MORN

Business Context and Reporting Period

Company: Morningstar, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: February 4, 2011
Reporting Period: This filing serves as a Regulation FD disclosure containing responses to investor questions received through February 1, 2011. It addresses operational updates, historical financial data, and strategic outlooks rather than reporting a specific quarterly financial period.

Key Financial Metrics and Operational Data

Revenue Composition (First 9 Months of 2010):

• Contracts and Licenses: ~65%
• Subscriptions: ~17%
• Asset-based Fees: ~12%
• Other (Advertising, setup fees): ~6%

• Shenzhen, China: Capacity for ~1,050 employees; currently ~850 employees (single shift).
• Mumbai, India: Capacity for ~300 employees (two shifts); currently 114 employees.
• New Delhi, India: Capacity for ~225 employees (two shifts); currently 141 employees.

• Participants: >690,000
• Average Account Balance: ~$27,000

General range for products (Licensed Data, Advisor Workstation, Direct, Investment Consulting) is 90% to >100% in dollar terms. Advisor Workstation is noted as having the highest renewal rate.

Material Changes and Management Commentary

Executive Departures and Restructuring:

• Tao Huang (COO): Departed end of January 2011. Severance costs will be recognized in Q1 2011. He will remain as a consultant for acquisitions and IT transition. No direct replacement as COO is planned; a search for a Chief Technology Officer (CTO) is underway.
• Patrick Reinkemeyer (President, Morningstar Associates): Departed mid-December 2010. His role is being consolidated under Peng Chen, who now leads all global investment management operations.
• Organizational Impact: Corporate sales now reports to the CFO; LIM is part of the data division. Management asserts no short-term gaps or disruption to information flow.

• Domestic (US): Morningstar claims to be the only publisher of independent qualitative mutual fund analysis for a broad audience, though it faces competition from in-house teams at brokerages and consulting firms.
• International: Competitors vary by region, including Mercer, S&P, Lonsec, and BestInvest.
• Product Comparison: Capital IQ is not considered a close competitor to Morningstar Direct due to differing focuses (company-level data vs. investment research).

Management estimates the impact of recent Illinois state corporate tax hikes on 2009 earnings would have been nominal (less than $300,000) due to low apportionment of business to Illinois.

Guidance, Risks, and Unusual Items

Forward-Looking Statements:

The filing contains forward-looking statements subject to risks including global financial uncertainty, market volatility affecting asset-based fees, reputation damage from conflict of interest claims, fiduciary liability, industry consolidation, and database outages.

• Third-Party Data: Plans to add fixed-income data and expand energy, financial, and commodity data aggregation via LIM.
• Institutional Equity Research: Reported strong growth in revenue and new clients for the first nine months of 2010. Average selling price has steadily increased.
• Retirement Accounts: Strategy focuses on increasing adoption rates and average account balances to compete with Financial Engines (which reported higher average balances but fewer participants).

Investor Verification Checklist

• Q1 2011 Earnings Impact: Verify the specific dollar amount of severance costs recognized for Tao Huang in the upcoming Q1 2011 earnings report.
• CTO Appointment: Monitor for the announcement of the new Chief Technology Officer and the timeline for the IT transition.
• Revenue Mix Trends: Track the shift in revenue composition, specifically the growth of asset-based fees versus contracts, given the volatility risks cited.
• International Expansion: Verify staffing levels in Shenzhen and India against the stated capacity to assess operational scaling.
• Competitive Positioning: Assess the actual market share gains in the managed retirement account space relative to Financial Engines.