago, had record
attendance and generated revenue of $2.3 million.
* Operating income was $10.7 million in the second quarter of 2008, an
increase of 33.1% compared with $8.0 million in the second quarter of 2007.
Operating expense was $23.2 million, a 4.5% increase from $22.2 million in
2007.
* Operating margin was 31.5% in the second quarter of 2008, compared with
26.6% in the second quarter of 2007. The increase was driven by lower bonus
expense and general and administrative expense as a percentage of revenue.
Individual Segment: The largest product in this segment based on revenue
is the company's U.S.-based Web site for individual investors,
Morningstar.com(R). The Individual segment also includes Morningstar(R) Equity
Research and several print and online publications.
* Revenue was $28.1 million in the second quarter of 2008, a 16.5%
increase from $24.2 million in the second quarter of 2007.
* The Hemscott acquisition contributed revenue of $0.6 million to the
Individual segment in the second quarter.
* Morningstar.com, including Premium Membership and Internet advertising
sales, drove half of the increase in organic revenue. Morningstar.com had
179,827 Premium subscriptions as of June 30, 2008, compared with 173,974 as of
June 30, 2007. Ad sales were strong, but Premium memberships declined by
approximately 1,950 from March 31, 2008, reflecting the ongoing impact of slow
trial memberships throughout 2008.
* Morningstar Equity Research was the second-largest contributor to
organic revenue growth for this segment. Morningstar retained all six of its
contracts for independent equity research associated with the Global Analyst
Research Settlement for the final year of the five-year settlement period.
After the settlement period expires in July 2009, the investment banks covered
by the settlement will no longer be required to provide independent investment
research to their clients. Morningstar does not know how much, if any, of this
equity research revenue it will retain or replace. These contracts accounted
for approximately 4% of the company's consolidated revenue during the last 12
months.
* Operating income was $8.7 million in the second quarter of 2008, up
34.1% from $6.5 million in the second quarter of 2007. Operating expense was
$19.5 million, a 10.0% increase from $17.7 million in 2007, partially
reflecting the Hemscott acquisition.
* Operating margin grew to 30.8% in the second quarter of 2008, compared
with 26.7% in the second quarter of 2007. The margin growth was primarily the
result of lower general and administrative expense and bonus expense as a
percentage of revenue.
Note: Morningstar is rescheduling its next Form 8-K that addresses
investor questions for Friday, Aug. 8, 2008, instead of Friday, Aug. 1, 2008.
Delaying the filing by a week will allow the company to address questions
regarding the second-quarter results in a more timely manner, as opposed to
waiting until September.
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 more than 280,000 investment offerings, including stocks, mutual funds, and
similar vehicles. The company has operations in 18 countries and minority
ownership positions in companies based in three other 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; 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; legal,
regulatory, or political issues related to our data center in China; the
potential impact of market volatility on revenue from asset-based fees; 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, 2007. 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 the performance of its business. Free cash flow should not be
considered an alternative to any measure of performance as promulgated 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.
(C) 2008 Morningstar, Inc. All rights reserved.

Contact:

Media: Margaret Kirch Cohen, 312-696-6383, margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com or by fax to
312-696-6009.

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income

(in thousands, Three months ended Six months ended
except per share June 30 June 30
amounts) 2008 2007 change 2008 2007 change

Revenue $132,237 $109,685 20.6% $257,681 $205,132 25.6%
Operating
expense(1):
Cost of goods
sold 33,164 29,020 14.3% 66,102 54,875 20.5%
Development 9,801 9,134 7.3% 19,916 17,189 15.9%
Sales and
marketing 20,866 16,471 26.7% 43,090 33,200 29.8%
General and
administrative 20,560 21,128 (2.7%) 39,885 37,214 7.2%
Depreciation and
amortization 6,276 5,486 14.4% 12,433 10,181 22.1%
Total
operating
expense 90,667 81,239 11.6% 181,426 152,659 18.8%
Operating income 41,570 28,446 46.1% 76,255 52,473 45.3%
Operating margin 31.4% 25.9% 5.5 pp 29.6% 25.6% 4.0 pp

Non-operating income
(expense):
Interest income,
net 1,381 1,437 (3.9%) 2,900 3,186 (9.0%)
Other expense,
net (321) (69) 365.2% (297) (305) (2.6%)
Non-operating
income, net 1,060 1,368 (22.5%) 2,603 2,881 (9.6%)

Income before
income taxes and
equity in net
income of
unconsolidated
entities 42,630 29,814 43.0% 78,858 55,354 42.5%
Income tax
expense 15,076 11,996 25.7% 28,580 22,287 28.2%
Equity in net
income of
unconsolidated
entities 445 455 (2.2%) 797 992 (19.7%)
Net income $27,999 $18,273 53.2% $51,075 $34,059 50.0%
Net income per
share
Basic $0.61 $0.43 41.9% $1.12 $0.80 40.0%
Diluted $0.57 $0.38 50.0% $1.04 $0.71 46.5%
Weighted average
common shares
outstanding:
Basic 45,921 42,852 45,572 42,632
Diluted 49,290 47,868 49,150 47,758

Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
(1) Includes stock-
based compensation
expense of:
Cost of goods
sold $528 $513 $964 $851
Development 367 371 688 624
Sales and
marketing 379 412 724 711
General and
administrative 1,695 1,907 3,337 3,351
Total stock-
based
compensation
expense $2,969 $3,203 $5,713 $5,537

Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue

Three months ended Six months ended
June 30 June 30
2008 2007 change 2008 2007 change

Revenue 100.0% 100.0% - 100.0% 100.0% -
Operating
expense(1):
Cost of goods
sold 25.1% 26.5% (1.4) pp 25.7% 26.8% (1.1) pp
Development 7.4% 8.3% (0.9) pp 7.7% 8.4% (0.7) pp
Sales and
marketing 15.8% 15.0% 0.8 pp 16.7% 16.2% 0.5 pp
General and
administrative 15.5% 19.3% (3.8) pp 15.5% 18.1% (2.6) pp
Depreciation
and
amortization 4.7% 5.0% (0.3) pp 4.8% 5.0% (0.2) pp
Total
operating
expense(2) 68.6% 74.1% (5.5) pp 70.4% 74.4% (4.0) pp
Operating margin 31.4% 25.9% 5.5 pp 29.6% 25.6% 4.0 pp

Three months ended Six months ended
June 30 June 30
2008 2007 change 2008 2007 change
(1) Includes
stock-based
compensation
expense of:
Cost of goods
sold 0.4% 0.5% (0.1) pp 0.4% 0.4% -
Development 0.3% 0.3% - 0.3% 0.3% -
Sales and
marketing 0.3% 0.4% (0.1) pp 0.3% 0.3% -
General and
administrative 1.3% 1.7% (0.4) pp 1.3% 1.6% (0.3) pp
Total stock-
based
compensation
expense(2) 2.2% 2.9% (0.7) pp 2.2% 2.7% (0.5) pp

(2) Sum of percentages may not equal total because of rounding.

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

Three months ended Six months ended
June 30 June 30
($000) 2008 2007 2008 2007

Operating activities
Net income $27,999 $18,273 $51,075 $34,059
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 6,276 5,486 12,433 10,181
Deferred income tax expense (benefit) 43 (994) 2,919 (1,698)
Stock-based compensation expense 2,969 3,203 5,713 5,537
Equity in net income of
unconsolidated entities (445) (455) (797) (992)
Excess tax benefits from stock
option exercises and vesting of
restricted stock units (11,376) (4,879) (17,343) (7,011)
Other, net (1,020) (86) (775) (49)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable 2,484 2,126 (3,222) (5,456)
Other assets 121 (374) (1,846) 869
Accounts payable and accrued
liabilities (1,773) 966 997 3,228
Accrued compensation 13,040 13,402 (28,890) (12,891)
Deferred revenue (2,449) 2,368 6,772 13,389
Income taxes payable 6,002 (1,254) 13,104 7,203
Deferred rent 5,923 81 9,306 36
Other liabilities (52) (1,751) (327) (1,909)
Cash provided by operating
activities 47,742 36,112 49,119 44,496
Investing activities
Purchases of investments (22,645) (16,782) (46,946) (40,243)
Proceeds from sale of investments 38,262 12,675 82,213 42,220
Capital expenditures (10,643) (3,898) (17,354) (5,888)
Acquisitions, net of cash acquired (115) (2,933) (51,017) (55,063)
Other, net - - - (3)
Cash provided by (used for)
investing activities 4,859 (10,938) (33,104) (58,977)
Financing activities
Proceeds from stock option exercises 6,845 4,112 12,595 5,686
Excess tax benefits from stock
option exercises and vesting of
restricted stock units 11,376 4,879 17,343 7,011
Other, net (4) - (4) -
Cash provided by financing
activities 18,217 8,991 29,934 12,697
Effect of exchange rate changes on
cash and cash equivalents 122 595 1,352 622
Net increase (decrease) in cash and
cash equivalents 70,940 34,760 47,301 (1,162)
Cash and cash equivalents - Beginning
of period 135,937 60,218 159,576 96,140
Cash and cash equivalents - End of
period $206,877 $94,978 $206,877 $94,978

Reconciliation from cash provided by operating activities to free cash
flow (a non-GAAP measure):

Three months ended Six months ended
June 30 June 30
($000) 2008 2007 2008 2007

Cash provided by operating activities $47,742 $36,112 $49,119 $44,496
Less: Capital expenditures (10,643) (3,898) (17,354) (5,888)
Free cash flow $37,099 $32,214 $31,765 $38,608

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

June 30, December 31,
($000) 2008 2007

Assets
Current assets:
Cash and cash equivalents $206,877 $159,576
Investments 64,560 99,012
Accounts receivable, net 95,950 86,812
Income tax receivable 9,409 8,998
Other 14,961 13,163
Total current assets 391,757 367,561

Property and equipment, net 35,951 19,108
Investments in unconsolidated entities 20,041 19,855
Goodwill 158,338 128,141
Intangible assets, net 114,986 95,767
Deferred tax asset, net 11,167 15,658
Other assets 3,417 3,217
Total assets $735,657 $649,307

Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $28,489 $22,325
Accrued compensation 41,780 64,709
Deferred revenue 142,376 129,302
Deferred tax liability, net 1,051 557
Other 472 945
Total current liabilities 214,168 217,838

Accrued compensation 8,354 13,913
Other long-term liabilities 15,211 9,253
Total liabilities 237,733 241,004
Total shareholders' equity 497,924 408,303
Total liabilities and shareholders' equity $735,657 $649,307

Morningstar, Inc. and Subsidiaries
Segment Information

Three months ended Six months ended
June 30 June 30
($000) 2008 2007 change 2008 2007 change

Revenue
Individual $28,147 $24,169 16.5% $55,506 $48,230 15.1%
Advisor 33,862 30,209 12.1% 64,556 56,186 14.9%
Institutional 72,842 57,554 26.6% 142,770 104,906 36.1%
Eliminations (2,614) (2,247) 16.3% (5,151) (4,190) 22.9%
Consolidated
revenue $132,237 $109,685 20.6% $257,681 $205,132 25.6%

Revenue - U.S. $99,534 $86,538 15.0% $194,697 $166,399 17.0%
Revenue -
International $32,703 $23,147 41.3% $62,984 $38,733 62.6%

Revenue - U.S.
(percentage of
consolidated
revenue) 75.3% 78.9% (3.6) pp 75.6% 81.1% (5.5) pp
Revenue -
International
(percentage of
consolidated
revenue) 24.7% 21.1% 3.6 pp 24.4% 18.9% 5.5 pp

Operating income
(loss)(1)
Individual $8,671 $6,465 34.1% $14,432 $11,793 22.4%
Advisor 10,680 8,024 33.1% 19,486 14,890 30.9%
Institutional 26,402 17,868 47.8% 50,579 32,791 54.2%
Corporate items and
eliminations (4,183) (3,911) 7.0% (8,242) (7,001) 17.7%
Consolidated
operating income $41,570 $28,446 46.1% $76,255 $52,473 45.3%

Operating margin(1)
Individual 30.8% 26.7% 4.1 pp 26.0% 24.5% 1.5 pp
Advisor 31.5% 26.6% 4.9 pp 30.2% 26.5% 3.7 pp
Institutional 36.2% 31.0% 5.2 pp 35.4% 31.3% 4.1 pp
Consolidated
operating margin 31.4% 25.9% 5.5 pp 29.6% 25.6% 4.0 pp

(1) Includes stock-based compensation expense allocated to each segment.

Morningstar, Inc. and Subsidiaries
Supplemental Data

As of June 30
2008 2007 % change
Our employees
Worldwide headcount (approximate) 2,060 1,620 27.2%
Number of U.S. stock analysts 103 96 7.3%
Number of worldwide stock analysts 132 113 16.8%
Number of U.S. fund analysts 22 25 (12.0%)
Number of worldwide fund analysts 53 53 -

Our business
Morningstar.com Premium subscriptions 179,827 173,974 3.4%
Registered users for Morningstar.com
(U.S.) 5,502,739 5,106,501 7.8%
U.S. Advisor Workstation licenses 188,792 163,813 15.2%
Principia subscriptions 45,219 49,486 (8.6%)
Morningstar Direct licenses 2,683 1,684 59.3%
Assets under management for
Morningstar Managed Portfolios $2.1 bil $2.1 bil -
Assets under management for managed
retirement accounts $14.6 bil $11.6 bil 25.9%
Morningstar Associates $1.2 bil $0.9 bil 33.3%
Ibbotson Associates $13.4 bil $10.7 bil 25.2%
Assets under advisement for
Investment Consulting $99.1 bil $81.5 bil 21.6%
Morningstar Associates $54.1 bil $49.8 bil 8.6%
Ibbotson Associates $45.0 bil $31.7 bil 42.0%

Three months ended Six months ended
June 30 June 30
($000) 2008 2007 2008 2007
Effective income tax expense rate
Income before income taxes and equity
in net income of unconsolidated
entities $42,630 $29,814 $78,858 $55,354
Equity in net income of unconsolidated
entities 445 455 797 992
Total $43,075 $30,269 $79,655 $56,346
Income tax expense $15,076 $11,996 $28,580 $22,287
Effective income tax expense rate 35.0% 39.6% 35.9% 39.6%

Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP
Measures

Reconciliation from consolidated revenue to revenue excluding acquisitions
and foreign currency translations (organic revenue):

Three months ended Six months ended
($000) June 30 June 30
2008 2007 % change 2008 2007 % change

Consolidated revenue $132,237 $109,685 20.6% $257,681 $205,132 25.6%
Less: acquisitions (4,876) - NMF (15,974) - NMF
Less: impact of
foreign currency (3,085) - NMF (5,366) - NMF
Revenue excluding
acquisitions and
foreign currency
translations $124,276 $109,685 13.3% $236,341 $205,132 15.2%

Reconciliation from international revenue to international revenue
excluding acquisitions and foreign currency translations:

Three months ended Six months ended
($000) June 30 June 30
2008 2007 % change 2008 2007 % change

International revenue $32,703 $23,147 41.3% $62,984 $38,733 62.6%
Less: acquisitions (3,495) - NMF (12,399) - NMF
Less: impact of
foreign currency (3,085) - NMF (5,366) - NMF
International revenue
excluding acquisitions
and foreign currency
translations $26,123 $23,147 12.9% $45,219 $38,733 16.7%

Morningstar includes revenue of acquired businesses in its financial
results from the date of acquisition. As a result, revenue from
acquisitions represents incremental revenue (compared with the same
periods in 2007) from the following acquisitions, which occurred in 2007
and 2008:

Acquisition 2008 Revenue from Acquisitions

Standard & Poor's fund data business January 1, 2008 through
March 15, 2008
Hemscott data, media, and investor relations January 9, 2008 through
Web site businesses June 30, 2008

SOURCE Morningstar, Inc.

Margaret Kirch Cohen of Morningstar, Inc., +1-312-696-6383,
margaret.cohen@morningstar.com, or Investors, fax, +1-312-696-6009,
investors@morningstar.com